Greetings and welcome to the Fox Factory Holding Corp. Second Quarter 2019 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, David Haugen. Thank you. Please go ahead.

Thank you. Good afternoon and welcome to Fox Factory’s Fiscal Second Quarter 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 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 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, David, and good afternoon, everyone. We appreciate you joining us on today’s call. It’s a pleasure to be speaking with you in my first earnings call as the CEO of FOX. As we previously announced, our CEO succession plan was completed on June 29th. After eight incredibly successful years leading FOX, Larry Enterline has assumed the role of Executive Chairman of the Board. I thank Larry for his leadership and our collaboration. It’s an honor to succeed him and I look forward to working with Larry on strategy and business development initiatives going forward. At the same time, Dudley Mendenhall transitioned from Chairman of the Board to Lead Independent Director. In addition, Rich Winters, our former Executive Vice President, has assumed the role of President, Powered Vehicles Group. Rich and I worked together for many years and like me, he joined FOX in 2018 from FLEX where he was most recently Senior Vice President. FOX is a unique company and it's been exciting to work shoulder to shoulder with such high performing team of people to deliver best in class, performance defining products with an authentic brand experience. I am confident that in the quarters and years to come we are going to build upon our accomplishments to generate sustainable growth and value for our shareholders. Now onto our second quarter results. I will briefly discuss our business and financial highlights. Rich and Chris will then provide more detailed updates on their respective businesses. Zvi will review the second quarter financials and discuss our 2019 guidance. After that, we will open the call for your questions. We were very pleased with our continued broad-based strength and for the second quarter we are reporting record sales and profitability. We benefitted from the continued strong growth in our Powered Vehicles Group…

Thank you, Mike. Good afternoon, everyone. I'm very honored and very excited to assume the role of President of the Powered Vehicles Group. In the second quarter of 2019, sales of the powered vehicle group products were up 40.1% compared to the second quarter of 2018. These strong sale results are due to continued high growth across our product lineup, particularly with our off-road and Power Sports products which exceeded our forecast. In addition, the recent acquisition of Ridetech got off to a great start. Ridetech is part of our newly created street performance business based in Mooresville, North Carolina. This group focuses on developing performance defining products that can successfully compete in race aftermarket and OEM street vehicle applications. In Georgia, we continue to make good progress on our expansion efforts. We broke ground in early June and started developing the site for our future manufacturing facility in Hall County. This new facility positions us very well for future growth. The first phase of this expansion project is on track to be up and running in the late second quarter of 2020. We are also in the process of readying a new state of the art R&D facility near our current location in Brazelton, Georgia. We anticipate the site will be up and running by the end of August. It's located at the iconic Rode Atlanta, a racetrack FOX has sponsored since 2018 and where we've helped support the development of the track's off-road courses. The new facility will enable us to continue to expand our research and development for both on-road and off-road products. We continue to focus on our off-road capable, on-road vehicle market as our OEM customers, Ford, Toyota and Jeep, continue to market and sell their respective model year 2020 products featuring FOX Shocks. These OEM platforms, which are being very well received by the media and consumers, raise our brand awareness and inspire passionate enthusiasts to upgrade their current vehicles to be off-road capable with our aftermarket bolt-on suspension solutions. We have also made progress with our commercial line of shocks that includes semis and RVs. We recently launched a catalog for products that will start to see volume production once capacity is established in Georgia. I'll conclude with a couple of Desert Racing highlights as we continue our winning tradition. FOX driver Andy McMillan won his second straight SCORE international Baja 500. And his cousin, Luke McMillan, finished second. In total, FOX drivers earned 12 podiums across various Baja 500 clashes. FOX drivers also won 4 of 5 classes at the Ultra4, excuse me, Ultra4 El Rey Baja race in May and we won the Tatts Finke Desert race in Australia. With that, I'd like to turn it over to Chris.

Thank you, Rich. Good afternoon, everyone. In the second quarter of 2019, sales of Specialty Sports Group products were up 3.1% compared to the same period in fiscal year 2018 and we continue to build on the strong performance we delivered in the first quarter. Awareness of our portfolio brands remained strong and we launched additional initiatives designed to strengthen our customer loyalty and engagement. One of our key brand building and product development strengths is our tireless effort on the racetrack. Earlier this year we launched a new web series, Dialed, which gives a behind the scenes look at our race support efforts on the UCI Mountain Bike Circuit worldwide and showcases that talent and grit of our athletes. Viewers can tune into our series on our YouTube channel every race weekend to view a new episode. At our bank of offices, we have a new retail concept store which we call the 101. It's a multifunction retail space where consumers can learn about, service and purchase FOX, Race Face, Easton Cycling and Marzocchi products. The space also showcases our history and serves as a venue where we can host consumer meetings, cycling community and media events. I'd now like to share some product news. We introduced the all new Easton BA90 AX disc wheel set in the spring that is being well received by our customers and media. Also new for 2020 is the Race Face Turbine SL wheel set and the Marzocchi Z2 trail Enduro front forks. I also have some news about our expanded relationship with Quality Bicycle products which services more than 5,000 bicycle retailers through its 4 U.S. distribution centers. QBP now offers FOX Performance, Performance Elite, Factory Series, forks, shocks, dropper posts and services parts in addition to selling Race Face, Easton and Marzocchi products. I'll conclude with a few race highlights. Brett Reeder won the first of 2 3-stops on the Crankworx Rotorua and is in contention to win the triple crown on the Slopestyle in August. To date this season, our athletes have claimed 39 UCI Mountain Bike downhill and cross-country podiums. And now I’d like to turn the call over to Zvi to review our financial results.

Thanks, Chris. Good afternoon, everyone. I’d like to focus on our second quarter results, then review our guidance. Sales in the second quarter of 2019 were $192.1 million, an increase of 22.5% versus sales of $156.8 million in the second quarter of 2018. Gross margin was 32.4% in the second quarter of 2019, a 100 basis point decrease from 33.4% in the prior year period, while our non-GAAP gross margin decreased 70 basis points to 32.7%. The decrease in non-GAAP gross margin was primarily due to a change in customer and product mix as our larger North American Powered Vehicle OEMs represented a higher proportion of sales. In addition, as we anticipated, we continue to experience manufacturing and supply chain inefficiencies as a result of the increase in demand which negatively impacted gross margins, similar to the levels we experienced in Q1. Our team continues to execute on improvement programs in our existing California facilities to mitigate the inefficiencies while we are developing our new platforms in Georgia. Total operating expenses were $32.7 million or 17% of sales in the second quarter of 2019, compared with $28.1 million or 17.9% of sales in the second quarter last year. The increase in operating expenses on a dollar basis to support our growth is primarily due to higher personnel costs as we invest in product innovation, acquisition related expenses and operating costs from our newly acquired Ridetech subsidiary partially offset by lower patent litigation related expenses. Non-GAAP operating expenses as a percentage of sales were 15.1%, consistent with Q2 of last year. Focusing on expenses in more detail, sales and marketing increased $1.5 million due to personnel, promotional activity and various other costs as well as operating costs from our recently acquired subsidiary as we continue to invest in our brand. R&D…

Thanks, Zvi. And with that, we'd like to open the call for questions. Operator?

[Operator Instructions] Your first question comes from Michael Swartz, SunTrust Robinson Humphrey.

Just a question on the bike business, or sorry, specialty sports business. This was I think the first quarter in maybe it was a year and a half where you haven't posted double digit gains and I know you've stuck to your long-range targets for that business this year. But was there anything specific in the quarter as to why that business decelerated? I think you said it was up 3% in the quarter.

Yes, Mike, I'll start and I'll let Chris weigh in as well. We're really proud of the SSG business, specialty sports business. And we think that bike remains strong in a market that has shown some weaknesses. As we said in the prior quarter and we say again this quarter, we're sticking to our current guidance range and we think we'll be right where we should be. But there wasn't anything significant in the quarter that changed dramatically what we would have thought occurred. So there was no event, if you will. Chris, any thoughts?

No, we've said mid to high single digits all along. We're confident that we're going to be able to handle that through the course of the year and we're on target to hit our plan.

This is Zvi. I might add that in the beginning of the year, we indicated that the growth rate for this year would be mid to high single digit target so we're well on track with that. Year to date 7.3% and we're pleased with our results. We think our results are ahead of what the industry is doing.

Great. Then sticking with the Specialty Sports and bike business, can you talk about the expanded relationship with QBP that you announced? I guess when do you expect to start seeing the benefit of that? Is there any kind of inventory build around that? Any kind of quantification on what that might mean for the business?

Hi, Mike, it's Chris. Yes, we started shipping them last month, we've had 2 weeks of checkout data with them and all indications so far are very positive. They sell all of our brands currently now. There was a bit of a gap there, they sold all of our brands with the exception of FOX, so we’re really just bringing them up to speed with everything. They’ve been a strong customer for Race Face for over 20 years and now they're selling all four of our brands. So we’re very excited and we think long term this is going to be a great boon for us at retail in the U.S.

This is Zvi. Maybe I can add we do believe this is part of that mid to high single digit algorithm, it’s not additive.

Yeah, this was a planned decision. This wasn't something new.

Okay. Great. Then just one final question, Zvi, on gross margin. I think some of the headwinds you had this quarter in terms of mix and some of the inefficiencies that you’ve talked about were very similar from the first quarter. Maybe give us a sense of how long should those inefficiencies be in the business? Is this something that will kind of ameliorate once that new Georgia facility is up and running? Or I guess how should we think about timing around some of that?

Yeah, I think that’s right. It’s not the day that the Georgia facility launches. Obviously when a facility launches there’s a period of time where you optimize its operation as well. But we’ve seen outsized demand, very good demand in the Powered Vehicle business over the last several years here and that has -- we think that the revenue and the relationships with the customers are very desirable relationships. And so we want to make sure that we meet customer expectations and as a result of that, we run certain inefficiencies, frictional costs, things such as expedited freight, overtime, things of that nature. I would point out, as you said, the level of inefficiency is relatively unchanged. The larger portion of it relates to the mix.

Okay, great. Thank you.

Thank you. Your next question comes from Craig Kennison, Robert W. Baird & Co.

Hi, good afternoon. Thanks for taking my questions. Sounds like your business is able to sort of grow through or maybe grow in excess of the industry pace. But could you comment on demand for your products, end market demand for your products in North America and Europe?

Craig, this is Mike. Let me kind of start with sort of a global statement and then I can let the guys weigh in. One of the benefits we’ve got in North America and in Powered Vehicles, most of that demand is in North America, is that market has stayed strong and gotten stronger. So we continue to benefit from the very healthy economy here. And a huge amount of passion for the products we’re putting out in the market on a number of different vehicles. So that’s played out very positively for us and most of the market in Powered Vehicles is a North American conversation. In the rest of our business, in SSG, it’s much more balanced between Europe and the U.S. Europe, although the market has some economic pressure, we've seen strong bike demand and strong bike product demand there pretty consistently throughout the year. So we wouldn't say that we're recession proof, but I would say we’ve been able to balance our business between softer markets probably better than the average in that space.

That’s helpful. And then I don’t know to what extent you’re able to deconstruct your growth and in the specialty sport market, but clearly you’ve got the end market which seems to be slowing but then you’ve got your own drivers whether it’s a eBikes, Marzocchi, Rhythm, maybe some spec games, maybe some upside for QBP. Is there any way to rank order what those drivers might be to help you outperform the market?

Craig, this is Zvi. We don't typically break it out. I think you hit some of the important points that have contributed to our growth, but we don't typically quantify or rank order them. Some of those trends, like eBikes that you mentioned, they've been strong trends for the last couple of years. That's clearly an important trend. And I think you hit most of the major ones. I'm looking at Chris and I don't know if there's anything you want to add, anything he might have missed?

Craig, it's Chris here. You commented earlier on softness in Europe. I think we've sort of pointed at a number of times to the eBike mature market in Europe and I think that certainly helped our growth in Europe. So that's one thing to look at when we look at some of our markets that may be under pressure. We're growing in those areas still. So I think overall, we're outstripping the market for sure.

And lastly, sounds like the channel is well positioned here, but sometimes when we see a slowdown in retail activity, some of the channel partners are unaware of it and need to reduce inventory. Is there any expectation or any concern that at the OEM level or the dealer level, inventory is not where it should be?

No, we're not seeing that at all. And actually, the addition of QBP we're seeing that's an input of inventory into our U.S. market. So just the opposite actually.

Your next question comes from Scott Stember, C.L. King.

You guys talked about the mix shift towards OEM business. Obviously, there's a big component of that in the Powered Vehicle segment. Could you maybe just talk about both the specialty bikes and Powered Vehicles how the aftermarket is performing on a year-over-year basis?

I think if you look on a year to date basis, our OEM aftermarket business is 62% OEM, 38% aftermarket. So it's a little higher, it was actually significantly higher last year. Last year this same period of time it was 56% OEM/aftermarket. We don't break out between bike and Powered Vehicles, but we would tell you that we think our aftermarket is also performing well. It's just that we've had some really strong growth in the OEM. And our long-term strategy is to make sure, Scott, that we stay balanced between aftermarket and OEM business. We think it's very healthy to keep those fairly balanced within the overall business on both sides, SSG and PVG side.

Got it. The commercial vehicle opportunity you talked about having some product ready to go relatively shortly and you would expect the start of this ramping up once you get into your new facility. Maybe just talk about, size up that opportunity again and just maybe a little bit more granularity as to when we could possibly see that actually hitting the numbers?

We're selling product now, so we don't want to suggest that we're not selling product. But selling product in volume is kind of a different conversation which is why Rich alluded to Georgia and the ability to do true scale in that space. We think the TAM is significant, whether it's in commercial long-haul trucking or in the RV space, we think there's a great opportunity. We usually roll into these pretty slow starting aftermarket and going into OEM, that's typically the strategy that we would deploy. We'll do that here too. And when you think about kind of the timing for volume to occur, it's really kind of the back half of next year. That's when we have the facility up and running, we can have the lines up and running, we can actually take orders that are significant in size and be able to meet that demand. The last thing we want to do is take orders we can't fill. So our customers are patient with us, they appreciate the catalogs we've created, they're excited to get going and so are we.

Got it. Just last question going back to the bike market. In the past when we've seen the overall market slowdown, typically your higher end of the rarified air that you guys operate in usually remains relatively robust. And again, I think you kind of alluded to that before, but just let us know how your market is doing so we can basically tell how you guys are faring with it in the space that you're in.

I'll start and Chris or Zvi can jump in. We do believe that that premium product category is a very good product category to be in. We think those buyers tend to be strong and a bit more resilient to other changes in the economy. So we like that space, we think that's going to serve us well for the future. And that's clearly where we're targeted. So it's hard to say. You never know on a long-term basis whether one part of the market will soften more or less than others, but so far, it's been positive for us.

I think the thesis is still intact. We believe that the segments of the market that we serve tend to perform better. We haven't seen any evidence to the contrary. As you're aware, there's not a lot of great third-party data out there, but we have no reason to think our thesis has changed in how it's played out the last several years.

Your next question comes from Larry Solow, CJS Securities.

One more question on the bikes or the specialty sports, just in relation to the quarter. And it does sound like it is timing and I realize having followed you guys for a while, there's always some quarterly volatility. But just remind me, Q2 is normally the, I guess, first quarter on the bike side for buy-ins for the new model year. Does that have any, should that be any more worrisome or noteworthy with a little bit of decline in year-over-year sales? Does that mean anything or am I reading too much into it?

Yes, Larry, I think you're reading too much into it. We are pleased with the performance of the SSG group. It's not any different than we expected at the beginning of the year. There's always differences in what your customer's timing is for taking the initial orders in the model year. We are very excited about the product lineup, we're gotten good reception from our customers, from our OEM customers, from our end customers, from the media, so I think you're reading too much into it and we're very pleased with the performance of the business. I think Chris's business continues to outperform the industry.

Great, excellent. And then on the gross margin issue, it sounds like kind of a high-class problem I think with the mix piece. Then on the relocation or the delta of capacity, I assume there's an impact just as you're building out capacity, but there's also probably a greater impact which could turn into an opportunity just because there's just too much demand for you to bite off, for you to chew right now. So maybe, I don't know if you can have or project increases in gross margin like you saw with Taiwan in the bikes, but just looking out 3 to 5 years, you would assume growth slows because it can't continue at this rate on the Powered Vehicle side, but I would imagine there would be an offset to the cost and even a bigger improvement once you're settled into that facility. Is that fair to say?

Yes, Larry, it's Mike. I'll tell you I think you're absolutely right, it's a high-class problem to have. We got more demand -- we had more demand this last quarter than we expected going into the quarter. We fulfilled that demand and kept our customers happy. Obviously, a bit more painful for us to do it because it’s just not the most efficient way to do it in California with our current capacity and factories there. So, we do believe that as you create the new platform, the new campus here in Georgia that has all the right supply chain structures and vertical integration, that it's an improvement for our business. Now we’re not going to categorize or try to character what those numbers look like, but we think it’s actually a great long-term step for us and gives us the capacity to continue to grow. I think you’re thinking about it right. We will continue to work on it and I think as we get that factory up and running, some of the expansion moved over to Georgia, we’ll continue to see improvement.

The other thing maybe I could add to that, Larry, is we like to focus more on EBITDA margins than gross margins. And I think in my comments I noted that we would run more like 19.5% to 20% this year versus the 20.1% we ran last year. We think that as we get Georgia up and running and its operating at volume and at efficiency, then we can be over that 20% long-term target on a sustainable basis. How far over, we’ve never really put an exact number on it. It kind of depends to some degree on the mix of business we get. The 20% is our number. We’re not dogmatic about it. If we had a good piece of business at 19.5%, we’re not going to walk away from it. So, but having said that, we’re confident in that number over the long term.

Right. And just last question, just not an exact timing, but it sounds like you probably have some of these inefficiencies for the next few quarters. I guess you’re not going live with that facility for about another 12 months, is that right?

Yeah, we’re planning to open that facility in the second quarter of next year, kind of the tail end of second quarter. So you’re going to see some of those inefficiencies as we go from here to there. And they’ll actually, because it’s not a digital one day it’s off, one day it’s on event, there will be some that will go past that. But you’re going to see improvements along the way as well. I think Zvi commented in his prepared remarks that we are doing work right now in California to improve, so we are seeing traction in some of those areas to help be more efficient. We will continue to do that. We’re not going to just wait for Georgia. We will absolutely continue to push everything that we can in California to reduce those inefficiencies.

Thank you. Your next question comes from Rafe Jadrosich, BofA Merrill Lynch. Go ahead please.

Hi. Thanks for taking my questions. First question is, in the tariffs that were, tariff increases that were announced in May, was there any incremental pressure to your margins from that?

It’s not material. There’s some impact. It’s not material, it’s not part of the reason for any of the margin decline. It has been very manageable for FOX. We have managed it over the last since they initially got announced at their initial level and not a meaningful impact.

Yeah. And I would add, if there is much of an impact at all, it’s really indirect in that the supply chain in the U.S. and North America I would say gets a little bit of pressure and gives them the opportunity to try to raise prices. So, you get a little of that indirect pressure but since we buy so little that comes out of China and most of that goes to Taiwan, it’s really negligible for us.

That's very helpful. Then during, in your prepared remarks, you spoke about the increase in the credit facility. Can you just talk a little bit more about the reasoning for that? And then can you also discuss or update us on the M&A strategy? Have you seen any changes there? Are the multiples out there changing at all? And then just remind us sort of what the parameters are in terms of size of company you're looking for, what leverage you're willing to take on, and just what type of company that you're looking at?

Yes, a couple of things. We entered into the new credit facility for a couple of reasons. Number one, we increased our capacity from $150 million to $250 million, so we have the ability now to do deals without necessarily going and refinancing it. The second thing we did is, structurally we had part of our facility was line of credit and part of it was term loan. This is 100% revolver. And the advantage of that is in the past I was reluctant to pay down debt with excess cash flow because I would hurt my availability. Now if we have cash, we can pay down the facility entirely and preserve our capacity. On top of that we extended the facility and we lowered our interest rate, so we thought it was a good opportunity to take advantage of a very favorable lending environment. We're also pleased that we did it with Bank of America. We had a relationship with Bank of America, they were already one of the members of the existing facility, so they know us well and they've been with us on the credit facility side for a while. Additionally, they got involved in our first secondary, so they've known us pretty well, that made us feel comfortable as well. In terms of the M&A strategy, no real change. I think we've been signaling that as we've grown as a company, we are open to larger deals. But we are not under any pressure to do a deal. We're comfortable doing deals or not doing deals. We're very excited about the core business. But I think our, I think we're a little more willing to do bigger deals if the deals meet our strategic and financial criteria. As Mike said, it starts with strategy. If the strategy fits, then you can decide if it meets your financial returns and all and checks all those other boxes. Did I miss any of your question Rafe?

Just the multiples that you're seeing out there for potential M&A targets.

As you know, we've been fairly frugal on the multiples we've paid. I mean it's a case by case basis, right? Multiples have been expensive for quite a while, the multiples we've paid have been fairly I'd say below market given the assets we've gotten. But depending on the quality asset you get, I think there is a possibility for higher multiples and there's a possibility for the same multiples we're already paying. But clearly, it's a very, it's a seller's market and it has been for a number of years.

Your next question comes from Jim Duffy, Stifel.

This is Peter McGoldrick on for Jim. I've got a question for you. Can you give an update on your strategy to enlist new customers as you expand beyond the core enthusiasts? How is this trending compared to your expectations and is there anything specific you can share between the bike and Powered Vehicle divisions there?

From my perspective, it's critical to us long-term to make sure we diversify and expand that customer base. We do that through innovation and technology and looking at adjacencies that stack well with our core business. So just like we did with Ridetech where we moved through street performance to go on-road, our brand works very well in that category. We think that's a huge TAM for us to go after. So that acquisition, albeit small, was a door opener to create a new way to get to an entirely new customer base with our brand and with the Ridetech brand. We're going to continue to do things like that, either organically or through acquisitions to open doors into these new industries. I believe in a very diversified portfolio. I think it's important to the long-term sustainable success. Like I said, I think our brand has a very passionate enthusiast base. You never know, the mountain biker may have a Corvette in his garage or a Ford Raptor in his garage. In either case, we can advance that relationship. So we're doing well, we think it continues to grow, and we think it's an important part of our strategy.

Then a question for Zvi. Could you share a picture of your inventory on hand? Is the growth related to the upcoming manufacturing relocation? And how comfortable are you with the level and makeup to support your growth outlook?

Yes, I would tell you that there's 3 major, our inventory grew a little bit faster than our sales grew. It actually grew, and I'd say there's 3 major factors. Number one, we've had a bit of a shift in strategy in elements of our business to increase fill rates. And in certain cases, have a build to stock model as opposed to a build to order model. The Ridetech acquisition of course we only got a little bit of their sales, not a full quarter of their sales. Also, they have lower inventory turns than ours. And then that third factor was with the increase in OEM basis, that business tends to have safety stock requirements that tend to be a little bit higher than the core business. So I would tell you that none of the inventory build related to getting in front of the Georgia move. Is that helpful?

That is helpful. So would that normalize towards the fourth quarter?

I mean the factors that I just talked about, I'd expect to continue into the fourth quarter. None of those factors are transitory. Having said that, I mean this team over the long term, once we're in Georgia, is always going to strive to improve the working capital profile of the business.

Your next question comes from Alex Maroccia from Berenberg.

I just have a quick one for you. You finished the quarter with a net cash position which looks to be trending higher based on the guidance. How should we be thinking about future capital allocation given the cash? I know you hit on M&A earlier and the new facility in Georgia, but are there some other CapEx plans or share repurchase plans in the future?

There's no change to our capital allocation strategy. We have a few major priorities. First and foremost, to reinvest in the business. And examples of that would be the Georgia buildout. Previous examples of that would be our Taiwan buildout, our ERP program. First and foremost, reinvest in the business. Acquisitions is probably our second biggest priority, but we're not under, we're only going to do acquisitions when they make sense. If they don't make sense, we're happy to do a deal, we're happy not to do a deal. And then beyond that, we have done things like share repurchases in the past and depending on market conditions and acquisitions and future needs, we'd always look at them.

Thank you. Your next question comes from Ryan Sundby of William Blair. Go ahead please.

Mike, you talked about kind of the desire to balance between OEM and aftermarket. And I think the path forward for OEM is pretty straightforward. But I'm just wondering, how do you grow aftermarket? Is that adding product around the FOX brand in aftermarket or do you think there’s ways to kind of grow the FOX brand in aftermarket as well? And if so, what are some of the levers you can pull there? Thanks

Yeah. You’re right, we’re pretty aggressive in the FOX brand in the aftermarket space. It actually resonates very well. We sell upgrades. We sell upgrades for the FOX Raptor, we sell upgrades for Jeep, we sell upgrades for a number of different brands that we find the customer base is very eager to have. And we get significant demand from our partners in the channels to fulfill that. So innovation for us is really begins with race, goes into aftermarket and then lends itself to OE. So that innovation on the aftermarket helps drive that demand and keep it fresh so that the customers out there are getting access to some great technology that they can use in their vehicles or their power sports products. And I think that’s very helpful. At the same time, in both our SSG business and in the PVG business, we have really strong OEM relationships which we think are very important to us and we want to maintain. So balancing them is a bit of finesse sometimes. Georgia will help us a lot on the Powered Vehicle side. I think in SSG, Taiwan does very well at it. So that’s how we think about it. We think that aftermarket space is absolutely a great area for us. Then of course through acquisition. Ridetech is an aftermarket business 100%, so as we add those businesses and Sport Truck is another example of that, that helps us to continue to drive and maintain that part of the business.

Okay. Thanks for the color.

Thank you. There are no further questions at this time. I would like to hand the conference back to management for closing remarks.

Thanks for your questions and interest in FOX. On behalf of all of us at FOX, I’d like to thank our customers and our suppliers for their support and our employees for their hard work, all of which will be important to our continued success. We look forward to speaking with you guys again when we report our 2019 third quarter results. Have a good evening. Thank you.