Fox Factory Holding Corp

NASDAQ:FOXF

Earnings Call Transcript 2018-Q4

[Operator]

Greetings, and welcome to Fox Factory Holding Corp Fourth Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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, you may begin.

[David Haugen, General Counsel]

Thank you. Good afternoon, and welcome to Fox Factory's fourth quarter and fiscal 2018 earnings conference call. On the call today are Larry Enterline, Chief Executive Officer; Mike Dennison, President of Powered Vehicles Group; Chris Tutton, President of 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 may involve a number of known and unknown factors, 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, 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 and 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.

[Larry Enterline, CEO]

Thank you, David. Good afternoon, everyone. We appreciate you joining us on today's call. To start, I will discuss our 2018 business and financial highlights. Mike and Chris will then provide a more detailed update on the respective businesses and brand development. Zvi will then review the fourth quarter financials and discuss our 2019 guidance. After that, we will open the call for your questions.

Before I review our performance, I want to spend a moment on the announcement we also made today about my decision to retire from my role as CEO at the end of the second quarter of 2019. Mike Dennison, our president of powered vehicles group will succeed me as CEO on June 29. Mike's vast international operating experience and deep understanding of Fox, our people, and diverse end markets make him uniquely qualified to lead Fox into the next phase of our growth. I look forward to continuing to work with Mike, the board of directors, and our entire Fox team on strategy and business development initiatives in my new role as Executive Chairman. Under Mike's leadership, Fox will continue to execute our shared strategic vision for growth.

Now onto our earnings. We had a strong end to 2018 with record financial results. We benefited from consistent execution and favorable business fundamentals in our powered vehicles group and in our specialty sports group. Our broad based growth led the annual sales and profitability well above our initial expectations. Our 2018 sales of $619.2 million increased 30% compared to the prior year. It was also a record year for profitability with non-GAAP adjusted earnings per diluted share of $2.22 and adjusted EBITDA of $124.6 million.

Fox’s differentiated market position continues to fuel our growth in new and existing categories. It's a privilege to lead our dedicated team and I appreciate their consistent passion and enthusiasm for the Fox brand. This translates into the strong relationships we have with our athletes and OEMs, reinforcing the value of our brands across the diverse end markets we serve. We believe Fox remains well positioned for future growth. The underlying fundamentals of our business and end markets remain strong. Accordingly, we are initiating strong guidance for 2019, which Zvi will detail in his portion of the call.

Based on our strong operational and financial results, as well as our outlook for 2019, we continue to opportunistically make strategic investments to expand our manufacturing capacity primarily in our US operations to better support the needs of Fox's growing business over the next several years. We are diversifying our manufacturing platform while providing additional long-term scalable growth for our powered vehicles group.

We completed the relocation of our Fox corporate headquarters from Scotts Valley, California to our existing offices in Georgia at the end of 2018. These are important strategic actions to help further diversify our manufacturing platform and provide additional long-term capacity to support growth over the next several years. In summary, we had a strong finish to 2018, our team remains confident about our opportunities for continued growth in 2019. We believe Fox's differentiated market position will continue to fuel our expansion in the diverse end markets we serve.

And with that, I'll turn the call over to Mike.

[Mike Dennison, President of Powered Vehicles Group]

Thank you, Larry. And good afternoon everyone. First off on behalf of our entire team, I'd like to thank Larry for his tremendous contributions to Fox. He is an exceptional leader who's guided Fox to extraordinary growth and will continue to play an important role as Executive Chairman. Larry developed the foundation for long-term success, building enduring international brand and an outstanding team that’s poised to continue delivering superior performance.

I'm honored to have the opportunity to succeed Larry as CEO and I look forward to continuing to work closely with him during this transition and in the future, with his roll of Executive Chairman. Fox is a unique company. And it's been my pleasure to work alongside such high performing teams who care about delivering best in class performance to find products with an authentic brand experience. I'm confident we're going to build upon existing accomplishments to generate sustainable growth and value for our shareholders.

Now, focusing on fourth quarter results. In the fourth quarter, sales of powered vehicle products were up 47.7% compared to the fourth quarter of 2017. And our fiscal year 2018 sales were up 46.5% compared to prior year. These strong results are due to continued high growth across our product line up, particularly with our off-road capable, on-road suspension product. In addition, sales of upfitting products from our customers division further contributed to the strong growth. We remain focused on the off-road capable, on-road vehicle market and we're excited about the prospects of our automotive OEM customers; Ford, Toyota, and Jeep. In fact, one of our latest platforms was the all-new highly anticipated 2020 Jeep Gladiator Rubicon that debuted at the Los Angeles Auto Show in November.

And at this month’s Chicago Auto Show, Toyota unveiled the 2020 Sequoia TRD Pro featuring Fox shock. It is the fourth model in the TRD Pro lineup, all of which right on par. We also introduced shock and stirring stabilizer packages for the 2018 and 2019 Jeep Wrangler and Ford Super Duty models and we added a performance series 2, 2.0 iQS or Intelligent Quick Switch shock application for 2017 2018 Jeep Wrangler.

We believe the popularity of our OEM vehicle products validates both the market’s appetite for such vehicles and the customers’ desire for performance defining product. As an example, the Ford Raptor Ranger has been very successful in Southeast Asia and Africa and recently won the 4x4 of the Year at Australian motoring awards. We are driving product expansion in our testing and sport truck USA businesses as well.

In February, Tuscany unveiled the officially licensed 2019 F-150 Harley Davidson addition at the Chicago Auto Show. The autoblog.com editors wrote: “The list of custom exterior features is massive, but one sticks out. Tuscany gave the F-150 some pretty sweet 22-inch milled aluminum wheels that are a direct visual link to the wheels seen on the Fat Boy”. In order to support this tremendous growth and as Larry mentioned earlier, we're ramping up our Georgia presence including significant additional manufacturing capacity in Hall County. Once operational in the first half of 2020, this will help optimize our manufacturing and supply chain footprint.

Now let's move on to some racing highlights. Racing is in our DNA and partnering with race professionals who are at the top of their sports helps define the Fox brand. On the off road racing and winter extreme sports circuit. Fox drivers swept the top five overall at the 51st SCORE Baja 1000 with one clinching the 2018 SCORE International Trophy truck championship. UTV racer, Wayne Matlock, won the Baja 1000 Pro UTV, Forced Induction class and the 2018 Pro UTV F1 championship. He also helped his team capture the overall SCORE Series championship title, a first for UTV.

In his first Dakar Rally, Casey Currie finished fourth and earned the Rookie of Dakar award. At the 2019 Best in the Desert Parker 425, Fox Athletes scored the overall win and three class victories. Jason Scherer won the 13th annual King of the Hammers race, becoming the first back to back champ and the only the second to win it three times. Fox athletes finished first and second in the Desert Invitational [indiscernible]. And finally, our Fox athletes took home seven metals at the 2019 Winter X Games. Our race program has a great future, like it has throughout history, racing will remain the center of the Fox culture and our success.

With that, I'd like to turn the call over to Chris.

[Chris Tutton, President of Specialty Sports Group]

Thank you, Mike. Good afternoon everyone. During my remarks today, I'll talk about a few of our recent specialty sports groups business highlights. In the fourth quarter, sales of bike products were up 11.9% compared to the same period in fiscal 2017 and continued the record performance we delivered last quarter. For the fiscal year, sales of bike products increased 14.9% compared to prior year. Especially, sports groups’ momentum continues on the back of a strong model year 2019 portfolio.

Our products are being well received by our OEM and aftermarket customers. Additionally, after extensive research by our leadership team, we relocated our US aftermarket distribution, sales, service and operations from California to Reno, Nevada to better service our customers. Our model year 2020 is being well received, and our OEM customers and athletes are optimistic of our overall spec position.

Our bike products continued to win media accolades. Some 2018 highlights include Fox Grip2 dapper cartridge, bike suspension product of the year, Fox Live Valve, Design & Innovation Award 2019 offer components; Fox best rated brand 2018 in ENDURO Mountainbike Magazine reader survey; Fox rated number one dropper post, number one fork, number one rear shock to buy in 2018 Vital MTB reader survey award. Race Face is rated number one crankset and number one chainring to buy in the Vital MTB reader survey award.

Marzocchi Z1 best value in test, ENDURO Mountainbike Magazine. Race Face Next R 31 carbon wheelset, editor’s choice best mountain bike wheels OutdoorGearLab. In their review, the OutdoorGearLab editor wrote, the Next R 31 impressed out testers and takes on the editor’s choice award for Best Overall mountain bike wheelset. The combination of excellent ride quality, freehub engagement, lightweight, impressive durability and good value make this our favorite wheelset in this review.

Earlier in the year, we introduced our Grip2, our next generation sealed cartridge kit damper, [indiscernible] with ENDURO Mountainbike Magazine editor reviewed the Grip2 and wrote: The new FOX GRIP2 damper takes everything that made the Fit4 RC2 damper 'the one to beat' and adds more control to the rebound circuits and reduces friction. On the trail, this results in blisteringly fast performance. As Mike said, racing is a key part of our DNA and Fox athletes help validate innovative technologies and products through the demands on the race course. They also create excitement around the Fox brands which helps expand our customer base and stimulates the Fox brand loyalty.

Here are a few highlights from our 2018 race season. Fox sponsored athletes took eight of the top 10 spots in the men's Downhill UCI World Championship, won the women's Downhill UCI World Championship, earned six of the top 10 overall spots in the Men's Cross Country UCI World Cup, won FMBA Slopestyle World Championship, and the covenant Red Bull Rampage. Racing has always been an integral part of R&D and brand building strategy and we look forward to continuing to build our race program success.

At this point, I'd like to turn the call over to Zvi to review the financial results.

[Zvi Glasman, CFO and Treasurer]

Thanks, Chris. Good afternoon, everyone. I’ll focus on our fourth quarter results, then review our guidance. Sales in the fourth quarter of 2018 were $156.8 million, an increase of 29.5% versus sales of $121.1 million in the fourth quarter of 2017. Gross margin was 32.5% in the fourth quarter of 2018, a 20 basis points increase from 32.3% in the prior period, while our non-GAAP gross margin percentage was unchanged at 32.5%. The improvement in GAAP gross margin was primarily due to acquisition related inventory adjustments in 2017 that did not occur in 2018. Q4 non-GAAP gross margin was flat due to some short-term operating inefficiencies to support the volume growth in certain parts of our business and in preparation for incremental growth in 2019.

Total operating expenses were $28.1 million or 18% of sales in the fourth quarter of 2018 compared to $23.1 million or 19.1% of sales in the fourth quarter last year. The increase in operating expenses on a dollar basis is primarily a result of the inclusion of a full quarter of expenses from our Tuscany subsidiary that was acquired in 2017 December and investments in R&D to support future growth, partially offset by lower acquisition related expenses. We saw some improvement in our operating leverage on the increased sales volume. Non-GAAP operating expenses when stated as a percentage of sales were 16% compared to 16.4% in Q4 of last year.

Focusing on expenses in more detail. Sales and marketing was up $1.8 million, primarily due to 1.2 million of costs incurred at our Tuscany subsidiary. R&D was up approximately $1.7 million, primarily due to increased personnel investment to support new product innovation as well as prototyping and equipment costs. 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 fourth quarter of 2018 were $10.6 million compared to $9.7 million in the prior year period. The change was primarily due to the $300,000 in expenses associated with Tuscany along with growth in other areas of our business, including personnel, facilities and depreciation, partially offset by decreases of $400,000 in stock-based compensation and $200,000 in ongoing litigation related expenses.

For the fourth quarter of fiscal 2018, our effective tax rate was 7.3% compared to 81.3% in the fourth quarter of fiscal 2017. The fourth quarter of fiscal 2017 includes a one-time impact of $9.3 million related to the Tax Cuts and Jobs Act. Excluding the impact of the Act, the company's adjusted effective tax rate was 20.4% in the fourth quarter of 2017. The reduction in rate from 20.4% to 7.3% is primarily due to benefits associated with our international restructuring efforts as well as lower US corporate tax rate resulting from tax reform.

Adjusted EBITDA was $29.8 million for the fourth quarter of 2018 compared to $23.6 million in the same quarter last year. Adjusted EBITDA margin was 19% compared to 19.5% in the prior year quarter. The decrease in adjusted EBITDA margin is primarily due to lower stock-based compensation as a percentage of sales offset by increases in other operating expense categories to support the growth of our business. 2018 was an extremely strong growth year for sales, as we've consistently mentioned, in higher growth years, operating expense growth can lag the growth in sales. We did see some of the catchment and investment spending occur in the fourth quarter. For the full year, we were pleased with our EBITDA margin of 20.1%, which exceeded the guidance we have we provided at the beginning of the year.

On a GAAP basis, net income attributable to Fox in the fourth quarter of 2018 was $20.1 million or $0.52 per diluted share compared to net income of $2.8 million or earnings of $0.07 per diluted share in the prior year period. Non-GAAP adjusted net income was $22.5 million, an increase of $7.6 million compared to $14.9 million in the fourth quarter of the prior year period. Non-GAAP adjusted earnings per diluted share for the fourth quarter of 2018 were $0.58 compared to $0.38 in the fourth quarter of 2017.

Now focusing on our balance sheet, as of December 28, 2018, we had cash on hand of 28 million. Total debt outstanding was $59.4 million compared to $98.6 million as of December 29, 2017. Inventory was $107.1 million compared to $84.8 million at the end of 2017. Accounts receivable was $78.9 million compared to $61.1 million as of December 29, 2017. And accounts payable was $55.1 million compared to $40.8 million at the end of 2017. The changes in accounts receivable, inventory, and accounts payable are primarily attributed to the growth of our business.

Now turning to our outlook. For the first quarter of 2019, we expect sales in the range of $150 million to $158 million and non-GAAP adjusted earnings per diluted share in the range of $0.44 to $0.49. As previously mentioned, we did experience additional operating inefficiencies in Q4 and we expect some of those costs to continue into Q1. For fiscal 2019, we expect sales in the range of $695 million to $715 million and non-GAAP adjusted earnings per diluted share in the range of $2.45 to $2.55. We expect adjusted EBITDA margin percentage to be fairly consistent with 2018.

We expect gross margin percentage to be up slightly in 2019 as benefits from efficiency gains and operating leverage will be partially offset by unfavorable mix due to increased revenue contribution from large OEM. Additionally, we expect non-GAAP operating expenses to increase to approximately 16%, as we continue to invest in the business to drive our future growth. I would like to point out that for the next few years, we expect non-GAAP operating expenses to run between 16% and 16.5% of sales. There is no change to our longer term target of 16.5% to 17% of sales for non-GAAP operating expenses.

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. In addition to our Q1 guidance, we wanted to review our 2019 quarterly cadence. We expect our sales seasonality in 2019 to be similar to 2018. Accordingly, growth will be a few percentage points higher in Q1 and Q2 versus the back half of the year. Seasonality can vary from year to year based on timing of new product introductions and other factors. We expect capex for 2019 to be in the range of 5.5% to 6.5% of sales, which reflects the impact of our operations expansion announced last year. We would note that this guidance is higher than the 5% to 6% we previously guided as some of our planned 2018 expenditures are expected to shift into 2019.

Beyond 2019, we expect long-term capital expenditures to return to our longer-term model of 3% to 4% of sales. For 2019, we expect sales growth for bikes to be in line with its mid to high single digits long-term target and we expect powered vehicle to exceed its long-term target of low double digit growth. There is no change to our longer term growth target rate for both bike and powered vehicle. Our guidance assumes a non-GAAP tax rate of 15% to 19% for 2019. For Q1, our tax rate is projected to be between 11% and 15%. We continue to expect from quarterly fluctuations in tax rate 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 would also like to note that when we are 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.

With that, I'd like to turn the call back over to Larry.

[Larry Enterline, CEO]

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

[Operator]

[Operator Instructions] Our first question is from Larry Solow from CJS Securities.

[Larry Solow, CJS Securities]

Great, thanks. First, congratulations to both Larry and Mike on the announced succession plans.

[Larry Enterline, CEO]

Thanks, Larry.

[Larry Solow, CJS Securities]

Absolutely, I'm pleasured. Just on that, obviously you’re coming off a great year, great quarter and good outlook. Just on the Powered Vehicles side, the above -- sort of above long-term growth rates that your outlook incorporates. It sounds like broad based, but maybe specifically really sort of acceleration on the success side with, on the automotive, on the off-road, capable on road and maybe some better growth at Tuscany, are those sort of the bigger drivers or a little more color on that would be great?

[Mike Dennison, President of Powered Vehicles Group]

Yeah, this is Mike, why don't I start and then I’ll let Zvi and Larry jump in as well. It was broad based, Larry, you called it correctly. We did see some really good growth in both the aftermarket space and the OE space and we see that continuing on into our 2019 and throughout the rest of the year. I kind of highlighted as you know on the call, the things that I thought were probably the most specific relative to Tuscany and our off-road growth with Ford Jeep and Toyota. So those continue to play out really well for us, and what I like about it, we've got a pretty good diversified portfolio. So we expect that to maintain throughout the year.

[Larry Enterline, CEO]

I mean, the only thing I would add is, we're obviously pleased that we exceeded our long-term target growth rates in 2018. We're also pleased that our expectation for 2019 is above our long-term target rates for Powered Vehicles and in line with for the SSG business. There is no change to our longer-term outlook, but it is our job as a management team to try to beat our targets and we plan on continuing to attempt to do so.

[Larry Solow, CJS Securities]

So – and then on the Powered Vehicles side, on the semi-tractors, any contribution is expected from those? Any material contributions in '19 or you've --?

[Mike Dennison, President of Powered Vehicles Group]

We'll see that business continue to grow for us in '19. We don't expect to be a major part of our business in the year, because there is a lot of work to do. And as you know, we tend to start aftermarket and build that capability before we go into the -- a bigger space like OE. So we're going to do it methodically and be very thoughtful about how we grow that business. And as it grows, I’ll spend more time talking about kind of size and scope, but for now, we think that we’ll just continue to evolve throughout the year.

[Larry Enterline, CEO]

Yeah, we're -- just to add to what Mike said, we're very optimistic about the prospects for that business longer term. We do think it's an important part of how we get to that low double-digit growth target on a longer term basis, initiatives such as add other white space opportunities. But if you were just going to look at it from how meaningful it is in 2019, it's not terribly meaningful from a pure numbers point of view. We do think that's meaningful however for the future of the business.

[Larry Solow, CJS Securities]

Right. So certainly qualitatively. Okay. Just a follow-up just on the gross margin outlook. It sounds like some modest improvement expected in '19 or at least in your guidance. Is the transition to Georgia and sort of capacity expansion in Powered Vehicles, is that sort of a -- will that be sort of a similar drag on margins in the short term, sort of similar to your move to Taiwan in the bicycle, our Specialty Products division was a few years back?

[Mike Dennison, President of Powered Vehicles Group]

Yeah, we don't think that that's a big -- there is some cost in there, we don't think it's a huge impact to margins. The bigger impact, we had some pretty exceptional improvement in gross margin in 2019, and we've done that over the last few years. We are seeing a little bit of a shift to larger OEMs in 2019. So there's a little bit of a drag with mix in 2019 that offset some of the benefits we expect to receive from our efficiency initiatives and higher operating leverage. But yeah, and that said, on a long-term basis, so we do believe through the footprint, development and supply chain innovation that will do as a part of the process moving to Georgia, but long term this is a very good thing for us from a profitability standpoint.

[Larry Enterline, CEO]

Yeah, I mean one of the things we've been contending with is, there's always -- when you grow quickly, you’re always faced with trade-off between capacity and efficiency. And when we get faced with that choice, we're trying to of course satisfy customer demand. What we think Georgia allows us to do is to grow more elegantly and to realize some of the efficiencies you'd expect with the higher volume. So we think also in California, of course, as we've grown, we've contended with things such as minimum wage increases and things of that nature. So we're just – we’re now just kind of have a more diverse North American platform and be able to make decisions about where the extra capacity goes as we grow elegantly.

[Larry Solow, CJS Securities]

And the shift sort of little bit back towards large OEMs, I think the businesses have been actual transitioned the other way due part to acquisitions, but is that really related to some new wins on the Powered Vehicle side, particularly in the auto side, is that fair to say?

[Mike Dennison, President of Powered Vehicles Group]

Well, I mean we're -- we would tell you, obviously that the Powered Vehicle growth we expect in 2019 is higher than the longer-term targets and is higher than SSG next year. So obviously in Powered Vehicles, we have a fair bit of business with OEMs that are large both in power sports and automotive. We'd really not like to comment more specifically about which customers or which segments.

[Larry Enterline, CEO]

And we believe aftermarket is also going to provide good growth for us this year. I mentioned the Harley Davidson launch, which was a great success for us at the Chicago Auto Show, and we’re expecting good things from that through the business deal.

[Mike Dennison, President of Powered Vehicles Group]

Yeah, I mean it is broad based. It is broad based, but the mix with the Powered Vehicle business growing faster than the SSG part of the business and some of that is coming from the aftermarket side as well from the OEM side, on the Powered Vehicle side.

[Operator]

Your next question is from Craig Kennison from Robert W. Baird. Please go ahead.

[Craig Kennison, Robert W. Baird]

And Larry, congratulations as you finish an excellent run as CEO.

[Larry Enterline, CEO]

Well, thanks, Craig.

[Craig Kennison, Robert W. Baird]

Mike, as you transition to that role, will you continue to run Powered Vehicles or is that a role you're going to want to fill as well?

[Mike Dennison, President of Powered Vehicles Group]

Yeah, we're working through that transition right now. Ultimately, we'll fill that role and we've got -- we've got a great team. So we’ll look both internally and externally, but we've got a great team here, and I think Larry and I are both confident that that transition will go very smoothly.

[Craig Kennison, Robert W. Baird]

And a question for Chris or anybody really that wants to respond, but it sounds Specialty Sports market, what are your thoughts on any opportunities to grow in wheels or even adjacent markets that have nothing to do with ride dynamics, I know that's come up recently.

[Chris Tutton, President of Specialty Sports Group]

We would probably already have a lot to do with ride dynamics. But we have two full-time wheel machines on board now, we are producing wheels, both domestically and internationally. We have multiple programs that we will be rolling out over the next 24 months. So we see a lot of opportunity there. We definitely see it as a space that we're going to grow in.

[Larry Enterline, CEO]

And I think, as we indicated, Craig, we're actively screening core things that maybe don't hang directly on a bicycle, but have it tied to that same passion to the end consumer. I think we're working with Chris and his team for what those opportunities might be.

[Craig Kennison, Robert W. Baird]

Yeah. And on that front, Larry, could you comment on the M&A environment, and whether you've made any assumption about M&A with respect to your guidance.

[Mike Dennison, President of Powered Vehicles Group]

May I start with guidance? The guidance does not include any acquisitions for this year. We would tell you that if you look on a longer-term basis, part of the way we achieve our longer-term guidance for bike and Powered Vehicles is some tuck-in acquisitions from acquisitions. But in terms of 2019, specifically, none of the guidance presumes that we get a deal done.

[Larry Enterline, CEO]

Yeah. And I would just – the comment overall, I mean we, I think Craig, as we've indicated before, we run active screens both for Specialty Sports Group and the Powered Vehicles Group. We've got plenty of things on those screens we'd like to look at, a lot of them don't realize there for sale right now and that's just the process, as you know, we don't like auctions. I think it's one of those things that if we have a meeting of the minds, we'll obviously announce a deal if we don't, we won't.

So I think in terms of the environment, I mean I think there are things out there. I do think it's cooled down a little bit based on my sense from some of the private equity auctions that were being run, which I think might be a little bit more helpful in putting deals together. But again, we're strategic about it. I think there are certain things that both Chris and Mike are looking for in their businesses, those are the things we're going to focus on. If we can get them at a reasonable price, we will put a deal together. If we can't, we believe we have great organic growth opportunities in both businesses.

[Operator]

Our next question is from Brennan Matthews from Berenberg. Please go ahead.

[Brennan Matthews, Berenberg]

So I wanted to just ask a little bit about, I think, the short-term efficiencies from the quarter, and I think you've mentioned might carry into Q1. I mean are these sort of things I cannot air freight that you're just using to think that kind of outsized growth you've seen or is there any more color you can maybe provide on what is where?

[Zvi Glasman, CFO and Treasurer]

Yeah, this is Zvi. It's the usual suspects, it's expedited shipping, it's over time, it's excess capacity for inventory, kind of the usual suspects you'd expect when you're running to meet strong demand.

[Brennan Matthews, Berenberg]

Okay, great. That's really helpful. And then just kind of one other question for me, I wanted to ask about, kind of with the international opportunity and a little bit more so on kind of Powered Vehicles. And are you expecting any outsized growth in any kind of international markets this year? And I guess even longer term, I mean is this something you see as maybe being more kind of market driven by OEMs, aftermarket or even a combination?

[Mike Dennison, President of Powered Vehicles Group]

It is a combination -- this is Mike. We've already seen growth in overseas in the international markets, especially with things like the Ford Ranger Raptor in Australia and Africa. I mentioned in my prepared comments that we won the truck of the year award in Australia. We're also seeing a big expansion, what we call go fast over landing, and that's kind of a weird phase what it basically means is things like TRD Series vehicles from Toyota, there is a huge swing to that side of the market and that's developing nicely both on the OE side and the aftermarket side.

So really the key for us is to still be focused on that passionate, enthusiast and developing that enthusiast base in some of these markets. Things like the car rally help get our name out there and helps spread our brand. As that expansion happens in brand awareness, we are seeing the growth in both aftermarket and OE. The final comment there is, we do see -- we have seen in '18 and I think we're going to continue to see it, sales of our Tuscany trucks on an overseas basis too which is pretty interesting. So yeah, we feel really good about it. We think it's going to expand and have an impact in 2019.

[Operator]

Our next question is from Randy Konik from Jefferies. Please go ahead.

[Unidentified Analyst]

Hi, everyone. This is actually Anna on for Randy. I know it's still a bit early, but if you could provide any update on the progress on the commercial trucking segment that would be really helpful. Thanks.

[Mike Dennison, President of Powered Vehicles Group]

Yeah. As I mentioned -- this is Mike, Anna. We see that market continuing to build for us, but again, we started out very slow by creating some specific shock solutions that we then put on long distance trucks, maybe trucks go long distances. And we really wanted to test that out, and make sure that the right -- we are developing the right products, but you're going to continue to see that kind of beta testing, prototyping and small production runs throughout the majority of the year, you'll see growth occurring all along the way. But as we mentioned earlier, we don't see it as a meaningful element of our 2019 guidance. We do see it as a very strong element of our long-term guidance and a growth in a way to -- for us to grow in the double-digit type of region.

[Operator]

Our next question is from Ryan Sundby from William Blair. Please go ahead.

[Ryan Sundby, William Blair]

Yeah, hi. Just wanted to say thank or congrats again to Larry and Mike. That's great to see. Just wanted to ask, I see in the K that Europe was down a bit in the quarter. I notice kind of really, kind of tough comp, but just wondering if there is anything else kind of going on in that [Technical Difficulty].

[Larry Enterline, CEO]

I'm sorry, you asked, can you say, did you say Europe, is that what you said?

[Ryan Sundby, William Blair]

Yeah, in Europe. Yeah.

[Larry Enterline, CEO]

Look, the way we think about our business, those figures determine where we ship things, that's not necessarily by end customer destination. The mix of our business is a lot different this year versus last year as well. Our Powered Vehicle business continues to grow, Powered Vehicle group tends to be more of a North American based business. So I would say there's nothing going on in the business that we think geographically is an indicator of the underlying health of the business. It's just a function of mix.

[Ryan Sundby, William Blair]

Got it. And then just I guess with the kind of market pull back in December and then the trade and tariff kind of talk, have you seen your partners behave any differently? Are they managing the inventory tighter or maybe not pushing innovation as hard. Just wondering if you're seeing any kind of behavior change there?

[Larry Enterline, CEO]

I don't think, broadly no. I don't think we see, Mike, Chris, anything that we would characterize as unusual. I think clearly people are paying a lot of attention to their businesses. I mean, I think you've seen a lot of folks announced so far. But no, I think we see it as a pretty normal environment right now.

[Chris Tutton, President of Specialty Sports Group]

Yeah. We do see some lengthening lead times on certain parts and commodities as we go through this process. Most of that indirect can be mitigated by just knowing the forecast and knowing the place that you order correctly. So it’s nothing as having a huge headwind for us in the business.

[Ryan Sundby, William Blair]

Okay, great. And Larry, enjoy the time in Harley.

[Larry Enterline, CEO]

I certainly will, but that's certainly for another couple of quarters.

[Operator]

Our next question is from Jim Duffy from Stifel. Please go ahead.

[Jim Duffy, Stifel]

Larry, congratulations. Very successful leadership.

[Larry Enterline, CEO]

Thanks, Jim.

[Jim Duffy, Stifel]

Mike, congratulation to you as well.

[Mike Dennison, President of Powered Vehicles Group]

Thanks, Jim.

[Jim Duffy, Stifel]

Great year, guys. Understandably the growth could create some inefficiencies, any chance you can kind of quantify the impact of those and speak to your sidelines to resolution of that. When do you expect gross margins to come back?

[Larry Enterline, CEO]

Yeah. We'd rather not quantify the actual dollar impact, but we do think that it's largely going to be a Q1 issue.

[Jim Duffy, Stifel]

Okay. Mike, you mentioned a couple new offerings specific to the Ford Super Duty and the Jeep Wrangler. Can you elaborate on those a little bit, talk about what's new and unique about those? I presume those are aftermarket solutions.

[Mike Dennison, President of Powered Vehicles Group]

Jeep, I'm going to talk about, Jim, because as you know we're on the new JT, which is the first time we're on Jeep as an OE platform, and that's just gotten great reviews and we've seen that really take off. So we like that, that's good for us to develop that relationship with Jeep. And through the process of doing that, we've also built several solutions in aftermarket shocks for Jeep that have had huge demand from the aftermarket.

And we think that's going to continue through 2019. Especially as you see more of a JR crowd out there, I guess in the street and people buy the new JR version versus the old JK version. So we're liking a lot of new technology that we're putting out there and we think that's going to continue. In the rest of the markets like the 250 side and things like that, it is more aftermarket than anything, but that’s great for us. We like those markets and that kind of leads us to stronger relationships with guys like Ford, which has become very strong for us.

[Jim Duffy, Stifel]

Okay. And specific to those aftermarket products, it seems their design and tuned for those vehicles, is there anything that's new and unique to these versions versus prior versions?

[Mike Dennison, President of Powered Vehicles Group]

The newer technologies, depending on the vehicle, it has lots of different technologies we use. When we do two men to each, you're absolutely right, two men to each vehicles, that vehicle becomes a higher performing product. I think we're going to continue to use that aftermarket space to innovate new products. I would call out like the F-150 Harley Davidson edition where we developed a shock specifically for that vehicle and it looks like it's going to have a great success this year. So you're right. Back to your question, we actually build the shock specifically for the vehicles which are going on in the aftermarket and because the technology is getting more and more complex, pretty purpose-built specific to a vehicle.

[Jim Duffy, Stifel]

Great. And then Mike, last one for you. Can you just comment on your thoughts on the side by side market looking across 2019?

[Mike Dennison, President of Powered Vehicles Group]

We've had great success as you know in the side by side space. As a market, our growth has been talked about pretty consistently from BRP and Polaris. So I won't speak to their own businesses and what they're doing. It's still, it's a very good business for us. We just announced recently on the talent products, which were on as they enter more the racing adventures to line of side by sides. So we see that growth happening, but in that market, you see mix shift happen quite frequently and so we'll be in that equation as volume moves from a Polaris to a BRP to a Honda or beyond.

Larry, do you want add anything?

[Larry Enterline, CEO]

Yeah, I think Jim, to maybe get to your question, I think much as you've read from some of our customers, we think the side by side, principally the high-end recreational we participate will be -- will grow this year, the market. So we think we view that as a positive, and I think that's echoed by several of these guys, and again, that's good -- and we're out there as always trying to take more than our fair share or so.

[Mike Dennison, President of Powered Vehicles Group]

The key for our success is to make sure that we're on the premium high performance vehicles during which we pretty consistently do and if we can continue to do that, no matter who wins, we win.

[Operator]

Our next question is from Rafe Jadrosich from Bank of America Merrill Lynch. Please go ahead.

[Rafe Jadrosich, Bank of America Merrill Lynch]

Hi, good afternoon. Thanks for taking my questions. And congratulations to both Larry and Mike as well.

[Larry Enterline, CEO]

Thanks, Rafe.

[Mike Dennison, President of Powered Vehicles Group]

Thanks, Rafe.

[Rafe Jadrosich, Bank of America Merrill Lynch]

Just on my first question, you've done a really good job over the last few years, taking market share in bike, and you have definitely outpaced the overall market. Going forward, where do you see more opportunity? Are there more categories that you could go into? Do you expect the market to continue to grow at a strong rate? Where do you see more opportunity in bike going forward?

[Chris Tutton, President of Specialty Sports Group]

Hi, Rafe. It's Chris. Yeah, I mean, we clearly have indicated our projected growth rate moving forward, we're being conservative, but we think there's lots of opportunity in the markets that we perform and we're continually bringing out new product categories outside of just suspension, looking at components, wheels, other areas where as Larry mentioned earlier, we're looking at other white space opportunities as well for the Special Sports Group.

[Rafe Jadrosich, Bank of America Merrill Lynch]

That is helpful.

[Larry Enterline, CEO]

I mean I think the key for, Chris, in bike division has been, we have innovated and our innovation has driven us to be able to achieve growth above the industry, there's only so much market share you can take, we feel like we have a pretty strong market share, but we're working on innovation directly in suspension and in some of these other categories that Chris talked about. And then lastly, again, expanding SSG to things that don't necessarily hang on a bike.

[Mike Dennison, President of Powered Vehicles Group]

Yeah, and I think Rafe, the other thing I would say is, clearly, the long-term targets that these indicated for Specialty Sports Group, we believe are certainly higher than maybe what the overall bike industry would support. I think we get there several ways, the innovation Chris’ folks are constantly putting out a lot of new products, and as he indicated, a lot of those are outside the sort of legacy Fox suspension business. I mean, we're doing a lot in that area. I think we're also a little excited about being able to expand the TAM, maybe beyond what might be directly on a bicycle with some product areas that are again -- have a tie to that same passion to consumer, but maybe not so directly dependent upon bikes.

[Chris Tutton, President of Specialty Sports Group]

And Rafe, to add to that, we have a pretty diverse portfolio around e-bikes, which is a growing segment in the marketplace, and we think that positions us well moving forward into '19 and '20.

[Rafe Jadrosich, Bank of America Merrill Lynch]

Thank you. And then just Mike, a really broad question, over the last few years, Larry has talked about that the huge white space opportunity in power vehicles and that has definitely proven out. Can you talk about what makes you most excited? Where do you see the most opportunity going forward with over kind of the long-term and then maybe talk about some of the biggest challenge that you see? Thank you.

[Mike Dennison, President of Powered Vehicles Group]

Yeah, Rafe, good question. In terms of white space, we've spent a lot of time thinking about this in the several months and wherever we go and how we get there, on-road for me is an incredibly important space for us to get into. It's not in our guidance today, but we have -- we are developing plans, we have plans on how we can be in that space. We think if you're in the premium end of that market through raise aftermarket and OE relationships, we can grow the TAM of our businesses significantly. Beyond that, we are of course working on things like long haul which you've heard about earlier and we really talked about, and even things like marine and others. But for me, I really look at that white space, both internationally and in the on-road market kind of the things to get after right away.

In terms of the challenges, the biggest challenge we have right now is our growth is, as you've seen, it's been very significant. That causes two things; that causes manufacturing, supply chain challenges that you have to overcome and you overcome those through making sure you have the right people in the right organization in the right processes. So we have to make sure we're delivering to our customers and making sure we’re meeting our on-time delivery, at the same time, we're building an organization that can scale and factories and capabilities that can scale. That's what we lay awake at night thinking about and making sure we do right.

[Rafe Jadrosich, Bank of America Merrill Lynch]

Just following up on that. Can you talk about how the transition, the headquarters to the Southeast has gone. And then where you -- the near term capacity plan outlook and do you estimate significant near-term investments, just to keep up with demand.

[Mike Dennison, President of Powered Vehicles Group]

Yes. So our Georgia -- the transition of the headquarters went absolutely fine. No issue whatsoever. In terms of the capacity build out in Georgia, that has gone very well, but that's a longer process. You're talking about a fairly significant campus.

[Larry Enterline, CEO]

We expect that's a greenfield.

[Mike Dennison, President of Powered Vehicles Group]

Yeah. Greenfield. So that will be online kind of I think the first half of 2020, which is the lowest kind of what we estimate and that's marching to plan today. So we feel really good about it. In terms of what we need for 2019, we actually have capacity in our current footprint that footprint that will get us there, but it's not as elegant as we'd like it to be and that's some the benefit of getting to Georgia, so we can actually really construct automation, supply chain, all those kinds of things that will help us be better at growing in the future. So this year, we've got some plans, near term to deliver on what we've got in front of us with the expectation that early in 2020, when we kind of a purpose-built very, very modern facility.

[Operator]

Great, thank you. This concludes the question-and-answer session. I'd like to turn the floor back to management for any closing comments.

[Larry Enterline, CEO]

Thank you, Matt, and thank you all for your questions and your interest in Fox. We look forward to executing on our opportunities for continued growth in 2019. On behalf of all of us at Fox, I would like to thank our customers and suppliers for their support, and I would like to thank our employees for their hard work, all of which will be important to our continued success. Thank you and have a good evening.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.