Clarus Corp (CLAR) 2014 Q1 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 First Quarter ended March 31, 2014.

Joining us today are Black Diamond's President and CEO, Mr. Peter Metcalf; the Company CFO, Mr. Aaron Kuehne; and the Company's Director of Investor Relations, Mr. Cody Slach. Following their remarks, we will open the call for your questions.

Before we go further, I would like to turn the call over to Mr. Slach as he reads the Company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions and regards forward-looking statements.

Cody, please go ahead.

Thanks, Calvin.

Please note that during this conference call, the Company may use words such as appears, anticipates, believes, plans, expects, intends, 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 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; and the Company's ability to implement its growth strategy, including its ability to organically grow each of its historical product lines, it's new apparel line and its recently-acquired businesses. The Company's ability to successfully integrate and grow acquisitions, the timing and results of the Company's exploration of strategic alternatives to monetize its Gregory Mountain Products business.

The Company's exposure to product liability or product warranty, claims and other loss contingencies; 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 the price, availability and quality of raw materials and contracted products; foreign currency fluctuations.

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 reports 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.

And I would like to remind everyone, this call will be available for replay through May 19 starting at 8 PM Eastern Time tonight. A webcast replay will also be available via the link provided in today's press release, as well as on the Company's website at BlackDiamond-Inc.com.

Any redistribution, retransmission or rebroadcast of this call in any way without the express written consent of Black Diamond is strictly prohibited.

Now I would like to turn the call over to the Chief Executive Officer of Black Diamond, Mr. Peter Metcalf.

Peter?

Thanks, Cody.

Good afternoon, everyone. As you saw at the close of the market today, we issued a press release announcing our financial results for the first quarter ended March 31, 2014. Black Diamond's first-quarter results are a reflection of our product variety and seasonal diversity, as well as our global distribution platform.

In spite of some extreme dry weather conditions in different parts of the world, Black Diamond's first-quarter sales increased more than 8% in constant currency, and approximately 7% in real terms compared to the first quarter of 2013. We also grew across all of our major geographies.

During the first quarter, we shipped the majority of our spring 2014 apparel line, and sell-through is both on track with our internal plan and, based upon selected retail response, is trending ahead of our fall 2013 launch.

Early retail and trade feedback for POC's road bike collection suggests it is well-positioned for the core cyclist. And we expect the majority of the line to ship in the second quarter.

Before I comment further, I would like to turn the call over to our CFO, Aaron Kuehne, who will take us through some details of our financial results for the first quarter. Following Aaron's remarks, I will speak briefly and then open the call for questions.

Aaron?

Thanks, Peter.

Good afternoon, everyone.

Black Diamond's consolidated total sales in the first quarter of 2014 increased 7% to $54.5 million, compared to $51 million during the same year-ago quarter. This increase was primarily attributed to the retail launch of Black Diamond's spring apparel, as well as strong growth from POC's ski product.

Almost every quarter, foreign-exchange markets contribute some level of volatility to Black Diamond's financial results due to activities across multiple currencies -- primarily the US dollar, the euro, the yen and Canadian dollar.

Due to net weakening of foreign currencies against the US dollar on a consolidated level, first-quarter sales were negatively impacted by approximately 140 basis points, or $700,000. So on a constant currency basis, Q1 sales increased 8%.

Gross margin in the first quarter increased 70 basis points to 38.4%, compared to 37.7% in the same period last year.

The increase was primarily due to a favorable product and geographic mix, as well as increased contribution from higher-margin products by POC, PIEPS and BD Apparel. Partially offset by an 80-basis-point negative impact from foreign exchange fluctuations. Excluding foreign currency, or on a constant currency basis, gross margin would have been 39.2%.

During the quarter, [DN] in production and shipping variances had a negative impact of 220 basis points on gross margins which, for comparative purposes, is an improvement of 40 basis points compared to the prior-year quarter.

First-quarter SG&A, which excludes restructuring, merger and integration, and transaction costs, was $22.6 million, compared to $20.9 million in the year-ago quarter. The increase was primarily driven by further investment in BD Apparel and POC.

Adjusted net income before non-cash items, a non-GAAP term, decreased slightly to a loss of $0.5 million, or a negative $0.02 per diluted share from the first quarter of 2014. Compared to a loss of $0.3 million, or a negative $0.01 per diluted share, in the first quarter of 2013.

While first-quarter working capital increased primarily from seasonal increases in accounts receivable and the timing of certain reductions in accounts payable, we continue to be pleased by our overall working capital efficiencies, which have been driven by better sourcing and inventory management.

While total sales for the first quarter of 2014 grew 7%, total inventory actually decreased by approximately $3.2 million, or 6%, to $51.9 million, compared to the same period last year.

At March 31, 2014, we have $17.5 million outstanding on our $30 million revolving credit line with Zions Bank, compared to $13.4 million at March 31, 2013. Total debt stood at $45.4 million, which includes $17.5 million of 5% subordinated notes due in 2017. This compares to total debt of $38 million at December 31, 2013.

Our first-quarter results are right in line with our expectations. And our financial guidance for first half and full year 2014 remains intact.

We continue to expect FY14 sales to raise between $235 million to $240 million, which would represent an increase of between 16% to 18% from our 2013 sales. We continue to expect first half of 2014 sales to range between $95 million and $100 million.

For the second half of 2014 -- the six months ending December 31, 2014 -- we expect total sales to raise between $135 million and $145 million. On a constant currency basis, we continue to expect consolidated gross margins for FY14 to be approximately 39.5% to 40.5%.

Finally, Black Diamond and KPMG, our independent accounting firm, are in the process of finalizing the review of our valuation allowance assigned to our NOL carry boards. For this reason, the press release issued excludes our condensed consolidated balance sheets. ¶

We anticipate filing our first-quarter Form 10-Q on or before the filing deadline of Monday, May 12, 2014. This concludes my prepared remarks.

Now I'll turn the call back over to Peter.

Peter?

Thank you, Aaron.

As I mentioned in my opening remarks, we believe that our Q1 results are indicative of Black Diamond's geographically diverse and complementary product offering. These results were somewhat challenged by the lack of precipitation in certain parts of the world, which certainly impacted the sale of BD ski equipment in these regions, such as our Backcountry ski-tailored products.

Record-low snowfall in parts of the US -- like California, Oregon and Washington -- for two-thirds of the winter essentially ruined their ski season. Record-setting droughts also impacted Austria, most of Switzerland, and much of Southern Germany.

However, this is balanced by double-digit growth from POC, whose foreign country's product portfolio generated very strong results in the quarter. The sell-through of these products is not as dependent upon the winter snowfall as our Backcountry portfolio, since the majority of ski resorts across the globe were able to produce some snow in times of unseasonable conditions.

We believe POC sales are strong primarily due to brand appeal to consumers. The high-profile of POC as an emerging brand was reaffirmed during the Olympics, which highlighted POC's strength, clean design, and attractiveness to consumers on a global stage.

The lack of precipitation was not nearly as impactful on our small but growing BD apparel lines, as cold temperatures still drive demand for our soft goods, especially in urban settings. And because the first quarter is much more about shipping spring than it is about selling residual winter inventory to wholesale.

While BD Apparel and POC are well-positioned for significant growth on a global scale, Black Diamond, Inc. product offerings received over a dozen industry awards during the debut at the Outdoor Retailer Winter Market, SnowSports Industries Association, and ISPO Munich Trade Shows.

Our award-winning products ranged from snow safety equipment, skis and ski bindings, to backpacks, embedded apparel accessories, and helmet crash sensors.

The first quarter marked the retail launch of POC's road bike line, with the shipment of a very small amount of the Octal helmet and POC apparel. As planned, the majority of POC's spring line was shipped during our second quarter. H

However, we have received some very encouraging press and retail feedback that confirms our belief that the line is well-positioned for our targeted core cycling enthusiasts.

Similar to Black Diamond's fall 2013 apparel launch, POC is also pursuing a scarcity strategy with its road bike line. And we expect its impact on sales to be more meaningful as (inaudible) builds into spring 2015.

Having said that, the road bike category is cycling's largest and most vibrant niche, and POC's expansion into this category is an important part of our growth strategy. This move into cycling's largest and most vibrant category is supported by two innovative, high-profile and global marketing initiatives.

The first is that of POC partnering with the Garmin-Sharp racing team to be the official helmet and sunglass sponsor of the acclaimed Tour de France cycling team. We are optimistic this will be exceedingly impactful, and benefit POC's subsequent product development in the bike market, including its recently announced a partnership with Volvo.

Together, POC and Volvo are cooperating on a myriad of projects, from exchanging competencies in safety equipment and research to producing innovative driver-cyclist interaction products.

I am pleased with the continued progress towards centralizing certain selling and distribution of POC's products direct to dealers in Central Europe. While the steps to complete this goal are still in process, during the first quarter, we successfully closed POC's distribution center in Sweden and integrated it with our Central European warehouse.

We also expect to deliver BD apparel in Europe out of that same distribution center for fall 2014, and ultimately expect to be shipping to all of our European customers from that facility by spring 2016.

We also continue to make progress replacing select POC distributors in critical markets with internal sales agents that are successfully converting several of POC's independent distributors in North American and Europe. All of these material conversions are expected to be complete in fall of this year, and we expect both initiatives to be margin accretive.

BD apparel shipped almost its entire spring 2014 inventory. And although we will need another four quarters to draw a conclusion about the health of the spring launch, based upon a small sample of dealer feedback, the pace at which it is selling at retail is at a faster cadence than our fall 2013 launch with an equal number of days after shipping.

During the first quarter, we fortified BD's global marketing talent by filling a position that had been vacant for some time, and by consolidating the entire Black Diamond brand messaging under a new Global VP of Marketing, Niclas Bornling. For efficiency and better coordination, Niclas will be brand marketing for both apparel and gear and equipment on a global basis.

Bornling joins Black Diamond after ten years in Annecy, France, working for Salomon, with his most recent role as Global Brand Director. Prior to that, Bornling led marketing for Salomon in Sweden and the Nordic countries for five years.

This hire and other moves to be assessed later in the call underscore a pivot from a geographically-centric management structure to a globally-centric alignment. Concurrent to hiring Bornling, BD also hired Stephan Hagenbusch in our Basel, Switzerland office to coordinate marketing initiatives in Europe. Hagenbusch worked with Bornling at Salomon Europe prior to joining Black Diamond.

Looking towards our fall 2014 apparel line, which builds the collection to a more meaningful 1,945 SKUs sold through approximately 800 retail doors, we have some key marketing initiatives planned for this season. Our strategy focuses on Black Diamond epicenters by core BD retailers and customers, key global mountain communities, as well as a few important global retailers.

Compared to our fall 2013 launch, we are significantly expanding our in-store marketing to include a toolkit to create more visibility at specialty retail. We are also developing seasonal BD messaging that will appear broadly from retail windows to in-store displays, to on-product technology. These displays will highlight new and innovative technology, like our Gore-Tex-plus cohesive partnership in primaloft and down blends.

(Inaudible) marketing is a fast-revolving space, and we are focused on engaging our core customer, either before or after a visit to the specialty retail shop. For our full 2014 line, investments include online advertising, digital catalogs, targeted e-mail campaigns and a social media strategy.

We indicated earlier this year that we expect to triple our apparel revenue during 2014, and our fall 2014 apparel bookings are in line with earlier shared expectations. Over 90% of those retailers who participated in the FY13 launch are carrying the line, and carrying it in greater breadth and dollars.

We made significant progress during the first quarter in the implementation of our strategic pivot. You may recall that in the fall of 2013, we introduced the following important strategic conclusions.

First, the recognition of and commitment to the idea that BD and POC brands represent our most significant long-term opportunities for compounded, multi-channel revenue growth and profitability.

Second, we preferred to invest our capital in these assets rather than in additional brands in a marketplace where the attractive brands are trading at historic valuations. ¶

Third, the belief that over time, e-Commerce and direct-to-consumer in some form of still-to-be-defined strategic retail distribution model, will play a meaningful role in the development and distribution of all our brands.

And fourth, a long-term commitment to Black Diamond gear equipment, which forms the foundation of our lifestyle-defining brand.

Inherent in these strategic conclusions is our goal to make Black Diamond more streamlined in its processes related to product design, development and distribution. And more focused on maximizing growth and profitability in what we've defined as our core product categories.

To help accomplish this goal, we are in the process of appropriately and thoughtfully realigning resources. This includes realignment of both our capital resources and human resources to those areas of that have the greatest opportunity for stronger growth and higher margins.

On the human capital side, we have made significant progress by both better-aligning our human resource spend with those faster growth and higher-margin areas of our business.

As a result of this realignment, Brian Geller decided to resign from his role as a BD Brand President, and we have realigned resources under Mark Ritchie, our Chief Operating Officer, to a more global-centric versus geographic-centric management structure.

And we have created a new Black Diamond Brand Managing Director position reporting to Mark. Tim Banfield, who headed up BD's apparel initiative, has been promoted into this new global brand head position, overseeing all aspects of the brand, inclusive of gear and equipment and apparel.

While Martin Linden has been promoted from Apparel Design Director to VP of Merchandising and Design Apparel. In addition, Black Diamond European Product Manager, Thomas Hodel, has been promoted to Ski Line Product Manager and will perform this global leadership job out of Basel, Switzerland.

We believe placing two Europeans into these global leadership positions, alongside the recent hiring of Niclas Bornling, our VP of Marketing, and the recent promotion of Dutchman Wim de Jager into the VP of Global Manufacturing goes a long way in reinforcing Black Diamond's commitment to being a global brand leader. Already today, over 50% of BD's business occurs outside of the USA.

Our Black Diamond, Inc. President search is also maturing nicely. We have recently been introduced to a handful of very interesting and highly-qualified candidates with exceptional experience and background, all of which would be strong strategic additions to our business.

By design, this kind of hire takes time for people to get to know one another and to establish alignment on so many important long-term goals. We are, and expect to continue to be, purposefully deliberate in this process; and we are optimistic that we can conclude this process successfully in 2014.

On the capital side of the equation, during the first quarter we continued to explore strategic alternatives for Gregory. As you are aware, we retained Rothschild to assist us with this process, and we are optimistic that we might conclude this process successfully during the second quarter.

We expect the strategic pivot to be largely complete by the end of 2014, positioning the business for faster growth and profitability in the future, and helping to further evolve our direct-to-consumer channel strategies.

And as Aaron indicated, we continue to see double-digit sales growth during 2014.

At this time, Aaron and I would like to open the call for a 30-minute Q&A session. So we are ready for that.

Thank you, sir. We will now begin the question-and-answer session.

(Operator Instructions)

Dave King with ROTH Capital.

Thanks. Good afternoon, guys. First off, that's pretty encouraging on the spring line in terms of -- on the early feedback you guys are getting out there. Peter, I was just looking for more color in terms of what do you think that means, or what do you think might be driving that?

Is that -- any sense from those specific retailers -- is it, in your mind -- is part of it the fact that at the spring line, and you're not having to deal with weather as much? Or are there other things you care to speak to that might be driving that?

A great question. I think number one is that, it is less weather-dependent. Number two, it's more -- there's a large component of sportswear involved with this that you can wear anywhere and rationalize wearing it anywhere. Thirdly, the price points, as you know, are lower. And it's easier, I believe, to make an extemporaneous or impromptu buying decision when you see a shirt or pair pants or jacket that you'd like that's relatively moderately priced, compared to a technical winter item -- you are much more apt to buy it.

But I think in general, it is -- and [there is some a] reasonable displays of the product that we worked with the retailers on, that I think have also helped better merchandising. But at the end of the day, I do think it's the fact that we have lower price points, there is less of a seasonal aspect and it's more versatile, relative to where you can wear it.

Okay, that helps. And then, maybe with that in mind, does that make you guys re-evaluate at all your thoughts around fall, and your price-point strategy? Or how does that all fit with each other? And how are you guys thinking about fall shaping up versus that spring traction?

Yes, even if we had some epiphanies, it couldn't affect fall, because fall is [solved]; it's produced. It's being made. Some of it is on boats now; that sort of thing. So it couldn't impact it.

That said, I think what we've laid out is a good strategy of having sportswear that can be worn in multiple locations, in multiple environments, and doesn't need a technical environment to be appreciated. Or you don't need to be in a cold environment; you can wear it anywhere.

And apparel does have a different price point. We know that. So it's really not at this moment affecting how we think about our fall business in any way, or future fall seasons. But we are gratified to see that the initial response at retail by the consumer is that they are embracing the BD brand and BD Apparel as a sportswear brand, a lifestyle brand. And it doesn't have to be technical for them to buy it.

Okay, that helps. And then, in terms of that, I think it was 90% of retailers, I think was the number you cited. 90%-plus of retails in 2014 are carrying the line versus 2013. Does that include spring? Or is that your -- is that a fall versus fall kind of --?

That number there is a fall versus fall number.

Okay, thanks. And then -- I appreciate all the color on that. Aaron, just a quick one on the valuation allowance on the NOLs. Can you provide any more color around what might be going on there, and what we should be expecting? Or what those conversations have been like, in terms of whatever you can share around that?

Yes, so let's remind everyone that just under 45 days -- or around 45 days ago, we filed our 10-K with a clean opinion. And as you can imagine, working with one of the big four firms, they have a internal process review at the national level that we are just trying to get through.

So concerning that this area is a very technical -- it's a super-technical accounting issue, it's highly subjective, we are just getting through that process with KPMG. However, regardless of the impact, whether it has or has -- whether it may or may not have an impact, that impact would be a non-cash item that would flow through -- once again, if there was an impact as a result of this review.

Okay. And then, would it inhibit your -- is it just against the valuation allowance in terms of what's being hashed out? Would it impact your NOLs and your ability to recognize them at all?

In no way would it impact the overall amount or our ability to utilize them.

Okay. Thanks so much, and good luck with the rest of the year, guys.

Thanks.

Camilo Lyon with Canaccord Genuity.

Thanks, good afternoon, guys.

Hi, Camilo.

I would like to get your thoughts on -- a little bit more color on the reception by the retail community on the women's composition of your fall 2014 line. I think that's obviously a highly anticipated part of the fall line.

And I think it be helpful to understand how the retailers that you've spoken to are thinking about the line and how they want to position it. What they're representative reception to that line is, vis-a-vis, their men's -- the take on the men's side.

Camilo, this is Peter. Anything I give you at this point in time I feel is really too anecdotal. And I would be happy to talk about that in the near-term future when we've got both Tim and Brian, our VP of Sales.

But what I will say at this point in time, that we've had quite a few retailers who have adopted that apparel, are excited by it, and so it's a positive trend for us. But if you want more detail than that, I don't have that at this moment.

Okay. Would it be safe to say that the positive reception you are getting on that fall line is balanced between men and women?

Unfortunately, I don't have those numbers in front of me. And I know that if -- I don't want to put my foot in my mouth. We are pleased with the response. But whether it is balanced -- what do you define as balanced? 50-50? I don't believe it's 50-50. But we need to dig into those numbers, and we will get those for you.

Okay, no problem. And moving on towards -- to the comment where you made about Gregory, and hopefully expecting some sort of consummation to that process potentially here in this quarter, in the current quarter. I recall that on the last conference call you said that the proceeds from that potential sale would enable you to re-accelerate the top-line sales growth to an excess of 20%.

If you could remind us, if that still holds, and if that would be something that could happen as quickly as the back half of this year? Or would that be more of a 2015-and-beyond re-acceleration?

Yes, Camilo, that's a great question. Our belief is that we can use those funds to fund apparel growth, POC growth, direct-to-consumer growth and retail growth. And there is nothing that we see that we could do with those funds, really, in 2014, that would have any impact in 2014. It's really starting in 2015 and beyond that we can impact that.

And as you know, opening retail stores takes a reasonable amount of capital to do. It would certainly be -- it could be utilized and deployed at that. But we would take that at a pace that's appropriate for dialing out our retail strategy and making sure that the first store is a well-thought out and is resonating in every which way. And then, we will move from there.

So it will be a multi-year use of those funds, unless a unique opportunity appeared that would give us pause and cause us to say, you know what? We can accelerate our deployment of that money.

Okay, great. Thanks for the color. And then, just finally, we are coming off of a pretty good winter season for -- at least here in the Northeast and in the Midwest -- for outerwear apparel, and footwear. Retailers have certainly made their orders with the vendor community, such that they don't run out of inventories when many have.

Are you experiencing the same level of early commitments from the retailers that you partner with, with respect to your fall product line, so that you are able to fast-forward some of your production?

Good question, Camilo. And there is really a cadence for gear and equipment, and a cadence for apparel. And if you look at gear and equipment, gear and equipment POs are always placed after apparel POs, in part because apparel is much more of a -- heavily towards bookings in pre-seasons. While equipment has a higher ASAP component, and retailers always put it after the apparel.

Apparel did have a good season in most parts of the world, and certainly in many parts of the US. Gear and equipment, as you have probably noticed looking at some of the other people who have reported -- especially ski gear and equipment -- had a slower response in the marketplace, because of some of the areas where there really were droughts. And to those areas, people are more reticent to give quick orders and large orders.

To answer your question, number one, with apparel. Well, I would say that, yes, with both of them, we've been in -- we've been doing apparel now -- this is our second season for fall. We have an experienced team running it. The bookings that we have received or done are in line with expectations, and in line with the guidance. And then likewise on the gear and equipment side of things, we are comfortable with our guidance. It's in line with our expectation.

We've been doing this a long time, and we understand that when it comes down to winter products -- especially ski product -- is, it's a heterogeneous landscape down there around the world. And you never expect it to all be good, and you can never expect it to all be bad. So we are comfortable with our guidance, and it is in line with our expectation.

Do you have any room for -- Allan's orders, ASAP orders -- should those arise between -- or inter-season? On the apparel side?

You know, both gear and equipment, and for apparel, at very different ratios, we have the capacity for at-once orders. That's always part of what we do. Obviously you're trying to find a balance between risk and reward.

Great. Nice quarter, guys, and good luck with the rest of the year.

Thank you.

Sean Naughton with Piper Jaffray.

Good afternoon.

Hi.

When we look at the US business, I'm just a little surprised that the growth was only up 3%, given the POC ski business, apparel launch, and also some of the growth that you've had with some of the outdoor retailers where you sell some of your products.

I'm surprised it wouldn't have been a little faster. Can you just remind us why the growth might have been a little bit slower? Or any nuances that happened in the US for your product line?

Yes, Sean, this is Peter. First, let me state that it is right in line with our expectation, the guidance we gave. And then let me say that clearly, there were parts of the country, important parts of the country that, from the standpoint of ski equipment -- gear and equipment -- where it was just warm, and it was dry.

So important parts of our market -- and we certainly saw that in the fourth quarter coming. That it just didn't -- it wasn't very conducive to strong, robust sales by any means. And it stayed that way for various gear and equipment categories.

Again, we've been at this a long time. I think it was very weather-related. But as a result of that, yes, it was soft in some of the gear and equipment categories. However, it was in line with the expectation. I did give some color there as to what was strong and what was a bit weaker.

Okay, that's helpful. And then, the growth in the apparel business. Can you talk about -- and I know it's early -- but any differences between domestic and international? Are you seeing better response rates with the international customer or with the domestic customer?

And then, if you are, any color you can give us on the global stage for the brand as well. What's happening on the international side of the business with that high single-digit growth rate that you generated?

On apparel?

Yes.

As you know, there's not one Europe. It's a country-by-country description. But I would say is that, we don't see -- if you really look at the US and you look at Europe as the two major markets for us at this time, it really comes down to the quality of the store, how specialized is it, how strong of a BD retailer is it, who is their consumer base.

So where there is [Chamonix] -- we've done very well in Chamonix, for example, and have some great -- or a great retail partner there. And there are other areas like that.

The way I would describe it is, specialty retailers who have a true enthusiast customer base can merchandise well, have a great staff and attract more of the enthusiasts then the generalist, whether you are in Europe -- different countries in Europe, or England or North America. I think that's the commonality there. And if it's a more general sort of big box, it's a little bit weaker.

Okay, that's helpful. Last question. You mentioned something about the distributor conversion that's going on, where you are taking back some of these markets direct. Can you just give us a little bit more color there? And then, the future opportunity on bringing more distributors potentially into a direct model for BD.

Sure. It is for BD, Inc. But the Company we are speaking of here specifically is POC. And the markets that we converted that were worthwhile markets to convert, either because of their size now and/or their future potential, and/or their ease of doing business were France, Belgium, Holland and Canada. Those are the ones we have just converted, are excited about, and think are a good opportunity for us, either because of what we're doing now or the potential for the future.

There are other markets that include, for POC, Switzerland, Italy -- oh, and sorry, we also converted Japan. That's a very small market now, but we think it's got potential over time. People there do not wear helmets very -- at the level we do here. But it's a matter of time, we believe, before they embrace it. So that would be a good future. Italy is another potential market.

But we are doing careful analysis to make sure that we understand when the customer buys POC and cycling or ski from a distributor, what else are they ordering? To make sure that if you are just POC, you are not going to miss out because the customer is also wanting to order several other brands at the same time. That's sometimes is the advantage of a distributor market, until you hit a certain critical mass.

So we're doing a pretty extensive evaluation, market to market, at this moment. We have not made any commitments to any of the markets.

I should say, there is one other one that we are looking at -- sorry -- seriously. It's Scandinavia. We do not -- the POC is located in Scandinavia. We do not sell direct to retailers in Scandinavia, and that is the one that is the highest profile -- highest priority for us in the not-so-distant future to make some decisions on.

Okay, that's great, thank you. Best of luck in Q2.

Thanks.

Joseph Altobello with Oppenheimer.

Yes, hi. This is Maury, in for Joe. I was just wondering if you guys can discuss -- because I know in the past you talked about how you made a fair investment in e-commerce. And I was wondering if there is more spending or more investment in e-commerce? And the role you see e-commerce playing going forward as the business evolves? And where you can see it going as a percentage of sales?

This is Aaron. Yes, we continue to invest into our e-commerce platform. It continues to be an important part of our overall business. Just even in Q1, as a percentage of sales, [DFC] was about 7% of our sales compared to a historical run of about 5% or so. We are starting to see some nice up-ticks coming from that channel, and it will definitely be a part of our focus into the future.

Okay, great. And then my last question has to do with SG&A. You guys said you expect to realize operating leverages here and beyond. I was just wondering how much you think there is around the SG&A line, and how low you think it can get as a percentage of sales.

Maury, we provided guidance a couple months ago related to how we are thinking about 2014 and SG&A spend, in that we believe that our SG&A will be up to $12 million. We outlined that in the previous call. But yes, over time we do anticipate to continue to leverage our SG&A spend, and to become a more meaningful, profitable Company into the future.

Okay, thank you.

Mark Smith with Feltl and Company.

Hi, good afternoon, guys. First, can you give us any update on Gregory, as far as results outside of transaction? Any impact it had on sales and gross profit margins during the quarter?

Hi, Mark. Peter here. We just don't break out the results by brand, for competitive reasons and otherwise. Appreciate you asking, but this is not a place we are going.

Then for Aaron. I think on the last call you talked a little bit about stock-based comp. You said that you would expect it to be a little closer to 2012 levels, rather than 2013. Is that still the case?

Yes, it is.

Okay, perfect. Actually that will do it for me. Thank you.

Thanks.

(Operator Instructions)

Andrew Burns with D.A. Davidson.

Thanks, good afternoon. In light of the strategic pivot towards POC and Black Diamond Apparel, as well as the margin analysis by SKU you guys have performed, are there any changes -- especially in light of the operational changes you outlined today -- in terms of your core Black Diamond equipment new product strategy? Any changes to the velocity of new products, the areas of focus for new categories, or profit hurdles required to bring new products to market? Thank you.

Hi, Andrew, this is Peter. I'll take that. What we are doing right now is, we are rigorously using that profitability analysis to do a couple of things. Number one is -- and we will report this in our next call -- but for spring 2014, you will see a very meaningful reduction in the number of SKUs in the Black Diamond gear and equipment line. It will be very substantial, the reduction. And we will give that number out in our next call what that is. And when you see us at the trade shows, you will know.

But looking at the numbers, we understand that we have a -- we love product, and our teams have allowed us to get too much product that doesn't pay back on itself. So that's number one. We believe that we will be much more efficient, with a greatly reduced SKU count.

Number two, we are looking at potentially getting out of -- and we will announce this, I think, by the next earnings call -- of potentially getting out of a category or two that isn't meaningful to us from a profitability standpoint, or a brand standpoint.

Number three, we are definitely making sure that our spend on product in gear and equipment is moving back towards our historical levels. It's a bit higher -- it had been a bit higher than that. And right now we've done some things to make sure that it's back at a historical level, that is a profitable and sustainable level.

And then I should say number four is, we remain very committed to being a leader in the primary gear and equipment categories that Black Diamond plays in now in most of those categories. They are profitable; they define the brand.

But we want to curate those lines much more tightly. We want to make sure that there is a financial plan to go with the development plans, and that we are coming out at the right cadence with new product -- and meaningful new product that moves the meter. We are known for that; it has defined the brand.

We know we can continue to do that. But we also believe that we can do it with a tighter budget, a tighter group of people, more tightly orchestrated and more tightly integrated into the operations and into manufacturing. Which became a little bit vulcanized or siloed over the last four years as we traded BD Inc. from BD. And that is major part of the motivation between moving to a global-centric management structure from a geographic-centric management structure.

And secondly, to have Tim Banfield as the new Black Diamond brand leader reporting to the COO, who has control of some of these other assets, and can make sure that they are being well-integrated to avoid redundancy and ensure efficiency.

So the commitment is, we're going to continue to innovate at BD in the key categories. But we will do it with greater discipline, a much more tightly curated line, and a smaller line, which will I think help ensure that the products we launch are meaningful, innovative and definitive to the brand.

Great, very helpful. Thank you.

Yes.

This concludes our question-and-answer session. I would now like to turn the call back over to Mr. Metcalf for closing remarks. Please go ahead.

All right, thanks very much. Our Q1 results were emblematic of our product diversity, and a testament to the fact that, no matter the conditions, our customers love to be outside. We are well-positioned to execute our growth strategy in 2014. And we look forward to addressing you next on our second-quarter call, which we expect in early August. Thanks again for joining us.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.