Clarus Corp (CLAR) 2012 Q2 法說會逐字稿

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Black Diamond's financial results for the second quarter ended June 30, 2012. Joining us today are Black Diamond's President and CEO, Mr. Peter Metcalf, and the Company's CFO, Mr. Robert Peay. Following their remarks we will open the call for your questions.

Before we go further I would like to take a moment to read the Company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important precautions regarding forward-looking statements. Please note that during this conference call the Company may use words such as appears, anticipates, believes, plans, expects, intents, future, and similar expressions which constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are made based on the Company's expectations and beliefs concerning future events impacting the Company and therefore involve a number of risks and uncertainties. The Company cautions you that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.

Potential risks and uncertainties that could cause the actual results of the operations or financial condition of the Company to differ materially from those expressed or implied by forward-looking statements used in this conference call include, but are not limited to, the overall level of consumer spending on the Company's products; general economic conditions and other factors affecting consumer confidence; disruption and volatility in the global capital and credit markets; the financial strength of the Company's customers; the Company's ability to implement its growth strategy; the Company's ability to successfully integrate and grow acquisitions; the Company's ability to maintain the strength and security of its information technology systems; the stability of the Company's manufacturing facilities and foreign suppliers; the Company's ability to protect trademarks and other intellectual property rights; fluctuations in price, availability, and quality of raw materials and contracted products; foreign currency fluctuation; the Company's ability to utilize its net operating loss carry forwards; and legal, regulatory, political, and economic risks in international markets.

More information on potential factors that could affect the Company's financial results is included from time to time in the Company's public reports filed with the Securities and Exchange Commission, including the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. All forward-looking statements included in this conference call are based upon information available to the Company as of the date of this conference call and speak only as of the date hereof.

The Company assumes no obligation to update any forward-looking statements to reflect events or circumstances after the date of this conference call.

I would like to remind everyone that this call will be available for replay through August 20, 2012, starting at 7.30 p.m. Eastern time tonight. A webcast replay will also be available via the link provided in today's press release, as well as available on the Company's website at www.BlackDiamond-Inc.com. Any redistribution, retransmission, or rebroadcast of this call in any way without the expressed written consent of Black Diamond, Inc. is strictly prohibited.

Now I would like to turn the call over to the President and CEO of Black Diamond, Mr. Peter Metcalf. Sir, please go ahead.

Thank you, Britney, and good afternoon, everyone. At the close of the market today we issued a press release announcing our financial results for the second quarter ended June 30, 2012.

The first six months of this year represents our spring/summer product season and compared to last year sales were up 16% to $78.3 million. This healthy double-digit sales growth squarely met the high end of our seasonal guidance and we attribute this to strong demand for our diverse collection of life-defining products, global distribution capabilities, and our continued steady focus on sales and marketing.

On July 2, 2012, immediately subsequent to the second-quarter close, we acquired POC, which is widely regarded as one of the most innovative, fastest growing, and hottest brands in action sports protective gear today. In addition to numerous operational synergies with our Black Diamond global operating platform, POC's alpine and free ride skiing as well as cycling products add to our product diversity and expand the breadth of our multi-seasonal offering.

In particular, we are especially excited by the opportunities to appropriately share with one another innovative product IT. For that matter, the new BD vapor helmet being launched for spring 2013 already utilizes one of POC's patented innovative helmet technologies.

But before I comment further I would like to turn the call over to our CFO, Robert Peay, who will take us through the details of our financial results for the second quarter ended June 30, 2012. After Robert's remarks, I will return to discuss some of the additional highlights in the quarter as well as some potential highlights for the second half of 2012.

Following my remarks we will open the call for your questions. Robert?

Thanks, Peter, and good afternoon, everyone. Historically the second quarter is Black Diamond's smallest revenue quarter. Nevertheless our total sales in the second quarter of 2012 increased 13% to $31.9 million compared to $28.3 million during the same year-ago quarter. The growth in sales was attributable to an increase in the quantity of new and existing products sold during the period, especially those within our climb and mountain categories.

The foreign exchange markets continue to experience volatility and Black Diamond operates across multiple currencies, primarily the US dollar, the euro, and Swiss franc. Net-net the Company experienced a $1.1 million, or 4%, decrease in sales due to the weakening of foreign currencies against the US dollar during the second quarter. On a constant dollar basis our sales increased to $33 million, or 17%.

As many of you are aware, and as we have mentioned at the end of our first quarter of this year, we manage our business according to two six-month seasons. As a result, we believe that the end of the first quarter that in part our robust 19% first-quarter growth reflected an early transition to spring/summer from last year's warmer, drier winter. As a result, we are pleased by Black Diamond's sales growth of 13% and 16% for the second quarter and first six months of 2012, respectively.

Gross margin in the second quarter increased 20 basis points to 39.1% compared to 38.9% in the same period last year. The increase in gross margin was primarily driven by a favorable mix of higher-margin product and by the distribution channels in which these products were sold. We also attribute our recent margin expansion to the global investments we have made in our infrastructure over the past two years and the unique capabilities of Black Diamond's operations group.

SG&A expenses in the second quarter of 2012 increased 12% to $13.3 million compared to the same quarter last year, due primarily to investments in our strategic initiatives and infrastructure to support both current and anticipated future growth. These expense increases are largely a reflection of the increasing size of our apparel team as well as investments in global manufacturing and distribution. We expect to see these investments result in both higher sales and accelerating margins as we realized our long-term growth objectives. But as a reminder, we don't anticipate sales from these investments until 2013.

For the second quarter of 2012 Black Diamond's net loss was $1.9 million, or negative $0.06 per share, compared to a net loss of $0.8 million, or negative $0.04 per share, in the same period last year. Net income in the second quarter of 2012 included $0.5 million of non-cash items and $1.1 million in transaction-related costs primarily related to the POC acquisition.

Internally, we continue to focus on adjusted net income before non-cash items, a non-GAAP term, which was a loss of $0.3 million, or negative $0.01 per share, compared to adjusted net income before non-cash items of $1.3 million, or $0.06 per diluted share, in the second quarter of 2011. Adjusted EBITDA in the second quarter of 2012 was $0.6 million versus $1.1 million in Q2 of 2011 and excludes $0.4 million of non-cash equity compensation and $1.1 million in transaction costs.

We define adjusted EBITDA, which is a non-GAAP term, as earnings before interest, taxes, other income, depreciation, amortization, non-cash equity compensation, and transaction costs. Tables reconciling adjusted EBITDA and adjusted net income before non-cash items to the nearest GAAP measurement are presented in the earnings release we issued today. It is also available in the Investor Relations section of our website.

Now turning to our balance sheet, we have $43.4 million of cash and cash equivalents at the end of the second quarter compared to $2.4 million at December 31, 2011. The increase was primarily due to our February 2012 public offering that resulted in net proceeds of $63.4 million.

On July 2, 2012, we completed our acquisition of POC for a total consideration value of SEK311.3 million or approximately $44.9 million. This was comprised of 460,065 shares of Black Diamond common stock and approximately $40.6 million cash in cash based upon the Swedish kroner/US dollar exchange rate as of the closing date. Given effect to the POC acquisition, our adjusted cash balance at June 30 would be approximately $2.8 million with approximately 31.3 million shares of common stock outstanding.

We would like to point out that the unregistered shares issued in connection with the POC acquisition are subject to a lockup agreement for two years and are pledged to Black Diamond as security for indemnification claims under the share of transfer agreement. Total long-term debt, including the current portion, was $17.7 million at June 30, 2012, which included $2.2 million outstanding on our $35 million line of credit with Zions Bank, leaving $32.8 million of available capacity left outstanding letters of credit.

Non-cash working capital was $61.3 million, down approximately $1.3 million from March 31, 2012. We continue to experience strong cash collections during the quarter, which reduced our accounts receivable level demonstrating the year-round relevancy we have with our global distribution partners.

As we discussed during our first-quarter earnings call, we are carrying higher inventory in part to support growth in the business and also due to the previous dry winter. The good news is that the majority of our overhang from last winter is in-line product, primarily in high-ticket ski items such as ski boots, skis, and gloves, and we are actively managing the supply chain to meet anticipated demand.

We believe strongly that having control of much of our own production in China plays to our advantage. The bad news is that the overhang has impacted our free cash flow in the first half of the year and until the snow starts to fall around the world we will not know exactly how long this overhang will last.

Prior to the acquisition of POC, Black Diamond's ski business represented approximately 15% of its global revenues. If we experience a normal winter season and product moves through the channel, we would expect to see lower inventory levels by the end of the winter season, which could be comparable to the inventory levels we saw at the end of fall 2010 winter season. Thus far we have avoided any deep discounting to move excess inventory, but have been successful in moving meaningful levels of seasonal product during the first half of the year.

As we have previously mentioned, we think about, plan, and proactively manage our business as two six-month seasons -- spring/summer, fall/winter -- and we historically revisit our outlook on a semiannual basis. We haven't and don't plan to share specific brand performance relative to sales, growth, or operating margins.

In February of this year, we expected fiscal year 2012 sales to range between $160 million and $165 million from existing product categories and exclusive of the impact of any potential strategic acquisitions such as POC. With what we believe to be appropriately sober sensitivity to the headwinds of the European economy and the uncertainties of the winter weather ahead, we believe our sales without POC to be around the lower end of our previous guidance range.

When we include POC to estimated [12/12] sales, we now expect sales for the 12 months ended December 31, 2012, to increase to a range between $173 million and $178 million. These estimates include POC from July 2, 2012.

As you might expect as a Eurozone company, POC is expected to alter our revenue mix slightly. For the calendar year December 31, 2012, we estimate our annual revenue in US dollars to be approximately 48% in North America, 34% in Europe, and 18% in the balance of the world with the largest percentage of that in Asia.

POC has historically operated at higher gross margins than Black Diamond and we expect POC to have a positive impact on our overall gross margins going forward. However, due to a step-up in fair value of inventory as a result of purchase accounting, our estimated cost of goods sold needs to reflect the additional costs that will run through our income statement during the remainder of 2012. As a result, our expected gross margin for fiscal year 2012 is expected to be approximately 37.8%.

Without the additional expense, but with the inclusion of POC, we would anticipate our gross margins being north of 39% for 2012. We expect the step up in fair value of inventory to be fully expensed by the end of 2012.

This completes the financial portion of our presentation. Now I will turn the call back over to Peter. Peter?

Thanks, Robert. As I mentioned in my brief opening remarks, the second quarter wrapped up another successful spring/summer season in which we continued to drive double-digit sales growth despite an anemic worldwide winter season and an economy in Europe that is facing both the onset of recession and currency convulsions.

Europe has also recently been plagued by a cold, wet, early summer. Nevertheless, we are optimistic that the outdoor industry can, with only modest dislocation, overcome any period of unseasonable weather and hard economic times as we have demonstrated in the past. In addition, we believe Black Diamond is exceeding the overall growth rate of a healthy outdoor industry, growing faster than the market in each location we compete.

We remain confident in our ability to drive additional market share throughout 2012 and beyond. This is due in part to the proactive investments we have made over the past few years to deliver the most innovative product, as well as the strength within our global distribution platform and our execution on the sales and marketing front.

While we see challenges in Europe for the reasons I mentioned, we are categorizing Europe as a flat environment for Black Diamond. However, we are pleased to have achieved modest sales growth in this area for the quarter and the first half of 2012 despite these factors that are beyond our control.

Asia is solid and an accelerating market for both Black Diamond Equipment and Gregory, and we believe Asia is a large market with significant long-term growth potential. We have received strong bookings to date and we believe our distributors feel positive across the board.

In North America, we remain on target with our expectation. Black Diamond and Gregory are solidly outperforming a market that we would describe as solid and growing modestly.

Although we are not in the habit of breaking down specific brand performance, we will share the specific categories that are driving our first-half and second-quarter 2012 growth in Black Diamond. They include trekking poles, headlamps, lanterns, some components of climbing equipment as well as packs for Gregory. We have experienced growth within these categories beginning last winter and attribute it to the solid execution in our delivery of goods, marketing, and merchandising support. And most importantly, offering products that are at the forefront of innovation and create a healthy degree of consumer demand.

We are pleased with our second-quarter direct-to-consumer sales growth and we are gratified to see the investments we have made in the past year come together. The group is led by director Bob Jones and his team who have driven healthy double-digit growth in this channel for the spring season.

As we prepare to begin shipping fall 2012 orders, we are feeling confident in our book of business for the back half of 2012. In late June we initiated the preliminary launch of spring 2013 products with a select group of our large retail partners. We unveiled many exciting new additions to our product suite, including a super-lightweight helmet, new headlamps, new next-generation climbing protection, new additions to our very successful, fast-growing trekking pole line, as well as an array of other accessories.

In the pack world, both BD and Gregory launched several collections of innovative new packs. The response from these preliminary, select retailer meetings, as well as our just completed European and North American trade show circuit, has been very positive. We believe this line is strong and continues our multi-decade track record of innovative product launches across most key categories.

As a result, we expect to see strong global bookings for the spring of 2013 from the majority of the world. Black Diamond continues to take proactive steps to invest in and expand our manufacturing footprint and to control our own distribution. We are seeking to broaden the portfolio of products that we ourselves manufacture in our Black Diamond facility in Zhuhai, China, and we learned in 2011 that manufacturing for those who are truly confident and skilled can be a great source of strength and competitive advantage.

In addition, we continue to augment our staff throughout the world as we build up supply chain, IT, and sales and marketing functions to maintain our growth being vigilant to increase efficiency. After a rigorous and nearly six-month long request for proposal process, we are well along in the implementation of a major new MIS project for Black Diamond's global sales and dealer services team, state-of-the-art B2Bs software that we anticipate will both increase our effectiveness and efficiency in all aspects of the dealers selling and our servicing cycle.

The requirement gathering team has completed reviewing their final round of brand creative software presentations that came out of the RFP process for the new B2C transactional and creative software platform. The transaction presentations will be reviewed later this month.

On the marketing side, the launch of our second online dynamic digital catalog was very successful. The second issue promotes our family of climbing products in a dynamic setting and is focused on climbing and road tripping in various parts of the world. As part of our plan to drive higher sales through both existing and new doors, we have made steady progress on our new strategic visual merchandising initiative that showcases our products more prominently in the shops of our retail partners. This goes both for our equipment and our planned apparel launch.

We selectively unveiled this program at the trade shows to key retail partners for the purpose of beta testing an array of prototype pictures and related images prior to commercializing a large number of these.

Finally, as the solid momentum at Black Diamond continues we have promoted from within and hired exceptional talent for newly created positions that bolster our operational platform and augment our new apparel team. One promotion I would like to highlight is Mark Ritchie who we promoted to Black Diamond's newly created position of Chief Operating Officer.

Ritchie joins our CFO, Robert Peay, and I as one of the three senior executive officers of the Company. For nearly 20 years Ritchie has thoughtfully led the permittable global operational platform that supports the complex and highly efficient modern businesses of Black Diamond Equipment, Gregory Mountain Products, and now POC.

Speaking of POC, subsequent to the end of the second quarter, we completed the acquisition of what we believe is one of the most innovative, fast-growing, and hottest brands in action sports protective gear today and a strong strategic addition to the Black Diamond platform. We expect POC to benefit significantly from Black Diamond's robust operational infrastructure, which is tailored to highly engineered, life dependent products, including our rigorous level of QA/QC testing and compliance, manufacturing and engineering acumen, and global distribution platform.

In addition to numerous operational synergies, POC's product line developed for the alpine and free ride ski and cycling markets, including their paradigm-changing innovations in helmet design, provide us an array of products that expand the breadth of our multi-seasonal offering. At the ongoing London Olympics POC launched a truly head-turning and radically different bike helmet for time trials and triathlon events.

Relative to integration plans we have both laid out and executed in the first of many scheduled meetings for the integration across all three POC regions -- that is Austria and Germany, Sweden/Europe, and North America. We expect POC North America to be integrated in the first half of 2013 with meaningful integration of POC Europe in the second half of 2013. The initial set off of meetings were very encouraging.

Looking towards the rest of 2012, we believe we are in a solid position to sustain our organic growth in most parts of the world through continued product innovation and by further capturing of the macro active lifestyle trends currently working in our favor. During the balance of this year we hope to be in a position to announce several new strategic initiatives, including additional in-house manufacturing and the possibility of acquiring new distribution.

As most of you are aware, it is at the end of this calendar year that we will be selectively launching to the trade our expected fall 2013 apparel collection. Our plans currently call for launching with select retailers in North America, Europe, and parts of Asia.

The fall 2013 collection has been finalized. We have issued purchase orders for the sales samples to be assembled, identified key launch dates with our retail partners, and are planning a series of sales and marketing events through the end of the year. We continue to receive strong and affirming feedback from nearly all the key retailers we have met with.

We have also initiated work on our spring and fall 2014 collection. Our current strategy contemplates additional new collections rolling out over six concurrent seasons that span a three-year period.

On the acquisition front, we have not stopped cultivating our pipeline of targets. With the POC acquisition we have expanded into new product categories such as helmets and goggles and into new vertical markets such as biking. We remain committed to our goal of building it to an annual revenue run rate of $250 million through acquisitions and we remain focused on high performance technical product as well as new categories.

We have more than two years of full-time development on our pipeline. We are hopeful that we could close another acquisition in 2012 off of our existing balance sheet.

With or without another acquisition in 2012 we are excited about the progress we are making towards our long-term objectives. In addition to the integration of POC, we have a number of significant strategic initiatives in the works, several of which we hope to announce later this year. We are cognizant that we are in a marathon and not a sprint, and we remain focused on execution against these very long-term objectives.

Before concluding my remarks I would like to say a few final words about my recent resignation from the Utah Ski and Snowboard Association. As you know, Black Diamond was founded in part to make a difference on behalf of a community of mountain, canyon, and crag enthusiasts. Part of staying true to that foundational ethos has been to champion the sanctity of our public lands on which our customers go to recreate, find solace, and to re-energize.

In a nutshell, our public lands are integral to the vibrancy of the outdoor industry and to Black Diamond. Unfortunately, Utah has become ground zero for some of the most radical and damaging policies in regards to the healthy stewardship of our public lands. After working collaboratively and effectively with three governors it became clear that a collaborative approach with our current governor and the majority of our state's extreme congressional delegation was proving ineffectual at best.

Hence, at the consultation with close and respected advisers, I determined that the most honest and effective course of action for myself and Black Diamond was to end our collaboration and instead be free to respectively and constructively, but publicly and vigorously, challenge our state governor and congressional delegation on behalf of our customers, the sustainability of America's human-powered outdoor industry, and the long-term economic well-being of our home state of Utah.

We have been gratified by the national outpouring of support for our position by the industry, by our customers, and our fellow Utah business people. Clearly, we spoke to their concerns and our industry is responding now as well.

Thank you for participating in today's conference call. We remain confident in our ability to drive shareholder value and advanced Black Diamond as one of the most respected and leading active outdoor equipment companies in the world where we continue to lead the fight for conservation and access to our public lands.

Now we would like to open up the call to your questions.

(Operator Instructions) Sean Naughton, Piper Jaffray.

Thanks for taking the question and congrats on a solid performance for the first half of the year, especially in the domestic business. If we could spend just a couple of minutes on the international side, how would you -- maybe Peter -- characterize the environment in Europe for the different product lines you are in and maybe some geographies you compete in?

Then, secondly, and I know you don't want to give brand-specific detail, but qualitatively how the expansion of Gregory went for you in the first half of the European market.

Sure. Thanks for the question, Sean. Speaking about the European market, I mean let's start at 20,000 feet, what we have is an acceleration of the de-acceleration of the European retail environment. And by that, stating the obvious, is we have a thought that clearly the onset of a recession and a high level of anxiety among European consumers to spend when they don't know what the future of their currency is.

And I think that it is hitting all aspects of the retail environment in Europe regardless of where you are. Obviously, some regions more significantly than others.

That said we have seen both BD and Gregory perform far better than the market in some of the peripheral European markets than you might otherwise have anticipated. Even within that, as we said, we have had growth in Europe. Gregory has had significant growth in Europe, admittedly from a small start in the first half.

Categories that are really driving the growth are the ones that I articulated earlier in this call, things like lighting, trekking poles, and certain categories of climbing. And then, of course, for Gregory it is packs is what is doing that.

I think the takeaway from that, and looking at POC business as well, is that real innovation and especially innovation in less than large consumer priced items, i.e., you move away from high-priced items and for activities that are inexpensive to basically free to do, when you deliver really innovative product you can drive growth into a relatively flat at times constricting market. At the same time, it is a strong headwind and that is what we have become aware of at this point in time.

We have seen some retailers reticent to reorder product that they were sold out of in the way of, say, Gregory Pack typically because they had enough inventory of competing brands and they wanted to move that product out in order to both make sure that they had a stable balance sheet and that they moved that product before ordering additional product.

Makes sense. Then I guess in terms of the POC revenues, just because we haven't seen a lot of some of the seasonality associated with the business just from a modeling perspective, Robert, how should we think about the seasonality associated with some of these revenues for POC and where some of the larger pockets of contribution could potentially be in the second half of the year?

So, Sean, we mentioned when we closed POC that their LTM revenues ending April were approximately $22.5 million and the majority of their business to date is in the fall of the year. And so the bike part of their business is growing really strongly, but it is still relatively modest compared to what their helmet, ski helmet revenues are in the fall. So it is much heavier towards the end of Q3 and Q4.

So kind of just depending on when the chips fall and the shipments typical maybe seasonality at Black Diamond as seen historically from a revenue contribution (multiple speakers)

Probably a little bit more concentrated in the fall than even BD currently. I mean these days BD is kind of 50/50, but if you go back a couple of years we were more kind of the 55%, 60% in the fall. And POC is actually a little bit heavier than that in the fall.

Understood. Best of luck, guys, in the second half.

Andrew Burns, D.A. Davidson and Company.

Thanks, congratulations on the first half. On the POC acquisition, could you talk about the potential to accelerate POC's store growth by leveraging your existing Black Diamond relationships particularly in the US?

Hi, Andrew, this is Peter. To us when we acquired POC what we really liked about POC was the distribution channels, the verticals it took us into, as well as the fact that they are mission driven, have a strong sense of who they are, where they are going, and their rich IP, as well as the rate that they were growing.

We clearly have the ability to open new doors for POC, and we have already been approached by some of the larger North American retail partners that we have asking us to do just that. And we will do that.

We have not yet put a number on what that additional growth opportunity could look like because we are not that far into it with POC, but we do believe we have good retailers, both in the cycle and free ride ski, off-piste ski market that -- like MEC in Canada, case in point. They are very interested in POC. And these are doors and introductions that we will be making.

Likewise, in Europe, there are similar sorts of opportunities to do that on a [collegial] basis as we get to know those accounts and they get to know us and as we introduce sales agents and sales reps. In addition, as we begin this overall integration advert and we have the whole European team coming here next month, one of the goals is to also do an audit of our European agents and our international global distributors and do that with POC as well. See where there may be additional opportunities for synergies, for change, for perhaps joining teams and that sort of thing.

So it is too early to give you a number or a percentage or be more specific than that, other than to say we believe the opportunities are there. And with the robust growth that POC has already been achieving we believe the relationships and contact we bring will play a relatively important role in helping to maintain a healthy level of growth.

Okay, thanks. I appreciate the gross margin guidance related to the POC acquisition, but I was hoping -- I know it is early for 2013 guidance but help us understand the integration timeline better and if there is upfront costs that need to occur that will be running through SG&A and when you see the synergies starting to unfold from a cost perspective with that acquisition. Thank you.

I will take it at a high level and then Robert speak more to the specific numbers. The first thing is that POC has got really three components to it.

One is it has got its headquarters of sales and marketing, design, strategic direction, and that is in Sweden. It has a POC subsidiary where it controls its sales and marketing in Germany and Austria. And then there is the subsidiary of POC USA in the United States that controls the US directly. In every other market, including Canada, it is an independent distributor.

So our high-level goals, what we are sharing at this point in time, is that we believe that we can bring POC US into the BD global operating platform distribution, the operating platform -- I want to be careful how I say this -- and (inaudible) of that operation in spring 2013. So that is the first one.

However, let's make it clear that we are not a slash and burn organization. So those people who are unable to relocate in January of 2013 will be offered a fair and appropriate severance package if they are not being relocated here or to the Aspen sales and marketing office at POC USA. Likewise, we have a negotiation that is already being explored with the landlord of the POC facilities in New Hampshire because that lease goes into 2014. So some of those expenses won't all be saved immediately.

Likewise, in Europe, what we are looking at at this point in time, contingent upon how the work goes next month with the European team, is to have a significant amount of integration occurring in fall 2013 that at the same time we have to still be cognizant of contracts with individuals and with facilities, severances where appropriate or relocations. So the savings certainly begin then as well, but probably would not be all completely realized until later in the fall.

Then additional benefits will be gleaned by bringing Canada into the BD, Inc., North American operational platform, but that will be fall 2013 as well and there will be some negotiations there. So we are early into this still to give precise numbers, but the savings begin in spring 2013. However, they will not all occur immediately for the reasons I just stated.

Then they build in fall 2013, as I just articulated, and then I would believe right now that if they were [say] by spring 2014 is when hopefully most of the residual costs -- severance packages, leases, etc. -- will have been taken care of.

Andrew, let me give you a little color on how we are seeing margins going forward. Certainly now all the one-times cost that Peter mentioned, one thing that really was attractive when we first started visiting with POC was their higher gross margin. For a hardgoods company they have higher margins than most, and we actually think that there is two things that can even help that even go higher. One is on the sell side and one is then more on the COGS side.

On the sell side is that there are a large number of sales that POC currently has, primarily in Europe, that are still distributors. Over time and at the appropriate pace we would be considering to move off of a distribution platform more to an in-house Asian structure. By so doing you can increase your top-line revenue and also increase and expand your gross margins.

On the COGS side, given the size of BD and its platform globally in the operations group, I am confident that we will be able to bring some good ideas and some efficiency to the existing POC supply chain. We know several of the same vendors. I think we have enough scale within our shipping that we can get better shipping rates, we can cross-dock.

So there is kind of this boring block-and-tackling kind of activities that can be meaningful when you aggregate them together to see accelerating margin. So stripping out those one-time costs, we were optimistic and expect to see gross margins expand over time.

Thank you.

Sean McGowan, Needham & Company.

Afternoon, guys. I have a couple of questions. Looking at the products, you took us through some of the products that were drivers there. Could you comment on which of those you would characterize as having a positive influence on overall gross margin?

Hi, Sean; Peter here. Most of those products we showed you should be accretive to improve gross margins. Those are some of our better, higher-margin categories -- lighting, trekking poles, helmets, and climbing protection -- that I will add that, as a manufacturer, when you manufacture complex products ramping up the line is often not immediate. It is just the nature of complex manufacturing.

So that one specific category of product that we launched, which is quite meaningful, may not be right out of the starting gate. But I am quite confident that as we produce that over a period of months we will improve our efficiencies relatively quickly and because of the patent protection on that product and its innovative nature that should result in margins similar to our other [catalogs] which are very nice.

So, overall, the product that we highlighted at the trade show -- some of the new packs, the new trekking poles, the new lighting, the Vapor helmet, and the next-generation [sticks] for our cam -- those should all be on the positive side above our average margins.

Okay, thank you. Robert, when you talk about your revenue guidance now for -- I have a couple questions on that. Can you share with us what your assumptions are for the key foreign exchange rates that go into that guidance? I assume that this is -- your guidance is -- and reported, that is what you expect to report. So can you share with us what the rate assumptions are?

So, Sean, what we do is, as you know, we generally look out for a season or two and look at our expected cash flows. We then have kind of a net foreign currency position, long or short. As we've been clear in the past, we have a long euro position and so for the back half of this year we entered into contracts last year that were meant to protect our budget, and so our budgeted rate.

And so we will then take those contracts and then juxtapose those against current exchange rates, so what we would look at is our expected revenues and cash flows for the back half of the year at more today's rates. Then translate those euros and other currencies into US dollars and see what those results would be. Then we layer on our foreign exchange contracts.

To date and when we look out into the fall we expect to have had a successful year from a hedging perspective. We don't necessarily speculate, but we have contracts then that will protect our margin.

And so what you noticed on our top line is that we, in Q2, backed up about 4%, or $1.1 million, but when you roll that all the way through March in an operating margin it is much less impactful on our results, primarily due to our hedging. And so the short answer, Sean, is that it is a combination of current rates and our foreign exchange contracts that we have on our books to help protect our budget is how we are kind of framing up the back half of the year.

Okay. But in terms of the translation impact, are you basically assuming current rate holds for the balance of the year?

We are just not that bright to have a crystal ball that would really help us lean one way or the other, so when we reforecast, which we do fairly frequently, we mostly take current rates. We certainly read a lot of information to kind of give us a view of how things will move, but we feel that the current rate is probably the best rate to use when re-forecasting.

Okay. Now I know you are not inclined to breakout any specific contribution from POC -- that is kind of our job -- but would it be fair to say that if you looked at your forecast now for the full year, excluding whatever contribution POC might get, that it is a more conservative outlook than you might have had at the beginning of 2012?

Sean, recall early in the year and what we mentioned in the script is that we guided to $160 million to $165 million. And while we don't want to get specific about POC, I did mention that we expect our revenues to be around the lower end of that range. And so I think your conclusion is safe that we are a little more conservative factoring in the headwinds that every company that does business in Europe is seeing.

Okay. Thank you very much.

Joe Altobello, Oppenheimer & Co.

Great, thanks. Good afternoon. Just to follow up on that, Robert, it sounds like the biggest sort of change, if you will, or the biggest reason why you're trending toward the low end of that guidance is purely, or I shouldn't say purely, but mostly European macro. It is not anything to do with maybe foreign exchange, which may be working against you, at least on the top line, or possibly weather-related inventory overhang.

Joe, I think you are right. When we look at our business and we look at the different channels, if you look at -- like our domestic growth this year is higher than our domestic growth last year for the same two periods. And so, I have said this before on a call that it is usually good somewhere. Even though Europe seems to be kind of coughing at the moment, the rest of the world seems to be holding up relatively well.

So the primary driver in how guidance works lower end, without POC, would be the uncertainty of the European economic conditions and also just to factor in weather. When you come off a winter like we just came off of you have to be a little more realistic, or maybe not realistic, but conservative in your estimates.

So I'm not really that concerned about the overhang of inventory impacting sales necessarily. I'm not necessarily worried about currencies for the remainder of this year; I think those things are in check. It is mostly Europe.

Got it, okay. Just one housekeeping item. The share count now with POC?

It is about, Joe, I think 31.3 million.

31.3 million.

Yes, because we had -- yes, 31.3 million.

Okay. And just before I let you go, last conference call you mentioned you were a little worried about the health of two of your European retailers. This seems like it is sort of a separate, yet related, issue to European macro. At this point, early August, how do you feel about your European retail partners and their health?

At this point our concerns have not gone up at all. We are getting -- our collections are coming in. They are a little bit slower than they have been in the past, but they are coming in. We are collecting small parts through the continent.

So right now we are vigilant, but our concerns have not becoming any greater, any more acute, or anything like that. It is dealing, at this point in time at least, relatively stable, at least with accounts that we are working with.

Okay, great. Thank you.

Lee Giordano, Imperial Capital.

Thank you. Good afternoon. Can you talk about what you have learned or any key takeaways during your time last week at the outdoor retailer summer market show and any insights maybe into the competitive environment or new competitive threats that you might have seen? Thanks.

Hi, Lee. It was nice to have you too, so thanks for being there.

I think that show for us was relatively reinforcing and a bit inspiring in that there has been in the US, both in the outdoor market and at retail in general, some volatility. One month you will get an amazing record report from a retailer, the next month it is somewhat of a sobering report, and it is a little bit hard to put it in context.

The takeaway from that show was that, hey, American outdoor specialty, North American outdoor specialty is solid overall. It continues to grow and move forward -- and I am not referring to all dealers in all locations. The dealer base that is there now has figured out and engineered a strategy to survive and/or prosper in a volatile and dynamic world.

What we really appreciated hearing over and over and over was, honestly, the kudos and accolades that we were receiving for being one of the few companies in that couple hundred thousand square foot tradeshow hall that is really driving customers into these stores through real innovation and opposed to the stores through real innovation, as opposed to the meaningless me-too line extensions. The feedback we were getting is that the retailers remain as committed to us for that and to grow with us as they ever have, because they need that now more than ever.

They also affirmed their great respect and desire to partner with us because of the way we steward our distribution and are careful with it. And we were very gratified by the number of people who talked to our sales rep, our sales agents, our sales managers in regards to the leadership position. We were taking on these issues that are so important to the industry and everybody else it seems is too preoccupied to get off their seat and deal with them.

So in a nutshell, coming out of that tradeshow we are feeling as good as we have. Quite good relative to both the marketplace's solidness and our ability to grow faster than market, because of the way we conduct our business, the way we continue to innovate, and the way we continue to lead.

That is great. Then, Robert, just following up on SG&A, is it reasonable to assume that SG&A dollars should grow kind of in line with sales growth during the back half of the year? I guess I should we think about that? Thanks.

Lee, there is a component that certainly is variable, a component of sales, and there is also a fixed component. So recall we talked about at the early part of the year that we would see incremental OpEx of about $7 million, $3 million of which was apparel and then $4 million was to finish off the organic growth initiative and also to help, as we have talked about in this call and other calls, to expand our global manufacturing footprint and then look at maybe some distribution opportunities.

As we have seen in our businesses that the pace of spending generally increases as the year goes on because we have made the hires of headcount, we have the full effect of their wages in a quarter, so you will see some variable cost kind of creep up in conjunction with the hires that we have made. Then there is the sales component or the variable cost of sales that relates to the sales volume.

Great, thank you.

Rob Young, Wm Smith & Co.

Good afternoon. I had a question relative to gross margin and then on operating margin for POC. Why do they have such a better gross margin than BD in total? Then can you maybe talk a little bit about their respective operating margin at all?

Rob, good questions. Let me start with gross margin and then Peter can jump in as well. Actually, let me have Peter start with gross margin and then I will follow up.

So, Rob, POC positioned themselves as a truly premium, premium brand. And so if you look at the price point for their products, which I am sure you have, whether it is goggles or helmets in any of the categories, they are definitely playing all in the upper end of each one of the segments they are in. Black Diamond's strategy has been more of an Audi kind of strategy where we have in our line we have got our Q7s and our A8s and then we have a heck of a lot of A4s. For us, A4s are the bread and butter, but we also sell some A2s and A3s.

That is our strategy for Black Diamond. Gregory is a bit different. And for POC, POC is primarily selling at this point in time A6s to Q7s and A8s; that is their positioning. When you position yourself like that and you have the product integrity and quality, the innovation, and the marketing to support that you can command a premium level of margin, both in the markets that you yourself control directly and even in the market that you yourself are but an exporter into with an independent distributor.

So again that is how I contrast it against Black Diamond and it is what gives them the ability to get a premium margin over where we are because of the position where they are playing.

Okay, that makes sense.

Then let me talk about operating margins. I will remind us that what we mentioned earlier in the call was that we are a little hesitant to give specific brand revenues, gross margins, and operating income. But let me just kind of help frame this up so when you're putting together your model you have some context.

POC is still a relatively young company that has grown really quickly. It has grown top line really well, it has got solid gross margin, but it is taking most of its gross margin dollars and having to reinvest in the business. And so its level of profitability and its level of operating income at this point in its life is probably where you would expect the Company to be given its growth and its trajectory and what it is trying to accomplish.

Said differently, that will expand over time, but right now it has not been the focal point of their business. It has been more about growth and developing just absolutely killer product.

Right, okay. That makes sense. So, Peter, I believe at the show last week you expressed your optimism related to the hydration pack at Gregory. I was wondering if you could maybe talk a little bit about the market size of that product line as well as maybe how much of that market you anticipate to get.

Yes, Rob, I will answer that at high level, but I will be honest with you that I am not up on enough detail to get into specific market size for different micro-categories that we are in. But I will share this with you.

Having been at [Freezer Top] in the European Outdoor Retailer tradeshow, if there was one theme coming out of that show that everybody agreed to and you saw it manifested itself in a variety of booths, whether it was footwear, apparel, hydration, or pack, was that one of the fastest-growing categories in Europe right now is ultra running, trail running, mountain running, this sort of thing.

Likewise, if you go to Asia now you will see and experience the same sort of thing. And in the US, where all of us are located, I think for those of you who trail run and engage in any kind of mountain running will know that you can't get into any meaningful mountain race today if you haven't been there when the registration has opened up on computer or whatever because it is just a booming category.

So it is very significant. It is going to be -- it has the potential to be very meaningful for Gregory for its revenue side in a variety of ways. Revenue absolutely on a global basis, because this is a big growth activity. Gregory knows more about and cares more about designing well-fitting pack bags and this sort of thing than just about anybody.

The skill set there with the design team is extraordinary and they have spent roughly two years working on this, testing it with runners in the Wasatch 100 and elsewhere, and I think we have a really unique offering. At this end it helped move the brand into a younger, more athletic demographic, which is the growth area, certainly more so than the larger pack, the backpacking, which is a great business to be in but it is not a big growth category.

So we believe there is very strong, multi-year growth for Gregory and that it can compete successfully and win because of the distribution we have, the brand awareness, and the uniqueness of the product. We will engage in joint marketing activities between Black Diamond and Gregory.

Black Diamond has got the (inaudible) and lighting and gloves that so many aerobic athletes in the mountains use and need. Now Gregory has got the really phenomenal ultra-running trailpack that those athletes need. So we are already seeing lots of opportunities here and brainstorming on more on how to market those together.

But I can't give you an exact percentage of -- a number as to exactly how big specifically that hydration market is, other than to say when we looked at it a year-and-a-half ago and made the determination that we were going to get serious about it. It looked very attractive to us for Gregory.

Okay, that is helpful. Thank you. Then just lastly, and I may have missed it, but did you disclose what the free cash flow was for the quarter?

No, we haven't done that but let me do so. So the free cash flow number for the quarter would be a negative $1.1 million. And you will see that in tomorrow's Q that we filed.

Do you have any working capital or non-cash working capital expectations for the end of the year at all?

As I mentioned, we have had a really good, I think, first half of the year relative to sales and gross margins. The one thing that that has been a little bit disappointing, at least internally, is the free cash flows. We have generated, I think, healthy and good amounts of cash and you can see that in our EBITDA numbers for the first half of the year, but we have had to use most of that cash to finance our working capital.

And so since I mentioned also we do have that overhang of inventory that we won't fully know what it is going to look like until the snow falls. And so if we have a normal winter and product moves through the channel at normal traditional pace our cash flow will definitely improve. We do have a good working line of credit, so I am not necessarily worried about this from just a pure financing perspective, but just more from a cash utilization effectiveness perspective.

Okay, great. Thank you very much.

(Operator Instructions) Camilo Lyon, Canaccord Genuity.

Good afternoon, everyone. So, Peter and Robert, you guys mentioned in your prepared remarks that you were considering taking some of your distribution in house towards the later end of the year. I was hoping you could shed some color on perhaps the region that those distributors exist in and maybe directionally what those sales represent from a distributor perspective and what that could mean from -- if you went wholesale.

We are more than anxious to share that with folks, but I think we have got to be kind of paused and kind of hold serve on our prepared remarks. But that said, if you think about the evolution of your sales channel, you usually start with a distributor and when you have enough critical mass you move to more of a subsidiary in-house sales structure.

So as we have mentioned this call and calls in the past, there is a certain area that we are very optimistic that we can help improve our own footprint from a distribution perspective that will be, we believe, quite meaningful starting as early as next year.

And I will just add that we feel it is integral that when we make an announcement we have all our ducks lined up, that we have agreements set, that we are ready to make these announcements to those who we have been working with, those who will be affected by this, the investment community, employees, everyone. And we are not ready to announce that because we don't have all our ducks lined up.

But we have continued to make a huge amount of progress in developing these plans and how we will execute on them and what kind of people we need and who they may be and that sort of thing. But I think certainly before this year -- we believe before this year is over we will be able to make some announcements in that regard.

Okay, fair enough. Would it be incorrect to assume that taking over those distributors would allow you to get into markets that you are currently not in?

No, I don't think that is fair to say. Our goal, when we looked at this, is to do what we did in Europe 16 years ago and that is take markets that are growing and have proven themselves so that when we do something like this we have got a certain amount of critical throughput. We know enough about that market to know that it is really worth the investment and that we can build upon that by making additional investment, but we are not starting from scratch.

Okay, got it. Thanks a lot and best of luck for the rest of the year.

Thank you.

At this time this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Metcalf for any closing remarks.

All right, Britney, thank you. I want to thank everyone for listening in the Q&A. We hope our presentation provided more insight into our performance for the quarter and our outlook for the rest of the year.

I appreciate those who were in Salt Lake late last week. Enjoyed being able to introduce you to the management team and show you our line and I look forward to speaking with you all again soon. Thank you.

Ladies and gentlemen, does conclude our conference for today. We thank you for your participation. You may now disconnect.