Clarus Corp (CLAR) 2015 Q3 法說會逐字稿

Good afternoon, everyone. And thank you for participating in today's conference call to discuss Black Diamond, Inc.'s financial results for the third quarter ended September 30th, 2015.

Joining us today are Black Diamond, Inc.'s Executive Chairman, Warren Kanders, the Company's COO, Mark Ritchie, the Company's CFO, Aaron Kuehne, and the Company's Director of Investor Relations, Cody Slach.

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 regarding forward-looking statements. Cody, please go ahead.

Thanks, Travis. 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, the Company's ability to implement its reformation and growth strategy, including its ability to organically grow each of its historical product lines, the ability of the Company to identify potential acquisitional investment opportunities as part of its redeployment and diversification strategy, the Company's ability to successfully redeploy its capital into diversifying assets, or that any such redeployment will result in the Company's future profitability, 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 patents, trademarks and other intellectual property rights, fluctuations in the price, availability, and quality of raw materials in contracted products as well as 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 report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K.

All forward-looking statements included in this conference call are based upon information available to the Company as of the date of this conference call, and speak only as 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'd like to remind everyone that this call will be available for replay through November 23, 2015, starting at 8.00 PM Eastern 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, Inc. is strictly prohibited.

Now I would like to turn the call over to the Executive Chairman of Black Diamond, Inc., Mr. Warren Kanders. Warren?

Thank you very much, Cody. And good afternoon, everyone. As you may have seen earlier today, the Company reported its earnings for the third quarter and nine months ended September 30, 2015. In addition, the Company announced that after more than 25 years of service to the brand, Black Diamond Equipment's Founder Peter Metcalf will retire as the Company's Chief Executive Officer, effective December 31, 2015.

Given the significance of our remarks following both Peter's decision to retire and the completion of our process to explore strategic alternatives, I am going to lead off this afternoon's call. Following my opening remarks, you will hear from each of Mark Richie, our Chief Operating Officer, and Aaron Kuehne, our Chief Financial Officer.

Consistent with our past three earnings calls, we are not going to entertain questions following our prepared remarks. However, we strongly encourage those of you with questions following our call today to follow up directly with either me, Aaron Kuehne, or Cody Slach.

We would also encourage you to attend our annual shareholders meeting in New York City on Friday, December the 11th. We issued a press release on October the 9th that outlines the specifics of the meeting, including RSVP instructions.

My remarks this morning are organized in three primary areas. I will firstly review the past by highlighting the journey we have been on since May 2010 acquisition of Black Diamond Equipment and some of the strategic objectives that we established. Second, provide some color on our strategic process that we have just concluded. And thirdly, focus on our future, specifically our plans to keep the Black Diamond Equipment and PIEPS businesses, and to redeploy our capital into potentially diversifying assets.

Black Diamond, Inc. is currently structured as a publicly traded holding company. Currently Black Diamond Equipment and PIEPS are the holding company's only operating assets. We have a significant cash balance coupled with our NOLs, which we intend to redeploy into diversifying assets. At the appropriate time in the future, we may change the name of the holding company to something more reflective of our business focus and approach.

Mark Richie, who you will hear from today, is the newly appointed President of Black Diamond Equipment, and I will continue to serve as the Executive Chairman and also as the Company's principal Executive Officer commencing upon Peter's retirement.

Please allow me to begin by briefly going back to 2010 just to set the stage. In May 2010, we successfully combined the assets of three distinct companies, Black Diamond Equipment, Gregory Mountain Products, and Clarus Corporation. In doing so, we created a pure play publicly traded outdoor recreation and lifestyle equipment company.

In early 2011, we outlined our five-year strategic plan. The backbone of this plan was 12.5% compounded organic revenue growth by the existing business before any incremental spending to develop new product categories or acquire additional brands.

To achieve our objectives, we made substantial investments to leverage Black Diamond Equipment's operating platform. Over a period of time, we expanded our global (inaudible), including a large master distribution facility, a ski factory, and a more robust direct-to-consumer engine.

To support that 2012 acquisitions of POC and PEIPS, we also invested in a series of centralized customer service, global supply chain, logistics, human resource, and other administrative capabilities.

We worked to augment the strategic plan by investing in and launching new product categories like apparel, which required significant additional capital. The plan also contemplated several acquisitions of various sizes, and we developed a robust pipeline of target companies that our team was continuously evaluating.

All told, we believe this plan could enable us to achieve $500 million of annual sales by 2015 through existing categories and acquisitions with an additional $250 million opportunity in apparel by 2020.

With revenues steadily climbing above $200 million at the end of 2013, we commissioned and completed a global profitability study with the assistance of an outside consultant. This study was designed to help us better understand our profitability by product, category, and by region, as well as to enable us to better allocate resources between competing long-term objectives.

Supported in part by the profitability study, we initiated a strategic pivot away from acquisition-led growth and towards the fastest growing components of our business. We believed at that time that Black Diamond Equipment and POC represented our most significant long-term opportunities for compounded, multi-channel, multi-year revenue growth and profitability.

We saw e-commerce and branded retail stores as potential avenues to further development and distribution of our brands. We looked to the outside for additional leadership and hired a seasonal senior executive with significant consumer-facing, merchandising, and omnichannel experience. It was also at this time that we initiated the repatriation of global manufacturing to Salt Lake City.

To finance the pivot, in July 2014, we sold Gregory, an asset we purchased in 2010 for approximately $44.1 million for $84.1, or 2.4 times 2013 sales. By the beginning of 2015 and after careful consideration, our Board of Directors concluded that the Company was struggling to execute its plan as evidenced by eight consecutive quarters of disappointing results.

More importantly, while the apparel initiative had [hit] a number of important milestones, the Board appropriately questioned whether apparel's sell-through was sufficient to support the Company's $250 million revenue target by 2020.

At the same time, the market appeared to have a scarcity of authentic branded assets available to strategic buyers, many of which have significant scale to both leverage our brands and efficiently absorb our apparel.

The Board determined that the time was right for us to explore on behalf of our shareholders the value of our assets in the market and potentially monetize our NOL. This exploration contemplated either the sale of each of POC and Black Diamond Equipment, PIEPS independently, or the possible sale of the entire Company.

After a robust seven-month global process that included 225 parties contacted and 90 confidential memorandums distributed, in October 2015, we closed the sale of POC, a business that we had acquired in July, 2012 for approximately $44.9 million. We sold it for $64.6 million, or 1.9 times 2014 sales, and realized net proceeds of approximately $60 million. We believe the sale realized a strong result for POC on a revenue multiple basis.

This brings us to the present. We believe that Black Diamond Equipment has far more intrinsic value than our strategic process conveyed. During the process, Black Diamond Equipment was burdened with redundant operating platform costs, historically in place to support POC, Gregory, and future development.

We have already begun to rightsize and to reform Black Diamond Equipment to its historical and industry commensurate levels of profitability. Reformation begins with new leadership. After 21 years at Black Diamond Equipment in a variety of operations, management functions, and most recently as the Company's Chief Operating Officer, we are excited to see Mark Richie stepping into the role of Black Diamond Equipment Brand President and leading the reformation of the business.

We have challenged Mark and the team to be the number one climbing brand in the world, to sell more of our core products more deeply into existing channels, to grow our e-commerce globally, and seek to return the brand to its 2011 cost structure, or roughly a 10% EBITDA margin run rate excluding corporate costs sometime during 2016.

Mark's senior leadership team at Black Diamond Equipment is made up of direct reports with collectively over 60 years of experience with Black Diamond Equipment, and over 100 years in the industry.

With the reformation of Black Diamond Equipment in progress and the sale of POC completed, we believe that we are well positioned to redeploy approximately $100 million of cash balances pro-forma for the sale of POC.

Given the state of M&A markets today, the availability of capital in the financing market, and the liquidity of our pro-forma balance sheet, we believe we can acquire high-quality, durable, cash flow producing assets with enterprise values in the range of between $250 million and $500 million.

We expect to invest in assets potentially unrelated to outdoor equipment in order to diversify our business, and have retained the global investment bank Rothschild to assist us in our search.

In connection with driving value in our Company, our Board of Directors has amended our 10% stock repurchase program, replacing it with a $30 million plan. While we strongly prefer to invest our capital in diversifying assets, we are prepared to be opportunistic in our own shares if appropriate.

Our common stock continues to be subject to a Rights Agreement that has attempted the limit of 5% or more owners, and therefore reduce the risk of a possible change of ownership in order to maximize the value of the NOLs. Any such change of ownership under these rules would limit our ability to use our existing and significant NOLs for federal income tax purposes. I should add that under our prior 10% stock repurchase plan, we had repurchased no shares under that program.

In closing, on behalf of our Board of Directors, shareholders, and employees, I would like to thank Peter Metcalf personally for his decades of service and leadership to Black Diamond Equipment, both as its Founder and Chief Executive Officer.

Peter tirelessly led Black Diamond Equipment from its creation to where it is today, and we wish great success in his future endeavors. We will expect that Peter will continue as an advocate for the Black Diamond Equipment brand and serve as a beacon for issues of great importance to our customers, end users, and the sports we serve.

At this time, I'd like to turn the phone over to Mark Richie to address more specifically the reformation plans and current state of the Black Diamond Equipment brand. Mark?

Thank you, Warren. And good afternoon, everyone. I first joined Black Diamond Equipment in 1994 and have held the positions of Planning Coordinator, Director of Planning, Purchasing and Logistics, Director of Operations, VP of Operations, and Chief Operating Officer during my career here. I am honored and committed to lead the reformation of Black Diamond Equipment as Warren has described it.

To get there, Black Diamond Equipment will no longer serve as an outdoor platform. As a result, a reduction in force has already occurred for both open and [billed] positions in North America and is underway in other parts of the organization.

We are also moving forward with a plan to restructure our European business, reducing overhead, complexity, and structural risk. Tim Bantle, our former Head of Black Diamond Equipment, is moving to Europe and will be leading this business for the brand.

We are continuing to develop our apparel effort, but actively scaling back the category to a naturally organic rate of growth so that it can achieve profitability at industry-appropriate margins. Our mission is to grow Black Diamond Equipment and to continue to develop the number one climbing brand in the world, albeit at a different tempo, with the long-term goal of expanding in the climbing category, which has historically grown at mid-single digit rates. Our business center of gravity will reside within hard goods with a continuing focus on new product development.

Regionally, our consolidated North American business continues to be strong through the third quarter after a very solid first half, driven by growth in our foundational product categories of climbing mountains to the largest and most important retailers.

We continue to drive double-digit direct-to-consumer growth in the quarter. In fact, this emerging channel continues to be our fastest growing business globally. While we would characterize our North American business as strong, retailer mentality going into the winter continues to be cautious until weather proves otherwise.

In Europe, we continued to characterize the environment to be flat to down with generally soft consumer spending. We've also seen consolidation one would expect in such a market with smaller stores going under and regional stores being acquired by other regional counterparts.

This type of consolidation also necessitates the consolidation of SKUs and vendors with a bias to only the best core and European brands. These retailers are adopting an edit and amplify strategy, which is a positive for the categories where we are strongest, but a negative in the areas where we have a smaller presence.

Given this backdrop, Europe continues to be a challenging market for Black Diamond Equipment. We are also dealing with significant headwinds from foreign exchange. From a sales perspective, with the currency markets where they are, our products are much less competitively priced than our European and Asian comparables. We have chosen to stay the course, or in some cases, raise our prices in this market. But we'll look for other opportunities to enhance margin as we go into 2016.

From a cost perspective, our Swiss-based operations have also become more expensive. Eastern and Northern European countries remain strong. However, Central and Southern Europe, which make up our largest portion of the region's sales, continued to be challenged.

Outside of Europe, our international business continues to be challenged by softness in Japan and Russia. As we mentioned at the end of 2014, BD has a strong presence in Japan and the country is experiencing both consolidation and stabilization after a three-year growth spurt. They are also being impacted by the weaker Yen and changes in duty rates that are hampering consumer spending. Hence, 2015 is about aligning inventories with flat demand.

Finally, Russia's retail sector has been badly buffeted by a combination of economic sanctions and the sudden and rapid decline of the ruble, making all dollar denominated goods substantially more expensive right at the time that consumer spending was rapidly declining.

Fortunately, the repatriation of manufacturing activities to Salt Lake City has been completed. Our new Asian 3PL business is up and running, and supporting our international global distributors in a much more cost-effective way.

We expect to begin to realize the efficiency from consolidation of operations, greater absorption of fixed overhead, and increased volumes of first-quality product being manufactured. When complete, we expect this strategy to provide working capital improvements as well as competitive benefits through a faster refresh cycle and greater speed to market.

We continue to make positive strides in the holistic integration of our marketing program of building brand awareness while being transactional in nature. There is no better example than the launch of BDTV.

BDTV is a branded content channel for the Black Diamond brand to showcase stories that are authentic, engaging, and representative of the cultures of climbing and back-country skiing. These beautiful, succinct, visceral stories underpin all of our social media marketing content and tie into our in-store marketing campaigns and fixtures. While still early in the evolution, our first episode was viewed by over 300,000 people, and episode two is tracking even better.

Anecdotally, we continue to hear about the growth of indoor climbing gyms throughout the world, particularly in North America. In partnership with the Access Fund, we kicked off the 2015 Rock Project Tour with successful [solo] stops in San Francisco, Salt Lake City, and New York City. The Rock Project is designed to educate and inspire these growing populations of gym-to-crag climbers, the fastest growing climbing demographic, to embrace responsible habits and behaviors when they make the transition outside.

Looking to spring 2016, our bookings are tracking to plan with the exception of Japan and parts of Europe for the reasons I mentioned earlier. I should note that we expect our spring 2016 climbing equipment to be the first complete season of product manufactured or assembled completely in Salt Lake City.

Despite being a spring 2016 product, we launched our totally redesigned Spot Headlamps for the upcoming holiday season. This launch was driven by solid retail demand for a product that is Black Diamond's best-selling SKU.

This concludes my discussion of operations and plans of Black Diamond Equipment. I'd now like to turn the call over to Aaron Kuehne, Black Diamond, Inc.'s CFO, to wrap up the call with a discussion of our third-quarter financial results. Aaron?

Thank you, Mark. And good afternoon, everyone. The reporting results we issued in today's press release are from continuing operations, excluding the results of POC for both the three-month and nine-month period ended September 30th.

Sales in the third quarter of 2015 decreased 11% to $39.3 million compared to $44.1 million in the same year-ago quarter. The decrease was driven by the weakening of foreign currencies against the US dollar and softer product volume in parts of Europe and Japan.

Due to the recent volatile foreign exchange markets, third-quarter sales were negatively impacted by approximately 550 basis points, or $2.4 million. So on a constant currency basis, Q3 sales only decreased 5%.

Consolidated gross margin in the third quarter decreased 340 basis points to 36% compared to 39.4% in the same period last year. This was in spite of a 375 basis point headwind from foreign currency. So on a constant currency basis, gross margin would have been a healthy 39.8%, an increase of approximately 40 basis points. The constant currency improvement was due to a favorable mix of higher margin products and channel mix, and reflects the margin-enhancing initiatives contained in our strategic pivot.

Third-quarter SG&A, which excludes restructuring, merger and integration, and transaction costs, declined 11% to $14.2 million due to the actions outlined in our strategic pivot, the realignment of redundant operating platform resources following the sale of Gregory, as well as general optimization efforts across the organization.

During Q3, we incurred restructuring charges of $696,000 related to the continued realignment of resources associated with the repatriation of manufacturing activities from Asia to the US and the reformation of Black Diamond Equipment.

During the third quarter, you will notice that we increased the valuation allowance on our NOLs by $49.2 million. This does not mean we will lose our ability to utilize our NOLs. But given the actions of our strategic review and where we sit today, our ability to generate likely near-term taxable income to offset them no longer meets the more likely than not criteria. We expect our redeployment to potentially unrelated assets will utilize our NOLs in the future, at which point the reserve against the NOL would be removed and will flow back through the income tax line on our P&L.

Adjusted net income from continuing operations increase 10% to $2.6 million, or $0.08 per diluted share in the third quarter of 2015 compared to adjusted net income from continuing operations of $2.3 million, or $0.07 per diluted share in the third quarter of 2014.

At September 30th, 2015, cash and available-for-sale marketable securities totaled $35.5 million compared to $39.7 million at December 31, 2014. Total debt was $19.7 million, which includes $19.6 million of 5% subordinated notes due in 2017, and $100,000 in term notes, compared to total debt of $18.6 million at December 31, 2014.

However, cash including the net proceeds from the sale of POC is approximately $95.5 million as of September 30th, 2015, or approximately $2.91 per share. And we continue to carry $22.7 million in undiscounted total debt. Although no amounts are currently outstanding, we continue to maintain the $20 million revolving credit facility with Zions First National Bank, which matures on April 1st, 2017.

We entered into an amendment to the revolving credit facility today, reducing the minimum net worth financial covenant required to be maintained by the Company for the year ending December 31, 2015 from $240 million to $170 million with an annual increase of $2 million for each fiscal year there after.

We finished the quarter with $54.3 million in inventory, a decrease of 5% from the same time last year. As we indicated last quarter, we are purposely carrying higher levels of inventory through the first three quarters of 2015 (inaudible) disruption associated with the transition of our manufacturing activities from Asia to the US as well as the early build-out of (inaudible) inventory in advance of moving to Tier I supplier in 2016.

All of these activities are on track with our internal schedules, and we expect the business to return to standard levels of inventory, and the Company's free cash flow to benefit during the first quarter of 2016. It is worth noting, however, that inventory levels for our core business finished goods is down 13% year over year.

Now turning to our outlook for the year ending December 31, 2015, which has been revised to reflect the sale of POC. We now expect constant currency sales in 2015 to be approximately $160 million compared to $158.3 million in 2014. Also on a constant currency basis, we expect gross margin in fiscal 2015 to increase 160 basis points to approximately 38% compared to 36.4% in 2014.

As previously mentioned, we've already begun to rightsize and to reform Black Diamond Equipment to its historical levels of profitability. As part of the reformation, we will eliminate overhead, simplify business operation, and refocus the operating activities solely onto the Black Diamond Equipment brand.

As a result, over the next 15 months we estimate that we will incur approximately $3 million to $5 million of total cash and non-cash restructuring charges related to employee-related costs, contract termination costs, and facility costs associated with the reformation. All of these charges are expected to be self-funded by the operations of Black Diamond Equipment.

We are also targeting our corporate overhead expenditures to be approximately $4 million in 2016, and our inventory normalization should result in a targeted reduction of $10 million in 2016. We plan on providing formal 2016 guidance in early 2016.

To conclude our remarks this afternoon, on behalf of Warren and Mark and the entire team at Black Diamond Incorporated, we remain committed to our mission and dedicated to serving our customers and community of users.

I'd like to thank every one for joining the call today. We look forward to a successful future and hope to maintain your continued support as we embark on the next phase of our growth.

At this time, I would like to turn the call over to the operator.

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