Clarus Corp (CLAR) 2014 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, 2014.

Joining us today are Black Diamond's CEO, Mr. Peter Metcalf, the Company's CFO, Mr. Aaron Kuehne, and the Company's director of Investor Relations, Mr. Cody Slach. Following their remarks we'll 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 statements within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding -forward-looking statements. Cody, please go ahead.

Thank you, Laurie. 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, financial strength of the Company's customers. The Company's ability to implement its growth strategy including its ability to organically grow each of its historical product lines, its new apparel line, and recently acquired businesses.

The Company's ability to successfully integrate and grow acquisitions, and 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 materiel and contracted products. Foreign currency fluctuations, and 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 SEC, including the Company's annual report on 10-K, quarterly reports and 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 the date of this call and speak only as 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 25th starting at 8 PM Eastern tonight. The webcast replay will also be available via the link provided in today's 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 Inc. is strictly prohibited.

Now I would like to turn the call over to the CEO of Black Diamond, Peter Metcalf. Peter?

Thank you, Cody. And good afternoon, everyone. As you saw at the close of the market today, we issued a press release announcing our financial results for the second quarter ended June 30, 2014. Strong second quarter results were driven by double-digit sales growth across the Black Diamond, POC, and Pieps brands, as well as strong growth across every product category and region.

We attribute these results primarily to the successful introduction of new and innovative hard goods products, the rollout of POC's spring 2014 road line, and the advancement of our apparel offering. In addition to strong operating performance, we have now completed, or nearly completed, all of the important strategic steps contemplated by the strategic pivots that we announced last year.

Most importantly, we have officially hired an outstanding new leader in Zeena Freeman. In her role as BDE President, Zeena will be taking over all high-level operating responsibilities of the Black Diamond Equipment, POC, and Pieps brands, including the full P&L. And it is our expectation that Zeena will succeed me as CEO no later than June 30, 2015.

The most important part of Zeena's background is that for the better part of a decade at Gap, working across multiple brands and of course multiple functions, including retail, brand strategy, and operations. She brings to BDE a wonderful combination of leadership, strategic thinking, brand management, consumer product apparel and omni-channel expertise.

Most recently Zeena lead Sony's global retail and consumer business development. She is precisely the kind of strategic merchant, global GM, and dynamic brand leader that we have been seeking and we see her as perfectly positioned to lead Black Diamond's fastest growing brands through an omni-channel environment over the next decade.

While we expect Zeena to succeed me as the next CEO of Black Diamond, I intend to remain very involved with the business for long-term, both as a director and as a senior executive responsible for public policy, advocacy, activism on behalf of our community of users, as well as playing an integral role with our culture and values. I also expect to have a meaningful level of involvement with product and brand positioning.

Secondly, the strategic pivot also contemplated a series of reorginizational steps to simplify our business and improve both our gross and operating margins. With the help of that LEK Consulting group, we have embarked on a plan to significantly reduce hard good SKUs by approximately 25%, more officially utilize, and hence reduce the size of our global operating platform, and rationalize the overall organization. We expect these efforts to result in overall cost optimization with our existing business of approximately $10 million by the end of 2016, with full-year savings realized in 2017.

A significant part of this plan involves developing alternative sourcing strategies for climbing hardware, some of which will likely be North America based, as we seek to improve gross margins and reduce supply change complexity. We expect these plans to be finalized and initiated during the third quarter and to produce the improved gross and operating margins. We also expect to significantly reduce lead times and work in process inventory during 2015 and 2016.

Third, the final part of our strategic pivot is the sale of Gregory, which was completed in July. The sale simplified our business model, allowed us to take costs out of our operating platform, significantly strengthened our balance sheet, and enabled us to utilize a meaningful portion of our NOL. We have several months of work Samsonite ahead of us to transition some important functions out from underneath of our operations. And then, when these are complete, we expect to realize some additional expense savings by the end of the year.

Before I comment further, Aaron Kuehne, our CFO, will discuss our financial results for the second quarter. Following Aaron's remarks, I'll make some additional remarks and then we'll open up the call for questions. Aaron?

Thanks, Peter and good afternoon, everyone. The reported results we issued in today's press release are from continuing operations, excluding the results of Gregory Mountain Products, the divestiture of which was completed subsequent to the end of the second quarter. I will discuss these results in detail, but first wanted to provide total sales for the first half, and second quarter 2014, including Gregory.

Total sales for the first half of 2014, including Gregory, increased 8% to $97.5 million, compared to same period a year ago. Which was in line with our prior guidance of $95 million to $100 million. Q2 sales, again, including Gregory, increased 10% to $42.9 million. From this point forward all my financial discussion consistent with our press release excludes Gregory and discusses continuing operations.

We are reporting sales from continuing operations in the second quarter of 2014 of $34.4 million, compared to $29.2 million during the same year ago quarter, an increase of 18%. The increase was primarily due to an increase in the quantity of new and existing mountain, climb, and wools products sold, as well as addition of apparel sold by Black Diamond Equipment and the launch of POC's road cycling collection.

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 strengthening of foreign currency against the US dollar on a consolidated level, second-quarter sales were positively impacted by approximately 70 basis points, or $193,000. So on a constant currency basis, Q2 sales increased 17%.

Gross margin in the second quarter decreased 30 basis points to 35.9%, compared to 36.2% in the same period last year. The decrease was primarily attributable to product and channel mix. During the quarter, we experienced a 28% increase in sales to our independent global distributors.

These are sales that significantly lower average gross margins, where our distributors incur all of the selling and distribution costs, and we believe this reflects very positively on our brand opportunity globally. Excluding FX, or on a constant currency basis, gross margin would have been 35.5%.

During the quarter, discontinued merchandise, or DM, and production and shipping [branches] had the been negative impact of 240 basis points on gross margin, which, for comparative purposes, is an improvement of 40 basis points compared to the prior-year quarter. Second-quarter SG&A which excludes restructuring, merger and integration, and transaction costs was $18 million compared to $16.1 million in the year-ago quarter. The increase reflects continuing investments in the Company's strategic initiatives, such as BD apparel, the transition of certain POC distributors into our in-house operations, and the launch POC's road cycling collection.

Adjusted net income from continuing operations before non-cash items, a non-GAAP term, decreased slightly to a loss of $3.7 million or a loss of $0.11 per diluted share in the second quarter of 2014, compared to a loss of $3.3 million, or a loss of $0.10 per diluted share in the second quarter of 2013. In spite of 18% sales growth, working capital decreased $2.6 million during the quarter, reflecting more efficient sourcing and inventory management. Compared to June 30th, 2013, total inventory increased during the second quarter by approximately 14%, or $7.7 million, as the Company is building inventory in anticipation of a rapidly expanding second half of 2014.

At June 30th, we had $17.9 million outstanding on our $30 million revolving line of credit with Zions Bank. Total debt stood at $47.3 million which includes $17.8 million of 5% subordinated notes due 2017. However, on July 23rd, we completed the sale of Gregory to Samsonite for approximately $84.1 million. We have since fully paid down our Zions line of credit and paid off our $9 million term note in full.

The Gregory sale is expected to monetize approximately $30 million of our NOL balance, shielding approximately $10.5 million of cash taxes, leaving the balance of approximately $180 million. In December, we expect to pay approximately $11 million to $13 million in income tax associated with built-in gain taxes that could not be offset by our NOL.

Now looking ahead to our expectations for the second half of 2014. We expect sales to reach between $113 million to $118 million, which implies there year-over-year organic revenue growth in the 15% to 20% range. We expect gross margins to range between 39.5% to 40.5%, which reflects a 1.6% to 2.6% increase, compared to last year's pro forma gross margins. For modeling purposes, we expect to spend between $40 million to $45 million in SG&A, an increase of up to $5.5 million over the same period last year, and generate between $3 million to $6 million of free cash flow before giving effect to the tax payment associated with the Gregory transaction previously mentioned.

During the second half of 2014, we are planning to improve restructuring charges associated with the number of margin enhancing initiatives that Peter described. We expect to quantify these specific charges during the third quarter of 2014.

For the full year 2014, we expect sales to range between $192 million to $197 million, which implies year-over-year growth of between 14% to 17%. And we expect gross margin to range between 38.5% to 39%, or 1.3% to 1.8% year-over-year pro forma improvement. Preliminarily, we are currently planning our 2015 budget cycle around year-over-year sales increases of approximately 10% to 13%. However, this is without the influence of our new Black Diamond Inc., President, Zeena Freeman, who will oversee the full P&L

The sale of Gregory leaves us with an estimated $45 million of positive cash balance after the repayment of loans to Zions Bank. During the third quarter, we plan to develop a cash yielding investment strategy supported by a working capital line with Zions Bank for seasonal working capital purposes. And I should remind you that our interest income is expected to be free of federal income tax as a result of our available NOLs.

Before I turn the call back to Peter, I would like to address a few further points related to the sale of Gregory Mountain Products. First, the sale of Gregory was an asset sell. We sold the Gregory business, which had just under $12 million of non-cash working capital, as well as intangibles and other assets, for $84.1 million.

The pro forma information provided as part of our SEC filing on July 28, 2014 only reflects the direct revenues, and direct expenses, of the Gregory business. This does not include any allocated costs associated with the Gregory business that will be taken out of the business over a period of time. Furthermore, the timing of the pro forma information filed reflected all apparel expenses with little revenues.

Secondly, we did not sell Gregory to raise capital in order to fund our existing business. We believe the existing business will continue to grow its revenues, experience enhanced gross margins, and increase in profitability. We did raise capital through the sale of Gregory to fund the development of a very majored omni channel strategy. As a result, we believe that we have sufficient capital to invest simultaneously in our fastest-growing brands in an omni channel model.

Third, we believe we have some of the fastest-growing assets in the outdoor space and we are focused on revenue growth and improving gross margins. We believe that in these two categories we are greater than most of our peers.

And fourth, consistent with historical policy, we will not provide segment reporting. The business is too complex and integrated. Also, we do not believe this is helpful from a competitive basis. As a result, we will continue to report a financial results on a consolidated basis.

This concludes my prepared remarks. Now I'll turn the call back over to Peter. Peter?

Thank you, Aaron. Before opening the call for questions, I have two objectives.

The first is to provide you with some insight into our business plans for fall 2014 and spring 2015. And the second, in light of the recent performance of our share price, is to provide you with some big picture and longer-term perspective. As I mentioned in my opening remarks, a strong and well-balanced Q2 sales growth is a reflection of demand for our new and innovative hard goods products, continued rapid growth from POC, highlighted by the spring 2014 road line launch, and our expanded apparel offering.

These results were also achieved in a slightly more cooperative global retail than and we have experience in several years. We believe this improvement is due to multiple factors, including more normal seasonal weather patterns, cleaner inventories, and a somewhat improving economy in several parts of the world. These improving macro forces helped Black Diamond Equipment healthy double-digit sales growth during the quarter.

We also experienced strong ASAP sales to some of our Asia distributors, as well in Northern Europe, where we are benefiting from our recent move to replace several sales agencies in key markets. We also benefited from a diverse, innovative product line that we believe meets the needs of our consumer. Such products include new introductions in lighting, trekking poles, as well as climbing gear.

In the second quarter, the buzz and brand awareness from POC continued to grow. As we previously announced, POC partnered with the Garmin-Sharp racing team to be the official helmet and sunglass sponsor of the Tour de France competing cycling team. Many of you may have already seen the significant exposure POC has received during the world's largest annual sporting event, which attracts an estimated 3.5 billion viewers in over 180 countries around the world. The visibility of the POC brand during the Tour was timed with our road launch at retail.

Q2 marked the shipment of the majority of POC's inaugural road AVIP line, an the product has sold out at a bookings basis. All indications from our retail partners confirm that the line is well-positioned for the core cycling enthusiasts and our first-year limited distribution and scarcity strategy appears to have played out well.

We believe we're making significant progress in the global centralization of our POC and European distribution capabilities. On the last earnings call, we notified our investors that we successfully closed POC's two distribution centers in Sweden and Austria and integrated into a single central European 3PL warehouse. The warehouse is now fully operational and we are on track to deliver BD apparel in Europe out of the same warehouse for fall 2014 and all of the BDE products by spring 2016.

We successfully converted POC's independent distribution structure in Japan, Canada, France, Holland, and Belgium, to an independent sales agency structure. This commission based comp structure puts us in charge of building these important markets by allowing POC to control its own sales and marketing efforts, while providing higher wholesale margins that we can use to fund this investment. Fall 2014 is the first season that will completely benefit from these conversions and are reflected our second half guidance.

In the spring of 2015, we expect to go POC's cycling revenue by increasing the number of SKUs and production quantities of the AVIP line, as well as increase the number of global doors carrying the line. We expect to introduce 14 new styles and 43 new SKUs, and approximately double our door count to 1,000 doors in 2015. In addition, we expect to launch a second collection of cycling apparel and gear for spring 2015, which we have labeled and appropriately positioned as Raceday. Raceday has approximately 34 new styles, including helmets and 135 new SKUs. These expectations will position us to slightly more than double sales related to the road product in just one year.

Spring 2014 marked the first retail selling season of our spring BD apparel, highlights of the line include alpine and [cram] climbing apparel such as shirts, hoodies, pants, and light-weight synthetic outerwear. Although the selling season is still underway, especially in some of the mountain towns where we have excellent support, our Salt Lake, European, Japanese operations are largely sold out. Average sell-through in North America was approximately 15 percentage points higher than our fall 2013 launch, at the same point in the season.

Overall, we believe that our retailers are encourage with the sell-through trends and decision to target a more athletic fit has resonated well with our targeted user, the core climber and enthusiasts. Our larger retail partners did as well with the spring line as our specialty shops, which is very encouraging. However, we recognize our sell-through rates need to continue to climb before we will reach a level that some of our largest partners, like REI, consider a requirement for distributing throughout all or most of their stores.

In our direct consumer business, we found ourselves sold out in the majority of the more popular sizes, and the more popular products too early in the season. We will certainly take what we've learn from this initial spring selling season and apply it in spring 2015. Nevertheless, our online apparel offering continued to help drive solid double-digit sales growth in our DBC business.

We're also gearing up for the expected delivery of our fall 2014 apparel line next month, which builds the collection to a more meaningful 1,945 SKUs sold to approximately 800 retail doors. Fall 2014 also marks our women's outerwear launch and will introduce men's hard shell and down outerwear.

In North America, we are booked to meet our sales goals and the vast majority of production is tracking to plan. Outerwear and insulation are driving the bulk of our bookings and the ratio of mens to women is 60/40, which we are exceeding pleased to hit this ratio in our first full year. European bookings are about where we expect after a dry Central European winter. And our smallest market, Japan after the few soft winters will likely be more ASAP driven.

Looking towards our fall 2014 apparel line, our marketing initiatives are built on a two-pronged strategy. Build brand equity and drive apparel sell-through. A key component to our fall brand equity campaign are positioning BD as a snow safety brand and communicating our brand positioning -- use, design, build, engineer, repeat.

We expect to be initiating large integrated digital and print multimedia campaigns with both Powder and Outside magazines. We will also be incorporating video campaigns, print advertising, and five digital catalogs.

Finally, we are the underwriter and sponsor of the Mountain Project's mobile app Guidebook, which is potentially the most widely downloaded and regularly utilized mobile app for climbing in North America. Every time you use it, you see our name, a headline and hotlink to something on our site. Since Black Diamond partner with Mountain Project, the app has significantly increased downloads and overall impressions of more than 5.8 million for Black Diamond Equipment.

We are planning to significantly expand our in-store marketing at key retailers to include apparel windows and banners, brand kits, tech tag kits, and branded apparel body forms and hangers. We also expect to be piloting a very robust apparel products seeding program to the staffs of our best retail partners. As well as conducting a retail co-op program with key large and specialty retailers and expect to have a significant apparel presence through our sponsorship of two of the biggest climbing events in North America this fall.

Looking towards spring 2015, North America's plan to be 60/40 men's women's and while the spring bookings process is still underway, the average shop door is booked substantially over spring 2014. In both Europe and North America, we are substantially ahead of booking for spring 2015 than we were at this time last year for spring 2014. We are optimistic that these trends will allow our retailers to be comfortable taking additional inventory.

In Europe and Asia, older and sportswear are reasonably strong while tech apparel is a bit more challenged. With that being said, we believe Europe will hit our spring 2015 booking goals and that we expect to closely monitor Japan is as it is still early in our bookings process there.

To conclude I'd like to make five important observations. First, today we announced that our Board of Directors has authorized as discretionary stock repurchase program for up to 10% of our stock. It is not our intention to use up our balance sheet to support our shares, however, our Board wants to ensure that it has ability to be opportunistic if the market presents any unusual opportunities.

Secondly, since initiating our strategic pivot in late 2013, in addition to solid first half revenue growth, the Company has executed against all of its strategic objectives, including the sale of Gregory, the hiring of a talented new president, and the development of a series of strategic initiatives to improve margins and profitability.

Thirdly, the Company realized $84.1 million in cash or 2.3 times projected 2013 revenue for its slowest growing, and in our option, least valuable brand. In our opinion, the Gregory sale validated our strategy and underscores the value that can be created through long-term investment in our fastest-growing brands. Based on our revenue guidance, extrapolating the multiple we achieved in the sale of Gregory, to our continuing brands and businesses. This implies a minimum pretax breakup asset value of greater than $15 per share.

Fourth, under Zeena Freeman's leadership over the next 12 months to 18 months, we expect to develop plans to augment our growth to an omni channel strategy, which is likely involve some form of owned retail business and a significant business in our global directly to consumer capability. We expect to share these plant with you in more detail as they develop.

And fifth, finally, we believe strongly that the Company is well positioned for growth. We are entering our second fall season since launching apparel and POC has successfully expanded its product offering from skiing into cycling. As you can see from our guidance, for the balance of this year and beyond, we are also confident that we can simultaneously grow the business and improve margins.

Perhaps most importantly, we believe that we have sufficient capital to invest simultaneously in our fastest-growing brands and in a very measured development of an omni channel model. Going forward, given the strength of our brand and margins, we are prepared to thoughtfully reinvest a significant amount, if not all, of our ongoing profits in our future growth.

At this time Aaron and I would like to open the call for a 30 minute question-and-answer session. Operator?

Thank you, sir.

(Operator Instructions)

Camilo Lyon with Canaccord Genuity.

Thanks. Good afternoon, guys. Aaron, there is a comment that you made in your remarks -- I just wanted make sure I heard correctly. Did you say that you were now planning -- the initial planning for 2015 sales growth of 10% to 13%?

That is correct. Recognizing that, once again, that those plans do not have the influence of our new BD president, Zeena Freeman, included in those numbers. But that's how we are think about it right now.

Okay. Maybe you can help me connect the dots, because hearing that number, I'm a little surprised at that number, given that you've now sold Gregory, which is the slowest growing part of the business. I would expect that apparel is going to continue to expand its store penetration and SKU count, and I would expect that POC would also become a bigger part of the business. I'm a little bit not certain how to get to that lower growth rate, particularly with the sale of Gregory now having been consummated, and now having the excess capital to accelerate growth in these other two brands?

Camilo, hi, this is Peter. Let me respond to that. The first point to make is that we have not even launched or even finalized last aspects of fall 2015 for either POC or Black Diamond. So we're being conservative in putting forth these numbers until we have those plans fully developed.

Secondly, yes we have sold Gregory, and we've just consummated that sale. And we're still in the process of developing our marketing plans on how we're going to grow our bands. And secondly, relative to an omni channel strategy, we need Zeena to be in the saddle a little bit here, before we have a plan and know when that plan is going to meaningfully begin to build revenue.

I think you're going to have to just wait for a further update as we get further into this. But that's the number we feel comfortable in giving at this time.

Has there been a material change in what you're seeing on the apparel business in Black Diamond apparel, that would cause this number to be what it is?

I don't think I would say that. What I would say is we haven't shipped fall 2014. We are pleased, as I've communicated, with the bookings and we need a good winter.

We need to see the impact of our marketing programs. And then as that goes as we hope and anticipate, we may take another look at our forecast for fall 2015.

Okay. So maybe it's safe to say that this doesn't embed any significant growth in the apparel business? I am just trying to connect the dots as to what is the part of this guidance that you do feel comfortable with, and what's really being left out and will come into that guidance as this fall 2014 season unfolds?

I think the best way to answer at this point in time, is that it typically we wouldn't be giving guidance for 2015 at this point in time, but because of the sale of Gregory, we felt the need to give some ballpark figures. And we also recognize that we are better off giving conservative guidance than liberal guidance, that's something we've learned from the street very well. And until we have the line -- the marketing plans completed for fall 2015 and see a little bit as to how the season takes off, we're going to, at this moment, stay conservative in the forecasting.

Okay. Is it fair to assume that the fall 2015 apparel line, or really all of 2015 apparel will have a greater SKU representation and a greater door penetration than fall 2014?

I'll have to share with you, I don't have the SKU in front of me. That line is about done, but it's not absolutely finalized. The SKU count, I believe does go up modestly. We certainly anticipate having more doors, as well.

And then I should add, there is other element that you should be aware of, that we're taking into account as we give these numbers. And that is one of the integral parts of the pivot is a SKU reduction of 25% of hard goods SKUs.

And in that we have approached that very strategically and thoughtfully with two ideas in mind. One is to improve margins, to improve overall profitability to that line, and to divest to maintain growth momentum.

But at the same time, when you reduce 25% of your SKUs, you are for the first year acting a bit as a brake on revenue. So our revenue growth in the largest category we're in, gear and equipment, is going to grow, we believe.

But it's also going to have to not only grow in the 75% we're retaining, it's got to also make up for the 25% that we are cutting out next year from the line. That we're cutting out because we don't believe it was overly profitable.

We believe that it hurt margins. And we believe that we can ultimately make that up, but we made very deliberate decision to simplify, streamline, and put our focus on a more tightly curated line. But what comes with that is a loss of some revenue.

Understood. Lastly, just how quickly do you think the new president's influence can start to impact the business positively? Can it happen in 2015 or does it need to be 2016, when she's had some time to season?

I appreciate that question and how I'm going to answer it very seriously, is that I believe Zeena Freeman can begin to have a positive influence on this business within weeks. How that manifests itself in margin and revenue, that will take longer, just because of the nature of being in a senior position. It's the nature of the timelines in a business like this.

So she will have, I'm confident, a positive influence and effect on this business very quickly in what she can get started and what she can move on, and just how her influence can be felt by the senior team and all the brands. Again, to attempt to quantify it at this moment, this was her first official day, as relative to revenue or margin -- I'm going to have to just pass in that question, because it's really impossible to answer at this moment.

Okay. Fair enough. Good luck with the holiday season.

Thanks very much. Appreciate that.

Andrew Burns with D.A. Davidson.

Something you could provide a little bit more information on the SKU reduction, if there is any particular that is hardest hit, whether it's ski, mountain, or climb -- first half, second half revenues or product mix that would be most impacted? Thank you.

This is Peter. I think at this point what we'll say is, it is spread to all categories. I think that BD being a product driven company, loves product, and the team has a better adding than subtracting. So part of this process was a curation process throughout the line.

I would say that there's probably a slight weighting to the fall winter line. There is definitely a slight weighting there. I can't give you the exact numbers off the top of my head. But it is definitely weighted somewhat more towards the fall winter and ski line, where we wanted to tighten that up more.

Okay. Thanks. On the idea of outsourcing some of the equipment, I'm sure that's not a decision taken lightly. Can you maybe walk through that decision process?

And perhaps, if you can provide any details of your own facilities in China or the Salt Lake manufacturing. What happens? And the timeline of which any sort of outsourcing could occur?

Very good question. So here's how we're looking at. Seven or eight years ago we and many of our peers in American manufacturing in the consumer products world saw China as a place with an endless supply of very inexpensive labor. And a place to make all goods at the lowest prices possible and sort of a panacea for everything.

We're at a point now where, as both a manufacturer in China -- we own greenfield project -- and working very closely with a good handful of strong strategic OEM partners, are recognizing that especially on the product -- that's what I'm talking about that we ourselves are making in China in our own facility, that we have studied very carefully now for a full year, the macro -- the holistic cost, all the cost really involved with everything from the commercialization to the product to getting it back here. When you really looked at that, we have come to the conclusion that a large, large part of that -- a majority of that, can be repatriated to North America, and some of it to, perhaps, other suppliers in Asia, and give us higher margins, reduced overhead, as well as a reduced response time to our key customers. Which we see as very important, simply because we're in a period of just-in-time inventories, in a mode where the larger retailers like to work with forecast versus absolute [bought or] bookings and you need to be able to respond to that.

So a significant part of this is looking at what we can bring back into our own facility here, and reduce that 60 day back-and-forth lead time. We're looking at all the various scenarios. And we do know that some of that will end up back here, but we can't speak to -- at this moment, I can't tell you what percentage of that precisely.

But we will certainly know that and have our plans finalized by the end of this year. And will be moving on that very quickly. We believe that we will have this repatriation and redistribution of those products -- relative to the manufacturing, completed by early 2017, or late 2016.

Thank you. I will jump back in the queue.

Dave King with Roth Capital Partners.

This is Joe Bess on for Dave. My first question is, can you talk little bit about the traction of your spring apparel line and any of the significance, as some of the promotional activity out there? And kind of how you plan to address or reduce it in the future seasons?

This is Peter. So I just want to make sure I understand your question. Are you saying that -- how are we going to reduce discounting with our spring line?

Yes. So we've seen quite a bit of discounting online lately. And we're just kind of looking to get a little bit more color on what you can do to kind of offset that in the future seasons?

Well, let me begin by saying, we have very well developed, very didactic map policies that we work to enforce pretty rigorously. I think overall, that our retail partners abided by those map policies and the same level that they did with our competition.

And in relative to anything going on sale right now, this falls within the map policies. And I don't believe what is being put out there -- what is being promoted is any more substantial than any of the end of the season sales that your city retailers will have in August, as they prepare to bring in winter apparel, which many of them bring in August.

It's a fairly natural process. From what we know, relative to sell-through, which as I already stated in my remarks, is up 15 percentage points, at the time that we put the information together before the show, over winter.

We're seeing a positive trend and we don't believe there is a substantial amount of unsold product out there. But, yes, just clearing out inventory at the end of every season is a part of the process.

And then relative to next season, for those who are at the outdoor retailer trade show last week, they had a chance to meet our new a Vice President of Global Marketing, Niclas Bornling, who came to us from Salomon. He was the head of global brand for Salomon for many years, before he came over to the States to take this position late this past winter.

He presented in a very succinct format what our marketing strategy is for spring, what that themes will be, how we will execute on that. And that is the answer to how you diminish how much product is left in the channels at the end of each season to be discounted and put on sale.

There will always be some. That is just the nature of the beast.

But the goal is to have as little as possible, and I think will do that through more robust, richer, better integrated, and more hard-hitting marketing programs. And that's exactly why we hired Niclas, and that is what he showed in a succinct format to those who were at the outdoor retailer trade show.

Great. Thanks for your color there. Just a follow-up, I think you said that there is a modest SKU or style expansion in the spring 2015 apparel line -- is that what you said? And also can you give us an update on how you're thinking about that style and SKU expansion longer-term?

Yes. So first for spring 2015, that is a very robust increase. The line that we are showing and have been showing, have been selling and have been getting a very solid response on is what we're entitling it at its core from the gym -- the climbing gym to the crag. And it's made up of -- it's our unique perspective on unfulfilled needs of climbers as they cross the spectrum of various active athletic activities, that include just wanted to be into the pub or hang out with their friends, after a bouldering session, or campusing, or out at the crag, or at the gym.

And we've increased the SKU count very substantially. And it's the launch of our women's line. It's our first spring women's line. I think is very strong. So very large SKU count increase. I don't have those numbers in front of me, but we been very public with those.

Relative to fall 2015. We haven't absolutely finalized fall 2015. It is being sampled, and we're getting ready for that. We do have the numbers, I just don't have them in front of me, but in our next call we will have that for you.

And then what I should share as an add to that, we are looking to basically tighten up the curation. We will launch additional collections. But we're going to curate and hone, because I don't believe we need substantially more SKUs and that point in time.

We need to really cultivate the bestsellers and have different versions of that. And to continue to build our marketing. But I think we will have a very strong line.

Okay. Great. Can you talk a little bit more about the rationale behind selling Gregory, given that it seemed like it was a fairly profitable business, even if it wasn't really one of the faster growing business in your guys' portfolio?

So this is Aaron. When we think about the sale of Gregory, it really comes down to, once again our focus on the fastest-growing components of the business, primarily being BD apparel and POC. It's not to say that we needed to sell the Gregory business, because we felt that we sufficient capital to be able to continue to grow those piece of the business, based off of the existing business.

However, in order to really expand the business into this omni channel strategy, that's where we felt the need, but also the opportunity, to be able to raise some capital through divestiture of one of our brands which, once again, we believe to be the least valuable of our brands and the slowest growing. For that reason is why we sold Gregory. Is to be able to take advantage of the opportunity to pursue this omni channel strategy that we believe will require some element of capital.

Okay. Great. And then Aaron, you talked about guidance for SG&A in the back half of the year -- about $40 million to $45 million. Looks like a little bit of an increase, year-over-year. Can you talk -- or kind of a little bit higher -on a run rate basis -- talk about what sort of expenses are being added?

Yes. So first of all, that represents about a $5.5 million -- up to a $5.5 million increase year-over-year. Well, we're looking at revenues growing 15% to 20%, and so we believe this is a good manifestation of the business beginning to take hold and to be able to start leveraging some of these investments we put into place.

But I will say this, is that increase is purely related -- primarily related to POC and BD apparel. And so it's the focus or this investment into those brands to continue to further those businesses along. And that's where the increase in SG&A is coming from.

Okay. Perfect. Thank you. I'll jump back in the queue.

Joe Altobello with Oppenheimer.

Good afternoon, guys. First questions, I wanted to go back for the guidance for second. I want to make sure I understand.

Looks at you guys sort of pulled down the second half revenue guidance, if you back out what we thought Gregory was going to do by about $5 million. Is that due to slow down in the base business? Or is that partly due to the SKU rationalization that you guys are undergoing?

So the way that we're looking at the second half is based off of where we stand right now, current market trends. It does have an element of the SKU rationalization, because that process, as we announced earlier in the year, had already begun to a certain degree. Now as we said today we feel more comfortable with where we're at, and the direction that we're taking there.

But overall, I mean, Joe, this is where we're very pleased with the overall guidance but were providing. We're seeing the businesses, whether it be gear and equipment apparel or POC and also Pieps, seeing some good growth rates and definitely above the peer group.

But it is lower than what you thought originally three months ago?

It's right in line. Obviously, you're dealing with ranges, right? And so, all-in-all it's still right in line with how we thought about the business after the last several months.

Okay. In terms of apparel, I didn't hear you guys say this today, but do you still expect that business to triple in size this year versus last year given the success you've had so far in the spring line?

Yes.

And one last one. I think Peter, you touched on this a little bit. Can you tell us about what in Zeena's background you found more interesting or most attractive, that would translate into success at Black Diamond? Thanks.

If you look at the Black Diamond, POC, Pieps team, I think we have a great degree of experience, skill, acumen in the gear and equipment world, on a global basis, in the wholesale channels. However, as you all know, a very substantial part of our future growth is predicated upon building an omni channel business, doing that on a global basis. And apparel -- apparel for both are Black Diamond and apparel for POC, which we've already launched, and growing that.

Our experience of the senior level and tenure in those areas of global, global direct to consumer, apparel and omni channel -- it's just not where we would like it to be, relative to the ambitions we have. Zeena comes in here with an impeccable track record of being a truly global executive, having comfortably moved into leadership assignments in foreign countries -- Japan for Sony, and in India for an apparel retail startup -- proven her capability to get those things going, operating with top-flight senior people, compete and do an excellent job.

So it's those areas. She just brings a level of experience, leadership experience at the global basis in the apparel, direct to consumer, retail world that we just don't have with our team here. So she's a perfect complement to what we do have, and that she has a great passion for these brands.

She's a nice hybrid between a general manager, a merchant, and a marketing brand builder, and she really sees the incredible value that resides within especially the POC and Black Diamond brands. And certainly enthused about what Pieps has as a supporting brand.

Plus, she has a great appreciation for the outdoors and what these markets represent. So it's all of those. I just think she's a one in a million find for this business.

Thank you, Peter.

Sean McGowan, Needham & Company.

Couple of maybe quick m housekeeping stuff. And then some longer ones. Aaron, will you be providing all of the quarters for 2013 on a pro forma basis?

Eventually. Yes. (laughter)

But only after they've been reported?

Well, you can get to first half and second half now based of what we provided, right?

Right.

But obviously, when we get to Q3 that's when Q3 of 2013 presented.

Okay. So not before then?

No.

Okay. Rats. Second, Peter, your last comment in your remarks before the Q&A -- just want to make sure I understand what you said. Did you say you're prepared to invest all the profit in growth? What does that mean?

What we're saying is that we're prepared to invest all of our profit into growth, if we see the opportunity to do that and we would do that in a very thoughtful, judicious, and systematic manner.

Okay. Now going back to Camilo's earlier question, I'm also a little surprised though getting rid of the slowest growing part, that you've be left with one that's slower growing than we thought it was. Is it safe to assume that you're expecting, given all the initiatives, SKU reduction, all the cost-cutting stuff that you've talked about, that the margin on that revenue that you see now in 2015 would be considerably higher as a percentage of sales than what we'll see in 2014?

It will be higher. Yes.

Okay. And then finally for you, Peter, given Zeena's arrival and the timing of when she takes over as CEO, what will your role be from that point forward?

Great question. It will be focused on areas, as you know, Sean, I have an incredible amount of passion for. I have a passion for all things Black Diamond, but I can focus on an area that very passionate about and have very little time to invest in, in the last few years. I think are very defining to especially the Black Diamond brand, and what I mean by that -- when we created this Company we said the why behind creating it, the sustainable why, is to make a difference for a fellow community of users. And how we attacked that was twofold. By bringing forth truly innovative, paradigm changing gear, equipment, and now apparel for the outdoor, mountain, canyon, crag, sports enthusiasts. And by championing the issues of great importance to that community.

I'm going to focus on the latter of those two. How do we make a difference to our customers? That's the why we're business, that's the sustainable why.

So my focus is going to be on advocacy, activism, public policy. Being somewhat of a front person for the brand on boards. Out there with the user groups and communities. Also very involved with our culture and on-boarding new people. I think that's critical as we grow to make sure that we maintain a culture that celebrates in a tangible manner the vibrancy and uniqueness of these mountain, canyon, crag sports.

And I want to have more time to do what I did at one time, which is to be more involved with product in a myriad of ways. Direction, details, opportunities et cetera. As well as how we represent these brands to the communities that I'm so passionate about and still a very active member of.

Great. That's what I thought it was. Thank you.

(Operator Instructions)

Jim Duffy with Stifel.

Good afternoon, everyone. You guys have given us an awful lot to digest here. (laughter) I'm going to ask, I guess, direct questions.

We're all trying to solve here to an underlining growth rate and margin structure for the remaining business. You've given us the 10% to 13% objective for 2015. Is that what we should expect going forward?

And then based on the results of the study of the consultants and their conclusion, what type of margin structure of the business should we be looking to, down the road? What's a reasonable objective?

Jim, let me take the first part of your question and Aaron can talk about margin here in a minute. Right now, we're in a sort of unique position here with BD relative to growth, in that none of the omni channel initiatives are going to grow any quicker than what we've been funding in organic rate next year.

Secondly, though we are excited about the opportunities for apparel growth and POC's growth in cycling, both of those still are very small and very new, relative to the core BD gear and equipment business. Which, as you can tell from the numbers is growing, but it's not going anywhere near the rate that POC's road business can grow for us, and where it's going or BD apparel.

So what you have in 2015, is a situation where you've got the largest part of the business growing more slowly. We're going to work on margins, as we talked about and Aaron will address that.

But the apparel parts -- the BD apparel, the POCs, new categories, they need to get a little bit bigger. They will get there in 2015. And then we do believe that growth will accelerate at that point between our global investments, the fact that those two entities are now the size of their growth generates an overall higher growth rate for the aggregate, and will begin to benefit from a very thoughtful, paced omni channel investment.

As it relates to margins, this is part of what we expressed in our prepared remarks. Is that, once again, our focus is on revenue growth and enhancing gross margins.

All the initiatives that Peter outlined we believe will enhance our gross margins over time. Also, just through the inherent growth of POC and BD apparel.

We're changing the characteristics of the Company. We're changing the margin profile of the Company with each of these investments. And that's where, yes, we do believe that margins will continue to improve, as Peter mentioned. These investments are still relatively small compared to the broader core business of gear and equipment, however even at that with these initiatives, whether it be the SKU rationalization or some of the optimization initiatives that we're taking on, we do believe that those will all have accretive or beneficial impacts on gross margin.

Well, again just to highlight that one point, there will be a one year diminution to the revenue lost from the 25% of the SKUs that we're knocking out. We're still growing gear and equipment, but as I pointed out earlier, when asked that question, we have to not only grow those categories, they have to grow fast enough to compensate for the SKUs we knocked out. Which obviously they will be growing but we have a one-year timeframe where we do feel the diminution of the SKU reduction and then we accelerate out the next year.

Okay. Let me take a different approach at this. Peter, I found it interesting you referenced comparable price to sales multiples as a reference for the breakup value of the Company.

How is the Board thinking about the value of the equity and improving the value of that equity? Do they see the price to sales multiple as the most relevant metric? Or is there an objective to the be valued on some measure of profitability?

Very good question, Jim. And I think what we were trying to communicate to you and all of our investors in the financial community, is that we are building very significant intrinsic value in our investment strategy in how we're growing these brands. I think the fact that we received the value we did on Gregory, which has been our slowest growing brand, we think is an affirmation of that.

So then, moving on to the guts of your question, we're about growing great global brands that can really become very large in revenue brands. But it will be done in a very steady way. It will be done with margin enhancement.

And so we are about, right now -- we're not about operating income or retained earnings. What we are about is building these brands into great brands. And we're pleased with the growth we're -- appears we're going to have this year. We're pleased with the margin expansion.

And that's what we're going focus in on, margin enhancement and growth, and do it in a way that can keep -- that momentum can continue. That it's a robust platform for growth. It is not a quick and dirty sort of growth initiative that ends up running out of steam.

This thing should build momentum and that's how we're looking at it. Again it's about building great brands that can expand. It's about revenue growth and it's about margin expansion.

When you say margin is not gross margin or is that at the operating margin line?

At this point in time it's gross margin. However, let me point out that if you're not in the acquisition mode, where you can capitalize your acquisitions, you instead grow organically. And that's what we're doing with Black Diamond apparel with POC entering the road category, with apparel et cetera.

Or converting distributors which, as you know with Gregory, costs money and then you add cost. But that all hits SG&A. And you can't capitalize that.

So what we were trying to communicate today to the financial community is that we can run a very efficient honed business. I did it for 20 years before we went public.

We grew this business from less than $1 million of equity to about $100 million. And the fact that we have identified how to pull $10 million worth of cost out of here by 2017, in the core business, shows we're honed, mean, efficient, capable operators that I'm very proud of.

And then at the same time, we know how to build businesses, as we've done in our past. That's how we've gotten to this point. And that's what we're doing with POC, with BD apparel, and with global distribution.

So we don't see the two as inimical. We can be honed and be cutting costs and scaling and right-sizing one part of the business, while making very meaningful robust investments in the other.

Again, we see the two complementary, not as inimical. But it is a little bit hard to look at a first-hand until you get that insight. But that's how we see it. So are running an efficient business and at the same time were building and investing.

Thank you.

Mark Smith, Feltl and Company.

Hello, guys. First just a couple housekeeping items. Aaron, sorry if I missed it, can you just give us the net cash position today?

So after we paid off the Zions line of credit and the term note, we're sitting on about $45 million in cash.

$45 million in cash. And no debt?

And no debt. Well, we obviously have some sub-debt out there and a modest line of credit out with our foreign subsidiaries funding POC.

But also as discussed, we do expect to be able to generate some free cash flow of anywhere between $3 million to $6 million in the back half. And so we are expecting to be able to have about $45 million on hand in order to invest strategically.

Okay. Peter, I think you said that all businesses were up a double digits in the quarter. Maybe if we dig deeper -- was the Black Diamond business, excluding apparel, a grower in second quarter?

Yes. Double-digit.

Double-digit. Okay. And then you just talked a little bit about cash. Can you talk about plans for retail stores now with more capital?

Great question, Mark. I know that is something that's on the minds of a lot of the street, not to mention ourselves.

That is why we hired Zeena Freeman, because we did not have enough bandwidth with the senior team here to be putting together a detailed, thoughtful plan that we're ready to execute on. That is one of the highest priorities for Zeena Freeman to lead as she gets her feet under her right now, is to develop that omni channel strategy and program. And we develop that we're certainly going to share that with the street.

My last question when you bought POC and Pieps, both those businesses were running mid-40% to almost 50% gross profit margins. Are those still similar gross profit margin today? Have you seen any decline? Have you seen any improvement in those businesses?

They're still running at those levels. And especially for POC as we continue to expand our distribution and take overs certain distributors and bring them in-house, and as we think about the omni channel strategy, we actually expect those to continue to increase over time.

Okay. Perfect.

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

Great. Thanks so much. Still looking toward the second half of 2014, our powerful brands and efficient global operational platforms have us well-positioned to continue our momentum while we implement the final initiatives of our strategic pivot. Ultimately, we expect all pivot initiatives to conclude by the end of 2016, and that this rationalization process will begin to manifest itself into healthy, organic growth and improve margins through completion. Thanks again for joining us today.

Ladies and gentlemen this does conclude this teleconference. You may disconnect your lines at this time. Think you for your participation.