Clarus Corp (CLAR) 2015 Q4 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 fourth-quarter and full-year ended December 31, 2015. Joining us today are Black Diamond Inc's CFO, Aaron Kuehne; Black Diamond Equipment President, Mark Ritchie; and the Company's Director of Investor Relations, 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 regarding forward-looking statements. Cody, please go ahead.

Thanks, Camille. 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 the 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 the cause actual results of operations or financial conditions 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 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 acquisition or investment opportunities as part of its redeployment and diversification strategy; the Company's ability to successfully redeploy its capital through 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 day 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 this call will be available for replay through March 28, 2016 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 BlackDiamondInc.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 President of Black Diamond Equipment, Mark Ritchie. Mark?

Thank you, Cody, and good afternoon to everyone. My name is Mark Ritchie, and on January 1, I formally assumed the role of President of the Black Diamond Equipment brand. At the close of business today, Black Diamond Inc. released its earnings for the fourth quarter and 12 months ended December 31, 2015.

Following my opening remarks, our CFO, Aaron Kuehne, will review the Company's 2015 financial performance and its outlook for 2016. Following Aaron's remarks, I will return to the call to provide some additional commentary, and we will leave time for a question-and-answer period.

During the fourth quarter of 2015, Black Diamond Inc. completed its divestiture of POC, and made the strategic decision to retain the Black Diamond Equipment and PIEPS brands, and commit to a long-term holding Company structure, in which Black Diamond Equipment and PIEPS will remain core holdings, while the Board seeks to redeploy its significant capital resources into diversifying assets.

To illustrate its commitment, the Board asked me to initiate a reformation project at Black Diamond Equipment. The reformation is expected to return the operating Company to its historical 2011 operating margins, with a long-term focus on and commitment to, increased operating cash flow. Prior to the reformation, the Company's strategy was to use Black Diamond Equipment as its operating platform to acquire additional technical outdoor brands, and to invest in sales growth to leverage that platform.

With the sale of Gregory Mountain Products in 2014, the sale of POC in 2015, and now the completion of our transition service commitments, we began to eliminate platform functions that had historically been staffed to provide centralized human resource, customer service, IT, supply chain, and other administrative services to all of our brands. In late 2014, the Company also began to repatriate its Chinese manufacturing functions to Salt Lake City.

We expect both the repatriation of our Asian manufacturing platforms and our reformation project to be complete in 2016, and we expect the brand to be well positioned to achieve its profitability and cash flow objectives on a run rate basis excluding corporate costs and transitional gross margin variances related to foreign currency, and the repatriation of manufacturing sometime in 2016. Thus far, the reformation project seeks to achieve the following primary initiatives:

Number one, significant cost reductions in North America and in Europe. Number two, the relocation of our European headquarters from Basel, Switzerland to Innsbruck, Austria. And number three, a reorganization of our apparel strategy to achieve profitability at substantially lower sales targets.

I would now like turn the call over to our CFO, Aaron Kuehne. Aaron?

Thank you, Mark, and good afternoon, everyone. The reported results we issued in today's press release are from continuing operations, which exclude the results of POC for both the three-month and 12-month periods ended December 31, 2015.

Sales in the fourth quarter of 2015 decreased 4% to $44.1 million, compared to $46 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 Japan. Due to the recent volatile foreign exchange markets, fourth-quarter sales were negatively impacted by approximately 370 basis points, or $1.7 million.

On a constant currency basis, Q4 sales were essentially unchanged at $45.8 million. Consolidated gross margin in the fourth quarter decreased 160 basis points to 33.5%, compared to 35.1% in the same period last year. Again, foreign exchange created the 245 basis point headwind, so on a constant currency basis, gross margin improved by 90 basis points to 36%, due to a favorable mix of higher margin products.

Overall, our sales and gross margins are impacted by unfavorable foreign currency changes on a transactional basis. The primary cost of our inventory is denominated in US dollars, while 42% of our global sales are denominated in foreign currencies, primarily the euro, Canadian dollar, Swiss franc, British pound, and Norwegian krone.

We attempt to manage our foreign currency risk on a continuous basis, through natural hedges and foreign currency hedge contracts. Although we have hedges in place for the different cash flows denominated in foreign currencies, these hedges will never be a perfect offset to the actual currency movements, especially with the currency volatility we've experienced in recent quarters. These hedges also do not protect our financial statements from the translation impact we experienced from these weaker currencies.

In our reported sales and gross margin, our hedges offset approximately $1.7 million of foreign currency exposure in the quarter, and approximately $5.8 million for the year. Fourth quarter SG&A, which excludes restructuring, merger and integration, and transaction costs, decreased 14% to $15 million, due to the realignment of redundant operating platform resources that Mark described, following the sales of Gregory and POC. During Q4, we incurred restructuring charges of $803,000 related to the repatriation of manufacturing activities from Asia to the US, and the reformation of Black Diamond Equipment.

We also incurred a $500,000 transaction fee to retain Rothschild Incorporated for assistance with our capital redeployment strategy. Also during the fourth quarter, we recorded a $29.5 million non-cash goodwill impairment charge, after determining that the implied fair value of Black Diamond Incorporated's goodwill was lower than its carrying value. For purpose of this analysis, under US GAAP, the implied fair value of the Company is determined solely by the Company's market capitalization as of December 31, 2015, plus a control premium.

Adjusted net income from continuing operations, which excludes these non-cash charges, as well as restructuring and transaction costs, increased to $600,000 or $0.02 per diluted share in the fourth quarter of 2015, compared to an adjusted net loss from continuing operations of $500,000 or a loss of $0.02 per diluted share in the fourth quarter of 2014. During the fourth quarter, we repurchased approximately 1.6 million shares of our outstanding common stock, and have repurchased an additional 360,000 shares of our outstanding common stock during the first 2.5 months of 2016, for a total cost of approximately $8.6 million, at an average price of $4.45 per share. As of today, $21.4 million remains on our $30 million stock repurchase program, and we will continue to seek to accumulate shares on an opportunistic basis.

As a reminder, our common stock continues to be subject to a rights agreement that is intended to limit the number of 5% or more owners, and therefore reduce the risk of a possible change of ownership, in order to maximize the value of our NOLs. Any such change of ownership under these rules would impair our existing and significant NOLs for federal income tax purposes. As of December 31, 2015, our NOL balance was approximately $166 million.

Cash and available for sale marketable securities at December 31, 2015, totaled $98.2 million or approximately $3 per share, compared to $39.7 million one year ago. Total debt was down -- total debt was $20.1 million, which includes $20 million of 5% subordinated notes due in 2017, and $100,000 in foreign term notes compared to total debt of $18.6 million at December 31, 2014. For flexibility, we continue to maintain a $20 million revolving credit facility, which matures on April 1, 2017.

On March 11, we entered into an amendment to the revolving credit facility, which reduced our minimum net worth covenant required to be maintained for the year ending December 31, 2015, to $140 million, with an annual increase of $2 million for each fiscal year thereafter. Our inventory balance decreased 9% during the last 12 months to $51.5 million.

As we indicated last quarter, we purposely carried higher levels of inventory through the first three quarters of 2015 to avoid disruption associated with the transition of our manufacturing activities from Asia to the US. This transition is now complete, and we have eliminated these safety stocks.

At December 31, 2015, stockholders? equity was $176 million, or approximately $5.64 per share, based on 31.2 million shares outstanding. Looking ahead to 2016, we expect sales on a reported basis to be approximately $145 million to $150 million, compared to $155.3 million in 2015. On a constant currency basis however, we expect sales to increase slightly to approximately $155 million to $160 million.

We expect gross margin in FY2016 on a reported basis to be between 32.5% and 33.5%, compared to 34.9% in 2015. On a constant currency basis, we expect gross margin to increase between 90 and 190 basis points, to between 35.8% and 36.8%. We expect SG&A in 2016 to be around $49 million, which is a decrease of $9.5 million or 16.2% from 2015.

This cost reduction reflects the work that Mark Ritchie and the team are doing to seek to reform our cost structure, to eliminate operating platform costs, and to achieve operating margin targets prior to corporate overhead. The $49 million includes approximately $4 million of cash corporate overhead expenditures. Our guidance assumes the euro to be at $1.08 and reflects our expectations for significant headwinds from foreign exchange in 2016, pressuring both reported dollars sales and margins versus the prior period.

During 2016, we anticipate $3 million to $4 million of total cash and non-cash restructuring charges, related to the elimination of operating platform costs in Europe and North America, as well as the costs associated with moving our European headquarters from Basel, Switzerland to Innsbruck, Austria. The move to Innsbruck alone is expected to reduce operating costs by approximately $2.2 million on a normalized basis in 2016, compared to 2015. We expect our inventory levels to decrease by approximately $5 million during 2016, with the remaining non-cash working capital components being consistent with that of 2015.

We are forecasting capital expenditures of $2.5 million during 2016. During 2016 we expect to generate free cash flows of around $5 million before corporate costs and related activities. We expect the combined EBITDA margins for the Black Diamond Equipment and PIEPS brands to be approaching our target of 10% by 2017.

However, this excludes transitional gross margin variances related to one, the continued ramp-up and optimization of our in-house manufacturing activities, which have a direct impact on the gross margins of our internally-manufactured goods, and two, better foreign exchange stability. We believe that through the reformation project, our cost structure will be appropriately aligned and supporting this target. At this point in time, it is too early to provide any specific guidance or details around the redeployment of our capital.

We continue to believe that at the appropriate time, we will acquire high-quality, durable, cash-flow producing assets, with expected enterprise values in the range of $250 million and $500 million. We expect to invest in assets unrelated to outdoor equipment in order to diversify our business, and as noted earlier, we have retained a global investment bank, Rothschild, to assist us in our search.

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

Thanks, Aaron. Before opening the call for questions, I would like to share a little more with you about our reformation efforts, primarily in Europe and with apparel.

We started with the following strategic objectives: to solidify Black Diamond as the number one climbing company globally. To sell more of our core products deeper into existing channels. To create new channels for longer-term growth. To grow our e-commerce business globally. And to return to brand to its 2011 cost structure.

Towards these objectives, as Aaron mentioned, we have already eliminated significant SG&A both in North America and in Europe, and we expect our European business to be fully relocated to Innsbruck in May of this year.

We expect the move to Innsbruck to reduce costs, alleviate complexity, and reduce structural risk. Moving our headquarters from the Swiss franc-denominated city of Basel, to the euro-denominated city of Innsbruck better aligns our euro sales with our euro costs, creating more of a natural hedge in our P&L. We also estimate Innsbruck's costs of doing business is roughly 30% less than Basel.

Today we are building out the office and actively hiring, and we see Innsbruck as a real asset to our brand. A great new home for the brand, and for our employees, who will now have immediate access to the mountains in summer and winter, similar to our global headquarters in Salt Lake City. To help drive these efforts, we have relocated our North American brand leader, Tim Bantle, to be the Managing Director of our European Operations, and we expect him to more tightly align our European headquarters with our corporate headquarters in Salt Lake City.

In spite of the office transition, Tim has already reorganized European sales management around account types, differentiating strategic accounts from regional key accounts, from specialty retail. We have also soft-launched e-commerce to test demand and fulfill from global inventory. In Europe, 2016 starts with various new product introductions.

Our spring-summer line is a comprehensive update of climbing hard goods, supported from Salt Lake City facility operation. Our lighting and trekking products remain market-leading and we have an ongoing effort to seek to develop our gym climbing business in a new, dynamic, and exciting distribution channel. As this channel develops over the quarters ahead, we will tell you more about it.

Outside of Europe, Black Diamond has relationships with approximately 30 independent global distributors, which extends our reach into many important and developing international markets. We continue to seek expansion in our international reach, but the most important focus remains on the largest and most established markets, such as Japan, China, Korea, Australia, and New Zealand. We've been faced with headwinds due to the US dollar currency strength that is making our products more expensive in these local markets.

Our 2015 financial results and our 2016 guidance reflects these headwinds, with the weakest markets being Japan, Australia, Russia, Ukraine, and Taiwan. Specifically in Japan, the country is experiencing both consolidation and stabilization after a three-year growth spurt. Weaker yen and changes in duty rates are also hampering consumer spending.

Our apparel business is also an integral part of restructuring Black Diamond Equipment to achieve historical operating margin. As many of you know, we launched apparel globally in the fall of 2013, with a bold objective to achieve $250 million in revenue by the end of 2020. Given the Company's latest objectives to grow organically and profitably, as well as to achieve 2011 operating margins, the apparel business has been reorganized to achieve industry-appropriate margin.

To be clear however, we remain absolutely committed to our apparel business as we recalibrate the line and the resources toward more humble objectives. To do so, we have naturally scaled-back our investment in development-level staff and certain marketing initiatives that were in place when apparel formed the center of our universe. This includes certain style and SKU reductions.

For example, our 2015 line encompassed approximately 290 styles, and over 3,000 SKUs. For 2016, we expect to reduce the line to around 200 styles, and approximately 2,400 SKUs. At the same time, we are also focused on broadening the accessibility of the line.

This includes improving the fit, and more approachable pricing on selected styles. In mid-November, we expanded our global footprint of our direct-to-consumer business, enabling access in the UK, Germany, and Sweden. This was a soft launch, and precursor to an expected full European launch.

We also implemented several new email solutions, starting with site cart abandonment and back-in-stock email capability. Mobile visitation was up 19%, and attributable sales up 49% versus the same period last year. Our focus for 2016 in our direct-to-consumer business is to expand further into Europe, and we expect to add an additional 10-plus countries in the second quarter.

On the online marketing front, in the second quarter, we will expand our email solutions, providing greater insight into customer needs, and our ability to market to them. On the mobile front, we expect the continued progression of our mobile experience to deliver our customers the ability to shop, interact, and experience the BD brand and products. Before we open the call for your questions, I'd like to highlight our recent new product awards.

A few of them coming out of the Outdoor Retailer and ISPO shows included the Outside Magazine Gear of the Show Award for the Helio fixed length ski pole. The GearJunkie.com best in show award, and the GearInstitute.com best new gear for the Helio fixed length ski pole.

The GearInstitute.com Best New Gear for the Micro Avalanche Beacon, the Climbing Magazine Editors Choice for the Snaggletooth Crampon. The Climbing Magazine Editor's Choice for the Camalot Ultralights, and the Manual.com Best in Show for the Micro Avalanche Beacon. With that, I'd now like to turn the call back over to Camille, for questions and answers.

(Operator Instructions)

Camilo Lyon, Canaccord Genuity.

I was hoping you could give us a little bit more detail on what does the apparel piece look like going forward, now that there's been some or conservative assumptions baked into the plan? And how do you see -- what kind of growth is needed to get back to the 2011 EBITDA margins on the apparel business? And then similarly, does that imply that you're just looking for more stable levels of demand in the equipment piece on Black Diamond, or is there also an embedded growth function for that piece of the business, as well?

Okay, so sorry, there were a lot of pieces to that. I'll do my best here. To reaffirm the fundamental concept, we remain fully committed to the apparel initiative. Obviously, as we have discussed previously, we've invested heavily. We've learned a lot and we've recalibrated our revenue expectations around the idea of organically and profitably growing this important product category.

But what we're doing is distilling the project line down to the essential pieces that are aimed at the pure Black Diamond customer, climbers and back-country skiers, along with the emerging gym climber. So we're making the line more accessible from both a pricing and fit perspective, and we are driving the business forward along a more natural rhythm. The goal is to have fewer key items that offer best-in-class value as we have done with products like the Momentum Harness and the Spot Headlamp, so to try to mimic those sorts of product placements.

But we are still committed to Halo innovative product. We recognize the need for sharper price points to drive sales. So the key takeaway here is that we remain committed to apparel. Would you like to comment on the EBITDA and margins?

You bet. So Camilo, as part of the reformation process, that included the scaling back of our apparel initiative, to be in line with what Mark just articulated. So as we think about the overall profitability target of 10% for the combined brands of Black Diamond and PIEPS on a go-forward basis, we believe that we have the appropriate operating model or cost structure in place, whereby the primary focus for us is really on two remaining factors of -- both of which actually impact gross margins.

And that is that of optimizing our in-house manufacturing activities, getting that ramped up and having our in-house products that are manufactured, which represent about 20% to 25% of our business. Producing the gross margins that we anticipate or expect as the result of the manufacturing repatriation, as well as a more stable foreign currency environment, if you will. We were not actively managing our foreign currency exposures, per se, during the exploration of strategic alternative process for obvious reasons, but we have been actively managing that process and addressing that process over the last several months.

And as we continue to evolve the organization through the reformation process in 2016, and start to experience hopefully a more stable environment when it comes to foreign currency, we do believe that we will be able to start to move towards -- more quickly towards that 10% EBITDA target. However, it does not necessarily pin itself on how big or little the apparel initiative is.

Okay. And then Aaron, maybe if you can just help us understand a little bit more granularly with respect to the cadence of SG&A as the year progresses. It sounds like there's some timing -- there's some distinct timing differences that will influence how that unfolds.

Most of the timing will actually relate around the restructuring charges that we outlined of $3 million to $4 million. We've been working on the reformation process, which we outlined during our Q3 call, for the last several months. And so, we have put a lot of this into motion, and so we do believe that for the most part, we'll have a nice rhythm to how we go about achieving these targets, as it relates to SG&A. Now, obviously, there will be the typical seasonal trends that it will follow, which if you look at 2015, that will provide you a good indication or proxy as to how we expect that to roll out, but it really will be around the restructuring activities, as far as the different timing components.

Okay, and then I guess, finishing up on the apparel piece, leading up to what began this transition last year, a big focus was improving the retail presentation and having a more robust direct-to-consumer piece. It sounds like there's more movement on the e-commerce portion of the direct to consumer. Is there a fundamental change in how you're viewing your presentation at retail, with respect to either partners that you're partnering with, and/or how you're viewing the presentation of the actual product at retail? So that there's a better -- a more definitive embracement of the brand?

So I believe my answer is that we continue to focus on trying to optimize how we appear at retail. We are -- and as you point out, we're pushing a lot on e-commerce and direct-to-consumer. We are doing a lot with point-of-purchase fixturing, in order to enhance how the product is displayed with our closest retail partners, and we do expect that will help to differentiate the product in the market as we move forward. But what we're seeking to do is to recognize where this product can really be sold, work closely with that retail customer, and begin to push the product through channels where we know it can be successful.

Does that mean that there is a change in the number of wholesale partners, whether up or down, that you'll be partnering with, with apparel?

I don't believe that there's any fundamental change. The desire is to simply focus and target the product better at what we're seeking to do, so that we can drive sell through and improve the position of the brand going forward.

Okay. So improve productivity of existing doors, basically.

Yes.

Okay. Great. I'll turn over the questions to someone else. Thanks very much. Good luck.

(Operator Instructions)

Jim Duffy, Stifel.

Aaron, I have a couple questions, looking for more clarity around the 10% EBITDA margin objective. You had mentioned excluded overhead costs. How much of those overhead costs, and just explain a little bit about what those overhead costs are associated with; is that the Connecticut office expense?

No, so what those relate to are the corporate overhead costs, or the costs associated with being publicly traded or non-directly attributable to the operations of Black Diamond and PIEPS.

Okay what's the number?

Approximately $4 million of cash charges.

Okay. And then what are the D&A assumptions?

Yes, so for 2016, our D&A assumption is right around $3.5 million.

Okay. And that's a good run rate for 2017 assuming --?

Given -- right now, with the way that we are approaching the business from the CapEx and the D&A perspective is more of a maintenance. Obviously, we're making investments in new tooling and other parts of the business to continue to further our innovation and our overall operations. However, we're not expecting significant CapEx assumptions into the outgoing years. And so the $2.5 million number that I provided as part of the 2016 guidance is a number that continue to utilize; same with the D&A assumption.

Okay. Very good. And then the point you made around lower currency volatility in the gross margins, maybe I'm slow on the uptake here, but can you explain that in more detail? Does that assume some recovery in currencies to get you back to some historical gross margin, or does it relate to pricing action, hedge contracts? Help me think through that.

Yes, just the latter. And so obviously, if we were to start to see a little bit of retraction or strengthening of the foreign currencies, it would help us out. But the way that we're thinking about it is that we're obviously in a volatile marketplace right now, and in order to help stabilize some of that, we are actively managing our foreign currency contracts to mitigate some of this exposure. And so that will obviously start to benefit us as we head into 2017, just being able to more actively manage that, versus where we were in 2015 coming into 2016.

But then also it does relate to pricing opportunities as well. And we recognize that out there in the marketplace, foreign currency is having an impact. It is making our product more expensive, and so we need to be sensitive to that on a global basis; however we will continue to -- we evaluate this process on a continuous basis, and we'll continue to do so, and where we believe that there are certain opportunities, whether they be geographically or via the different product categories, where we can be opportunistic, we will do so, but we are obviously sensitive to that component.

Got you. That's helpful. And then final question, can you just share some of the thought process on share repurchases versus the use of cash for acquisitions?

Yes, so we will continue to be active in the marketplace and continue to be opportunistic with our repurchases. However, the primary focus is around the redeployment strategy, as we believe that is the greatest opportunity in terms of shareholder value, and the maximization of our NOLs. And so, yes, we will continue to be active. We will be opportunistic. We have been. Also, please keep in mind though, that we are limited as to the amount that we can repurchase on a daily basis. And so we'll just continue to manage through the process. But obviously, once again, our focus is on redeploying the assets into -- redeploying the capital into diversifying assets.

Great. Thanks for that.

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

We'd like to thank everyone for listening to today's call, and we look forward to speaking to you when we report our first-quarter results, which we expect in early May of 2016. Thanks again for joining us.

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