Greetings and welcome to the Fox Factory Holdings Corp fourth quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host. Mr. David Haugen, General Counsel for Fox. Thank you. You may begin.

Thank you. Good afternoon and welcome to Fox Factory's fourth quarter and fiscal year 2015 earnings conference call. On the call today are Larry Enterline, Chief Executive Officer, Mario Galasso, President Business Divisions and Zvi Glasman, Chief Financial Officer. By now, everyone should have access to the fourth quarter and fiscal year 2015 earnings release, which went out today at approximately 04:05 PM Eastern Time. If you have not had a chance to review the release, it's available on the Investor Relations portion of our website at www.ridefox.com. Please note that throughout this call, we will refer to Fox Factory as Fox or the Company. Before we begin, I would like to remind everyone that the prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company's control and can cause future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors and risks that could cause or contribute to such differences are detailed in the company's earnings release issued this afternoon and in the Annual Report on Form 10-K filed with the Securities & Exchange Commission. Except as required by law, the company undertakes no obligation to update any forward-looking or other statements herein whether as a result of new information, future events or otherwise. In addition, within our earnings release and in today's prepared remarks, non-GAAP gross, non-GAAP adjusted net income, non-GAAP adjusted earnings per diluted share, adjusted EBITDA and adjusted EBITDA margin are referenced. It is important to note that these are non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures are included in today's press release which has also been posted on our website. And with that, it is my pleasure to turn the call over to our CEO, Mr. Larry Enterline.

Thank you, David. Good afternoon everyone and thank you for joining us today. On today's call, I will discuss key highlights of our fourth quarter and full year results and provide an update on our ongoing strategic initiatives. Mario will then discuss recent highlights from each of our business segments. Zvi will review the financial results in more detail and discuss our guidance. After that, we will open the call for your questions. We finished 2015 in a strong position. Sales for the year were above our expectations and adjusted earnings of $1.01 were at the high end of our increased guidance. Focusing on the fourth quarter of 2015, our topline increased approximately 29% to $95.7 million, which was above our guidance of $87 million to $93 million. This growth was driven by both our bike and powered vehicle products. Bike products were up approximately 23% and powered vehicle products were up approximately 37%. The increase in bike product sales was primarily due to the inclusion of our 2014 acquisition of Race Face/Easton as well as solid performance in our legacy bike business. Powered vehicle product sales reflected higher OEM sales. While we continue to see a positive response to our product lineups in both our bike and powered vehicles segment, we have seen some indication in our order book of side-by-side sales slowing. This trend is consistent with what our OEM customers have been reporting. As an international business, our team continues to be cognizant of worldwide macroeconomic conditions. The environment in 2015 was challenging, and while we believe the current conditions will persist in 2016, Fox's unique brand positioning helped us to perform well in spite of the headwinds in certain of our markets. In the quarter, our gross margin increased 30 basis points compared to the fourth…

Thank you Larry and good afternoon everyone. During my remarks today, I will discuss some of our recent business highlights and touch on some industry trends. I will begin with our legacy bike business. Brand momentum continues to build with the recognized performance of our model year 2015, 2016, and now early ride experiences of our model year 2017 products. Our model year 2016 factory series Float X2 rear shock won Pinkbike's 2015 Mountain Bike Suspension Product of the Year award. They justified their pick saying "It's the Fox Float X2 that takes the win in 2015 due to its massive and effective range of adjustments, reliable performance, and action that anyone would be hard pressed to tell the difference between it and a coil-sprung shock during a blind test." We also received Pinkbike's Innovation of the Year award for our Live Valve Electronic Suspension. Live Valve is currently a part of our racing applications development program. Pinkbike described this category as the most promising product in development not yet available in the market. Their support for choosing Live Valve is, "Because it promises to solve the universal dichotomy of the mountain bike's suspension age: How to design a suspension to produce traction and support and at the same time, maximize the efficiency of its wheezing, unbalanced powerplant, which can barely sustain half of a horsepower?" Model year 2017 products are being very well received by OEMs and Fox athletes. As discussed on previous calls, our initial product offering into a new front fork price point will be included in our model year 2017 lineup. Our acquisition of certain assets of Marzocchi's mountain bike product is expected to extend their product offerings and allow us to reach deeper into the performance mountain bike segment of the market in follow-on model…

Thanks Mario. Good afternoon everyone. I will primarily focus on our fourth quarter results, briefly recap our annual results and then will review our guidance. Sales in the fourth quarter of 2015 were $95.7 million, an increase of 29.1% versus sales of $74.1 million in the fourth quarter of 2014. As previously mentioned by Larry, the increase in sales reflects 37.1% growth in powered vehicle products and 23.3% increase in sale of bike products as compared to the fourth quarter of 2014. The increase in sales of powered vehicle products was due to higher OEM sales and the increase in bike product sales was primarily due to the inclusion of Race Face/Easton's sales as well as solid growth from our legacy Fox bike business, which were up big single digits. Gross margin was 29.9% for the fourth quarter of 2015, a 30 basis point increase from gross margin of 29.6% in the prior year period. The increase in gross margin was due to improved efficiencies, including our now complete move of the majority of our bike production to Taiwan offset by changes in product and customer mix. Additionally, the gross margins for the fourth quarter of 2015 and 2014 include certain acquisition related costs. Excluding such costs, non-GAAP gross margin for the fourth quarter of 2015 increased 90 basis points as compared to the previous year. Total operating expenses were $19.2 million, or 20% of sales in the fourth quarter of 2015, compared to $17.7 million, or 23.9% of sales in the fourth quarter of the prior year. The increase in operating expenses was primarily due to the inclusion of Race Face/Easton's operating expenses. Non-GAAP operating expenses, stated as a percentage of sales, was 16.5%, bringing our year-to-date non-GAAP operating expenses to 16.2%, which is consistent with the previous guidance…

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

[Operator Instructions]. Our first question comes from the line of Jon Berg from Piper Jaffray. Please go ahead.

Great. Thanks a lot guys. Good afternoon.

Hi Jon.

Good afternoon.

I guess, just for my first question, I know you have this long-term guidance of mid-30s gross margin on a GAAP basis excluding acquisition. So I think you are up 90 basis points this year versus that goal. How are you guys viewing how you are trending versus how you planned at this point? I know it's not linear but where are we as far as what you expected?

We think we are trending on track. We think over the next couple of years, we can achieve our long-term mid-30s gross margin for our legacy Fox business, which as we have previously described is a little lower on a blended basis.

Okay. And then I guess could you, Zvi, if you have it, provide any quantification of the impact that the strong dollar had on sales and EPS in 2015?

Yes. In 2015, it's a bit hard to quantify because we didn't own Race Face/Easton, for example, for the year, and the Canadian currency really got hammered hard. So I don't think it would be fair to impact our pro forma revenue for that. But I would say, if I exclude Race Face/Easton, it's about 1%.

Okay.

Earnings is a lot lower because as you know, a lot of our bike-based, a lot of that is in the bike business, and those costs are also in NT. So it's a lot lower in terms of earnings.

Okay. Got it. And then just one last quick one. Congratulations on the Toyota win. I guess when should we expect shipments to begin there? Is that before of after the Ford Raptor? Sorry if I missed that.

It's also a model year 2017. So we would expect to begin the shipments right before early in the fourth quarter.

Great. Thanks a lot guys. Good luck in 2016.

Thank you. Our next question comes from line of Jon Andersen from William Blair. Please go ahead.

Good afternoon everybody.

Hi. How are you doing?

Hi John.

First on the 2016 sales guidance. If I calculated it correctly, the midpoint is about 5% growth. Could you talk a little bit about your expectations across the two major end markets, powered vehicles and mountain bikes, understanding that you have seen some slowing perhaps in powered vehicle end markets, but could you give us a little bit more color on maybe the expectations across segments and how you build the mid-single digit throughout the year?

Well, I will tell you. We think that the bike business, we said that it's a mid-to-high single-digit growing long-term and we think that it's right around that mid-single digits for the bike segment for 2016. Notably, we assume that the currency drag doesn't get worse. So if the currency drag gets worse, then of course we don't achieve that goal. And I think as you just mentioned, you can kind of back into the powered vehicle growth in that.

Okay.

Jon we feel pretty good. While I think powered vehicles is a little bit challenged because of the side-by-side market, we have got Ford Raptor coming on late this year. The Toyota vehicle, while it's not a high-volume vehicle, we will see a little contribution from that, and we think that sets us pretty well up then for 2017.

[Indiscernible].

-- better powered vehicle growth.

Yes. That's helpful. Could you just clarify a little bit the timing? I want to make sure I am clear on the timing of the Raptor return. I think it was kind of $15 million plus type business on an annual basis prior to the model year changeover. When does that come online? And is the expectation that it comes back at levels similar to where it was prior to the changeover?

We don't comment specifically on Ford volumes obviously. We are thinking that it will be at least equivalent to the last Raptor. We obviously hope it does a bit better but that's kind of how we have gauged it. It will start going into the fourth quarter. We don't yet know how fast it's going to ramp to full production. We have made some estimates that obviously are included in our guidance, but we would expect by the first quarter of next year it will be hitting at production rate.

That's really helpful. And on the Tacoma, is this a similar product to the Raptor kind of serving the same end market? And how should we think about that in terms of the size of the opportunity relative to the Ford opportunity?

Well, I am going to let Mario tell you a little bit about the vehicle and how it compares to Raptor. But I would just tell you, the great news for us is, it is validation of the concept of an off-road capable on-road vehicle. So we feel very good about that. We would view at a relatively low volume vehicle. We obviously hope it does very well. But it's certainly much as the Raptor started out, I think it's a new entrant for Toyota and I would expect, they would be some cautious. Mario, do you want to talk about some of the specifics?

Yes. As Larry said, Jon, we are excited that it's sort of a validation to this off-road capable on road vehicle. The Tacoma is more of a midsize truck than the Raptor, which is built off of Ford's full-size F-150. And we don't want to speculate. We will let the media do the talking between the two vehicles, but we are excited that it's out there. And we described the shocks in our call here as 2.5 inch internal bypass. The new Ford Raptor has three inch. So it's a slightly bigger shock. But we are excited that it's out there and we will see what the media has to say between the two of them.

That's helpful. Last one for me guys, is when you think about putting Raptor and Tacoma aside, the balance of the powered vehicle business, I think Larry you mentioned the side-by-side market specifically a couple of times as flat, I guess or slowing. Can you talk a little bit about the dynamic there? What you think the principle drivers of that deceleration are? And are they more medium-term in duration? Short-term in duration? What's happening right now as you see it? And are what your expectations for that segment and maybe the other segments out there, ATV or Snow at the moment? Thanks.

Well, Snow obviously has been challenged based on weather this year. I think we view the side-by-side category as a great place to be over the long-term. I think it's challenged this year, I think it's for a number reasons. I think oil and agricultural markets have had a bit of an impact on it. We think that's going to probably clear throughout the first half of this year. And I think we will maybe be in a little bit better position in the back half and hopefully that again sets up for more normal 2017 for the category. But I think the great thing about our model, we try to point out, is hey we like all these segments. We think they are very viable and going to be healthier over the long-term, but nothing goes straight up forever over a period of years and I think one of the advantages of our model is we have got a lot of market segments to turn our attention to if one does happen to go flat for a period of time.

Yes. And that's clear with the work you are doing with Ford and Toyota. So it's nice to have that diversity. Thanks guys for the time.

Thank you. Our next question comes from the line of Craig Kennison from Robert W Baird. Please go ahead.

Good afternoon guys. Thanks for taking my question. Where are we at in the mountain bikes spec cycle this season? And given where we are at, how is your spec share trending?

Mario, you want to take it?

Sure. So Craig, this week is actually the Taipei bike show over in Taiwan where the final model year 2016 considerations are made for some of the smaller brands. I would tell you that for most of the bigger guys, both U.S. and international, we are pretty far along in the spec cycle. And we are pleased so far with the models that we have been awarded. And as we have said in the past, all that we can control are spec positions. And after that we are a bit along for the ride to see which of those models are selling well and not. But we are pleased sitting where we are sitting right now going into the season.

And on a related note, you have a strategy longer-term to enter some lower price point premium bike markets. Where are you at in that strategy? And then maybe how does Marzocchi fit into that as you have owned that brand for a little while now.

Well, we will start with Marzocchi, which we think is a real dovetail into getting us deeper into that segment. Fox branded products will start model year 2017 to address to be our first foray into those new price points which we plan to build out over subsequent model years utilizing both Fox and Marzocchi brands.

Thanks. And then Mario, do you have a sense for where the retail market concluded in 2015? Just I don't know if you have access to data that suggest the performance of the mountain bike category in 2015?

Well, again Craig as you found out and as we have discussed in the past, bike industry data is hard to come by and isn't always the most accurate, if and when you do. Our feeling is that 2015 ended up pretty well. We have seen some reports of potential inventory buildup in various of the channels. We are watching that. We don't think it's going to be model year 2017 buzz kill or anything like that. But we are mindful of it and when we see reports out like that, we will talk to customers and try to get a good handle on where we are. But we think it ended up okay. We think we are in a relatively decent position to start off 2017.

So finally on that piece, when you are in your discussions on spec position, understanding that you feel like you had a good year from that negotiation standpoint, can you give any sense of order trends this early in the cycle from your OEM partners? And how they might compare to last year?

That's is a little bit early to tell for that. We really don't see kind of the end of this quarter into the beginning of the next is when we start to see trends for actual orders coming for the model year 2017. We forecast and I think we are cautiously optimistic. As Larry said, there is some factors outside of our control, sort of macroeconomically which we would try to be cognizant of selling our spec positions to the best we can and do our diligence to be ahead of any upticks in which case we kind of prepare some capacity or downward trends when we try to mitigate anything that might happen here. But so far we are cautiously optimistic.

Great. Thanks for taking the questions.

Thanks Craig.

Thank you. Our next question comes from the line of Mike Swartz from SunTrust. Please go ahead.

Hi. Good evening guys.

Hi Mike.

Hi Mike.

Just a question on Race Face/Easton. In November you guys had put out an 8-K announcing that you would guarantee the full earnout ahead, I believe it was a year ahead of time. Can you just talk about the thinking around that? Why you guaranteed it a year early?

Yes. The thinking, Mike, was that they were on track to handily exceed it. Earnouts are very good on one hand and then could be complicated on another hand. On the one hand, you have a highly motivated target that is moving heaven and earth to achieve their goals which can be good for an alignment of interest point of view. On the other hand, you really can't do any integration that could be later questioned or something that might be effect of the obtaining of the earnout. So given that we had a very, very high degree of certainty that they were going to achieve the earnout, this gave us an opportunity to do more over the front end and back end integration that we would otherwise would have to wait or for a reason, we might as well take advantage of the opportunity that we can work together, not just that we weren't working together before, but it can be seen more. So for example, as we do our ERP, we might decide to move that integration up than we otherwise won't have, right, as an example. Or as we think about how we are expanding in Taiwan, we can think about how we can better integrate the manufacturing operations. Those discussions become very hard to have when you are in the middle of an earnout situation. So we put that behind us now.

Okay. So I would assume some of the integration activities, in other words, being pulled forward. Is there any material benefit of that, that we should see in 2016?

Well, I think there is a benefit but I don't think -- we have considered in our guidance and I think longer-term you are going to see some benefits accelerated, but it's probably not meaningful right now.

Okay. And then just wanted to touch a little bit on some of the investment cost that you alluded to in your 2016 guidance. I think you had mentioned El Cajon and ERP and some other projects. Could you maybe give us just the scale and the size of those investments, maybe versus 2015? Should we see --

Well, the main thing I would point out is Marzocchi, right. We bought Marzocchi and when we announced that we acquired and we indicated that was a couple of million dollars of sales. And you could imagine, if Tenneco had announced that they were closing down the business and so we had to make a number of investments in order to really reap the rewards of what we think can be a very good business for us in the next few years here. I say that's the main one. In terms of the other couple that we have, ERP, I want to say that we probably have an extra $0.5 million of cost over and above last year for ERP cost that are flowing through the P&L. And I don't have the El Cajon cost handy, but that's not insignificant either.

Okay. All right. Thanks.

Thank you. Our next question comes from the line of Andrew Burns from D.A. Davidson. Please go ahead.

Thanks and congratulations on the TRD news and thank you for the question or the comments on the retail, some discussion of inventory build on the mountain bike side. Could you perhaps role that into just a broader view of the mountain bike industry, the health and the type of the environment you are expecting in 2016?

Yes. Mario, you want to just take it?

Sure. Well, we would tell you that particularly in the price points that we participate in that it tends to be a very passionate end consumer where this is their activity of choice and technology and new features and excitement around product is really what drives the numbers at retail and 2017 is going to be a very, very good year to be a mountain bike enthusiast. There is lots of products coming out from OEs, from ourselves that we are excited about and we think overall the premium mountain bike segment is alive and well. And once we talked about mid-to high single digits long-term for our bike business, that's what gives us the confidence as our own and our customers innovation cycles and positioning and we think 2017 is going to deliver.

Okay. Thanks. And the Race Face/Easton acquisition, I remember when it was announced, one of the opportunities was to take those great brands and to have a very good aftermarket business and perhaps leverage your strength with OEM relationships and grow that side of the business for Race Face/Easton. Are you seeing that in this 2017 spec cycle?

So we talked about the various synergies that we will have between the brands going forward. And as you see bikes will allow with Race Face and Fox products, you will see some branding, primarily in colors and graphics that we have worked with Race Face ongoing into 2017 and then we will start to see more of the actual engineering and product synergies in follow-on model years. But the sales teams are aware of each other's offerings and we have integrated from a branding and marketing strategy look and feel so that there is a consistency when it's a Fox Race Face equipped bike and then you will see more engineering product synergy start to roll out after that, which are underway but can't really talk about it at this point.

Thank you. One last quick one, in terms of the El Cajon, the first phase of the manufacturing ramp there being done past 2016, do you have capacity to continue to go out and get more wins like the Raptor and the TRD? Or are you starting to need to go phase two or phase three? How does that process work in terms of getting wins and maintaining capacity?

Yes. Good question, Andrew. We clearly as we planned El Cajon and this notion of Automotive Ride Dynamics Center of Excellence, clearly our looking it over into the future for that capacity we will need. I would remind you that as bike has transitioned to Taichung, it's also opened up some capacity in our Watsonville operation. And our operations team now is in the process of looking at how do we optimize Watsonville and El Cajon in terms of the longer-term capacity and efficiency for powered vehicles.

Thank you. Good luck.

Thank you.

Thank you. Our next question comes from the line of Rafe Jadrosich from Bank of America Merrill Lynch. Please go ahead.

Hi. Good afternoon. Thanks for taking my questions.

Hi Rafe.

As you look at the guidance for next year, 4%-ish EPS growth in the low-end and around 12% on the high-end, can you talk about what gets you the high end of guidance or above it or what gets you to the low-end? Just trying to frame the assumptions that you have baked into that guidance.

Well, clearly the first thing I would tell you about the EPS guidance is, it comes from revenue and so a lot of it is within that revenue range. And as you know, as you put that range or you are trying to put a reasonable blanket around things that could happen, clearly we have envisioned some FX that will be in there. We have got a lot in transition. We have got the ramp, as we mentioned, of Ford Raptor that's a little uncertain. We have got some allowance for that. While we have got 80% to 85% of capacity of mountain bikes in Taichung now, I think our folks are still looking at some optimization of, okay, exactly what should that number be in the long-term vis-à-vis what we do back here. That's in that range. So there are a lot of factors, but I would say probably number one is revenue.

Got it. That's helpful. And then over the past few years, the SG&A ratio has been rising and it looks like this year it will be flat or up again. How do we think about longer-term when you might have an opportunity to get some leverage there?

Well, I think Rafe, this year's rise is because of the Marzocchi acquisition. And if you look at the last few years, there has been a number of factors. First of all, we have made two acquisitions that have impacted the increase. Second of all, we have made a number of investment in the business that are effect of being a public company. Obviously it's more expensive and as you probably go couple of years, you have some more cost than you did before. As we moved below 50% from Compass Diversified, we had more SOCs cost. As we have had this global tax initiative to get our tax rate to the mid-20s from the low-30s, that has a cost in terms of terms of SG&A. As we have done some of these acquisitions, staffing up and beefing up our biz development group to execute some of these acquisitions, it has important for us to make what we believe a good acquisition, that's been a part of this. And of course, not having Ford in the numbers for a couple of years, that's impacted. So I think long story short, there is a lot of reasons over the last few years we think that starting next year you should start seeing some leverage. But I would tell you that not a lot of leverage. We think that in sales and marketing and R&D, we are going to continue to invest. You will just start seeing a little bit of G&A leverage over the next few years.

And then, just have the priority for capital allocation changed at all? And maybe can you remind us of what the priorities are? What's most important to you?

The parties have not changed. In terms of what's important to us, it's first of all to fund some of the company's existing operations. I think I would say secondly to in a disciplined manner to pursue acquisitions. And the other two things is having Board of Directors interested in returning value to our shareholders and so we are going to continue to do things such as share repurchases, but we are going to be very disciplined again as well as on that, in terms of the purchase prices that we pay for stock as well. But no real change from what we have done before.

And then last question and I am assuming it didn't impact you because you didn't mentioned it at all in the call. But the earthquake in Taiwan, was there any disruption from that?

Got my heart rate going. But nothing material to our operations. We had one supplier down actually in that region, but no impact that was material.

Great. Thank you.

Thank you. Our next question comes from the line of Jim Duffy from Stifel. Please go ahead.

Hi guys. This is Molly, on for Jim.

Hi Molly.

Hi. Just a couple of quick ones from me. First one, how comfortable are you with the visibility you have to the high end of your revenue guide for fiscal 2016?

Well, I think we are comfortable with the range. I would tell you, when we put that range out, that as we sit here today that we feel good about the range and the target. I would tell you that the overbook supports that range. We have got, as you know, a pretty good forecast from both sides of the business, from our customers that again we feel support that. But I would tell you it's what you know that hurts you when you forecast. It's what you don't know. So I think we put our range out there that we obviously hope to meet and then we try to be pretty vigilant with what's happening in the environment as we go through the course of the year and we will update you quarterly.

Okay. Thank you. And then with regard to the tax rate, how sustainable is this rate going forward? Is this how you are planning the business at that mid-20% range beyond fiscal 2016?

Yes. It's sustainable for at least the next few years. Should our mix of international versus domestic business change, it will affect it, but as it currently stands with a mix of business we expect, at least for the next of couple of years we do this it's sustainable.

Okay. Great. And then finally, you guys talked on the last call about giving us a further update on the strategy behind Marzocchi. I know the dilution, I think it's about $0.01 higher than originally discussed. Are you still expecting it to be accretive in fiscal 2017? Will you keep the Marzocchi name? And what other, do you think, category opportunities are there with this business? Thank you.

Well, let me just start with the EPS effect. It's no different than we thought for. We thought it would be $0.01 to $0.02.

Okay.

And as we look at the opportunity to investment in the brand, we think we could run it with less dilution but we don't think that we will be doing the brand justice. As for the rest of it, I will turn it back over to Larry.

Yes. I think there are several things, Molly, that as we get into it, there is a lot we like. We acquired some intellectual property that we value. I think we have got some human resource assets that we were able to deploy which we are very, very pleased with. I think the team has been a lot of work so far with a lot left to do on where the Marzocchi product is going to play within the strata of price points we hope to get, both now and in the future. I think you will see the Marzocchi name used in certain places. Again, I don't want to get ahead of ourselves here, but as we roll some of that product our, I think you will see how we position Marzocchi vis-à-vis Fox.

Okay.

That is clearly out intent.

Okay. Thank you.

Thank you.

Thank you. Ladies and gentlemen, there are no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

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

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.