Fox Factory Holding Corp. (FOXF) Q2 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Fox Factory Holdings Corp. Second Quarter 2016 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. I would now like to turn the conference over to David Haugen, General Counsel. Thank you and you may now begin.

Thank you. Good afternoon and welcome to Fox Factory's second quarter fiscal 2016 earnings conference call. On the call today are Larry Enterline, Chief Executive Officer; Mario Galasso, Executive Vice President of Business Development and Chief Technology Officer; and Zvi Glasman, Chief Financial Officer. By now, everyone should have access to the earnings release, which went out today at approximately 04:05 PM Eastern Time. If you’ve not had a chance to review the release, it's available on the Investor Relations portion of our website at www.ridefox.com. Please note that throughout this call, we will refer to Fox Factory as Fox or the company. Before we begin, I’d like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside of 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 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 2016 results and provide an update on our ongoing strategic initiatives. Mario will then discuss some of our recent business highlights; Zvi will review the financial results in more detail and discuss our guidance. After that, we’ll open the call for your questions. The momentum we started the year of with continued into the second quarter. The strength of our diversified product portfolio drover our financial performance with quarterly results for both sales and profitability above our expectations. Our topline increased approximately 5% $202 million in the second quarter, which was greater than our guidance of $95 million to $101 million. Both our powered vehicle and bike products drove this growth. Powered vehicle products were up approximately 10%, and bike products were up approximately 2%. As a reminder, we experienced a shift in timing of approximately $3.5 million of certain bike custom orders from the second quarter of this year into the first quarter of fiscal 2016. The increase in sales of powered vehicle products was primarily due to continued higher demand for on and off road suspension products. The increase in bike product sales was due to the ongoing success in our bike product lines, which continue to be well received by customers. Mario will provide more details in his part of the call. Our teams continued execution of our operational efficiency initiatives, as well as product and customer mix result in a gross margin expansion of 90 basis points, which contributed to our profitability increase for the quarter. As a result, we generated non-GAAP adjusted earnings per share of $0.32 in the second quarter, which exceeded our guidance of $0.25 to $0.35. Additionally, we generated adjusted EBITDA of $18.6 million in the second quarter of 2016, representing approximately an 8% increase, compared to the prior year's quarter. We believe the strength of our diversified product portfolio across both bike and powered vehicles along with our teams consisted execution of our strategic initiatives helped us achieve these better than anticipated results. Given our year-to-date performance and our outlook for the second half we are raising our annual guidance for fiscal 2016, which Zvi will review in detail later. As many of you have read, there are certain areas both from our product and geographical standpoint across our broader industries, including the overall bike industry that have experienced headwinds. We continue to monitor these markets and the global economic backdrop to ascertain any potential impact on our business. To this point, we are also evaluating the recent events in the UK and the EU. While we believe our differentiated market position and diverse end markets give us the ability to deliver our long term growth targets, like most companies we are not immune to macroeconomic or industry specific issues that may occur. Our innovative products have helped fuel the continued success of product line ups in both bike and powered vehicles. Additionally, we have now made initial shipments of our bike model year 2017 line up and remain optimistic about its success in the marketplace. As always, we will continue to closely monitor retail sell-through as we move into the fall. Additionally, our recently introduced new lower price point fork is being well received by OEMs. As we look ahead to the second half of this year, we expect increased sales year-over-year from automotive OEMs as well as our aftermarket on road replacement shock business. We are committed to increasing our penetration in our existing vehicle categories and we believe that our continued commitment to product innovation will keep FOX in an industry-leadership position. In 2016, we expect to continue to realize incremental efficiencies across our global manufacturing platform as we benefit from moving our bike, fork and shock production to our Taichung facility and our team works to achieve the optimal production mix across our worldwide factories. In addition, this enables us to reconfigure our California facilities. Our Watsonville facility will focus primarily on power sports production and our El Cajon facility is focused on automotive and military production. As we mentioned on our earnings call last quarter, we launched our new ERP system in our El Cajon facility late in the first quarter. We are continuing to work through the implementation of the phase one rollout and we will finalize the phase two rollout schedule once this work is complete. In summary, we continue to perform at a high level across our business. Our global team has done a terrific job of executing our key objectives and we are well positioned as we head into the second half of fiscal 2016. Our management team remains committed to enhancing shareholder value and our capital allocation strategy. We will continue to focus on investments in our organic growth and at the same time, we will strategically review incremental M&A opportunities to further diversify our product portfolio. And with that, I'll turn the call over to Mario.

Thank you, Larry, and good afternoon, everyone. During my remarks, I'll talk about some industry trends and touch on a few of our recent business highlights. I'll start with our bike business. Our brand building efforts continue to increase momentum with favorable media reviews and awards, successful ski product launches, strengthened dealer relationships and race wins. We believe this momentum will be reflected as consumers upgrade their equipment and alter current bikes as well as new bike purchases. We believe this will be one of the positive future OEM spec indicators as we enter the model year 2018 selling season. One of our recently launched products is an all new adjustable height Seatpost, the Transfer, as a successor to the D.O.S.S., which had been on the market for four years and earned the reputation as being one of the most reliable on the market. Reliability is one of the most important factors for customers in the market for an adjustable height post. We've experienced strong initial sales in the aftermarket since its launch and favorable media reviews. Here's what Pinkbike had to say about it. With the discontinuation of the ultra-reliable D.O.S.S., and the fact that other companies are now producing some pretty good options, Fox's Transfer dropper post needs to be a home run. While my time on it has been limited, it seems as though Fox has managed to hit this one out of the park. And ENDURO Mountainbike Magazine’s first impression: With its cable operated simplicity, stunning looks and faultless performance it’s certainly a class leading post. It’s early days to comment on durability and longevity, but in terms of performance, ergonomics and ease of fitting, the FOX TRANSFER is unbeatable. If the long term reliability proves equally as good then the FOX TRANSFER is the best dropper post on the market. Our X2 shock technology continues to rack up accolades with the press. The FLOAT X2 bike rear shock recently took home 2016 BikeRadar award for the Most Wanted Suspension Product category. We're just getting into the initial throws of the model year 2018 OEM spec seating and will be heading to Eurobike at the end of August where our efforts really ramp up. As I mentioned on our last call, integration of Marzocchi Mountain Bike products is on track and as part of our overall model year 2018 line up. The 2016 mountain bike race season is rapidly coming to a close and we're pleased that to date Fox supported athletes had won 27 cross country events, 13 enduro events, 4 free ride events and 38 downhill events worldwide. We're currently leading the Men's and Women's UCI Downhill World Cup Series and the men’s Enduro World Series. Now I'll move onto our powered vehicle business. As discussed on previous calls, we believe our automotive OEM production will start ramping up in El Cajon on completely separate lines for the new Ford Raptor 3.0 Internal Bypass Shocks in the third or early in the fourth quarter along with production of the 2.5 Internal Bypass Shocks for the 2017 Toyota Tacoma TRD Pro. Yamaha recently announced their next generation side-by-side the 2017 YXZ1000R SS. The vehicle will ship with our 2.5 Podium X2 shocks with 16 inches of front wheel travel and 17 inches of rear wheel travel. Our X2 shock platform, which is used in both our bike and powered vehicle products, introduces a unique position sensitive damping designs, which provides excellent control, quick hydraulic response and 4-way adjusters that could be tuned to any terrain. I’ll conclude with our recent race results in the powered vehicle segment. Our circle track race drivers have over 400 wins to date this season. We consistently dominate UTV racing in the desert with our internal bypass technology. Wayne Matlock and Justin Lambert took the top two spots in the Turbo UTV class at the SCORE Baja 500. And finally, at the Tatts Finke Desert Race in Australia Glenn Owen won overall in the pro-class and Sam Barnes took the ProLite buggy event. I’d now like to turn the call over to Zvi Glasman, our CFO, to review our financial results. Zvi?

Thank you, Mario. I will focus on our second quarter results and then review our guidance. As detailed by Larry, sales in the second quarter of 2016 were $102.3, an increase of 5.3% versus sales of $97.2 in the second quarter of 2015. As a reminder from our Q1 earnings call, approximately $3.5 of shipments, which were originally anticipated to ship in the second quarter of 2016 shipped in the first quarter of 2016. Gross margin was 31.6% for the second quarter of 2016, a 90 basis point increase from 30.7% in the prior year period. The improvement in gross margin was primarily due to benefits associated with our manufacturing efficiency initiatives and to a lesser degree, favorable product and customer mix. Additionally, gross margin improved due to the non-recurrence of costs associated with the 2015 ramp up, reconfiguration and logistics of the bike rear shock production transfer to Taiwan, and the subsequent reconfiguration of our other facilities. On a non-GAAP basis, which excludes acquisition-related costs, gross margins for the second quarter of 2016 increased 100 basis points to 31.7% as compared to the second quarter of last year. Total operating expenses were $21 million or 20.6% of sales in the second quarter of 2016 as compared to $19.3 million or 19.9% of sales in the second quarter of last year. Non-GAAP operating expenses stated as a percentage of sales were 16.4% versus 15.4% in Q2 of last year. Including GAAP operating expenses was $1.1 of expense associated with recent patent related litigation activities involving a bike industry competitor. While we are confident in our position, the litigation activities are complex and we expect to incur additional expenses related to pursuing and defending the involved claims. Additionally, we continue to invest in strategic initiatives such as our ERP system, the Marzocchi mountain bike product line and our global tax strategy. As a result, we expect our non-GAAP operating expenses as a percentage of sales will be slightly below 17% for the full year of 2016. Focusing on expenses in more detail, within our operating expenses, our sales and marketing expenses increased to $6.5 million in the second quarter of 2016 compared to $6.1 million in Q2 of 2015. The increase was largely due to the $0.3 increase in our wages and related expenses, including Marzocchi with the balance coming from additional promotional activities to support the growth of our brand. Research and development expenses increased to $4.6 million in the second quarter of 2016 compared to $4.2 million in Q2 of 2015 primarily due to investments in new mountain bike and powered vehicle products and technologies. Timing of R&D and promotional expenses often changes between quarters and years depending on a number of factors including product launch cycles. Our general and administrative expenses in the second quarter of 2016 were $7.1 million compared to $4.9 million in the prior year period. The increase was primarily due to $1.1 million of additional legal expenses as previously mentioned, $0.3 million of additional expenses for our strategic initiatives, and $0.2 million of additional stock-based compensation. Other expense was $0.5 million for the second quarter of fiscal 2016, as compared to $0.4 million in the second quarter of fiscal 2015. The increase is largely due to higher interest expense. In the second quarter of 2016, our tax rate was approximately 16.9%, compared to 33.2% in last year's second quarter. This improvement was due to the company's ongoing global tax initiative, tax credits, and a benefit of $0.5 million related to favorable resolution of tax audits. Our tax rate excluding the favorable tax audit resolution, which is also excluded from non-gap adjusted net income was 21.4%. We continue to expect our tax rate excluding the audit resolution will be in the mid-20s for the entire fiscal 2016. On a GAAP basis, our net income in the second quarter of 2016 was $8.9 million, compared to $6.8 million in the prior year period. Earnings per diluted share for the second quarter of 2016 were $0.24, compared to $0.18 in Q2 of 2015. Non-GAAP adjusted net income was $11.8 million, an increase of 20.4%, compared to $9.8 million in the second quarter of the prior year period. Non-GAAP adjusted earnings per diluted share for the second quarter of 2016 were $0.32, compared to $0.26 in the second quarter of fiscal 2015. In the second quarter of 2016, adjusted EBITDA was $18.6 million, compared to $17.3 million in the same quarter last year. Adjusted EBITDA margin was 18.2%, compared to 17.8% in the prior year quarter. We believe non-GAAP adjusted net income, non-GAAP gross margin, and adjusted EBITDA are useful metrics that better reflect the performance of our business on an ongoing basis. You’ll find a reconciliation of all GAAP to non-GAAP financial measures in our earnings press release issued today. Now, turning briefly to our results for the first six months in 2016. Sales for the first six months of 2016 were $182.5 million, an increase of 10.6%, compared to same period in 2015. Sales of bike and powered vehicle products increased 11.3% and 9.7% respectively for the first six months of 2016, compared to the prior year period. Adjusted EBITDA increased 12.9% to $30.1 million, compared to $26.7 million in the first six months of the prior year period. Now, focusing on our balance sheet, as of July 1, 2016 we had cash on hand of $10.1 million, total debt outstanding was $75.3 million, compared to $47.9 million of debt outstanding as of December 31, 2015. Inventory was $80.9 million as of July 1, 2016, compared to $68.2 million as of December 31, 2015. Accounts receivable was $56.7 million as of July 1, 2016, as compared to $43.7 million as of December 31, 2015. Accounts payable as was $49.6 million as of July 1, 2016, as compared to $32.1 million as of December 31, 2015. The changes in accounts receivable, inventory, and accounts payable are primarily attributable to business growth and our normal business seasonality. Accrued expenses were $20.5 million at the end of the second quarter, a decrease of $2.7 million compared to year-end, primarily due to a scheduled earn-out compensation payment related to one of our recent acquisition, as well as business growth in our normal seasonality. Turning to our outlook, for the third quarter 2016, we expect sales in the range of $106 million to $112 million, and non-GAAP adjusted earnings per diluted share in the range of $0.37 to $0.41. For the full year, we are raising our prior guidance and now expect sales in the range of $387 million to $402 million, and non-GAAP adjusted earnings per diluted share in the range of $1.10 to $1.19. We expect to continue to invest in our strategic initiatives and as a result for the full year we expect non-GAAP operating expense stated as a percentage of sales to be slightly below 17%. In addition, while we expect continued annual improvement in non-GAAP gross margin, it is worth pointing out that due to changes in customer and product mix, coupled with the preparation of our El Cajon facility for the automotive business ramp up, we expect non-GAAP gross margin in Q3 will be slightly lower versus Q3 2015 and for Q4, we expect some year-over-year improvement. And as I mentioned earlier, we continue to anticipate our annual effective annual tax rate excluding the favorable auto resolution should be in the mid-20s. I would like to note, we are not providing guidance on GAAP EPS as it cannot be provided without unreasonable efforts due to the difficulty in accurately predicting the elements necessary to estimate. Finally, as a reminder, non-GAAP adjusted earnings per diluted share exclude the following items net of applicable tax. Amortization of purchased intangibles contingent, consideration valuation adjustment, acquisition related compensation expense, including related foreign currency transaction gains or losses, certain acquisition related adjustments, favorable tax audit resolution, and offering expenses. Additionally, non-GAAP adjusted earnings per diluted share excludes the tax benefit related to the resolution of audits by taxing authorities. These adjustments are more fully described in the tables included in our press release, which have been posted on our website. I’d now like to turn the call back over to Larry.

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

Thank you. [Operator Instructions] Thank you. Our first question is from the line of Mike Swartz with SunTrust. Please proceed with your question.

Hi, good afternoon guys.

Hi, Mike.

Just starting off with the housekeeping questions, Zvi just around the tax rate did I hear you correctly in saying that there has been no change to your full year outlook in terms of the tax provision?

Correct, mid-20s.

Okay. So just trying to get a sense in that event of, what’s really driving your expectations higher for the full year and I say this with the backdrop of obviously the ORV industry has been a little weak here and there is a lot of buzz around on the bike side of things that there is elevated inventories as we move through the spring and we’re starting to see some restructuring from some of the major OEMs and component manufacturers, so I guess what gives you comfort in your business?

Well I think a couple of different things Mike. Certainly, we serve a lot of different end markets. We have a great diversity there that I think helps us ride through difficulties in any one of them. You know we are geographically pretty well dispersed also now in our business, so when, like the oil patch for instance not been strong for ORV or truck related parts of our business, but new truck sales have been very good. So, I think that's a lot of it, but fundamentally our philosophy is to keep coming out with innovative product that is going to give people and consumers a reason to buy Fox and I think that also helps bring us through any individual market weakness. Now, having said that I will tell you we are cognizant of everything you referred to. We read the same papers and we are keeping a close eye on these kind of macro and industry specific developments for any impact that might have to kind of be ahead of that, but our guidance kind of contains the second half view that we see, as well as encompassing our first of performance.

Okay and then just maybe one final question for Mario, I think you did mention the new Rhythm Fork is being accepted fairly well by OEMs, but can you give us a little more granularity around that product in terms of is it opening a new customer base for you?

Well it’s not a new customer base, so we are talking to all the same customers about this product who have wanted and asked us to participate in this slightly lower served, lower price point served market then we've been in the past. We've mentioned on prior calls that we believe this $1500 to call it $ 2500 end bike price point in US dollars, you know to represent a 50% by unit addressable market increased for us and we've also said that in model year 2017 we are just sort of scratching the surface with an initial foray into that which will round out over the subsequent couple of model years. For our first entry into it, we are quite happy. Albeit not completely built out, which we will do over the next couple of years. Mike?

That's all I have thanks.

Okay.

Thank you. Our next question is from the line of Jon Berg with Piper Jaffray. Please proceed with your question.

Great, thanks a lot guys, good job on Q2.

Thanks John.

I guess must my previous question is just maybe more for Zvi here on how we're thinking about the guidance, I guess can you talk a little bit about how you're thinking about Q3 guidance versus the implied Q4 guidance? I guess at the top of your EPS range for Q3 it implies a pretty big slowdown in growth followed by a big acceleration in Q4 assuming you hit the top end of your range for the full year, why is the growth in Q3 so muted and I assume that Q4 growth accelerates as a result of new product launches, but if any color you could give there would be helpful?

I think what you have to keep in mind is, we have a lot of different markets we serve, we have a lot of different product introduction cycles, and those are not necessary the same year-over-year, so it is not - also it is not unusual for sales that to shift between quarters with no underlying difference in the economics of the segments served. So, I would tell you that we think, again the growth that we've got on a year-to-date basis, I mean there is timing involved and so forth, but this, our view has gotten better over the course of the year, we've raised guidance and tightened it and that’s in a challenging economic environment.

Okay great. And then secondly, I guess I think last time we spoke, I think you guys were may be expecting that you may see a slight improvement potential in the back half in the North America side-by-side market, do you still kind of see that potential recovery in the second half of 2016 or what are your thoughts right now?

Yes, I mean I think Jon we hear that that market is doing okay. I think for, particularly a lot of the vehicles we are involved with, you know there is obviously any one manufacturer out there who can have difficulty, there have been product recalls for instance that certainly tend to impact this, but I think our view of it now is that side-by-side, high-end recreational side-by-side market is probably going to do okay, it’s kind of flattish, but within that because we have vehicle introductions and things like that we may perform better or worse right depending on a given quarter, but I think we're feeling okay about it, you know setting aside sort of any customer specific issues that may be going on.

Okay. And then I guess maybe one last quick one from me, just given some of the recent cautious commentary I guess out of Ford on their Q2 call, are you at all concerned about how you're thinking about your Raptor volumes for 2017? I know it’s a great product, certainly high margin product for Ford and assume you guys too, but I guess what gives you confidence on your raptor sell-through for next year?

Yeah I think a couple of different things in how we are looking at it. Ford, obviously in their announcement didn't comment on the Raptor specifically, but I think if you look at the demand for the past generation vehicle and where we're selling in relation to sticker price and the availability of that vehicle, if you combine that with our understanding from doing our own checks of the pre-ordering for the new vehicle, we think it’s going to do just fine, and again keep in mind this is a relatively small volume vehicle for all of Ford, and I don't know that Ford’s general comments applied in this segment.

Okay thanks a lot guys. Good luck in the next rest of the year.

Okay Jon, thanks.

Thank you. Our next question is from the line of Larry Solow with CJS Securities. Please proceed with your question.

Thanks. Good afternoon guys. Just on the guidance, once last little follow-up, on the increase is it better on the bike side, better on the power vehicle side, or in any way you can characterize that?

Look, I think overall our business is performing well across the board. Like I said we challenged some pretty difficult environments, macro and industry-wide in some of the segments, some of it has been in the press. In some cases, we’ve got new product introductions with some of those so challenged segments that are helping to make up for it, there is a whole host of things, but I just think in general we’re operating, we’re doing a good job in executing.

And just historically, as a general - as close to the bike industry for some, but I know you're end markets are the mountain bike, especially the enthusiasts has really been some bit of a dichotomy from the general bike industry, right, not necessarily following the extract trends fair to say?

Well listen, we do think that high end mountain bike has done better than the overall bike market that much is clear. Having said that, the same IBD that sells - high-end mountain bikers are selling a high-end are selling other bikes, so these factors do have an effect on us. We think it has been a little bit more insulated, but has Larry in his comments, we are not immune to those kind of factors, but what we try to do to combat it is put our great product.

I know you guys have been a little concerned this year, especially with the strong dollar impacting some of your international sales to get the, what’s have been happening in the last couple of months in Europe and UK, that’s probably too early to say, but have you seen any impact or maybe hard to measure, but are you seeing any impact from sort of some of their less buying power on the international front?

You know what, what I would say Larry we certainly see pockets of weakness depending in geographies. We also see some areas that are going pretty good. Again, we try to be cognizant of these things, but if you got overly focused on all the news that seems to be coming our way, a lot of it has been mentioned on these questions, I mean you can get yourself pretty depressed right?

Absolutely.

I think philosophy is to kind of look through that, bring it out, you know great product be cognizant of those issues, if we do see anything macro and then we think because of our brand position and the kinds of products we come out in the segments we serve that whatever the environment is, we feel we will do better than average.

Okay, fair enough. Just lastly on the – did your prior guidance, had you always assumed that you would get some automotive OEM sales in late Q3 of Q4, has that always been part of the…?

Yes we’ve always assumed it and we’ve not really changed the assumption here. We’re not expecting all of a sudden that we're going to have a full run rate ramp up for our significant automotive customers.

Got it.

It is still a ramp up as they introduce the vehicles.

Got it, and if I may just squeeze one more, go ahead.

That is not driving our race.

Got it. And just one more, on the ERP, do expect as we go into Phase II, does that expenses start to ramp a little bit as the year progresses, or how do you look at that, on what the operating [indiscernible]?

Look, you got to remember, as you go into an ERP, a lot of those costs are getting capitalized.

Right.

We are expensing some of those costs and a lot of them are capitalized as well. I mean the expense run rate could go up a little bit next year, but for this year, probably not.

Okay great, thanks a lot. I appreciate it.

Our next question is from the line of Scott Stember with CL King & Associates. Please proceed with your questions.

Good evening.

Good evening.

Good evening, Scott.

On the powered vehicle side, noting that we haven't seen the Raptor of the Tacoma demand coming in yet, can you maybe just talk about in the quarter, OEM demand versus let's say Sport Truck in aftermarket kind of accessories and maybe just give us a flavor of what really drove the business in the quarter?

Well, again, without breaking it out, we have obviously a lot of OEM business. I'm not sure we're breaking out OEM versus aftermarket for the quarter.

No, we don't.

I would tell you again depending on the segment, we had some fairly strong aftermarket segments; one of the better segments during the quarter was our aftermarket on road replacement shock business for example. But we saw some pretty nice business from a lot of our OEMs, across both powered vehicles and bikes. It's a – it's kind of facts and circumstances beyond that.

Okay. Just going back to the overall macro issues that you brought up on the first quarter conference call about inventory issues within the channel and I know you guys have been monitoring that at least within your niche. I think last quarter you had said that you had at that point not seen any issues that you're monitoring and as we stand today and noting that I mean obviously you're operating in a challenging market, but have you seen any inventory issues that you have to deal with or so far it has been okay?

I mean, I think, we've seen again – I would characterize it as not a broad inventory issue across all of high-end mountain, I do think we've seen certain models, segments that have had more of an inventory issue than others. I would – I still think we characterize high-end mountain as around flat, might be down a little bit, could be up a little bit, that's kind of how we think. It's going to unfold from the year in spite of any of those inventory issues.

Okay. Got it. And getting back to the –.

I would tell you, it’s maybe as robust as it was a few years ago certainly right now and I think that’s part of this overall backdrop in an overall bike. But, again, I think, as Zvi indicated, in spite of what you read on the bike industry, we think mountain bike holds up better than that industry average and we think high-end mountain bike holds up better than mountain bike. And again, I think that's kind of how we're seeing it, still far from robust right now.

Got it. Last question, going back on the international side with – maybe with Brexit going on, maybe just talk about how much of your business is in the UK, have you've been able to identify that or if you'd be willing to share that and maybe just talk about what you're seeing right now and any concerns – major concerns that you have?

We don't break that out. Clearly, Europe is a big part of our bike business, but from what we’ve seen with our aftermarket business there, we haven’t seen any indications of slowdown there yet, I mean I was really keeping an eye on some of those distributors right out of the gate and it's been remarkably quiet.

Yeah. And things got less expensive in the UK.

Right.

That's all I have. Thanks for taking my questions.

Thank you, Scott.

Thank you, Scott.

Our next question is from the line of Jon Anderson with William Blair. Please proceed with your questions.

Good afternoon, guys.

Hi, Jon.

Hi, Jon.

Hi, Jon.

I guess, I wanted to ask first, as you introduced your lower price point fork, have you or do you expect any kind of change to kind of the competitive landscape or intensity? Or are you seeing or expect to see any kind of response in the market at this point to that move?

Jon, this is Mario. I think the response in the market that we expect to see is for us to add you know additional models in – without the family. We have good robust competition, but in each given year and this isn’t any different, we brought out this, we brought out new shocks, we brought the transfer seatposts. So we expect every year to have a competitive – robust competitive landscape and we focus on what we can control, which is our innovation and trying to be strong.

On the Raptor, the Ford business, could you talk – just remind me how big that business was, you know, order of magnitude, creed the model year – the body changeover and...?

No, Jon, we’ve never broken it out. It was clearly less than 10% because we would have been required to break it out. I think there's been a lot of triangulation on the figures by many of you and the analyst and the investor community and some of those numbers seem like they were in the ballpark. That's all I can say about it publicly, I don’t think Ford would really appreciate me commenting on their volume.

And is there any reason to believe that it wouldn't come back at least as strong over time as it was in kind of its previous iteration?

Well, we believe that it will certainly be as strong as our feeling. It's a much more capable vehicle. The last one was very, very popular. And again, we've done some checking around on our own on pre-ordering and that seems to be going just fine. So we are kind of planning for a level at least equivalent to the previous generation.

Okay. That’s helpful. On gross margin, I don’t know it sounded like you are cautioning a little bit on the back half, maybe some of the capacity El Cajon, et cetera, is your view a little bit more cautious on gross margin this year and does that kind of changed the longer term view that you're heading into the – kind of the 33% range over the next two year?

There is no change in our long-term view in terms of margin. We've been making a lot of great progress. This quarter we were up 100 basis points. Q3 is simply a function of customer and product mix as well as the ramp up in preparation of the OEMs. We have a lot of you – we have a very robust plan to continue to increase gross margins and we’re really pleased with our progress so far.

Okay. Just a little bit more on the ERP system. You mentioned phase one coming to completion soon and then you'll be entering phase two. Can you just describe what’s phase one, when that – and what’s coming next with phase two and the timeframe around that?

The system is turned up and we are shipping a lot of products out of El Cajon, but as you can probably appreciate before you implement a system of this kind of magnitude and put on the entire company, you want to really just hone it. So our business processes are optimized. And so we are right now in the optimization phase to ensure that this will scale up for the remainder of our business and we're still looking at that right now as we speak. The biggest mistake one can make is to jam it in, not thoroughly vet the processes, not squeeze the efficiencies out, because I know what you’ve done. You’ve made a multimillion dollar investment and you’ve not gotten what you’ve hoped to get from it. It’s kind of doing what we expected it to doing it, it take a little time, and kind of like we did in our transition to Taiwan, we're going to do it as fast as we can, but not faster.

Okay, great. Thanks for the questions and nice quarter guys.

Thanks.

Thanks, Jon.

Thanks, Jon.

Our next question is from the line of Jim Duffy with Stifel. Please proceed with your question.

Thanks. Good afternoon, guys.

Hi, Jim.

Hi, Jim.

Hi, Jim.

Nice, you guys doing so well in the bike category given the backdrop. I'm curious is aftermarket strength contributing to your above market performance in bikes.

I think it is.

Okay.

I think we are pleased again as you noted the overall market is something less than robust and we think we are doing well and certainly aftermarket has been a good contributor to that.

And Mario, maybe this is one for you. I’ve started to see more e-bikes around. Any comments on consumer uptake of e-bike and the opportunities? Is that a – the Rhythm be the solution for the city bike opportunity with that?

Well, there's e-city bikes and there are e-mountain bikes. We participate in both, but the e-mountain bike category is where we are participating more strongly.

Okay.

The consumer uptake is rapid in Europe, less so in the U.S., but it's coming. And the Rhythm fork is certainly something that is being considered for the e-mountain bike, as well as Marzocchi. We also have, all of our products are qualified for an e- bike that is classified as a bicycle, but being that these are heavier vehicles, capable of covering more ground and going faster, we do have e-bike specific fork chassis and damper and spring curve tuning to address that.

Got it. And then within the U.S. where does it stand from a standpoint of kind of regulatory, you know these bikes being allowed on trials, classified as a bicycle versus a motor vehicle?

Yes, I mean they are classified as a bicycle, I think there is, this is I believe, I think there is some may be unwanted unwarranted angst over what it’s going to do to trails. You know the fact of the matter is 250 watt and below power assist is classified as a bicycle and it’s purely assisting the power you put in, it’s not a throttle, it’s not an on/off, you have to pedal to get any benefit from it. So, I don't think it’s going to affect the trails much, but it’s being studied and I think it’s ultimately going to settle out like it has in Europe, which quite honestly is typically more stringent and there is a little more research about off-road impact than we do here. So, I think the uptake is going to be the same or better in the U.S. at some point, but right now Europe is leading the charge.

Okay and then, my last question is a big picture question, maybe Larry best addressed for you, are there any kind of macro indicators as you look guys look to in your categories for any evidence of a turn in cycle?

Turn, overall I want to make sure, I understand the question, but…

The genesis of it is, many are speculating about potential for a softening of the economic cycle, consumer spending and so forth, what I'm wondering is are there any indicators you look to specific to your categories for suggesting that that might be the case?

Yes, I mean we look at actually several things Jim from a macro standpoint, we are certainly looking at the, as you know in the bike industry there is quite a bit of publicly available data that is from the component guys, there is a biggest component guy in particular we tend to look at that data from a bike industry standpoint. We are looking a lot at automotive numbers, which is historically a cyclic business to see how that end of it may go. You know, we look at a lot of industry particular data that we can get our hands on. From a broad standpoint, we tend to look at the same things that I think a lot of other people do, we are looking at in various employment. The staffing industry, commercial staffing tends to be in early harbinger of overall economic cycles. We pay a lot of attention to that kind of data, but again having been through several cycles in my carrier, you know the one thing I’ve learned is, they are trough to predict and get exactly right. You want to be following them, you want to be prepared, if you do get in those situations, but you don't want to talk yourself into one either. So, I think we kind of philosophically try to be aware, be prepared, but then keep coming out with great product and we believe that great product in our brand position will help us through whatever that environment turns out to be.

Makes a lot of sense. Thanks for that perspective.

Thank you. Our next question is from the line of Rafe Jadrosich with Bank of America Merrill Lynch. Please state your question.

Hi good afternoon. Thanks for taking my questions.

Hi Rafe.

I was wondering if you could give a little more color on it, since the bike industry slowed and you guys are obviously outpacing that, I was wondering if you could give a little more color on who do you think the share gains are coming from? Are you seeing industry consolidation, just any color there would be very helpful?

Again, I’m not sure we could give you anything exact, but we feel in our suspension business that we've done pretty well. We've had some spec gains, as I think Mario said in his part of the last couple of calls we feel pretty good about spec position. I think obviously we're looking to still see sell-through data on the current 2017 model year. And we hope that holds up obviously. I think our Race Face and eastern product lines and continue to do well, cranks and think wheels are being, I think good products for us.

Okay. And then can you give a little more color on sort of the upside?

Well I think our focus is obviously to keep selling. I tend not to worry about my competitors, help [ph] that much when we are in selling season, but I think we are doing fine against our competition, given the overall bike market backdrop we’ve talked about.

Can you talk a little bit about the strategies for Marzocchi going forward?

Yes, Marzocchi again is we try to remind people that that wasn’t exactly a transformational acquisition. We kind of bought it, I hate to say of the bargain been, but that’s probably not far from correct. What the Marzocchi employees that we've brought over who are now Fox employees and our Fox folks in bike Mario has been a key part of this. What we’ve done now is position the Marzocchi brand going forward. Right, so you will be seeing that unfold here over the next couple of model years, but we have arrived that what we feel is good positioning where we want to have that brand. There is sharing of technologies both ways. You know, you're seeing some Fox technology go into Marzocchi traditional product and some vice versa. So, I think we're getting the kinds of benefits out of that we wanted to. The full impact of Marzocchi though, we won’t feel that until we get that product positioning rolled out and that is over the next couple of model years.

And then two more quick one. Can you remind us of what the different mix impacts are to gross margin, which - what type of customer do mix shift toward that’s higher margin and then what sort of, are there any changes to the incur cost outlook? As we kind of go through the back half of the year and into 2017? Thanks.

I will take the second part first. We don’t see any material change to the input costs. I mean they’ve been coming down over the last year as you know with the weakening commodity costs and higher dollar. In terms of the mix, as we’ve said before there is nothing structurally different between bike and powered vehicles and its things like we tend to get more in an aftermarket sale and in an OEM sale. We tend to, in bike we’re a own distributor in the U.S., where we go through distribution of powered vehicles. So, when we are our distributor rather go into distribution that’s higher margin. When we sell our OEMs, the biggest OEMs of ours are going to tend to - get more favorable pricing then some of your lower on the volume list. We only sell premium products, but when we are selling the most premium products they would typically have better margins that what I would call more the introductory price point premium products. And so it’s kind of those factors and those things. Those are some of the factors that are hitting us in Q3, or we anticipate to hit us in Q3, but those things tend to be fluid in various quarters and years.

Okay, thank you. It’s very helpful.

Thank you. At this time, I will turn the floor back to Larry Enterline for closing remarks.

Thank you. We appreciate your questions and your interest in Fox. As always, I would like to thank our employees for their hard work and dedication in helping us achieve our results. Additionally, I would also like to express my gratitude to our customers and suppliers for their continued support. Together, we will continue pursuing Fox’s future growth opportunities. We look forward to speaking with you again on our third quarter earnings call. Have a good day.

Thank you. This concludes today’s conference. We thank you for your participation and you may now disconnect your lines at this time.