Good day and welcome to the FOX Factory Holding Corporation Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Dan Robbins, Senior Director of Communications and Investor Relations. Please go ahead..

Thank you. Good afternoon and welcome to FOX Factory's third quarter fiscal 2019 earnings conference call. On the call today are Mike Dennison, Chief Executive Officer; Rich Winters, President, Powered Vehicles Group; Chris Tutton, President, Specialty Sports Group; 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'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 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 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 margins, non-GAAP operating expenses, non-GAAP income tax, non-GAAP adjusted net income, non-GAAP adjusted earnings per diluted share, adjusted EBITDA and adjusted EBITDA margins 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, Mike Dennison..

Thanks, Dan. Good afternoon, everyone. We appreciate you joining us on today's call. To start, I'll discuss our third quarter business and financial highlights. Rich and Chris will then provide an update on their respective businesses and brand development. Zvi will then review the third quarter financials and discuss our 2019 guidance.

After that, we'll open the call for your questions. Turning to our results, we feel very good about our record third quarter results, which exceeded our expectations for both revenue and profitability. We benefited from continued strong growth, primarily in our Powered Vehicles Group, and a modest increase in our Specialty Sports Group.

Our third quarter sales of $211 million increased 20%, compared to similar strong growth in the prior year period. Strong performance in the period was associated with our Tuscany division, which develops and markets aftermarket truck solutions then sold through dealerships across the U.S.

In addition, we are continuing to see significant demand for our off-road Power Sports products, which indicates strong consumer preference for our products in North America. In the quarter, we achieved the highest volume of shocks ever shipped, a significant achievement in a manufacturing environment already stretched with volume growth.

From a profitability perspective, we reported non-GAAP adjusted earnings per diluted share of $0.83, representing an increase of $0.11 and adjusted EBITDA of $44 million, or an increase of 11%.

We were reasonably pleased with our ability to control frictional costs associated with manufacturing in California, as well as staying on plan with our expansion in Georgia.

Speaking of Georgia, during the third quarter we also completed and opened our advanced engineering center at Road Atlanta, which will drive innovation across both our off-road and Street Performance businesses.

In Street Performance, we’ve completed our first full quarter with Ridetech, an acquisition we finalized in Q2 and we were pleased with the results. In Specialty Sports, we continued to perform well against a modest industry demand backdrop and remain comfortable with our mid-to-high single-digit growth targets for the year.

Our success is fundamentally due to our innovative product offerings, strong demand from our end customers and ability to lead markets in both North America and Europe.

As a result of our strong year-to-date and quarterly results and our current view of the markets we serve, we are raising our outlook for the year, which Zvi will outline for you in a few minutes.

We look forward to executing on our opportunities for continued growth in 2019 and believe FOX's diversified product offerings will continue to resonate with our customers, demonstrating our commitment to product innovation and growth of FOX brand in both existing and new categories.

We appreciate the strong efforts of our team as we continue to deliver differentiated products to our passionate customer base, which reinforces the value of our brands. Before I turn the call over to Rich, on behalf of the entire team at FOX, I'd like to thank Zvi for his 12 years as CFO and wish him luck in his future endeavors.

Zvi has been an integral member of our executive team, having successfully helped us transition our business from a privately held to a publicly traded company. Zvi's expertise and contributions have significant to our efforts to grow our global product portfolio, drive sales and expand margins.

As we previously announced, on November 1 Zvi will step down from his role of CFO. Our executive search remains ongoing to identify our next CFO. And John Blocher, our Senior Vice President of Finance, will become Interim CFO until a replacement is identified. Zvi will remain available to ensure a smooth transition through February 28 of 2020.

In summary, we are proud of our 2019 year-to-date results. Our outlook for the fourth quarter is robust and we are pleased to be in a position today where we can raise our annual guidance.

At FOX, we remain confident that in the quarters and years to come we are going to build upon our existing accomplishments to generate sustainable growth and [guidance] for our shareholders. And with that I'll turn the call over to Rich..

Thank you, Mike, Good afternoon, everyone. In the third quarter of 2019, sales of our Powered Vehicles Group products were up 37%, compared to the third quarter of 2018. We continued to see high growth across our diversified Powered Vehicles product lineup and these strong third quarter results succeeded our forecast.

Sales of off-road and Power Sports products remain strong and we continue to build on our solid second quarter results. Tuscany had very strong sales for the quarter, with strong demand on the Shelby platform and the new Harley-Davidson models.

In addition, the third quarter, as Mike stated, was our first full quarter with Ridetech, which is part of our newly formed Street Performance division. We have completed the integration of Ridetech, which has gone extremely well, and we're very pleased with the results.

To further promote our push into the street performance market, FOX is continuing its relationship with Road Atlanta, the iconic racetrack near our corporate headquarters in Braselton, Georgia. Road Atlanta annually attracts more than 320,000 visitors from around the globe. Road Atlanta is also now home to our new state-of-the-art tech center.

The 12,000 square foot R&D facility greatly enhances our product innovation and technology development capabilities. We expect that the additional capacity will allow us to more efficiently address our current projects and support our future growth. We recently launched our commercial long-haul products through Raney's Truck Parts.

Raney's is one of the largest online retailers catering to the independent owner/operator accessory aftermarket. Market reception so far has been excellent. Capacities are still constrained until we are able to move into our new Georgia facility. As I mentioned on our last call, we continue to make good progress on our expansion efforts in Georgia.

In early June, we broke ground and started developing a new manufacturing facility in Hall County. The first stage of this expansion project is still on track to be up and running in late second quarter 2020.

We continue to have a strong focus on our off-road-capable on-road vehicle market with our OEM customers Ford, Toyota and Jeep as they continue to market and sell their respective models 2020 products featuring FOX shocks.

These OEM platforms, which are being very well received by media and consumers, raise our brand awareness and inspire passion in enthusiasts to upgrade their current vehicles to be off-road capable with our aftermarket bolt-on suspension solution. In our Power Sports business, Kawasaki recently introduced the 2020 Teryx KRX 1000.

It's the first sport side-by-side in the 68-inch category and it features our FOX 2.5 Podium LSC shocks, combined with the long suspension arms that gives KRX 1000 the longest suspension travel in its class. As we gear up for more off-road racing this fall, I'll conclude with a quick desert-racing update.

In August, FOX driver Bryce Menzies scored the overall win at the 2019 Best in the Desert Vegas-to-Reno race. This was the first Vegas-to-Reno victory and the first win in his all-new, all-wheel-drive truck that debuted at the event last year.

Overall, FOX drivers earned 17 podiums across 10 classes at this race and has just dominated the off-road racing scene. I would now like to turn this call over to Chris..

Thank you, Rich. Good afternoon, everyone. In the third quarter of 2019, sales of Specialty Sports Group's products were up 0.5%, compared to the same period in fiscal 2018. On a consistent currency basis, Specialty Sports Group product sales were up 1.6%, compared to the same period in fiscal 2018.

However, we remain committed to our mid-to-high single-digit growth targets for the year. In our last call I talked about our expanded relationship with Quality Bicycle Products, which services more than 5,000 bicycle retailers through its four U.S. distribution centers.

We had a great initial quarter and we look forward to them helping us grow our U.S. aftermarket business. Awareness of our brand portfolio remains strong thanks to ongoing customer loyalty and engagement programs and initiatives.

DIALED, our new YouTube series about our UCI Mountain Bike World Cup race support efforts, has a library that includes over 50 videos that have more than 1 million combined views. This audience is highly engaged, spending over $7 million net learning about our brand, products, technologies and how we help athletes reach the podium.

In September we sponsored the Marzocchi Proving Grounds. This is the first official Red Bull Rampage athlete qualifier. This high-profile title sponsorship raised awareness with our OEMs and retail partners. We are excited that we are aggressively promoting and investing in the Marzocchi brand. I'd now like to share some product news.

In 2019, the Vital MTB audience surveyed their readers. For the fourth consecutive year voted FOX as both the Number 1 suspension force and the Number 1 rear shock to buy. At Eurobike in Germany we introduced the FOX E Live Valve system, which garnered positive media and industry reaction.

The Live Valve system that we launched last year took home one of three Eurobike Gold Winner awards, the 2019 Gear-of-the-Year award from Bicycling magazine and the 2019 Design and Innovation award from Eurobike – from ENDURO Mountain Bike magazine.

We also introduced our new Marzocchi Z2 e-bike fork [indiscernible] bike, displaying it and other products in a standalone Marzocchi exhibit to showcase the brand. In August at Crankworx Whistler, we introduced our new Race Face Aeffect R dropper seatpost and Aeffect R crank.

We also unveiled the new Easton EC70 and EC90 AX adventure cross wheels using an all-digital approach designed to increase awareness to the Easton Cycling brand's e-commerce site. I'll conclude with a glimpse at our most recent race results.

Our sponsored athletes earned 14 ENDURO World Series podiums at 4 EWS rounds, 40 UCI MTB World Cup podiums at 5 events, 14 podiums at Crankworx Whistler and 7 podiums at the UCI MTB World Championships in Quebec, Canada. And now I'd like to turn the call over to Zvi to review our financial results..

Thanks, Chris. Good afternoon, everyone. I'll focus on our third quarter results, then review our guidance. Sales in the third quarter of 2019 were a record $211.3 million, an increase of 20.2% versus sales of $175.8 million in the third quarter of 2018.

Gross margin was 33% in the third quarter of 2019, a 140-basis point decrease from 34.4% in the prior year period, while our non-GAAP gross margin increased 100 basis points to 33.4%.

The decrease in non-GAAP gross margin was primarily due to the continued shift in customer and product mix, as our larger North American Powered Vehicle OEMs represented a higher proportion of sales.

In addition, we continued to experience manufacturing and supply chain inefficiencies as a result of the increasing demand, which negatively impacted gross margins. However, we did see some slight improvement in the quarter versus earlier in the year.

Total operating expenses were $34.5 million, or 16.3%, in the third quarter of 2019, compared to $29.1 million, or 16.5%, in the third quarter last year.

The increase in operating expenses on a dollar basis was to support our growth, is primarily due to higher personnel costs as we invest in product innovation, operating costs related to Ridetech and increases in facility and various other administrative expenses to support the growth of the business, partially offset by lower patent litigation related expenses.

Non-GAAP operating expenses stated as a percentage of sales were 14.9%, compared to 14.3% in the prior year period. Focusing on expenses in more detail, sales and marketing increased $2.1 million, due to our recently acquired Ridetech subsidiary, personnel and various other event and promotional-related activities.

R&D was up approximately $1.6 million, primarily due to increased personnel investments to support new product innovations and costs associated with Ridetech, partially offset by lower prototyping expenses due to project timing.

As we've consistently stated, the 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 third quarter of 2019 were $12.7 million, compared to $11.2 million in the prior year period.

The change was primarily due to $1.2 million in payroll-related costs, $0.7 million of facility and depreciation expenses, $0.4 million of professional fees and various other items, partially offset by a $1.1 million decrease in litigation-related expenses.

For the third quarter of fiscal 2019 our effective tax rate was 12.9%, compared to a tax rate of 19% in the third quarter of [fiscal 2018]. The decrease is primarily the result of lower U.S. rates applied to certain foreign activities and ongoing benefits from our Q4 2018 restructuring activities.

Adjusted EBITDA was $43.6 million for the third quarter of 2019, compared to $39.3 million in the same quarter last year. Adjusted EBITDA margin was 20.6%, compared to 22.4% in the prior year quarter.

The lower EBITDA margin is primarily due to the change in gross margin I highlighted in my earlier comment and the increase in non-GAAP operating expenses due to timing.

On a GAAP basis net income attributable to FOX in the third quarter of 2019 was $29.5 million, or $0.75 per diluted share, compared to net income of $24.3 million, or earnings of $0.62 per diluted share in the prior year period.

Non-GAAP adjusted net income was $32.7 million, an increase of $4.5 million, compared to $28.1 million in the third quarter of the prior year period. Non-GAAP adjusted earnings per diluted share for the third quarter of 2019 was $0.83, compared to $0.72 in the third quarter of 2018.

Now, focusing on our balance sheet, as of September 27, 2019, we had cash on hand of $32 million. Total debt outstanding was $73 million, compared to $59.4 million as of December 28, 2018. Inventory was $131.2 million, compared to $107.1 million at the end of 2018.

Accounts receivable was $106.8 million, compared to $78.9 million as of December 28, 2018. And accounts payable were $64.9 million, compared to $55.1 million at the end of 2018.

The changes in accounts receivable, inventory, accounts payable and debt are primarily attributable to the growth of our business and normal seasonality, as well as the impact from our Ridetech acquisition.

Additionally, our net property, plant and equipment increased to $102.6 million as of September 27, 2019, compared to $64.8 million at the end of 2018, which includes $18.6 million due to the impact of new lease accounting standards adopted in the first quarter of 2019. Turning to our outlook.

For the fourth quarter of 2019, we expect sales in the range of $175 million to $181 million and non-GAAP adjusted earnings per diluted share in the range of $0.57 to $0.62. For fiscal 2019, we're raising our outlook and now expect sales in the range of $740 million to $746 million.

We expect non-GAAP adjusted earnings per diluted share in the range of $2.64 to $2.69 for fiscal 2019. We continue to expect full-year 2019 EBITDA margins of 19.5% to 20% and non-GAAP operating expenses to run 15.5% to 16%, consistent with our previous outlook.

I would also like to point out that our guidance continues to include the impact of tariffs and higher input costs based on current conditions. We continue to expect production in the new Georgia facility to begin in the second quarter of 2020 and ramp throughout the balance of the year.

And while we're not yet providing guidance for 2020, we would expect some inefficiencies to continue, as well as additional duplicative costs during this ramp next year. We expect CapEx for 2019 to be in the range of 5.5% to 6.5% of sales, which reflect the impact of our previously announced operations expansion.

Our guidance now assumes an annual non-GAAP tax rate of 12% to 14%, which is slightly lower than our previous expectation. We continue to expect some quarterly fluctuation in tax rates to occur during the year due to the timing of certain variables such as stock option exercises and stock prices that are difficult to predict.

I'd also like to note that we're not providing guidance on GAAP EPS as it cannot be provided without unreasonable efforts due to the difficulty of accurately predicting the elements necessary to provide such guidance and reconciliation.

Before I turn the call back over to Mike, I'd like to first thank the Board of Directors and everyone at FOX for making the past 12 years so rewarding. It's been a privilege to work alongside such a talented and dedicated team. I'll look forward to continue to work closely with Mike and the team during the transition.

I'd like to now turn the call back over to Mike..

Thanks, Zvi. We now would like to open the call for questions.

Operator?.

Thank you. [Operator Instructions] And the first question today comes from Michael Swartz of SunTrust. Please go ahead..

Hi guys good evening..

Hi, Mike..

Hi. Just wanted to touch on gross margins for a second. I think this is the fourth straight quarter we've seen that decelerate quarter-over-quarter. So, maybe give us a sense, Zvi, on how you're thinking about gross margin playing out for the rest of the year and then into 2020, specifically with the ramp of the new facility going on.

How should we think about that playing out?.

Yes. As we stated, during the course of the year because we're moving into Georgia, or expanding in Georgia, we're not making some of the longer-term investments you'd ordinarily make while you're in a facility that's stretched in terms of capacity. So, we're experiencing basically two big factors that are contributing to the decline in gross margin.

Factor Number 1, which is the larger factor, is the shift in mix with the larger portion of the business being comprised of the larger Powered Vehicle OEMs. And the second factor is the frictional cost as a result of the fact that we're not making some of those long-term investments while we're waiting for Georgia to get up and running.

We would tell you that the shift – the Powered Vehicle business is the faster growing of the two businesses. The long-term growth rate for that business is low double-digit rate, while the long-term growth rate for the bike business is mid-to-high single-digit rate. That business tends to have more of the larger Powered Vehicle OEMs.

So, we would tell you that it's not a temporary situation that we're existing in, in terms of some reversion of mix. In terms of the inefficiencies, we expect them to continue and to some degree increase for next year, as we'll probably have lower inefficiencies, but on the other hand we're going to have some of the ramp-up costs in the new facility.

What we're excited about, though, is that we think as we exit the other side of this, we think that the margins can improve pretty significantly, because we think there's a lot of efficiencies to be had in the new facility in Georgia. But it will take a little time to play out..

Okay. Hopping on that, it sounds like – and you're not giving 2020 guidance. I understand that. But it sounds like the picture you're painting here is that maybe gross margin could take another step back in 2020 before reaccelerating in 2021.

Is that a fair characterization?.

Well, I think it's too early to give 2020 guidance. But we would tell you that the factors that are going to be negative drags on margins are – the new facility will have a little bit of different negative impact. But on the hand, we are doing a better job on mitigating the inefficiencies. So, I think it's a little too early.

We don't know what the final mix will be. The Powered Vehicle business, while it has North American large OEMs, does have a fairly robust aftermarket business as well. So, I'm not prepared to give guidance for 2020 at this point..

Okay. Fair enough. And then just next question. I think last quarter you called out automotive revenue, to give a sense of maybe how big that is or how quickly that's growing.

Is that something you could offer again this quarter?.

We actually called it out last quarter just to give an indication. And it wasn't a factor we were going to call out every quarter.

On occasion, we want to give you guys some guidance just to give you some clarity to the breakup of our business and what it looks like in different elements, but that guidance we gave, or that delineation we gave last quarter on aftermarket versus automotive, was kind of a unique one-off.

We will do it again, but we're not going to do it every quarter..

Okay. Thank you..

The next question today comes from Rafe Jadrosich of Bank of America Merrill Lynch. Please go ahead..

Hi, good afternoon. It’s Rafe. Thanks for taking my question..

Hi, Rafe..

I first just wanted to ask on the bike segment, or the Specialty Sports segment, it decelerated this quarter, but you're reiterating the guidance for the year.

Just like can you talk about some of the dynamics there that might be driving deceleration, why you're still confident about the full year outlook?.

Well, some of that's seasonality or quarter-to-quarter mix shift. So, timing of things in the bike business have a tendency to reflect what happens in one quarter versus another.

A bit like the prior quarter, we weren't surprised about where we were going to end in our Q3 timeframe and we're not surprised about where we're going to end in our Q4 timeframe. So, we feel pretty good about it. But this year there has been some more timing adjustments based on when new product starts were happening.

There is other things in the bike business around e-bikes and equipment and parts and just the whole supply chain that don't relate to us, but does have an impact on when are products actually get installed in these bikes and sold in the markets.

So, when you add a few factors like that, but again, as Chris said, we're real confident with where those numbers are going to end up for the year and where we think we'll be..

And can you talk about just the end market trends you're seeing in mountain bikes, like how you feel about the inventory level?.

Yes. You know, [indiscernible] has talked in some of those areas, but what we're seeing in mountain bikes is the premium bike category, or the higher end part of the mountain bike business, is very strong still. Our spec position on that is really good. So, I actually believe that going into next year we're still very well positioned.

We've got I think, Chris, 9 new product launches next year. So, we just feel great about kind of where we're stacking up to closing 2019 and go into 2020. We'll give you the 2020 guidance on the next earnings call. But there's nothing here that we see as a significant headwind. We just think that we're still beating the market.

The market's not at 5%, Rafe, in general. So, for us to be between – in the mid- to high-single digits is pretty good and we're okay with it..

And then the final question for me. You talked about the gross margins from some of the larger OEMs. Can you just talk about the overall EBIT margin for those OEMs? Because even as the gross margins come under pressure, the operating margins continue to stay pretty strong. If you could talk about just the [indiscernible]..

Yes. Look, we think that – I think that's entirely true, actually, exactly true. Sometimes a lower gross margin also equates to a lower EBIT margin, sometimes not.

Depending on when you have higher gross margins you might have a more diverse SKU count, which means lower – I mean, which means you might have more R&D costs, et cetera, to support that customer. So, it doesn't necessarily translate 1 to 1.

With all that said, I guess what we feel good about it is we had put a long-term EBITDA margin in excess of 20%. We still feel very good about achieving that long-term EBITDA margin once we get past some of the inefficiencies we're experiencing while we're ramping up Georgia.

We think that the customer relationships we have with the profitability dynamics are very, very healthy..

Makes sense. Very helpful. Thank you..

Thanks, Rafe..

The next question today comes from Larry Solow with CJS Securities. Please go ahead..

Hi, great. Good afternoon, thanks. Zvi, first of all, good luck to you. It's been great working with you for the last six-plus years since you went public and wish you the best of luck. Just couple of follow-ups.

On the question on the margin on the Powered Vehicle side, as you ramp up and get past the ramp-up stage and look out into 2021 and beyond, is there something – you mentioned you see material opportunity there.

Is this something that we could sort of compare to the Taiwan opportunity you had on the – what was bikes then and Specialty Sports today, where you were increasing gross margin by, at least on the bikes side, 100 bps a year? Is that something we can potentially look forward to on the Powered Vehicles side as well?.

No. I think it's a little bit different. I mean, the differential in labor and other costs California to Taiwan is much greater than the differential in labor between certain parts of the U.S. and other parts of the U.S. So, I don't think that's the case.

Again, I think what I was pointing to is I do feel, we do feel confident about the 20% EBITDA margin, but whether we – I don't think we're willing to say that it's 22% or 23%, but we're willing to say that we believe we can be in excess of 20%, even our margins on a long-term sustainable basis..

Yes, Larry. From my perspective, our ability to run production and manufacturing solutions in this Powered Vehicles space where we've got a higher degree of automotive OE-type customers is actually really good for us because it creates predictable, sustainable manufacturing. You can vertically integrate it. You have good [low] forecast.

They don't change daily. It's just a really good product manufacturing environment. And I think there's a lot we can do with it. It's hard to do that right now in California just because we're stretched so far. But I think in general that can be a really good solution for us in the new expansion plan.

And, frankly, the fact that we actually shipped a record level of shocks last quarter out of our California factory is pretty impressive. It was quite a feat to get that done..

Right. Absolutely. And then just on the bike side, I guess one thing worth noting is – or Specialty Sports here. You had a pretty difficult comp Q3 last year. I think you grew over 20%. So, you said maybe some timing comes into effect. And I think it looks like timing last year you had the best quarter of the year by far.

So, maybe that just made this quarter's timing – exaggerated the timing a little bit..

Larry, thanks for pointing that out. I would say our business – the seasonality from Year A to Year B, it changes for different reasons every year. And as Mike said and Chris said, we're really pleased with achieving – or on track to achieve our mid- to high single-digit growth targets for the year.

And we're pretty excited about the product lineup this year and future years..

And just sticking with bikes and I know you don't break out gross margin by segment, but just qualitatively since obviously you discussed the Powered Vehicles side where there's a little bit of pressure there, or growth pains or anything.

But on the Specialty Sports side, obviously you've moved past your years where you had some pretty nice gains there.

But if you would isolate that and maybe not quantify it exactly, but gross margins there, are they sort of flattish or are they going up a little bit? I know you've moved down a little bit on price points, but pretty small amount I guess of the overall product.

So, can you give us any idea of where the direction they're headed?.

We'd rather not comment on the gross margins. What we would tell you is that we've gotten out of – that facility is a lot more efficient. We've been there a number of years now and we've gotten a lot of the efficiencies out there. We'd rather not comment on gross margins by segment. [Indiscernible] a great job..

Fair enough.

Just lastly, any update on the commercial tractor trailer update, anything you can tell us there? This year it seems like it's a pretty modest amount of sales, but could we expect growth going forward incrementally as you look out the next few years?.

Yes. I talked about this a little before, Larry. We're really relying on the Georgia expansion to give us the capacity to meet the demand out there. But I'll tell you – and Rich mentioned that we launched with Raney's, which is the largest aftermarket long-haul-type shop in the country that sells our product now.

We also put our catalog online live, so people can actually go on the catalog and buy parts. So, we're seeing the demand. That's actually creating increased demand, increased demand that right now we're not fulfilling. And we're kind of holding some of that business back until we can get to a more elegant manufacturing solution.

But Raney's launch this last quarter and the go-live on the catalog were a couple of big steps to head us down the right track..

It sounds like somewhat of a high-class problem to have, too, so sounds good..

Exactly..

Alright, thank you very much..

The next question today comes from Scott Stember with CL King. Please go ahead..

Good evening and thanks for taking my questions. Maybe just circling back to the bikes, I do appreciate that you are going up against a very difficult comparison.

Last year you had a phenomenal year, but can you just remind us how you guys from a perspective did on the last year so we just get an idea of how successful your products line? Maybe just give us a little feel of what you're thinking about for the next – the 2021 model year?.

It's Chris Tutton here. We were very well positioned last year. Our sales are organically tied to our customers. So, as bicycle sales go up, our sales would go up on the OEM side. So, we had great spec last year. We're early in the spec season going into this next model year. And I think that again we're positioned well.

As Mike mentioned earlier, we have nine new suspension platforms we're launching and we have a number of different component and wheel products we're launching. So, we have a lot of new product and a lot of new marketing initiatives and a great market share. So, we're excited going into next year..

And as far as aftermarket, just aftermarket, either segment it's in, obviously it's a smaller piece of the pie the last few quarters, but maybe just give us an idea about just quantitatively or qualitatively the growth levels there..

Sure. We’ve had some really bright spots. I think Canada, for instance, and a few other markets internationally have done extremely well for us. So, that trends to aftermarket being very, very strong. Again, strong product offerings, strong brand, all of those things have helped for sure.

Our carbon crank business, we've shipped an immense amount of carbon cranks this year on the component side, so that's also helped our aftermarket business, which components, primarily is a higher shift to aftermarket versus OE. So, again, we're feeling really good about it. We had great race results.

We've got a lot of demand for product and we've got a lot of new product in the pipeline on its way through to the consumer..

Alright. Last question on Powered Vehicles. You led the way talking about Tuscany, so I imagine that that had one of the biggest impacts to the positive side.

Could you maybe just give us a little more granular details of what's really there and what's driving the forward progress?.

Yes. I'll start and then I'll let Rich jump in, too. So, yes, Tuscany had a really strong quarter for us. We don't break out their numbers independent of the other ones on the call. But they had the Harley Davidson launch. And that was a great opportunity for us to do a tremendous amount of volume this quarter.

It's usually a big quarter for them anyway and it just happened to be a great quarter this year. So, some of that was timing and some product opportunities that moved in from – it would have been Q4 to Q3. So, we took advantage of those.

And I think that production solution that we have in Elkhart, we really kind of hit stride, almost 100% throughout the quarter. They're making a tremendous amount of vehicles on a per-day basis, which really helped them get the first shipments out the door. So, it's kind of a function of both operations and good production.

And the Harley Davidson launch, which really helped us, as it got into volume.

Rich, would you add anything?.

No..

That’s all I have. Thank you..

Thank you..

The next question today comes from Alice Wycklendt of Baird. Please go ahead..

Yes, hi gentlemen. This is Alice in for Craig. Thanks for taking my question. Many of them have been answered, but just wanted to look at your Q4 guidance. I think the revenue midpoint implies kind of low double-digit growth, while the EPS midpoint is more like low single digits. That's a wider gap I think than we've seen in recent quarters.

So, what are some of the factors driving that disparity?.

I think the biggest issue – we had a really low tax rate last year. So, that's probably the biggest factor..

Okay. And then you did note that tariffs are included in your guidance.

Any way to quantify the headwind you've experienced in 2019 and maybe what your expectations for that are in 2020?.

It's not that material. We talked about a couple pennies here and there. It has not been material. We felt the need to call it out because there's so much focus about it in various industries. But it has not been a big issue for FOX. Nor do we expect it to be. Nor, based on what we know today, do we expect it to be.

Now, if something should change, we of course might reserve our – we might reserve our ability to change our opinion..

Great. That’s all from me. Thanks..

Thanks, Alice..

The next question comes from Jim Duffy with Stifel. Please go ahead..

Thank you. Good afternoon. Question on the Powered Vehicles. We all know the automotive OEM growth has been strong, but it seems you have a lot of momentum in the aftermarket offerings, the Tuscany sport truck and other things.

So, looking to 2020, do you expect OEM revenue to continue to outpace the aftermarket revenue? Or does that mix drag to margins ease as we look into 2020?.

Look, as we said, I think – I don't think we want to give guidance for next year at this point yet. It's too early for us to comment about that. We think that – I guess what I was trying to point out in my earlier comments is we don't necessarily expect it to revert back.

Whether it changes, whether OEM becomes a bigger portion of sales, at this point we'd rather not comment about it until we give guidance. But we're not – I don't think we think there's going to be a big drag on margins next year because of mix..

And, Jim, I think a positive on what we see as we kind of look out into the outer years is the breadth of the portfolio, meaning the different vehicles we're on and the different OEMs that we're with. So, we've talked about Toyota. We've talked about [SPA], we've talked about Ford.

If you look back just a couple of years ago it would have been pretty much a Ford-only show. It's now a much broader portfolio than that. And I think that helps us in the long term. I think some diversification here is good.

And we're actually seeing the cycles by which they're renovating and innovating and developing new vehicles, is happening quicker than it used to in Detroit. So, that's an opportunity for us, because they're making better and better trucks and they're looking for us to help them to fulfill those vehicles with higher caliber products.

So, I kind of look forward and think that's a good part of our business that gets stronger over time..

Great. Now, I wanted to dig in on the Powered Vehicle aftermarket growth a little bit.

Can you talk about the types of vehicles that are driving growth there? Is it [indiscernible]?.

It's not just the types of – yes, it's a good question. It's not just the types of vehicles. Maybe I can help kind of corral that a little bit. The [indiscernible] vehicles we're testing when we're doing the [outfitting] and that's very clearly Ford and GM, et cetera, is what really drives most of the demand in that space.

But in aftermarket shop sales, and we sell through dealers, distributors and through – sports trucks we sell that into a wide range of different B2B solutions. That's across the board and we're seeing that being driven by new innovation, new product launches that we've done throughout the year.

And that's really helped us tell the FOX story and BDS and JKS and the brands that we have out into a pretty wide audience. And you'll see that really being driven on the Jeep platform, Dodge platform, the GM platform, the Ford platform. It's across the board.

And that helps us, because that aftermarket diversity really gives us a more predictable growth and gives us a more sustaining business..

That’s helpful. Thanks, Mike..

The next question today comes from Alex Maroccia of Berenberg. Please go ahead..

Hi, good afternoon guys. Thanks for taking the questions. So, first one is just a follow-up on one I heard earlier in regards to the commercial products.

It sounds like the sales are pulling through there pretty nicely, but where are the sales right now in relation to your expectations? And how is it relating to gross margins given that capacity is not as high as you'd like for those products?.

When you talk about commercial products can you clarify what you're referring to?.

For the long-haul trucking..

Yes. It is still – we're very excited about the space. We think that it can be one of the many drivers we have to continue growth. But the impact in margins is very small at this point. It's still a very small part of our business..

The part we like about it, it's in the aftermarket space so margins tend to be a bit stronger, which is what we've talked about in aftermarket. And as we're focused in that area, as we do expand the volumes and actually support more and more of the dealers and retail shops and other things, that should help us.

So, on a forward-looking basis, it looks very attractive. We've just got ways to get there..

Okay, that makes sense. And then one more on products. You've brought up the marine and military in the past.

Can you just give an update on what you're seeing right now in those markets?.

Yes. They're pretty predictable. I mean, marine is not a volatile market for us, so we can kind of look at it on a year-on-year basis and know what we're going to go do. It's a little bit constrained just from the same reason the long-haul business is constrained.

That's because it's using some of the same factories as our early and aftermarket business. So, though we have optimism around that long term once we can kind of un-constrain it, if you will, and because it's such a small part of our business now and has such a big TAM, it has definitely significant growth opportunity going forward..

Okay, got it. And then last one is on OEM contracts.

What are you guys seeing in the market right now for more of these off-road vehicles similar to a Ford Raptor, a Jeep Gladiator, in terms of contracts that might be coming up soon, and then opportunities abroad?.

Yes. So, we can't talk about the agreements and the platforms that we're entering into before the OEMs actually announce them publicly. So, we won't front run those announcements, but at the same time, we can see the heavy success or the great success of the Ford Raptor has kind of launched an entire new sector of trucks.

And obviously that benefits us and it creates conversations that we probably wouldn't have had before with different folks. And when you're thinking about the platforms in the future that we're on or will be on, it's pretty compelling. So, I think that whole notion of sort of a hero truck that the Raptor created.

Everybody took notice and said, "You know what? I want a JT Rubicon," if you're Jeep or with the new GM product. They want to have a similar vehicle of that kind of capability in their portfolio..

Alright, that’s great. Thanks a lot guys..

The next question today comes from Ryan Sundby of William Blair. Please go ahead..

Hi, guys. Thanks for taking my question.

Mike, with the acquisition of Ridetech off to – it sounds like a good start here and now the opening of the R&D center at the Road Atlanta track, could you maybe just take a step back and provide some color on what you think success looks like for the Street Performance group maybe here in the near term over the next year or so? And then as that business kind of grows and establishes itself what's the timeline when you think that business starts to kind of support that next leg of growth you talked about?.

Yes. I've talked before, as you know, Ryan, about Street Performance and where I think that category can go.

It has evolved with similar footsteps to what we've done off roading the Powered Vehicles Group and that getting our Mooresville, North Carolina center opened up, getting the Road Atlanta R&D center opened up, it gives us access to vehicles and to race applications and allows us to really develop some very interesting technologies that can not only be on the racetrack.

It can be on the road. That whole opening of our door into Street Performance – Ridetech has performed well. We see it performing well in the future. It won't be a short road. It will be typically a longer road to get to meaningful revenue and profit.

And that TAM is so big that along the way you really have to pick what part of that TAM you want to be a part of, where are you going to sell those parts into. And as you know, we're not a commodity supplier at all. We're going to focus on highly innovative, high technology products that helps people go faster further on racetracks and roads.

And I think over the years in our three-year planning and five-year planning it becomes a pretty meaningful part of our business. We're not quite ready yet to go give guidance on where that would be over time.

With what Rich and the team are doing and the investments they're making in both product and capability, I think you guys will see a kind of continual forward progression as we build and extend that business..

That’s great. Thanks for the color there, Mike. And I just want to say congrats to Zvi as well as he moves forward to the next phase. Thanks a lot..

Thanks, Ryan..

This concludes our question-and-answer session. I would like to turn the conference back over to Mike Dennison for any closing remarks..

Thank you for the questions and your interest in FOX. Our team has done a tremendous job year to date and I would like to thank all of them for their hard work. Your collaboration with our customers and suppliers remain important to our continued success.

We look forward to speaking to you again when we report our 2019 fourth quarter and fiscal year results. Have a good evening..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..