Fox Factory Holding Corp. (FOXF) Q2 2018 Earnings Report, Transcript and Summary

Greetings and welcome to Fox Factory Holding Corporation Second Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Haugen, General Counsel.

Thank you. Good afternoon and welcome to Fox Factory’s second quarter fiscal 2018 earnings conference call. On the call today are Larry Enterline, Chief Executive Officer; Mario Galasso, Executive Vice President and Chief Technology Officer; and Zvi Glasman, Chief Financial Officer and Treasurer. By now, everyone should have access to the earnings release, which went out today at approximately 4:05 p.m. Eastern Time. If you have not had a chance to review the release, it’s available on the Investor Relations portion of our website at www.ridefox.com. Please note that throughout this call, we will refer to Fox Factory as FOX or the company. Before we begin, I would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company’s control and can cause future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors and risks that could cause or contribute to such differences are detailed in the company’s earnings release issued this afternoon and in the annual report on Form 10-K filed with the Securities and Exchange Commission. Except as required by the 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 gross margin, non-GAAP operating expenses, non-GAAP income tax and related items, 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 that we believe are useful metrics that better reflect the performance of our business on an ongoing basis. 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. We appreciate you joining us on today’s call. To start, I will discuss our second quarter 2018 business and financial highlights. Mario will then provide a more detailed update on our business and brand development. Zvi will review the second quarter financials and discuss our guidance. After that, we will open the call for your questions. In the second quarter, we built on our strong start to the year and delivered record quarterly sales, earnings and adjusted EBITDA. We experienced broad-based strength across our powered vehicles and bike product offerings. Sales of powered vehicle products were up 47% and bike products were up 15%. The underlying fundamentals in our diverse end markets are strong and FOX’s differentiated market position continues to fuel our growth in new and existing categories. Second quarter sales and profitability were above our expectations. We generated record Q2 sales of $156.8 million, an increase of 30% compared to last year, record non-GAAP adjusted earnings per diluted share of $0.56 and record adjusted EBITDA of $32.4 million. We appreciate the strong and consistent efforts from our dedicated team in helping us achieve these results. The passion for the FOX brand starts with our employees and resonates with our customer base and our athletes reinforcing the value of our brand across our diverse markets. We believe FOX remains well-positioned for future growth. Based on our strong operational and financial results as well as our outlook for the remainder of the year, we are raising our annual guidance. In light of our current and future growth outlook, we are opportunistically making investments to expand our manufacturing capacity, primarily in our U.S. operations. Zvi will provide more detail on this and our guidance later in the call. Now, focusing on our business in more detail, on the powered vehicle side, the category remains an exciting growth area of our business. Our strong second quarter sales were driven by high growth in side-by-side vehicles, aftermarket truck categories, off-road capable on-road OEM vehicles and the addition of Tuscany. Our team has done a great job creating front end synergies from the acquisitions we have completed over the last 2 years as we leverage our global sales, marketing, engineering, distribution and supply chain resources to collectively develop and bring to market compelling product innovations. Sport Truck and Tuscany are great examples of this and industry dynamics continued to favor our product categories in premium powered vehicles and bikes. We believe our branded offerings along with consumer preference for higher performance products will continue to fuel our long-term growth. Looking ahead, our team remains committed to further broadening the FOX brand presence in our existing vehicle categories and consistently pursuing new markets. In bike, our business continues to perform well. Our new model year product lineup has been well received by our customers as demonstrated by strength in our OEM and aftermarket sales channels. Additionally, we continue to make progress penetrating the next price point down of the premium mountain bike segment with our expanded Rhythm series sport line. I also want to provide an update on our perspective regarding tariffs. As I mentioned on our first quarter call, we continue to believe that the direct impact from tariffs and input cost increases are contained in our guidance. However, we remain concerned about the possibility of escalating trade tensions, which could have a negative impact on our results as we progress through the balance of the year. In summary, we experienced a great first half of the year and we remain optimistic about our prospects for the remainder of 2018. And with that, I will turn the call over to Mario.

Thank you, Larry and good afternoon everyone. During my remarks, I will touch on a few of our recent business highlights. Beginning with our bike business, our brand building efforts continued to strengthen our position in the marketplace resulting in favorable media reviews, reader survey awards and enhanced customer relationships. We recently garnered these products praises. After testing our model year 2019 Factory Series 34 Step-Cast fork, Mountain Bike Magazine Germany’s editor-in-chief André Schmidt called it the best 120 millimeter fork. And in BIKE magazine Germany’s 2018 reader survey FOX was voted as the best fork brand and top of the competition as the fork brand their readers are planning to buy. Enduro Mountain Bike Magazine gave our model year 2019 Marzocchi Bomber Z1 fork its best value award and had this to say about it. For those on a budget who want to simply hit the trails, the Marzocchi Bomber Z1 is effortless to setup and offers a great bang for your buck and a more refined grip damper of the Marzocchi Bomber Z1 nudges it ahead to take the best value award. I will now share a few of our recent race results in the bike segments. In the first Diamond series event of the FMB World Tour at Crankworx Rotorua, Brett Rheeder won Slopestyle, while Thomas Genon secured second place. At the First UCI Downhill World Cup of the season in Croatia, Aaron Gwin took the win with fellow American Luca Shaw coming in at close second. At the third round of the Enduro World Series in France, Richie Rude won by 6 seconds over the competition. Loris Vergier took his first career UCI Downhill World Cup victory at the fifth stop of the series in Andorra, while Erin Huck and Catharine Pendrel are currently 1 and 2 in the women’s division of the Pro XCT. Now, we will move on to our powered vehicle business. On May 24, Ford announced that their 2019 F-150 Raptor will feature our proprietary Live Valve semi-active electronic suspension. We worked with Ford to integrate it into their vehicle control system so that it can process data from multiple vehicle sensors to adjust the suspension virtually instantaneously to meet the demands of the changing terrain. Initial reactions to the announcement have been positive and we are very excited to introduce this technology into the off-road capable, on-road truck market. Here is an excerpt from CNET’s roadshow write-up. The suspension is fundamentally similar to the FOX shock absorbers that were already employed by the Ford Raptor, but now with a solenoid that allows the truck’s computer to constantly adjust the damping force at each corner, new ride-height sensors at each front wheel feed information about the terrain to that computer. Ford’s in-house algorithms are designed to improve ride and handling whether you are driving the Raptor in normal, sport or off-road modes. For instance, for road driving, the suspension stiffens more as your speed increases and when cornering the outside dampers will stiffen to reduce body roll. In the off-road mode, the suspension damping will generally be much softer for compliance and handling. I will conclude with a few of our recent race results in the powered vehicle segments. In Baja this past June, FOX drivers Rob MacCachren and Luke McMillin took first and second overall respectively. In the UTV Class, Kristen Matlock took the overall title in the naturally aspirated class and Brandon Sims won the turbo class and Shannon Rentsch won the sixth outright title at the Tatts Finke Desert Race in Australia. I would now like to turn the call over to our CFO, Zvi Glasman to review our financial results. Zvi?

Thank you, Mario. Good afternoon, everyone. I will focus on our second quarter results and review our guidance. Sales in the second quarter of 2018 were a record $156.8 million, an increase of 29.8% versus sales of $120.8 million in the second quarter of 2017. Gross margin was 33.4% in the second quarter of 2018, a 110 basis point increase from 32.3% in the prior year period. The improvements in gross margin, was primarily due to operating leverage on increased volumes and improved manufacturing efficiencies. Total operating expenses were $28.1 million or 18.1% of sales in the second quarter of 2018 compared to $20.9 million or 17.2% of sales in the second quarter of last year. The increase in operating expenses is primarily a result of the inclusion of expenses from our Tuscany subsidiary, which was acquired in Q4 last year, higher patent litigation expenses, investments in sales and marketing, research and development to support future growth and higher amortization expense on an acquired intangible. Non-GAAP operating expenses stated as a percentage of sales were 15.1% versus 15.7% in Q2 last year, which was better than our previous guidance due to sales outperformance in the quarter, as operating expense investments in the business tend to lag growth at this level of sales. Focused on expense in more detail. Sales and marketing was up $2.7 million primarily due to $1.9 million of costs incurred at our recently acquired Tuscany subsidiary as well as increased spending in existing business lines to promote our products and grow our brand. R&D was up approximately $1 million as we continue to invest in product innovation and engineering resources across all product categories. As we have consistently stated, the timing of R&D and promotional expenses often changes between quarters and years depending on number of factors including product launch cycles. Our general and administrative expenses in the second quarter of 2018 were $10.8 million compared to $8.1 million in the prior year period. The change was primarily due to a $1.7 million increase in ongoing litigation related expenses and expenses of $0.5 million incurred at Tuscany. For the second quarter of fiscal 2018, our effective tax rate was 20%, consistent with our previous guidance and as compared to 22.7% in the second quarter of fiscal 2017. Adjusted EBITDA was $32.4 million for the second quarter of 2018 compared to $24 million in the same quarter last year. Adjusted EBITDA margin was 20.7% compared to 19.9% in the prior year quarter. On a GAAP basis, net income in the second quarter was $18.7 million or $0.48 per share compared to net income of $13.7 million on our earnings of $0.35 per diluted share in the prior year period. Non-GAAP adjusted net income was $21.9 million, an increase of $6.9 million compared to $15 million in the second quarter of the prior year period. Non-GAAP adjusted earnings per diluted share for the second quarter of 2018 were $0.56 compared to $0.39 in the second quarter of 2017. Now, focusing on our balance sheet. As of June 29, 2018, we had cash on hand of $22.7 million. Total debt outstanding was $65.9 million as compared to $98.6 million as of December 29, 2017. Inventory was $95.4 million as of June 29, 2018 as compared to $84.8 million as of December 29, 2017. Accounts receivable were $77.9 million as of June 29, 2018 as compared to $61.1 million as of December 29, 2017. Accounts payable was $58.3 million as of June 29, 2018 as compared to $40.8 million as of December 29, 2017. The changes in accounts receivable, inventory and accounts payable are primarily attributable to the growth of our business as well as seasonal factors. Turning to our outlook, for the third quarter of 2018, we expect sales in the range of $166 million to $176 million and non-GAAP adjusted earnings per diluted share in the range of $0.59 to $0.67. Our sales guidance for the balance of the year assumes a $5 million to $7 million shift in timing of sales from Q4 to Q3 related to new product introductions, attributable to a number of factors, including our recent acquisition of Tuscany. Given that our sales growth is outpacing our operating expense investments in the near-term, we expect Q3 2018 non-GAAP OpEx as a percentage of sales to be 50 to 100 basis points lower than Q3 of last year. For fiscal year 2018, we are raising our previous guidance and now expect sales in the range of $596 million to $614 million and non-GAAP adjusted earnings per diluted share in the range of $1.96 to $2.12. Given our year-to-date results and outlook for the balance of the year, we now expect adjusted EBITDA margins to improve relative to our initial guidance and be consistent with 2017. I would also like to point out that our guidance includes the impact of tariffs and higher input costs, which we currently expect to have a few cents drag on earnings based on the information available to-date. To capitalize on the strength of our business, we plan on increasing CapEx for 2018 and 2019 to a range of between 5% and 6% of sales. Beyond 2019, we expect capital expenditures to return to our longer term model of 3% to 4% of sales. At this point, there is no change to our longer term revenue growth targets of mid to high single-digits for bike and low double-digits for powered vehicles. We will provide guidance for fiscal 2019 during our fourth quarter earnings call. Our full year 2018 guidance assumes a tax rate of 19% to 21%. I would also like to note that we are not providing guidance on GAAP EPS as it cannot be reasonably provided without unreasonable efforts due to the difficulty of accurately predicting the elements necessary to provide such guidance and reconciliation. I would now like to turn the call back over to Larry.

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

[Operator Instructions] Our first question comes from the line of Scott Stember from CL King & Associates. Please proceed with your questions.

Good evening, guys.

Hey, Scott. How are you?

Good. In the powered vehicle side obviously, Tuscany helped, but it looks like you have a significant amount of organic sales growth there. Can you maybe just get a little more granular with some of the segments you mentioned ORV and some of the other items, so obviously just talk about the industry backdrop just what you guys are doing differently?

Yes. I would just say that one of the things we are very pleased about the quarter is the strength was broad-based across most of the categories that we are in certainly side-by-sides as I mentioned we are a big piece. The whole – just our aftermarket truck sales were good. Obviously, the automotive OEM that offer capable on-road vehicle market performed well, but we were great in bike too. I mean, bike had a nice quarter, again, pretty broad-based.

Just to add to what Larry said, the strength was broad-based. We were pleased with our Tuscany performance. We continue to be pleased, like the remainder of our business, it is exceeding our initial guidance for the year, but the powered vehicle business has obviously exceeded our longer term target of low double-digit growth even on an organic and on an inorganic basis.

Got it. Thanks. And on the bike side, very strong growth there, maybe just talk about the backdrop of the business, it sounds as if inventories are in really good shape and things are moving very nicely for your products. Maybe just talk about the backdrop of the industry as well?

Yes. I would tell you that just a couple of comments on it. One, I think from an inventory standpoint, again we are not making an industry inventory comment, but clearly in our channels, we feel pretty good about inventory position now. I would also say that the industry in general seems to be having a better year than it’s had the last few. And I think obviously we participate in a segment that’s even doing better than that. So, we feel good about that. I would just highlight Europe remained strong in general, Germany, the UK and in particular for bike, North America is doing well. It is still I think is challenged a bit by historical standards. Does that help, Scott?

Yes, it does. And just last question on tariffs, it sounds at least what’s been announced and actually gone through that it’s pretty much contained, but some of the other stuff that’s been announced today, the $200 billion worth and maybe just talk about high level, how you view that potential or is it just too soon to say right now?

Well, based on what we know today, the impact is contained within our guidance. Longer term should tensions continue to – should tensions and disputes continue to escalate, we don’t know enough. We are no different than anybody else in the economy. We have some exposure across – we would point out that in the past to the degree that these cost increases are sticky, we had in the past set pricing power, but we are taking away and see approach as it relates to the pricing. We are hopeful that these disputes get resolved. This can take away this new approach.

Got it. That’s all I had. Thanks for taking my questions.

Thank you, Scott.

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

Thanks. Good afternoon, guys.

Hey, Jim. How are you doing?

Very well. Thanks. You guys seem to be firing on all cylinders here. Question for you on the manufacturing with demand coming in as strong as it is, is there any challenges keeping up with demand or are you facing shortages in any areas?

Well, clearly, when you see the kind of demand that we have seen above our original plan, we certainly have challenges. I think our team has done a great job of jumping on that and being able to provide these performance defining products for that passionate customer base we have, but I would tell you with this kind of growth we are running some frictional cost that we wouldn’t normally see. That just comes with the territory as you expedite parts and products around, but again I think our team has done a terrific job in responding to it.

Coming to add to what Larry said, the back half of our guidance assumes maybe a slight uptick in gross margins, but as a result of both the tariffs, the higher input costs and the frictional costs, we don’t necessarily see the same kind of gross margin lift in the back half of the year that we have seen in the front half of the year.

Okay. I mean, you are seeing some nice leverage from the volume upside both in the gross margin and in the SG&A. Zvi, you have always talked about a long run objective for the margins. In previous years when you have been running ahead, you have spoken to SG&A investments to catch up, should we think about the business that way as we look to out-years with our modeling?

You should. Our non-GAAP OpEx will run below the initial guidance that we gave in the beginning of the year. I mentioned in my comments that our EBITDA margin will be similar to last year. If you recall at the beginning of the year, we indicated that EBITDA margins would be a little lower due to what you just spoke about, which is the fact that the investments in OpEx tends to lag the revenue growth in years that you have revenue significantly above our long-term targets, but it is our stated strategy, no change to the strategy that we continue to reinvest the business, especially at the point of attack is sales and marketing and R&D, because we think that is the best way for us to continue and take advantage of the market opportunity and execute on the business plan, achieve the higher growth rates that we have achieved and continue to expand gross margins and EBITDA margins longer term.

And you have seen good return on that. One more if I may, Mario, maybe this is best addressed to you. The Raptor suspension solution that you mentioned, is that an upgrade from what’s currently in the marketplace? And if so how does that work from a pricing standpoint, is that come with it more revenue per vehicle as you look to future versions of the Raptor?

Yes, so two questions there. First question, the Live Valve semi-active technology and electronic control is grafted on to the internal bypass technology that Ford had utilized on the Raptor since inception. So, it’s using that base technology and adding the enhancement of Live Valve. As far as pricing content, we don’t really talk about that and front run our customers on what they may or may not be paying, but in the past, we have said that we like to get paid for content and innovation, so that’s still our plan.

Very good. Thanks for that.

Jim, thank you.

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

Hi, this is actually [indiscernible] on for Larry. Good afternoon.

Yes, how are you?

So starting with the increased CapEx over the next couple of years, can you talk about the components of the growth portions of that?

We would tell you that our long-term model for CapEx is in the 3% to 4% range. So the way we think about it is anything – and clearly part of the 3% to 4% assumes kind of our normal growth in the business. The fact that we are now saying 5% to 6% for the next couple of years is us trying to position the platform for future growth and take advantage of the growth that we have achieved recently above our longer term targets.

So is that facility expansion, is that ERP, is that, I mean what kind of you spending all the money on?

Yes. So, the 3% to 4% kind of in the annual normal targets contains all of that and some of the upside on that is additional expansion of the manufacturing platform.

Okay. And then switching gears now that we are basically done with the 2019 bike selling season or well into it, can you talk about some of the shift you saw in market share and maybe how they compare to your initial expectations? And then as a follow-up to that, just how much of the positive outlook and the good stuff going on in terms of the guidance raise and the enthusiasm comes from aftermarket versus OEM?

Yes. So, on your first question we were pleased with the 2019 kind of sell-in cycle. We think that, that comes with some share gain and we think that the industry for our categories of product, are in a good inventory position. But as we have said in previous sort of Q2 calls in prior years, we have done what we think is a good job and we are pleased with the spec positions that we got. And now we have to see what sell-through is like to see how the balance of the year plays out. In terms of your second question, what was your second question?

I will take the second question. In terms of the OEM versus aftermarket, we have had, as Larry said, we talked about broad-based strength in the business. We would apply that equally, not necessarily equally the same amount, but we would tell you that we have broad-based strength between OEM and aftermarket. So we are not I guess ready to really ascribe it to one particular segment of the business. Yes, was there another one?

No, I think that was it. Yes, I mean, I think the question was on our enthusiasm, yes, we are pretty enthusiastic about both of them. Yes.

That sounds great. I will hop back in queue. Thanks, guys.

Our next question comes from the line of Craig Kennison from Baird. Please proceed with your question.

Hi, guys. Thanks for taking my questions. Sorry for any background noise. I wanted to follow-up on Scott’s question regarding strength in ORVs, to what extent is your strength in powered vehicles as a function of kind of end-market strength versus spec wins?

Well, yes, I would characterize it. We think that the ORV and Craig, you certainly know this from your surveys is having a pretty good year, we think inventory again balanced across, the industry is pretty good and we think retail is doing pretty well. I think we have been fortunate. We have been I think speced on some pretty popular models and again that’s part of that strategy we have. Our folks coming up with these performance defining technologies that people want to buy and we are going to continue to do that. So I think it is the combination. I think we have clearly done pretty well I think within that market, but that is on top of I think an improved market over the last few years.

And then I wanted to follow-up on your success with Live Valve now on the Ford Raptor, you have got it on the high-end Polaris. Maybe give us an update on what products that particular technology appears on and how broadly could that product be applied to grow the business?

Let’s see. So, we have it in bike. We had a product launch for Live Valve out of our Asheville location a couple of weeks back. Polaris was kind of first to bring it to market with us on their Razor products, high-end Razor products and now Ford. So, it has a fairly wide range of applications. It makes a difference, people are taking notice, we are extremely pleased with the adoption that it’s gotten and we think it has more places to go.

Yes. I think like a lot of sort of higher end technologies that are electronic, Craig, you will see here. Right now, it’s being adopted at the high end and we would hope that it gets a little broader based adoption. I think it will be a while before we put it on your screen to a damper low.

Well, you don’t know that. I might need one of those. And last question is just maybe an update on the E-BIKE market, to what extent did kind of growth in the E-BIKE market show up at all on your results this quarter and how optimistic are you about the future?

Yes. I would tell you in the quarter, I mean, we don’t breakout the specifics. We did have strength in E-BIKE sales, but I wouldn’t call it out relative to strength in the remainder of the business.

Yes. I mean, I think that we continue to remain enthusiastic about E-BIKEs. We continue to put more development money into E-BIKE to specific product. And I think that’s a wave clearly we want to be able to ride.

That’s great. Hey, thanks for your time.

Thank you, Craig.

Our next question comes from the line of Mike Swartz from SunTrust Robinson Humphrey. Please proceed with your question.

Hey, good evening guys.

Hey, Mike. How are you doing?

Just standing. I may have missed this, but did you change your expectations for Tuscany for the year relative to guidance? I know prior I think you said it was around $41 million, $42 million, something like that, has that gone higher as you have kind of gotten into the business this year?

Yes. In my comments earlier, I mentioned that it has exceeded our initial expectations, but I wouldn’t point out even ex-Tuscany, the remainder of the powered vehicle business was well ahead of our low double-digits longer term target rate.

Okay, that’s perfect. Thank you. And then just with regards to the CapEx investment, I guess as we think about the return on that investment you are making over the next few years, would it sit within maybe your typical or historical I guess return on new infrastructure new capacity? And then second part of that question is, is that going to be more of an El Cajon thing or is that across the North American manufacturing footprint?

Yes, let me start and then I will let Zvi chime in, Mike. I think couple of things are driving it. One is, we have seen pretty good market demand here as this year has developed that as we look out, obviously, we want to invest in our manufacturing platform. I think we also have talked before about now that we have deployed bike fully to Taichung that we would be turning our attention to the U.S. manufacturing platform. So I think you have got two things going on here. One is both looking at those, optimizing existing facilities for that powered vehicle production and we have done a lot of work in that area and we will continue to. I think the other though is that as this year has developed and we have got a good look at the order book, we wanted to get ahead of capacity. So, we have a team looking at how we extend our manufacturing platform. Zvi?

Yes. As Larry has said before, there is always a trade-off between capacity with growing sales and efficiency, right and in years when you grow above target, as we have talked about with frictional costs, you are going to tend to run higher frictional costs, because your footprint doesn’t necessarily – isn’t necessarily as efficient as it could be. And so, this is an opportunity. From time-to-time CapEx tends to work in a step function kind of a way when you make – sometimes it lags, sometimes it gets ahead. And so this is one of those step function opportunities for us with CapEx. As Larry mentioned, we have made some significant investments in the bike part of our platform and the lion’s share of the gross margin improvement that we have seen to this point is as a result of the move to Taiwan and the various initiatives, kind of the next step of the journey that’s been ongoing, but maybe goes on in a higher rate is going through a similar exercise on our North American powered vehicle platform.

And Mike, the other thing I think I can assure you if we didn’t see a good return on these investments, we wouldn’t be making them.

Understood guys. Thanks a lot.

Our next question comes from the line of Randy Konik from Jefferies. Please proceed with your question.

Yes, thanks a lot. I know there was kind of a joke earlier about broadening of the product and the screen door what have you, but I guess Larry it would be interesting to meet a newcomer to the story covering it now is when I think about this business and I have looked at it and I think about what’s going on here, it seems to be a story where product leadership, engineering leadership that’s allowed with a strong brand allowed the company to kind of move into product adjacencies or get on more types of vehicles and more types of products. So in a sense, you are broadening out that business and really scaling out the platform. So, I guess, it’s really interesting for me to hear is when you look at the R&D of the business and how you utilize those dollars and maybe the structure of the organization, how do you think that kind of changes most over the next 3 to 5 years, because you seem to continue the opportunity here where you have this expertise in these product lines that can be extended across other areas or other vehicles or other opportunities? I am just curious of how you think about the way that R&D has setup today and how that kind of changes over the next 3 to 5 years? That’s my first question.

Yes. Let me start and I will let Mario and Zvi comment on the backhand here, but I think the way we think about it, we have a couple of beliefs in this business and first and foremost, this business is driven – we are very much an engineering driven company, but we have got – we are blessed to have people I think in all of our categories that really understand the markets and understand how to turn out these performance-defining products that get them into the hands of these passionate consumers. And I think that’s the way the brand resonates in the market. So, that is a pre-sub. So, we are going to continue to invest in those things. Now, we have got opportunities and I think we have shown that both organically and by acquisition, we can move into direct adjacencies that get sold to that same passionate customer and do pretty well. We believe in smaller engineering teams that are nimble and can respond quickly and I think that’s been a traditional strength at FOX and one we intend to maintain. So, I don’t see that changing. I think we have also been able to figure out again how to stay pretty nimble while we are dealing with Tier 1 automotive suppliers, right which is a trick in and of itself. So, I think you will see us keep doing more of that. We have got R&D money both going into new markets and new applications and we have got money going into extending our work within given segments that we are in. And I think you will see that continue. I think as we made the point earlier, we do intend to keep investing at a pretty consistent rate here as our revenue grows, right. So we are getting more stew on target the bigger we get. And I think that’s what helps us maintain that edge in getting these innovative products into the market. Guys, any?

Yes. I guess I would say that maybe the cadence of that as I mentioned earlier, when we have this excess revenue growth, it’s going to tend to lag, because there is only so many talented engineers that, a) we can find, b) we can integrate into our operations and actually maintain the same kind of caliber of talent that we have attracted this far. We also – as Larry says, we don’t lack for our revenue opportunities. So, we tend to choose between a lot of competing priorities in terms of markets that we are in, markets we want to go after and markets that we think we can have success and we make the choices about where we are going to deploy those R&D resources based on a number of factors, including ensuring that we have a high ROI on them, but no dearth of opportunities that we are going after.

Yes, what Zvi is saying Randy is that screen door damper is pretty low on the list right now.

So, it’s interesting. Then the follow-up is the balance if you will between, I like the actual strategy of being on offense and deploying more capital back into the business as you have all the strength and then you know it kind of came out through the print this evening is the pay-down of debt, so the capital structure is very well maintained. So, how do you think about post the Tuscany acquisition, your acquisition philosophy combined with – you are putting the foot on the pedal – of the gas pedal of the CapEx to kind of further business over the long-term, just curious there?

Yes. In terms of our capital allocation strategy at least for the near-term foreseeable future, we plan not to pay debt down any further than under normal amortization of the loan and the principal reason for that is we have a pretty low leverage ration now well below 1x GTM EBITDA and we would like – so we would like to maintain the financial flexibility should there be acquisition opportunities that pass our financial and non-financial screening to deploy that capital as opposed to paying down debt. And maybe I will let Larry answer the rest of that question.

Yes. I think we continue to run active M&A screens across both parts of our business, bike and powered vehicle. I think we will continue to do that. There are things on there that we think would be great additions. And again as we have said before, it just takes a willing seller to help make a deal. So, you don’t know when those are going to happen. I do think, as Zvi indicated in his portion of the call, we are also not shy about deploying capital in our business to keep growing organically too that is a prime consideration and we are going to balance that with selective M&A opportunities as they come available.

Yes. I mean the number one priority for us, the number one and there is nothing even second is redeploying to support the growth in the business that we own today. That is the number one priority. Our number one priority is not to increase the amount of EBITDA margin this year and sacrifice future EBITDA, we want to execute on our business strategy and that is by redeploying capital into the business we have, because it’s a pretty exciting business we have we think.

Alright, great. Thanks, guys. That was very helpful. Thank you.

Thank you, Randy.

Our next question comes from the line of Rafe Jadrosich from Bank of America. Please proceed with your question.

Hi, it’s Rafe. Thanks for taking my questions.

Hey, Rafe. How are you?

Good. Thanks. So, Zvi, I was wondering if you can give a little bit more color on the shift – the sale shift of $5 million, $10 million from 4Q to 3Q, what’s driving that?

Yes. Look, I mean our company has difference in product introduction cycles. They just vary from year to year. So we would tell you it’s that – inclusive of that is shifts in Tuscany versus their seasonality and what our initial expectations were. I am not going to break it out any further than that, but those are the main drivers.

Okay, that’s helpful. And then for the – I think you beat at the high-end of your sales guidance by around $8 million for the second quarter and then you are raising the full year by at least at the high-end by around close to $40 million. Can you just give a little color on your visibility on the order book? And then what’s giving you the confidence and historically you have guided pretty conservatively, what’s giving you the confidence to raise the high-end of your revenue guidance by that much?

Well, I will tell you, obviously, the thing we look at first and foremost is the order book, right, so that would be the one thing that gives us some confidence. And as we have said before, we work closely with our OEM customers in terms of forecast and what they are seeing in their businesses. That’s another element. We have a variety of ways of reaching the aftermarket and we are active with those channels in terms of activity and inventory levels. So, I think it’s all of the above. I don’t think if what you are asking is have we changed our methodology and how we view the business, not at all. I think what we have seen this year though is progressive strength that has accelerated. And I think we are reacting to that in terms of being able to raise our guidance. And I think it’s consistent with how we have muted before and the good thing is the numbers are bigger. Does that help?

Yes, that does help. And then the – okay, the Ford Ranger Raptor, I think production when it started in July, is that – have you started shipping for that and then the timing of it, how does it compare versus your initial expectation?

Well, I will start with – we have not yet begun shipping. I would tell you, I am sorry, was the question I believe is on shipping or production?

Yes, when will you start shipping, do you have an estimate for when you will start shipping for the Ranger Raptor?

Yes, we would typically ship – we would start shipping towards the tail end of this quarter. I would tell you that could there – I mean there might be a slight difference of what we thought in the beginning of the year, but it’s not a major driver of any change in guidance that we are providing here. We have high expectations for it. We don’t breakout the specifics for any vehicle or customer, but we are enthused about it and not a lot has changed versus what we thought at the beginning of the year.

Yes. And then the final question is can you talk about your exposure to tariffs I know you have baked in the current impact of tariffs into your guidance, but just in terms of like your – as somebody who has a lot of – who does lot of sourcing at Asia, how does that – how are you positioned for potential further tariff increases?

Well, if you think about our business, I break it down into two major components, right in terms of the markets we serve. On the bike side of our business, keep in mind that all of our production happens in Taiwan and we only directly ship back into the U.S. what we felt to the aftermarket and dealers. Now, our customers might ship from Taiwan into the U.S. for end market sales. So, we don’t have any direct exposure for tariffs on the bike side of our business, because things that get imported get imported from other places to Taiwan and we haven’t heard anything of that nature. So, I guess what we have seen announced so far doesn’t at this point for the markets we are in indicate any tariffs on bikes or bike products that we are selling right now. We have some announcement of E-BIKE motors made in China. Those do not directly affect us. So, that part of the business, roughly little less than half of our business is not really exposed that significantly in the current shape – in any shape or form. The other major tariff that we fear I think it could affect us is aluminum. We use a lot of aluminum in our products even in the powered vehicle side of our business, but we know that the aluminum that we use tends to be highly processed aluminum. And so the actual alloy itself we have some exposure for that, but the actual alloy itself and the tariffs on that, they do impact some of it. But from what we have heard and what’s been discussed to this point, we don’t think it’s a major impact. Steel, we use some steel, we don’t use – it is a part of our cost, but it is not some material that we think it has a big impact. I would tell you that overall as it now sits, I won’t say we are not concerned at all because we are concerned, we are watching it, but based on what we have heard to this point, it is contained in our guidance and we feel relatively confident based on what so far has been announced. Should it change, we are going to keep an eye on it and we can’t predict the future and time it ourselves. We have, during the 10 years I have been here, we have, from time-to-time had faced increases in input cost for other reasons, whether it be labor or dollar or currency fluctuation or oil or things of that nature. And over time, we have been able to navigate pretty successfully at certain points increasing cost environments, using a number of different levers, including efficiency internally. And ultimately, if these things are sticky, price comes into the equation as well. We are just trying to – we are conscious of dampening end consumer demand by putting upward pressure on the actual end products and consult through the extra bicycles themselves, the actual side-by-sides themselves, the actual vehicles by our customers themselves. So, I guess long answer to a short question is we are taking a wait-and-see approach and we feel relatively confident right now.

Thanks. That’s really helpful,

Our next question comes from the line of Ryan Sundby from William Blair. Please proceed with your question.

Yes, hey, guys. Congrats on the quarter and thanks for the question. Zvi, just wanted to follow-up on your commentary there, it seems like most of it is focused on the cost side as it pertains to you, but are there any concerns that tariffs, i.e., pressure on farmers maybe could impact end demand on the line on something like powered vehicles?

Look, I think – I mean I think ultimately, the – I mean, you are right to the degree that there is tariffs and they affect our customers who then have to raise their prices or conversely they affect a part of the economy we serve of course they can have an effect. We have seen things like that in the past where when oil prices got hurt pretty hard that affected certain markets, but certain other markets made up for. I do think we are confident about the diversity of markets we serve, the segments we serve and the geographies we are in and always puts and takes, but the diversity of the business model of FOX has been a strength and we don’t think we are overexposed to any one particular segment such as farmers.

Yes, I would also add to that, Ryan. I mean, we are looking obviously at this stuff as it comes out and as I am sure you know it tends to drive rate around quite a bit providing great entertainment value, but we tend to not want to overreact to these things, because they seem to be transient this day and age, but we are closely looking at it, right. And we are closely looking at demand that we have from across our markets and product sets that we serve. And again, I think as Zvi said at this point in time, things look pretty good to us, right. Now as I think we commented on, we will continue to watch it and obviously we hope that continues. We in general would prefer not to have worldwide trade tensions. I know that, that’s helpful in the short-term to anyone’s business and you I am sure have been reading other folks’ announcements in terms of what it could do. But I also don’t think we are going to get too hung up that maybe we start reacting before we need to and help contribute to a bad situation, right, I think that’s what Zvi was referring to. We are conscious that at the end of the day we want to get an innovative product in a passionate consumer’s hands at a price he can afford today. So I think with that philosophy, we will be fine. And again, we have a rule of thumb we use for government activity and it’s two things, one whatever they say is going to take longer, and two when they are done, it’s probably not going to be good for us. And if we stick to that, I think we won’t be disappointed.

Got it. Thanks for that. The insight there is really helpful. And I guess thinking of government activity there, Larry, any kind of updates on some of the whitespace opportunities I know from time-to-time, you will comment on types of the trucking group you might add. Just any perspective there will be great. Thanks.

Yes. I mean, I would tell you – I mean the one that we have got, again, we are anxious. We are not quite there, but deep into test and production is obviously on commercial trucks that we are very pleased with what we see so far, but it’s not quite soon to get it out in a release on all the varieties that it has to have, but that would be the closest one that I think we are excited about getting our stuff into again a new category where we think we have got some technology that helps. I am hesitant to get through that one, because we think it’s a little bit bigger commercial opportunity. The next one behind that would be recreational vehicles, but right now, we are kind of positive, we get over the commercial truck launch.

Great. Thanks a lot guys.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

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

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.