Clarus Corp (CLAR) 2010 Q3 法說會逐字稿

Greetings and welcome to the Clarus Corporation Third Quarter 2010 Results Conference Call. At this time all participants are in a listen-only mode. 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, Mr. James Palczynski of ICR. Thank you, Mr. Palczynski, you may begin.

Good evening, everybody. Before we begin, I'd just like to remind you of a couple of things. First, any redistribution, retransmission or rebroadcast of this call in any way without the express written consent of Clarus Corporation is strictly prohibited. Please note also that this conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Clarus may use words such as anticipates, believes, plans, expects, intends, future and similar expressions to identify forward-looking statements. These forward-looking statements involve a number of risks, uncertainties and assumptions, which are difficult to predict. Clarus cautions you that any forward-looking statement is not a guarantee of future performance and that actual results could differ materially from those contained in the forward-looking statement.

Examples of forward-looking statements include, but are not limited to, statements about the benefit of Clarus acquisitions of Black Diamond equipment and Gregory Mountain Products, including future financial and operating results that may be realized from the acquisitions, statements of plans, objectives and expectations of Clarus or its management or Board of Directors, statements of future economic performance and statements of assumptions underlying such statements and other statements that are not historical facts.

Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include but are not limited to; our ability to successfully integrate Black Diamond equipment and Gregory Mountain products, our ability to realize financial operating results as expected, material differences in the actual financial results of the mergers compared with expectations including the impact of the mergers on Clarus' future earnings per share, economic conditions and the impact they may have on Black Diamond equipment and Gregory Mountain products and their respective customers' demand for products, our ability to implement our acquisition growth strategy, obtain financing to support such strategy, the loss of any member of our senior management or certain other key executives, our ability to utilize our net operating loss carry forwards, and our ability to adequately protect our intellectual property rights.

Additional factors that could cause Clarus results to differ materially from those described in the forward-looking statements can be found in the risk factor section of the Clarus filings with the Securities and Exchange Commission, including its latest annual report on Form 10-K and most recently filed Forms 8-K and 10-Q, which may be obtained at our website at www.claruscorp.com or the Securities and Exchange Commission's website at www.sec.gov.

All forward-looking statements included in this conference call are based on information available to Clarus as of the date of this conference call and speak only as of the date hereof. We assume no obligation to update any forward-looking statements to reflect events or circumstances after the date of this conference call. A full recitation of our Safe Harbor language has just been provided.

Thank you so much for bearing with me and, with that out of the way, I would now like to turn the call over to Peter Metcalf, Chief Executive Officer of Black Diamond.

Thanks, James. Good afternoon and thank you for joining us today to discuss our third quarter 2010 operations and financial results. Robert Peay, our CFO, is joining me today. Following our remarks this afternoon we will open the call for a brief questions and answer period.

We are pleased to have completed our first full quarter of consolidated operations as the new Black Diamond 2.0. Overall we are where we expected to be, both quantitatively and qualitatively. With respect to the numbers, revenue is growing, margins are stable and expected to improve and cash flow is in line with seasonal expectations.

We are tracking to our target of between $120 million to $125 million of pro forma revenue for the 12 months ended December 31, 2010 and we remain committed to a long-term goal of $500 million in annual revenue by 2015.

The reported financial results for the three months and nine months ended September 30th, 2010 are reasonably complex due to the acquisitions of Black Diamond and Gregory in May 2010 and the treatment of Black Diamond as the predecessor company for financial reporting purposes. In a few minutes Robert Peay will discuss our financial results and help clarify how to interpret those numbers.

From a high level though, I'd just stress that we view 2010 as a financial and operational transition year. There's a high level of transaction, restructuring, merger and integration costs associated with the acquisitions, which we are required to expense as incurred. Behind those costs is a very thorough integration process to which we are refining our operations. We are positioning the business to generate expanded operating profitability. While the 2010 results will show the benefits to combining the sales of Gregory and Black Diamond, the true earnings power of the combination is expected to begin to be apparent in fiscal 2011.

With respect to the Clarus infrastructure, I'm pleased to note that we have already eliminated the cost of our Stamford, Connecticut offices and completely moved the public Company administrative functions to our Salt Lake City headquarters.

We are eliminating significant costs from Gregory's operations by relocating the Gregory Headquarters and distribution center from Sacramento into our Salt Lake facilities. Importantly, the key Gregory people have agreed to make the move to Salt Lake and we are confident that we will achieve the planned cost savings from the consolidation without losing any of the critical DNA of the Gregory brand.

I just want to point out that, as we acquire and integrate businesses, we are incredibly sensitive to ensuring that we enhance the most important pieces of those businesses, their brands, their culture and their ability to innovate, to serve their customers and to grow. We are going to help them build their future. We expect to achieve cost savings, of course, but it will be because there are functional advantages to integration in those areas.

In addition to the retention of key people at Gregory, the combination of Gregory and Black Diamond has enabled us to add a number of extremely capable individuals to the Gregory team. These include John Pieper as our new Director of Domestic Sales and Marketing and Andrea Meerholz as Gregory's new Brand Manager for Europe. John spent the last three years as the Sales Director for Osprey packs, Gregory's primary global competitor. And Andrea Meerholz, who we've been aware of for a long time, is a very capable and experienced export manager from Mammut, the well known Swiss outdoor company.

Black Diamond is already a well distributed and established European brand with 32 people working from our Black Diamond office in Basil, Switzerland. Dedicated to Gregory, Andrea will be focused on leveraging Black Diamond's euro centric infrastructure to rapidly penetrate Europe with Gregory products. With 2011 to tweak the product line and to plan a proper product launch, we anticipate seeing meaningful revenue for Gregory out of Europe beginning in 2012.

In addition to the new hires at Gregory, it appears that a new public platform has also enhanced Black Diamond's ability to recruit top talent from around the industry. We've made some pretty exciting hires over the past quarter. While we've always attracted great talent over the years, there have been some people that as much as they believed in what we were doing, simply felt it was too much of a career sacrifice to come to Black Diamond.

It appears now the psychological roadblock to our human resource effort is changing. Frankly, I think we may have underestimated just how powerful the Gregory, Clarus, Black Diamond combination might be in that respect, which is really a pleasant surprise. A great example is Casey Jarvis, who for the last several years has been the Design Director for Nike's running shoe business.

As a growth driver we are interested in extending the Black Diamond brand into footwear. Through our ski boot program we have some considerable expertise in resource in the footwear category. Our Freeride boots, which combine the rigidity needed for great on or off piece downhill performance and the comfort and flexibility needed to hike, tour and access those lines, have been a great success. Beyond skiing, however, we believe that Black Diamond possesses many other footwear opportunities across several categories and we're very excited and fortunate to have Casey join our product team, as we plan future initiatives.

Another great example is [Phil Shettig], who we recently recruited in to take on a newly elevated position of Director of Development. Phil's background includes positions of steadily growing responsibility at Nike, [Air War] and most recently at Spyder Clothing, where he was the General Manager for their Alpine and commercial clothing lines. Apparel is another product category that we believe is a natural progression for Black Diamond to enter and we're adding the in-house capability to do so.

Just as we are more attractive as an employer, our unique public market position is helpful as we seek to identify strategic transactions. Historically Black Diamond has successfully completed a small handful of tuck in type acquisitions. However, access to the public capital markets, the listing or our shares and the proven track record and experience of our Chairman and Vice Chairman are meaningfully beneficial to this effort. It will take us time to develop our pipeline but, based on current dialogue, we believe that our reputation in the industry is already having a positive influence as we seek to identify strategic transactions.

We expect to complete the Gregory integration early in the first quarter of 2011 and be well positioned to continue down the acquisition trail in 2011. We're making investments in people and infrastructure necessary to achieve our $500 million annual revenue target by 2015.

Based on Black Diamond's historical compound annual growth rate of 13.6% since 1989, we expect approximately 50% of our revenue target could be achieved through organic expansion of our brand and about half of the targets result from acquisitions and the subsequent organic growth that will flow from them. We're developing a roadmap for the various opportunities we have by category, by brand, by distribution channel and by geography.

I'm going to reserve some additional comments for the closing but I'd like now turn the call over to Robert Peay, our Chief Financial Officer, to discuss our third quarter financials in some detail.

Thank you, Peter, and good afternoon, everyone. As Peter mentioned, we're very pleased with the Company's financial performance for the first three full months of consolidated operations of Clarus, Black Diamond and Gregory. Because the Company was largely created through the May 28th, 2010 acquisitions of Black Diamond and Gregory, purchase accounting adjustments and other issues make our comparative data more than a little confusing.

Our press release covers the first -- the three and the nine months period ending September 30th, 2010. Because Clarus did not have any business operations prior to the acquisition, we treat Black Diamond as the predecessor Company for financial reporting purposes. As a result, all of the historical financial data included in our combined results for the periods prior to May 28th, 2010 includes Clarus and Black Diamond but does not include Gregory.

Today's press release contains pro forma tables to help investors analyze our year-over-year performance as if Gregory were included in operations for all time periods. Given the costs associated with the acquisitions and the integrations, we believe that the most meaningful third quarter measurements are pro forma sales growth and adjusted gross margins. On pro forma basis sales for the three- and the nine-month periods ending September 30th, 2010 increased 9.7% and 8.9% respectively.

Actual consolidated sales for the three months ended September 30th, 2010 were $33.9 million. Both Black Diamond and Gregory Mountain products delivered steady sales growth versus the year, despite a generally challenging retail environment, both here in North America as well as in Europe.

We're also very pleased with the growth in the business by customer and we're making inroads with our largest customers, as well as with independent retailers. We believe that, as our sales organizations come to be more closely aligned, an integration process that we've only just begun, we'll be able to reinforce Gregory's penetration. This should prove to be particularly true in Europe, where the Gregory brand is extremely underpenetrated and going forward will operate on the well established BD platform, operational platform that Peter discussed earlier.

Gross margins for the three months ended September 30th, 2010 were 28.1%. You should note that this includes a non-cash, step up in inventory costs of $3.2 million as well as a significant negative impact from foreign currency movements. Excluding just the non-cash fair value adjustment, adjusted gross margins for the period would have been 37.4%. This compares to 38.3% for the three months ended September 30th, 2009 including Gregory and before any fair value inventory adjustment.

The 37.4% adjusted gross margins for the three months ended September 30th, 2010 are slightly lower than last year's adjusted gross margin of 38.3% primarily due to the impact of foreign currency, specifically the relationships between the U.S. dollar, the Euro and the Swiss Frank. Applying Q3, 2009 exchange rates, we estimate that on a constant currency basis our adjusted gross margins before any on-cash step up in cost of goods sold margins would have been approximately 39.2% for the three months ended September 30th, 2010. Absent the currency's volatility we gained considerable efficiency in our manufacturing operations with increased volume.

That said, our business is global and currency movement is a reality in that we attempt to actively manage through hedging activities. Through September 30th, 2010 we booked our foreign exchange gains or losses in other income. Going forward the Company expects to qualify for hedge accounting treatment, which will allow us to book our gains and losses through net sales to eliminate these unbudgeted financial exposures.

Turning to our operating expenses for the three months ended September 30th, 2010, in addition to our normally recurring operating expenses, this quarter we incurred cash, restructuring transaction, merger and integration costs totaling $1.2 million. This is a meaningful decrease compared to the $5.4 million incurred for these items in the second quarter of 2010. We expect these costs to decrease meaningfully again in the fourth quarter and be complete early in the first quarter of 2011.

In addition to these cash charges, during the three-month period ended September 30th, 2010, the Company incurred $3.6 million of non-cash operating expenses. These include $1.6 million of mark-to-market accounting associated with our currency hedges and $700,000 of non-cash charges related to restricted stock option packages granted in connection with the May 2010 transactions. Approximately $600,000 of these charges for new equity will be fully expensed by the end of 2011.

After all of the non-cash charges the Company reported a net loss for the three-month period ending September 30th, 2010 of $3.3 million, or $0.15 per share, on a 21.7 million shares outstanding. Before the non-cash charges, the Company reported adjusted net income before non-cash items of $2.1 million, or $0.10 per share.

Today's press release contains a reconciliation from net income to net income before non-cash items, adjusted net income before non-cash items and related earnings per share for both the three- and nine-month period ended September 30th, 2010 and 2009.

From a cash flow perspective, the third quarter is historically the Company's seasonal high for working capital, as it builds accounts receivable and inventory for the fall and winter season and its balance sheet reflects just that. Cash at September 30th, 2010 was $1.6 million, while total long-term debt increased to $32.9 million, including $19 million outstanding on our $35 million line of credit.

The cash uses associated with the transaction also served to distort efficiencies with the Company's actual use of cash for operations during the period. Suffice it to say that excluding all of the cash and non-cash expenses associated with purchase accounting and the transactions during the nine-month period the Company used just $800,000 of cash through its working capital peak, while expanding its revenue base by approximately 8.9% on a pro forma basis.

Historically the Company has generated significant amounts of cash from operations in the fourth quarter and we expect that this year should be no exception. Before the non-cash cost that I previously described, we expect the consolidated companies to generate in excess of $5 million of cash flow from operations during the fourth quarter in 2010.

In summary, we expect fourth quarter of 2010 to be in line with our existing revenue guidance and we expect to conclude the year with strong adjusted operating cash flow as our historical working capital needs reduce and we reduce outstanding borrowings under our line of credit. They have just begun the budgeting cycle for 2011 and expect to provide you with growth expectations and modeling assumptions for fiscal 2011 when we report the fourth quarter.

Thanks and now I'll turn the time back to Peter for some closing comments.

Thanks, Robert. I know that we are still in the scheme of things a small Company. That said, we have bold and inspired plans. Making those kind of plans and successfully executing on them is our track record. As we talked about last quarter, one important reason why Clarus was interested in Black Diamond as a platform company is because we are actually already bigger than we look.

To find a global infrastructure as well developed as ours, you'd have to search among much larger companies. To find a brand as powerful as ours, you would have to look at companies producing far more revenue than we do, at least for now. We are already in growing categories and we believe that we have significant untapped opportunities in new categories, particularly in footwear and apparel.

While it will take us some time to capture these opportunities, that's largely because we're going to take the time to do it right because of Black Diamond how we do things is every bit as important as what we do. This has been our commitment in forming the Company and it will continue to be a central tenet for our future. We call it style or the Black Diamond way. That means we do things with excellence, integrity, minimal impact on the environment and a very real understanding of what our customers want and need. It also means that while we take risks, we take them thoughtfully.

We know that our retail partners have a fundamental need for innovative specialty products. It's essential for them to differentiate their assortment from other channels. One of the key reasons why this new chapter for Black Diamond is so exciting is that we anticipate that we will now have the resources to accelerate our growth into new categories, select new partners to join us on that journey and to expand the leadership opportunity that our history and our brands provide.

There's a lot of anticipation and excitement in the channel and at Black Diamond about what we're going to do next. We hope that all of you, including our new investor base, will share in this excitement and join us for what we think is going to be a long and successful journey.

Okay I am going to ask the operator to take over here for questions and answers.

(Operator Instructions). Our first question comes from the line of Rob Young with William Smith & Company.

Just curious, Peter, you talked a little bit about how you're realizing some synergies as Black Diamond and Gregory kind of merge in the European market. I was hoping that you could comment a little bit on Gregory, kind of infrastructure that they have in the Asian market and what benefit you're seeing as the Black Diamond brand goes into that market?

Thanks, Rob, that's a great question. Gregory has a very strong presence, specifically in Japan. It's a brand that is both a technical and a lifestyle brand, enjoys very high margins over there and it's well established. It's an iconic brand. It has also three employees over there in the Gregory Asia/Pacific office that handle marketing, marketing support and product guidance for the U.S. development team.

At this point, and I should add there I was just over there about a week ago and spent three days there with the Gregory Asia/Pacific team with the international sales manager and with the current distributor touring around Tokyo, getting a better understanding of how Gregory does business. And at this point what I'll share with you is that there's no question BD has things to learn relative to how to really enter a market where you have an independent distributor to build that business into a more perhaps robust fashion than we have done in some of the Asian markets where we're currently competing.

So I would, I think the way to succinctly answer your question right now we're still in the learning mode relative to what Gregory is doing and how they do it to see what can apply to Black Diamond. But I will share with you that it's not a matter of if; it's a matter of when that between BD's very significant business in Japan and Gregory's very significant business in Japan, that we look to create an expanded operation there to handle the sales, marketing, distribution of our product.

Perfect great thanks. And then secondly, you talked a little bit about new products being footwear and apparel. I was just wondering if you were looking at that from an organic or an acquisitive basis.

Honestly we're looking at it from both. I mean, it's not a matter again of if; it's a matter of when. Both apparel and footwear are two categories that we are absolutely committed to entering. We are right now developing plans that include what level of resources that we could apply to that. We are going to develop those plans from the perspective of doing it organically but at the same time we are actively looking at and researching the landscape for potential acquisition targets, and I do mean actively, with the idea that an acquisition could help catapult that at that endeavor, that initiative, faster than if we were just to do it on our own.

Okay perfect and then lastly, if I may, I believe you have some shares that could be issued as well as some capacity on your revolver. I was just hoping that you could possibly touch on kind of what level of the capital structure you're looking at utilizing for a potential acquisition.

I am going to -- Rob, I'm going to turn that over to Robert Peay, our very succinct and articulate CFO. He's got a little bit more information to share with you on that than I have.

Perfect thank you.

Rob, what we have is, as you know, a $35 million revolver with [Lyon's Bank] and at the end of Q3 we've drawn just a shade below $20 million on that revolver. And Q3 for us or the end of September is generally our highest point on our borrowings. That's when we're building. We bought the inventory that we're going to sell through the fall and we've sold a fair amount of it in Q3 but then we have then the associated accounts receivable so we have a working capital build that's usually at its high point at this time of the year and then Q4, as we've seen in the past, it usually comes back down.

And so if we're going to do a deal off of our balance sheet, that would be the dry powder essentially that we would have, at least on that line. It does decrease Q4, Q1 so seasonal, a lower point would be a range of probably somewhere between $9 million and $12 million, so you have that kind of head room to be able to do something off your balance sheet.

Relative to an equity offer, it's my understanding we could issue up to 40 million shares and not put in harm's way our NOL, so those would be the two pieces we'd be looking at.

Okay perfect. That's all I have. Congratulations on the quarter, especially in a complicated environment.

Christian Buss, ThinkEquity.

I was wondering if you could provide some color on the flow of sales over the course of the fall winter selling season, particularly can you talk a little bit about how much has already shipped for the winter product and how much at once ordering there's potential for?

Hi, Christian, this is Peter here. We ship early season, we make our numbers primarily on the back of pre-seasons and we are just about on our numbers right now. November and December moved towards more of an ASAP month but we're half way through November and tracking very close to plan or slightly ahead of plan. December is the month that is most dependent on ASAPs in order to complete the second half of the year and let Robert just talk about exactly what the percentages are but I will add that December is the smallest of the winter months. It's September, then October, November and December it goes down.

We shipped heavy early season because of the pre-season so that's great quality of this business is the heavy bookings we have and the insight that gives us to look forward but then the final month is the one that's more ASAP dependent but it's the smallest of the months. They descend as we get towards December.

Okay that's very helpful. Thanks and good luck.

Eric Stein, ESS Capital.

Last quarter you talked about ramping wherever you spent $500 million. Can you quantify the opportunity that see in footwear and apparel and where you see acquisitions coming in? Thank you.

Apparel and footwear are two of the most substantial categories that one can enter. I mean, if you look at some of the players out there in the after space think of the North Face it's primarily apparel and at one point $4 billion. I mean they have a footwear business and they have a hard goods business but the vast, vast majority of that business is apparel, so that's very large.

If you look at a company like Merrell you see a very large player that is primarily, if not exclusively, a footwear player in the shoes, a large amount of business. If you think about it, if we were just to get 10% of the North Face's apparel business that is about $140 million. We would double in size. We have not specifically defined in five years how big apparel or how big footwear will be. We're working on developing those plans at this point in time. But I can assure you that apparel and footwear will be two of the big growth drivers.

They're probably larger growth drivers beyond five years because we have in the pipeline a pretty robust line of new products in all the categories we currently play in and believe that those will deliver the Company on a global basis significant growth. So there's quite a bit of opportunity still in the hard goods categories that we play in but we do want to commit to developing both apparel and footwear so that they're meaningful to us within five years and beyond five years they become more substantial drivers as we move forward because those categories, as you get larger, are more important.

Great and it sounds like the footwear and apparel is all sort of internal organic growth. Is that accurate?

We will, as I shared earlier, we will enter those categories regardless and we are developing plans now to do that in an organic fashion. However, we are actively looking at what the acquisition opportunities are that could catapult our entry into those markets, turbo charge it, etcetera. But, as you know, any deal takes a willing seller and a willing buyer and it needs to be a deal and a relationship that makes sense. We're going to be very, very thoughtful how we do this in order to grow BD in a way that is simpatico to how we've grown it.

That's very helpful and good luck with the plans, guys.

Thanks, appreciate that.

(Operator Instructions). Gentlemen, there are no further questions in the queue. I'd like to hand the call back over to management for closing comments. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.