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spk01: Greetings and welcome to the Fox Factory Holding Corporation third quarter 2020 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Haugen. Thank you, David. You may begin.
spk07: Thank you. Good afternoon and welcome to Fox Factory's third quarter fiscal 2020 earnings conference call. I am joined today by Mike Dennison, our chief executive officer, and Scott Humphrey, our chief financial officer and treasurer. First, Mike will provide business updates. Scott will then review the quarter financial results and the outlook, followed by closing remarks from Mike. We will then open the call up for your questions. 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 investor.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 latest Form 10Q and in the annual report on Form 10K filed with the Securities and Exchange Commission. Except as required by law, the company undertakes no obligation to update any forward-looking or other statements herein, whether as a result of new information, future events, or otherwise. In addition, within our earnings release and in today's prepared remarks, non-GAAP gross margins, non-GAAP operating expenses, non-GAAP income tax, non-GAAP adjusted net income, non-GAAP adjusted earnings per diluted share, adjusted EBITDA, and adjusted EBITDA 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. Reconciliations 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's my pleasure to turn the call over to our CEO, Mike Dennison.
spk04: Thank you, David, and good afternoon. We appreciate everyone taking the time to join us for today's call. Before we jump into our business and financial highlights, I hope everyone is staying safe and healthy in these trying times. And I want to thank every single member of our Fox family who has demonstrated incredible commitment and resilience to help us not only persevere, but to achieve a record quarterly performance in our third quarter of 2020. I am pleased to report third quarter sales of $260.7 million, which supports our conviction on the value and innovation that Fox Brand is bringing to our customers and our growing end user base. The strength in our performance was the result of our best-in-class and diversified product portfolio within the specialty sports group, which grew over 32% compared to the third quarter of 2019. Our PVG segment further contributed to the strong performance, growing nearly 18%, as OEMs came back from significant shutdowns, as well as continued strong demand in the aftermarket, where we have extended our leading market share through the SCA acquisition. This strong top-line growth coupled with gross margin expansion and operating expense leverage fueled our third quarter profitability, exceeding our expectations, finishing the quarter with an adjusted EPS of $1.07, a growth of 29% over Q3 2019. Within our specialty sports group, our business continues to benefit from the ongoing robust trend in outdoor recreational activities. Importantly, the environment is attracting new and diverse participants to the bicycling category, which is propelling demand for our product offerings in both OEM and aftermarket channels to record levels. In the third quarter, we achieved the highest volume of shocks and forks ever shipped. This is a significant achievement in an environment where production floor practices and supply chains have to be constantly monitored to minimize the impact of COVID-19 and social distancing. We have seen our customers and our suppliers adapt to the extended reality we find ourselves in, and we continue to successfully optimize our production to replenish pipelines and meet exceptionally strong customer demand. In the Powered Vehicles Group, we are pleased that all of our OEM automotive and power support partners are back in their full operation, and the aftermarket channel of demand has never been stronger. What is worth mentioning is that we have managed to meet this heightened demand and shipment volume without significant disruptions while transitioning to the new Georgia facility amid the global pandemic, as well as California wildfires. In our third quarter, we successfully completed the transfer of all of our aftermarket shock manufacturing to the Georgia facility and have already experienced significant productivity gains. Furthermore, We are currently working with our large OEMs to transfer automotive production lines. Georgia remains on schedule to complete the transition in 2021, and we remain confident in our ability to drive improvements in supply chain and manufacturing processes. Our relationships with our PVG automotive and power support customers are stronger than ever, and we are optimizing our R&D resources to handle the growth in new product and technology developments. I am pleased to share some exciting news related to the ongoing validation of our unique technologies. You have heard me speak regularly about our smart and connected shock technology called LiveValve. This advanced technology has now become a race winning solution in desert trucks, taking the first ever LiveValve victory in the premier class of the Blue Water Desert Challenge, further authenticating semi-active electronic suspension at the pinnacle of off-road racing. In addition, LiveValve technology also delivered a complete sweep of the Desert Pro Turbo Race podium by Fox athletes running Polaris RZRs at the 2020 UTB World Championship. LiveValve allows for more control, which maximizes off-road vehicle stability and minimizes harshness. It is fully tunable and rebuildable, and as we have proven, race-ready. What makes us especially proud is that this same technology platform is available on the Ford Raptor, Polaris RZR, and Honda Town UTVs, as well as on mountain bikes from Pivot, Giant Scott, and others. Another big accomplishment for our PDG business was on the OEM side. Ford recently introduced the Ranger Tremor off-road package and calls it the most off-road capable factory-built Ranger ever, featuring our off-road-tuned Fox 2.0 monotube dampers. We remain excited and confident in our ongoing product development collaboration across Ford brands. In regards to the current operating environment, we are cautiously optimistic that factory shutdowns, either our own or our customers, are fundamentally behind us. We have integrated the highest safety measures to keep our employees healthy and safe. However, Fox, like all other businesses today, will be required to adjust our operations should states and federal governments require us to take different actions. Looking ahead, we believe we are well positioned for future growth. In the near to midterm, we are hoping the pandemic will be in our rearview mirror and the world will get back to normal. Until then, and as our results have demonstrated, we will continue to work diligently to be flexible and agile, leveraging strong leadership and nimble operations to navigate and succeed in all potential environments. In summary, we are working to build upon our existing accomplishments and keep our employees safe. And we remain confident in our long-term financial objectives as we generate sustainable growth and drive shareholder value. Finally, and although we continue to operate in an uncertain environment, the view of our growth trajectory hasn't changed. In the long term, we expect our specialty sports group segment to grow in the mid to high single digits, and our powered vehicle group segment to grow into low double digits. In addition, our visibility into the current order book and overall outlook for our business enables us to reinitiate guidance for the remainder of 2020. Scott will elaborate more on this when he discusses our financials. And as I'm sure you understand, our guidance assumes there are no additional government restrictions or other unforeseen COVID-related impacts. And with that, I'll turn the call over to Scott.
spk08: Thanks, Mike. Good afternoon, everyone. I'll start with our third quarter financial results and then review our guidance. Sales in the third quarter of 2020 were $260.7 million, an increase of 23.4% versus sales of $211.3 million in the third quarter of 2019. The specialty sports group experienced a 32.4% increase in sales compared to the same period last year, driven by high demand in both the OEM and aftermarket channels. Sales for the Powered Vehicles Group reflected a 17.7% increase compared to the third quarter of 2019, primarily due to sales from SCA, which we acquired in March of this year. Gross margin was 34.3% in the third quarter of 2020. a 130 basis point increase from 33.0% in the prior year period. Non-GAAP gross margin increased by 110 basis points to 34.5%. The increase in gross margin was driven by our SBA acquisition, better product and channel mix, and improved supply chain efficiencies. Total operating expenses were $43.9 million, or 16.8% of sales, in the third quarter of 2020 compared to $34.5 million or 16.3% of sales in the third quarter of last year. The increase in operating expenses on a dollar basis was primarily due to the inclusion of SCA operating costs of $4.4 million, amortization expense of $3.6 million, and acquisition-related compensation costs of $1.3 million. However, Looking at non-GAAP operating expenses as a percentage of sales demonstrates the operating leverage that we believe is inherent in our business as we further scale our operations. For third quarter, non-GAAP operating expenses decreased by 90 basis points to 14%, compared to 14.9% in the prior year period. For the third quarter of fiscal 2020, our effective tax rate was 12.5%, This rate is slightly lower than our previous long-range guidance of 15% to 19%, primarily due to the realization of foreign tax credits and excess benefits related to stock-based compensation. Adjusted EBITDA increased by 38.1% to $60.1 million for the third quarter of 2020, compared to $43.6 million in the same quarter last year. Furthermore, Adjusted EBITDA margin expanded 250 basis points to 23.1%, compared to 20.6% in the third quarter of 2019. The increase in EBITDA margin is primarily due to the impact from higher sales and gross margins, as highlighted above, the positive impact of SCA on our results, and improvement in supply chain efficiencies. On a gap basis, Net income attributable to Fox in the third quarter of 2020 was $38 million, or $0.90 per diluted share, compared to $29.5 million, or $0.75 per diluted share, in the prior year period. On a year-to-date basis, earnings per diluted share was $1.46 compared to $1.80 for the first nine months of 2019. Non-GAAP adjusted net income was $45.4 million, an increase of approximately $12.7 million, or 38.8%, compared to $32.7 million in the third quarter of last year. Non-GAAP adjusted earnings per diluted share for the third quarter of 2020 was $1.07, compared to $0.83 in the third quarter of 2019. On a year-to-date basis, non-GAAP adjusted earnings per diluted share was $2.12 compared to $2.07 for the first nine months of 2019. Now focusing on our balance sheet, as of third quarter ended October 2, 2020, compared to our 2019 year end on January 3, 2020, we ended with cash on hand of $278.2 million Our accounts receivable was $114.1 million compared to $91.6 million. Inventory was $135.7 million compared to $128.5 million. Pre-pays and other current assets were $31.6 million compared to $17.9 million. Accounts payable was $101.4 million compared to $55.1 million, and Total debt outstanding was $389.2 million compared to $68 million, and our third quarter net leverage ratio on a pro forma basis was approximately 0.95 times. The changes in inventory, accounts receivable, and accounts payable reflect seasonality as well as timing of vendor payments. The increase in prepaids and other current assets was primarily due to SCA-related items including chassis deposits and contingent retention incentives held in escrow. Our net property, plant, and equipment increased to $156.8 million as of October 2, 2020, compared to $108.4 million at the end of 2019. The increase reflects the SCA acquisition as well as investments in our new manufacturing facility in Gainesville, Georgia. Between the cash we now have on hand and the borrowing capacity under our credit facility of $250 million, we believe we have the liquidity and financial strength to manage through any ongoing economic uncertainty while continuing to proactively execute on our long-term strategic objectives. Finally, an update on our outlook for the remainder of fiscal 2020. We are reinitiating our practice of providing sales and non-GAAP adjusted earnings per diluted share guidance given the success we have had in managing through this uncertain environment. Our visibility has improved and we want to provide the market with the most accurate forecast possible. So for the fourth quarter 2020, we expect sales in the range of $240 to $250 million and non-GAAP adjusted earnings per diluted share in the range of 72 to 80 cents per share. I'd also like to note that we're not providing guidance on GAAP EPS as it cannot be provided without unreasonable efforts due to the difficulty of actually predicting the elements necessary to provide such guidance and reconciliations. With that, I would like to now turn the call back over to Mike.
spk04: Thanks, Scott. In closing, As we look to a strong finish to 2020 and heading into 2021, we believe Fox is well positioned to extend our lead and capitalize on any opportunity. Given our diversified product lines to support a growing customer base of enthusiasts that use our products to make their lives exciting, enjoyable, and active. Our third quarter results clearly demonstrate the strength of our agile operating network, the resilience of our people, the power of the Fox brand, and our performance-defining products. We believe these core competencies, when combined with the strength of our valued OEM partners and aftermarket network, will continue to be our competitive advantage in the market as we move forward. I would now like to open the call for questions, operator.
spk01: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from Jim Duffy with Stiefel. Please proceed with your question.
spk04: Thanks. Good afternoon. Guys, I'm hoping you can provide more color on the power vehicle group trends. Can you comment on what you saw in the third quarter with the aftermarket business outside of SCA with your auto OEMs and then with the non-automotive OEMs? And then what changes do you expect to see with respect to this business in the fourth quarter? Hey, Jim, this is Mike. So, good question. You know, let's start with power sports. in the third quarter, that continued to be a very strong product category for us. As you probably know from a lot of our customers who have reported, their demand signals continue to be extremely strong. They're still working to try to re-inventory showrooms across the country and across the world. So we saw that growth continue on through Q3, and we believe that will continue on through Q4 and into the early part of 2021. Aftermarket didn't slow down at all. As you saw, the recovery out of Q2 into Q3, our aftermarket business, say in SCA, as you mentioned, continued to be strong through Sport Truck and through our legacy business. At the same time, of course, as you know, in Q3, we're moving that production from California to Georgia. It was a pretty amazing accomplishment from the team to deliver to that increased demand while transitioning. We're really proud of that. And then I think, you know, finally, when we look at kind of aftermarket going forward, it's hard to really get an early forecast yet on 2021 for aftermarket shock business. But we believe the strength and fairly broad strength in that category. There wasn't anything significant to fall out as a weakness or as a concern.
spk00: Okay, great. And then, Mike, it's clear from Bill and Jim.
spk04: I didn't catch that. Did you hear what Jim said?
spk00: Mike, I'll come again with it.
spk04: It's clear from diligence in the channel that dealer lots are depleted of inventory. How's your visibility with respect to those powered vehicle OEM categories looking out into 2021? Yeah, the powered vehicle, you know, again, I kind of break it into two pieces with the power sports and automotive. You're right on both cases that dealer lots are pretty depleted. we see that reduction that happened in Q3 on the automotive side, which is the function really being shut down in Q2. You know, when they shut down for 60 days, that created a hole that was really hard for their factories to recover for in Q3. That will slowly improve as you go through Q4 and into 2021. But, yeah, there's definitely a gap in vehicles and lots. and especially with the demand in the high end of the truck and SUV market, that's complicated matters, which is driving a lot of people to buy used trucks. And, of course, we don't mind that trend because it allows us to sell in the aftermarket, so it's a good trend for us as well. In power sports, like I mentioned earlier, those showrooms are pretty low, and I think they stay low. I think we are working as hard as we can to, to fulfill the increased demand for those power sports customers throughout Q4. That will continue on into Q1. I don't envision that those showrooms will be replenished to the extent that they used to be until Q2 of next year, 2021, probably at a minimum.
spk00: Great. Thank you, Mike. I appreciate the perspective. You got it.
spk01: Thank you. Our next question comes from Larry Solo with CJS Securities. Please proceed with your question.
spk02: Great. Good afternoon, and congrats on the quarter. Thanks for taking my questions. A quick follow-up to Jim's question on the power vehicle side. So clearly the COVID has lifted a bit of renaissance on the bike side. where it's growing over 30% this quarter. But power vehicles, I know it sounds like demand in the after channel you mentioned is stronger than it's ever been. Organic sales are flat the last couple of quarters, which is great in this environment or this quarter. That sounds like it's more of a function of supply than demand, which seems like it's running way ahead of that. So is there like a nice tailwind for a couple of quarters, two, three quarters, to sort of get back into what true demand is?
spk04: Yeah, I think there is, Larry. You know, from my perspective, we've got a record number of engineering projects, you know, in the queue right now in power sports and in automotive on the OE side. So, you know, when we're looking forward and we're seeing the demand signal coming from the end markets, this really has been more of a supplier recovery story in Q3. with our partners and just with the markets in general. So I think that creates a tailwind in 2021. And, you know, we're not in a position yet to give guidance for 2021. You know we do that at the beginning of the year. But I would tell you, you know, we have a very good insight into what demand signals look like on a long-term basis and what our automotive customers and power sports customers are asking us to go do on a longer period of time. With that information, we're already looking at 2021 and planning for a revenue north of a billion dollars. And, again, we'll give you more detail on that as we get closer to 2021 and in 2021. But we're very confident in what we're seeing in signals from the market today.
spk02: Right. Okay. That's very helpful. And how about on the progression in Georgia? You actually mentioned, I think, or Scott mentioned that you're actually experiencing some productivity gains. Is that sort of – Sequentially, would you say that overall sort of the transition is at least no longer a headwind to margins and maybe closer to a push right now in terms of next year, or have you already sort of reached that pinnacle of switching to positive?
spk04: We're still climbing that hill. So, you know, we did see productivity gains, and it gave us a lot of confidence in our long-term view of what Georgia will bring to us, as I've talked to you about quite a bit. I believe that's in front of us, and we're going to be able to go achieve some great things with Georgia. So I'm really happy with what we saw in the quarter. That aside, you know, we're not out of the process yet. We still have duplicated manufacturing in California and Georgia. That's going to continue on, as you know, until the second quarter of next year. So we've got puts and takes is the way I think about it, Larry. We're going to see some things that are going to improve in Georgia and some things that are going to continue to be able a headwind out of California. I'm proud of what the team's doing so far, and I think we're incredibly, as you saw in our numbers, you know, achieving the expectations that we set forward. But more work to do, and we're going to stay after it.
spk02: Okay. And just switching gears real fast on the SCA acquisition, you know, obviously pretty early in the game there, and COVID probably, you know, maybe skewed things a bit. Just, you know, six months later, has the integration been relatively unplanned? Is Tuscany able to – have they actually been able to get some cross-sell opportunities and sort of leverage off of the SGA as much larger base of dealers and relationships, or is it sort of too early and COVID sort of skewed that?
spk04: In the quarter, we actually did some integration between SGA and Tuscany, and the benefit of that integration will really start to deliver in 2021. But you know, we feel good about where that business is. We are, you know, incredibly happy with the team that we've, you know, integrated into Fox and with the strategy that we've got in that business. So it's performing, you know, at or above our expectations. And, you know, nobody expected COVID at the time that we did the acquisition. So that's the anomaly that we're all kind of reeling with this year. And when we look forward into the future with the SCA Tuscan business, We're incredibly excited about it. It's allowing us to do a lot of vertical integration in the company. It opens new doors and new channels for us. And we just, as you know, got that Jeep bailment in the quarter, which allows us to sell Jeep products through our bailment system like we have with Ford Chrysler and GM. So really, really good story for us, and I think great progress in the quarter.
spk00: Great. Thanks a lot. I appreciate the call.
spk01: Thank you. Our next question comes from Mike Swartz with SunTrust. Please proceed with your question.
spk10: Hey, guys. Good evening. Just wanted to touch on the powered vehicle side of the business. Looking at the 10Q, it looks like, if I'm reading this correctly, SCA was something in the low 20s in terms of revenue in the quarter, which would apply basically flattish. revenue organically in that business. Maybe give us a view of some of the puts and takes in the quarter. Were there any supply chain costs or just anything kind of that you were fighting through still in the third quarter?
spk04: Yeah, great question, Mike. There were challenges throughout the quarter between California wildfires that made us evacuate facilities for a period of time to, you know, just the whole notion of social distancing in a manufacturing plant is pretty difficult. So nothing was elegant in the quarter. We had to kind of fight from day one. Flat was actually above our original expectations pre-pandemic, just based on model changes and things like that. So achieving organic flat in the quarter was actually a strong result. I would say that the one nuance that I probably didn't cover in my prepared script was that we did end the quarter with some backlog that will then play out into Q4. You know, it wasn't an astronomical number that we aren't, you know, used to. But it was a backlog that we just couldn't get out because of the transition to Georgia and all the work we were trying to do. So, you know, I think when I look at powered vehicles in Q3, again, proud of the team. They did a lot of good work in productivity in Georgia. And I think it's, you know, on a long-term basis, still exactly where we want it to be and where it's going in the right direction.
spk10: Okay, great. Second question, just on EBITDA margins, I know long-term we've talked about kind of the 20% plus target. And now with some of the investments wrapping up and SCA obviously being accreted to the mix, and as I look at your third quarter and your implied guidance or margin guidance for the fourth quarter, it looks like you're still kind of shooting for that low 20. So are we now at a point where 20% plus is kind of the new normal?
spk04: Well, we've hit 20% plus in the past, and as you know and mentioned, we did better than that in Q3, and we're looking good for Q4. We're not ready yet to get 2021 guidance on it, but I do believe, as I said to you, Georgia brings a lot of value to us and a lot of productivity, which will help us on the EBITDA basis. So I do think we're going to stay focused on delivering north of 20, and we'll come back to you in the near term and talk about where we're going on a long-term basis.
spk06: Okay, great. Thanks a lot.
spk01: Thank you. Our next question comes from Scott Stember with CL King. Please proceed with your question.
spk11: Good evening, guys. Last quarter, you guys had talked about how, I guess, Supply issues or just a shortage of lower-priced bikes in the chain, I guess, led some consumers to buy more expensive bikes, which certainly helped you guys out. Are you still seeing that trend as we speak right now?
spk04: Yeah. You know, I think you see a couple of things happening. Right now, there's still an extreme shortage of bikes in showrooms. We're seeing an increase in the demographics that is purchasing bikes. Last quarter Q2, we saw people just buying whatever bike was available. I think you'll see that trend will start to dissipate as lower-end bikes start to refill showrooms. It will go back to people looking for premium bikes and e-bikes and the higher end of the range, which of course is where we play. Yeah, I don't know if that's a material difference in kind of thinking we all could be, you know, our end consumer. Our end consumer is still a more affluent buyer. And we're seeing that continued growth in our order book and what we're looking at for Q4 and at least the first half of 2021. Got it.
spk11: And the commercial truck offering that you have, can you talk about how that's playing out and how that plays into your – your estimates for the power vehicles group going forward?
spk04: Yeah, both commercial truck and military are areas that have seen growth. Military probably more than commercial truck just recently, but both are areas of growth for us going into 2021 as we expand the Georgia facility, especially with regards to commercial truck where we really can't fulfill the demand in front of us out of our El Cajon facility. So we really need Georgia up and running in a more mature state for commercial truck to pick up steam.
spk11: Just the last question, just bigger picture, you know, obviously, you know, with talk of a COVID-19 vaccine coming out shortly, there's, you know, some folks out there that are concerned that people will go back to their normal ways of recreating. Just talk about high level, how you guys think about, you know, how sticky it is, the customer base, the new customers that are coming to the market, and, you know, whether you think that this definitely, no matter what happens with the vaccine, that, you know, your business will benefit no matter what going forward.
spk04: Yeah, you know, Scott, we don't see it that way at all. We're really excited, obviously, as everybody is on the planet, if not at least the country, that a vaccine is apparently near term. So, And I don't think that's a surprise for anybody, right? We've all been watching the news and tracking all these companies, pharmaceutical companies, and seeing this vaccine emerge. So we're excited about that. We think that's a positive to sports in general and to biking specifically. I don't think it takes away from this renaissance we're seeing in the biking space or in the power vehicle space, by the way. We think it actually brings people back to work and creates prosperity and allows people to, invest into the hobbies they've created over this last year or nine months, as it may be. So we're not on the same page as some of the articles and people's opinions out there that say this is the end of kind of the outdoor lifestyle, sporting, boating, golfing, or biking. I think these are trends that are going to maintain and grow over time.
spk11: That's great. Thank you so much.
spk01: Thank you. Our next question comes from Craig Kennison with Baird. Please proceed with your question.
spk06: Hey, good afternoon. Thanks for taking my question. To your point, we've seen just tremendous demand in the end markets for your product, and then your customers are really desperate to build more units. So I guess I'm wondering, to what extent can you more aggressively flex your capacity to really build you know, produce a lot more in the fourth quarter so that, you know, some of your customers can catch up. I mean, they depend on hundreds of suppliers, so you're not the only one. But I think if they could have more product and could build more, they would. But I'm wondering to what extent you can flex your own capacity to meet that demand.
spk04: Craig, that's a great question. You know, one of the things we've been doing throughout Q3 and we'll continue doing Q4 is is add workforce. We've literally done job fairs, in some cases drive-through job fairs, because we need to do it because of COVID. We've done job fairs in probably four or five factory locations in the U.S., including California. We've done it in Taiwan. We're going to continue to do it. It's a function right now of getting enough people into these factories to support the capacity. It's about adding production lines in Georgia, adding production lines in Taiwan, all of which we're doing Now, those things aren't overnight. While we can hire people and get them trained in, let's call it, two weeks, it's probably more like 60 to 90 days to add lines and staff them and get them up and running with this supply chain. So keep in mind that it's not a digital scenario. But we've been doing it now for a couple of months, and we're going to continue working hard to increase that capacity. These are not big cap expense. These are really more about production lines and people. But we are tightly aligned with our largest partners in both FSC and PVG to establish the capacity they need going into 2021. And that relationship alignment is really helping us understand how best to serve their needs and to make sure that we run spec. Because what you'll find in times like this is the guy that can be nimble and fast and agile in their factories can achieve spec wins and more volume than other guys can't. So as a manufacturing guy, we're pretty focused on that stuff, and we're going to continue to drive that throughout Q4 and into Q1.
spk06: Thanks. And I guess, you know, a lot of our clients are pretty excited about the e-bike market as a potential commuter option. Could you just shed a little more light on where you see the Fox opportunity in e-bikes. I know, in particular, it's on a higher-end mountain bike, which may not be that commuter unit. But, you know, how excited should people be about that market in the scheme of all of your – in the context of all of your opportunities?
spk04: I think it's big. I think it's one of the primary growth drivers in our mountain bike business. And I would even say beyond our mountain bike business. You know, recently – there's an entrance of a category that doesn't exist. When I tell you this word, it doesn't exist, but it's called E-SUV, what we call E-SUV, or E-S-U-V, in the e-bike world. And what it is is kind of a combination of a city bike and a mountain bike. It's got, you know, in some cases, full suspension, in some cases, front forks. We've seen a huge increase in demand for our Marzocchi product on the E-SUV category. We think that's a very interesting... dynamic point now, because it's a mountain of cases of bikes that people ride in the city. And we're seeing price points, you know, $5,000, $6,000, $7,000, especially in Europe, where it's a really popular mode of transportation, where you can load your groceries or your dog, if you will, and head into town. That category really allows for high-performance mountain biking products used on a road application, not so different to what you see in, like, a Ford Raptor. So... Think about it in this strengthening and broadening of a category across e-bikes, and let's play in ways we haven't in the past. We've seen significant success coming out of that already. On the premium side, again, those bikes just get better and better. They get lighter and lighter, and to the extent they're getting better or lighter, we've become a prime candidate to supply products into that category, not just in suspension, but you know, in wheels and keypads and cranks and handlebars. So e-bike is big, and it's a real important part of how we think about our technology roadmap going forward.
spk06: Hey, thank you so much.
spk01: Thank you. Our next question comes from Alex Marocchia with Barenburg Capital Markets. Please proceed with your question.
spk09: Hi, good afternoon, guys. Can we go to Scott's question on bikes from earlier? Some of your Asian bike partners continue to report somewhat underwhelming numbers when compared to your specialty sports growth, which I'm assuming is all related to supply chain constraints. So can you slow a bike birth by OEM versus aftermarket, and how is that comparing to historic rates?
spk04: Are you talking about – hey, Alex, are you talking about between – aftermarket and OEM in SSG specifically, or are you talking about a broader question?
spk09: They're just in SSG.
spk04: Okay. Yeah, so we're seeing growth consistently across both ends of that spectrum. In SSG, you know, a lot of our product is in the OEM category. A lot of our volume is there. So that's where you're seeing some of the supply chain challenges for some of our partners because they're unable to get certain components And we are seeing a tendency for some component manufacturers to move fairly slowly towards capacity expansion. And so that does cause some of those partners, you know, larger challenges. That said, in the premium space, not as big of an issue. So probably a bigger issue for more broad line or lower cost type components. Not as big an issue for us. We are working hard on our supply chain to make sure it can keep up with our demand signals. Having pretty good luck in that, so it hasn't been a major issue. It's just a full-time event for our teams to manage. But we are seeing strength across aftermarket and OE pretty consistently. Lots of strength in the premium products category. Seeing some of our partners not reflecting the same growth levels as we are. And I think, again, that's a function of low-cost versus mid-price premium bikes versus high-end premium bikes. We tend to do well when the high-end fuel bikes are in so much demand.
spk09: Okay, that's helpful. And then secondly, you're spending on a pretty significant amount of cash right now. We're almost through the Georgia facility. So what would you be prioritizing for internal investments going forward? And then are you seeing any assets in the market right now, either bikes or PVG, that would easily fit into the business at a decent price?
spk04: Yeah, a couple of comments. I don't know if Scott jumped in on this one, too. So, you know, you're right. We are sitting on cash, and we took on that additional cash so that we could be opportunistic and play offense instead of defense, as you remember me saying before. We're still on offense. The challenge we found, both in FSG and in PDG categories, is the valuations and some of the price points that these companies are asking for in an acquisition model are just not in line with our our culture, our approach, or our view of the business going forward. So, you know, we're going to be pretty thoughtful and pretty conscientious about moving forward in a time when these multiples seem to us at least, you know, fairly inflated. That said, we're going to continue to use those dollars to invest in organic growth first and organic growth second. So we will keep looking and we will keep working it. And, you know, small acquisitions will occur along the way, immaterial to kind of the broader public, but You know, we'll do those to help vertically integrate parts of our business and to continue to expand our portfolio in a technology space. So we're going to continue to do that. But for us to have a big, which I would like to see, a nice large acquisition like an FDA, you know, we really need to do evaluations from back in the line of what we think the market should bear. So, Scott, you want to take?
spk08: Yeah, the only other thing I would add to that is, especially on the PVG side, You know, we're in the midst of a huge transformation with bringing everything across the country from California to Georgia, and so we're weighing any kind of transformational acquisitions on that side of the equation a little bit more heavily in terms of not burdening the business too much when they have so much on their plate from an execution perspective, because obviously, as you can see from our results, They are very busy.
spk00: All right, great. I appreciate the color.
spk01: Thank you. Our next question comes from Ryan Sunzee with William Blair. Please proceed with your question.
spk05: Yeah, hi. Good afternoon. Thanks for taking my question. Mike, when you look at favorable demand environments like the one you're in and tight supply, you know, that usually creates kind of a marketplace that's supportive of higher pricing. I'm just wondering if you've been able to lean into that this year and maybe take more price than normal just because of its dynamics.
spk04: You know, we have to be careful on that. You know, we've got really long-term partnerships with some really great customers. And to go in in a market like this and fight this, increased, you know, prices just because they're really dying for product and volume from us is not really a good long-term strategy for, you know, partnerships. So we try to, and I know that's probably not what you're suggesting, but we try to avoid scenarios like that. We do try to drive these innovation and technology and things like that to drive price increases. And as you know and can envision, over the years the price points of our products have consistently gone up year on year. So we're pretty focused on that. We'll use innovation and technology to drive value, which drives product price. And we're pretty focused on going up instead of down and trying not to be a commodity player. That said, I think our biggest opportunity right now for margin enhancement comes from supply chain management, from expansion in our factories, and from becoming more productive and efficient in the manufacturing process. Not a lot of price increases relative to just supply and demand right now. Really more about driving technology innovation to keep our price points higher and reflect the value we're bringing to those customers.
spk05: That's a helpful color there. And then just on the innovation front, you know, I guess when you see our OEM partners struggling to keep up with demand and trying to, you know, just get vehicles and bikes back into the store, Does that conversation change with them? Does replenishment become more of a focal point over the next six months, and maybe innovation becomes less important to them, or are you still seeing trying to appetite for more ideas?
spk04: We're seeing both. You really see two different sides of a partner business, though. The supply guys are absolutely knocking on our door every day, asking us to drive more products, create more capacity, and get as much volume up to where we can. On the engineering side, All these companies are looking at this as a new renaissance to growth, whether it's automotive or power sports or in biking. And so they're also doubling down in terms of innovation and technology to try to make sure that they are the winner as we exit this kind of anomaly with the pandemic. So we're really driving both hard. Like I said, I think in my prepared remarks or after, we have more engineering projects and hard vehicles today. directly related to a power sports or automotive customer than we've ever had in our prior past. So it has not slowed down its impact. It's increased. We're adding resources to support it. But at the same time, you know, we believe that the supply chain guys are really focused on volume and the design guys are focused on new product launches.
spk05: Got it.
spk04: Thanks for your comment.
spk01: Thank you. There are no further questions at this time. I would like to turn the floor back over to Mike for any closing comments.
spk04: Yeah, thanks, everyone. We appreciate your participation and questions on today's call. As always, we appreciate your interest in Fox Factory as well. And in closing, we ask everyone to stay safe and have a nice evening. Thank you.
spk00: This concludes today's conference.
spk01: You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.
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