Clarus Corp (CLAR) 2016 Q2 法說會逐字稿

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Black Diamond Incorporated financial results for the second quarter ended June 30, 2016. Joining us today are Black Diamond Incorporated's Chief Administrative Officer-CFO Aaron Kuehne; Black Diamond Equipment President Mark Ritchie; and the Company's Director of Investor Relations, Cody Slach. Following the remarks, we will open the call for your questions.

Before we go any further, I'd 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, Catherine.

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 acquisition or 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 in foreign suppliers. The Company's availability to protect patents, trademarks and other intellectual property rights. Fluctuations in the price, availability and quality of raw materials and 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 SEC, 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 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 everybody that this call will be available for re-play through August 15 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 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, everyone.

At the close of the market today, Black Diamond Inc. released its earnings for the second quarter ended June 30, 2016. Following my opening remarks, our Chief Administrative Officer and CFO, Aaron Kuehne, will review the Company's second-quarter 2016 financial performance and our outlook for the remainder of 2016. Following Aaron's remarks, I will provide some additional commentary, and we will leave time for a question-and-answer period.

Our second quarter was highlighted by growth in our North American business and strength in our global direct-to-consumer channel. We also experienced low double-digit growth in our independent global distributor business, as markets like Japan and Korea have begun to replenish their inventory after a period of industry consolidation and other market headwinds. We continued to experience foreign exchange challenges, particularly with the euro, which impacted both revenue and gross margin.

In addition, despite record factory output levels in May and June, the manufacturing activities that we repatriated from China back to Salt Lake City continued to operate at higher costs, further impacting gross margin. We're actively engaged in activities designed to improve, manage and measure factory efficiencies, and expect to achieve higher gross margin, low overhead and reduced response time to our customers in 2017.

Before going any further, I would like to turn the call over to our CFO, Aaron Kuehne. Aaron?

Thank you, Mark, and good afternoon, everyone.

For clarity, any comparisons made to prior periods are from continuing operations, and exclude the results of POC. Sales in the second quarter of 2016 decreased 3% to $29.1 million compared to $30.1 million in the same year-ago quarter. The decrease was primarily driven by the weakening of foreign currencies against the US dollar.

Due to the recent volatile foreign exchange markets, second-quarter sales were negatively impacted by $1.1 million, or approximately 340 basis points. So on a constant currency basis, Q2 sales were up slightly to $30.2 million. Consolidated gross margin in the second quarter was 28.6% compared to 35% in the same period last year. A portion of the decrease was due to a 250-basis point headwind from foreign currency. Excluding the impact of foreign exchange, constant currency gross margin was 31.1%.

Gross margins were also negatively impacted by an unfavorable product mix and additional costs associated with Black Diamond's recently repatriated manufacturing activities from Asia to the US. Excluding the impact of foreign currency and the repatriation of manufacturing activities, gross margin would have been approximately 33.5%.

As a reminder, our overall sales and gross margin are impacted by unfavorable foreign currency changes on a transactional basis. The primary cost of our inventory is denominated in US dollars, while approximately 40% 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 movement, 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.

During the second quarter, we received an arbitral award on agreed terms of $2 million related to certain claims against the formal owner of PIEPS, associated with the voluntary recall of all the PIEPS VECTOR avalanche transceivers during the year ended December 31, 2013. Second-quarter SG&A, which excludes restructuring, merger and integration transaction costs, was down 18% to $11.6 million. This decline was due to the realization of savings from a restructuring plan implemented in 2015.

A portion of our cost savings were offset by $275,000 of transition and integration costs associated with our reformation, which we read as one-time, but then qualify for classification as restructuring expenses. Our reformation activities were largely completed as of June 30, so we expect subsequent quarters to reflect a more representative cost structure of our business.

During Q2, we incurred restructuring charges of $531,000 related to severance, the move of our European headquarter relocation, and costs associated with the closure of our manufacturing operations in July. We also incurred $133,000 in transaction costs to retain Rothschild for assistance with our capital redeployment and diversification strategy.

Net loss from continuing operations in the second quarter was a loss of $3.2 million, or a loss of $0.10 per diluted share, compared to a net loss from continuing operations of $3.8 million, or a loss of $0.12 per diluted share in the year-ago quarter. Adjusted net loss from continuing operations -- which excludes non-cash charges, as well as restructuring and transaction costs, and the arbitral award -- was $2.5 million or a loss of $0.08 per diluted share in the second quarter of 2016. Compared to an adjusted net loss from continuing operations of $2.2 million, or a loss of $0.07 per diluted share in the year-ago quarter. Adjusted EBITDA was a negative $2.3 million compared to a negative $1.9 million in the second quarter of 2015, primarily driven by the aforementioned reduction in sales and gross margin.

Moving on to the balance sheet and cash flow, cash and available-for-sale marketable securities at June 30, 2016, totaled $98.4 million, or approximately $3.25 per share, compared to $98.2 million at December 31, 2015. Total debt was $21 million, which includes $20.9 million of 5% subordinated notes due in 2017, and $107,000 in foreign term notes, compared to total debt of $20.1 million at December 31, 2015. For flexibility, we continue to maintain a $20 million revolving credit facility, which matures on April 1, 2017.

Compared to the end of 2015, our inventory decreased 9% to $46.8 million, and our working capital balance declined 19% to $130.4 million. This helped us generate $4.7 million in free cash flow in the first six months of the year. We believe the decrease in inventory experienced during the six months ended June 30, 2016, represents a permanent elimination of the higher inventory levels of inventory that we were purposely carrying during 2015. Although we expect to experience a seasonal increase in the inventory and non-cash working capital during Q3, we continue to expect our inventory levels to decrease by approximately $5 million during 2016.

During the second quarter, we repurchased approximately 553,000 shares of our outstanding common stock for a total cost of approximately $2.3 million at an average price of $4.16 per share. As of today, approximately $19 million remains on our $30-million stock repurchase program, and we expect to continue to the opportunistic in accumulating additional shares. 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 June 30, 2016, our NOL balance remained at approximately $166 million.

Our sales outlook for 2016 remains unchanged. 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, or flat to up 3% compared to 2015. As a result of the repatriation ramp-up, we do not expect to recover enough gross margin in the second half of 2016, and therefore, expect gross margins on a reported basis to be around 30%, compared to 34.9% in 2015. On a constant currency basis, we expect gross margin to be approximately 33.5%.

We expect SG&A in 2016 to be around $49 million, which is a decrease of $9.5 million, or 16% from 2015. Please recall, the $49 million includes approximately $4 million of cash corporate overhead expenditures.

Finally, our guidance assumes the euro will trade around $1.08 for the remainder of the year. During 2016, we expect to generate free cash flows of around $5 million before corporate costs and related activities. We continue to target combined 10% EBITDA margins for Black Diamond Equipment and PIEPS in 2017. At this point in time, it continues to be too early to provide any specific guidance or details around the redeployment of our capital. Since we last spoke to you, financial markets appear to be improving, and it remains our intention to, at the appropriate time, acquire high-quality, durable cash flow-producing assets with expected enterprise values in the range of $250 million to $500 million.

At this time, we expect to invest in assets unrelated to outdoor equipment in order to diversify our business. And as noted earlier, we have retained 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. We remain focused on our mission to be the number one climbing and backcountry ski brand in the world, while selling more of our core products deeper into existing channels, growing our e-commerce business globally and returning the brand to its 2011 cost structure. We made many strides towards this goal in the second quarter, but before I discuss these, I'd first like to provide an update on our recently repatriated manufacturing activities from Asia to the US.

This initiative was designed to drive competitive benefits via enhanced product speed-to-market, as well as by improving working capital. In our first quarter, we noted that stronger-than-anticipated demand for certain new products, combined with a supply chain that was still ramping up, resulted in slower-than-anticipated output and increased costs. During Q1, we also determined to recall some products that have been recently manufactured in our Salt Lake City headquarters. We believe that we are past the most difficult aspects of the recalls and have reinforced quality assurance processes and controls, while further augmenting our quality assurance leadership with an industry-leading professional whose first day at Black Diamond is today.

The back-half of the second quarter also saw record output levels, satisfying a significant portion of our growing demand for climbing equipment. As we seek to gradually reduce costs and the need for increased output, we expect gross margins to improve as we move through the remainder of 2016, and we expect these initiatives to be accretive in 2017.

I'd like to now provide a bit of insight into sales activities in some of the various markets that we serve. Our North American business continues to perform well, and increased low single-digits in the quarter, driven by growth in our foundational climb and mountain categories. Our larger key dealers continue to drive strong sell-through of our products. And despite the noise in the overall retail landscape today, we generally characterize our North American dealer base as solid. We also have a very diversified mix of retail channels like e-commerce that helps to insulate some of the challenges brick and mortar is currently facing. We plan to take this diversified multi-channel retail approach to the rest of our markets in the near future, beginning with Europe.

Speaking of Europe, foreign currency continues to have a negative impact of approximately 900 basis points on our business in Europe compared to the prior year. We are also continuing to see consolidation at retail throughout the region. We soft-launched e-commerce in Europe to test demand and fulfill from our global inventory, and we expect to launch a comprehensive direct-to-consumer strategy in the region in the near future.

We've experienced positive feedback on the new sales structure that focuses on specialty and strategic accounts. Our refocus on climbing and the doubling of lighting has received positively by agents and retailers. Further, our new sales office located in Innsbruck, Austria, is fully functional, providing a re-invigorated and energized approach to servicing the European marketplace. The early signs of stabilization we described last quarter in our independent global distributor business, which covers our rest-of-world regions, including large markets in Asia, continued through our second quarter. Solid execution with places in orders and strong at-once, or ASAP, orders are the drivers of the low double-digit growth I described in my opening remarks.

All of the significant markets that make up the IGD business saw growth in key categories, such as light and trekking poles. This trend is encouraging, and reaffirms our belief that the inventory hangover that so negatively impacted us last year appears to be subsiding. We believe that overall market demand for our climbing gear remains strong. In spring 2016, our core climbing product continued to grow, as an ever-increasing number of new climbers are introduced to the sport through climbing gyms.

Strong products for us this past spring included the Solution, Momentum, Primrose, and Couloir harnesses, the Half Dome helmet, climbing accessories, particularly the Mojo Chalk Bags, Creek climbing packs, bouldering products and rock-climbing sportswear, especially the Credo and Notion pants. Lighting and trekking continued to be market-leading, and also gained additional share. Our spot headlamp was a real winner, benefiting from the momentum generated as a result of a key account early launch. We are following this same path with our Storm product for fall 2016, and based on orders so far, it's already gaining traction.

Our Alpine Carbon and Trail Trekking poles were also strong this spring, and though the revenue expectations of our apparel initiative have been right-sized over the last couple of seasons, our sportswear and logowear continued to gain traction, with solid sell-through rates with key accounts. Finally, our Liquor Point Gore Shell continues to be the number one style in technical outerwear.

An early look into spring 2017 will, we believe, continue to show our core climbing focus, with a continued effort on the climbing gym consumer. Some highlights of the line include the ATC Pilot belay device, which we believe is the future of passive belay devices for single-pitch indoor and outdoor climbing. Kid's full-body harnesses, which rounds out the harness assortment for the growing number of families getting into indoor climbing. And the introduction of some special new BD products which are expected to be limited initially to the North American lodge, with key retail partners.

In our lighting business, we believe that the Iota headlamp will be a super light and compact, rechargeable headlamp. We also have updated Icon, ReVolt and Ion headlights with increased lumens and functionality. We also continue to make progress on the marketing front. In North America, reorganization is underway to make the department more nimble in regards to creating digital content and supporting transactional sales marketing needs, while still focusing on trade and sports and community marketing.

We made several new marketing specialist hires, including a Director of Content and Creative Services, with several other hires planned for Q3. We will continue our strong grassroots programs to connect with core climbing consumers across the US, with a strong focus on the growing trend of new climbers coming to our sport.

We continue to drive our brand awareness by sponsoring some of the largest outdoor climbing events, including Red Rock Rendezvous in Las Vegas; Rock and Rave in Atlanta; the ROCK Project Tour, with stops in Las Vegas; Bishop, California; and Los Angeles. This 10-day education and stewardship tour will consist of eight BD athletes in partnership with the Access Fund.

From a trade-marketing perspective, in North America, we've continued to deploy our visual merchandising and brand awareness strategy in the retail and gym environments. Our Black Diamond TV film tour made 10 stops throughout North America, supporting key dealers and climbing gyms with film screenings and athlete presentations.

In Europe, since May 1, the new marketing department, which is tied directly to the sales department, is up and running, with a focus on trade and digital marketing. We also plan to capitalize on the gym-to-crag movement in Europe through gym partnerships, which also include partnerships with surrounding key retailers. We continue to support Europe with in-store events and installations to create demand and support sell-through. Today we have presence in 25 windows and three shop-in-shops throughout the region. In our international global distributor business, shop-in-shops were installed in dealer locations in Mexico and Chile.

Now moving on to our digital and social media marketing, we launched the three latest episodes of BDTV in three languages. These feature high-quality, engaging content that speaks to climbers everywhere. We've experienced continued growth of our social media channels and followers with a concentrated push to include more product-specific marketing to support our dot-com business. In Europe, we are beginning a new push to extend BD's social media reach, combined with a more European-focused SEO strategy.

We have continued to scale back our apparel business in order to speak directly to our core consumer, while also achieving industry-appropriate margins. This has been accomplished by a more intense focus on our core consumer, and by designing products that are more approachable from a fit and price perspective. To be clear, however, we remain absolutely committed to our apparel business, as we seek to recalibrate the line and the resources toward more humble objectives. With that, I'd now like to turn the call back over to the operator for Q&A, before my closing remarks. Operator?

(Operator Instructions)

Dave King, Roth Capital Partners.

Thanks, good afternoon, guys. I guess first off, on the gross margin, if I heard you correctly, I think it sounded like the repatriation may have waived by about 100 basis points or something during the quarter. If that is indeed correct, I guess, how should we be thinking about the guidance reduction for the year? I think it was about 250 to 350 basis points or so.

What were sort of the components of that? Aaron, I think you sort of alluded to them, but I'm just trying to get a better understanding of -- if you're able to quantify some of them maybe, I think [ForEx] might have been 20 basis points, but I'm wondering how we should be thinking the repatriation over the course of the year? And then are there any other items that are sort of weighing? Thank you.

Yes, good question, Dave. So first of all, our original guidance around gross margin was 32.5% to 33.5% gross margins. And as just updated in both our earnings release and as well as the prepared remarks, we're now looking at around 30% gross margins. The primary factor here is that of our manufacturing activities that we have repatriated from China to the US. In Q2, for example, it did have a negative impact on gross margins of about 240 basis points. Year-to-date, it's been right around 250 to 260 basis points.

And this is the primary driver or the driver for lowering our overall gross margin guidance for the entire year. We just don't see ourselves being able to recover all of the gross margin variances that have occurred as a result of the ramp-up in the back-half, and therefore, have updated the gross margin guidance.

Okay. Maybe along those lines, in terms of the repatriation, so where does that all -- I think you guys sort of talked about this in the prepared remarks. But where does all that stand, to what still needs to be done in terms of getting everything sort of up and running and in-line, so we can -- to just give yourself and us some comfort around the assumptions in that cadence around the gross margin? And what still needs to happen, and what has all occurred at this point?

So Dave, at this point, all of the product that was to be scheduled to be repatriated to Salt Lake City has been, so we are now building everything here that we need to. What we have done is, as a result of these quality problems, was focus, number one, on quality. Number two, on output, to meet the increased demand. And then number three on cost.

We are now at the point where we have met the majority of the back-order demand that existed, and we are focusing hard on a series of projects. Everything from a very detailed implementation of lean manufacturing processes on the floor, to a review of design components for product coming into the manufacturing operation, to assure that we can manufacture products in as a an efficient manner as possible.

So what we see is, over the course of the balance of this year, is a series of projects that pull cost out of that manufacturing operation so that we can achieve the sorts of margins that we budgeted coming into the year. This is a cross-functional, cross-organizational initiative, with everybody from the manufacturing folks to supply chain, all the way up to the design group, deeply embedded in this process. Because we all understand that margins, particularly in the hardware categories, are where we have to put our focus.

Okay, that's great color, Mark. And then just more broadly, in terms of the environment, it sounded, Mark, from your comments, that you're feeling pretty good out there, especially maybe relative to what we're hearing from others in North America. Maybe you can just talk about that a little bit? Is that mainly driven then in the climbing equipment side?

And maybe just -- can you touch on how you're feeling about apparel, both domestically and internationally, at this point? How has the response been to the scale-back that you've done, and how is that product selling through? And channel inventories, all that kind of stuff -- just how you're feeling about the environment?

Okay, thank you. There's a lot there. I'll try to hit the big pieces. As it relates to North America and climbing, as was mentioned, we're seeing strong growth there. And if we had the sorts of product availability that we had forecasted to build, we would be in a really good position. So from that perspective, we're feeling bullish about things.

As it relates to the retail environment, which was, I believe a component of your question, what we're seeing from the markets that we serve is, reasonable strength. The specialty retailers that we deal with are demonstrating strength. Aaron can cite some of the specifics and facts. But we're not having problems with specialty.

As it relates to the larger-box folks that we've been working with, obviously as we discussed in the Q1 review, we've had issues with a couple of them, but there is strength with everybody else. And our exposure was reasonably minimized due to our tight credit management philosophies. So we don't feel a tremendous amount of pressure from the retail environment, though there are certainly parts of it that we don't play in, that are under a lot of pressure. But we seem to be doing pretty well from Black Diamond's perspective.

As it relates to the issue that you touched on with apparel, I guess what I'll summarize by saying is that, particularly in North America, what we're seeing is, the reduction in the line size, combined with the very clear focus on our core consumer -- the rock climber and backcountry skier, is an acknowledgment internally that, that's the target market we're going after.

And with the focus on fit and price points starting to really impact sell-through, we are getting good feedback from the market at this point -- much improved over what it has been. That Black Diamond has taken the right road here and is starting to make some real inroads into this piece of the market that we're seeking to get after in detail. So I don't have a lot of specifics as it relates to sell-through; most of it is anecdotal. But all of it is very positive for the team here in Salt Lake that continues to drive the line forward.

That's great to hear, and thanks for the color. I will step back, and good luck with the rest of the year.

Thanks, Dave.

Jim Duffy, Stifel.

Thanks, good afternoon, guys. Hey, so I'm interested in some more detail on the progression of the repatriation challenges. Do you still have issues with suppliers, or is that now sorted? Is there any way to quantify missed sales due to inventory shortages? How has that impacted your inventory levels? A little more detail would be helpful. I'll probably have some follow-ups.

So there's a lot of complexity there also, but I'll do my best. In the Q1 review, we did discuss the fact that we had supply chain shortcomings that had led to some of our quality and back-order problems. I will say that the majority of those supply chain issues have been resolved. The nature of our manufacturing operation is that there's always been some background noise of that variety, but it's not of significance, and at this point, generally speaking, it is not of significance. So we are manufacturing product is at, as noted, record levels in order to get out of the back-order situation.

So generally speaking, that is what's happening. And demand is being met. We have the majority of the back-order covered in North America. Europe lags a little bit, due to just transportation lead times and the like. But generally speaking, we've made great strides on the demand-fulfillment side.

As it relates to, again, the cost side, where we're focusing hard for the rest of this year and then going forward, is in simplification of design for product coming into manufacturing, consistency of components and materials, and refinement of process, to assure that we can be as efficient and as effective as possible. And that's, again, what the team is highly focused on.

Okay. A few follow-ups related to that. How much has that impacted your inventory levels? Are the inventory levels understated relative to where they would be otherwise? And then what's the cost burden on inventory from the inefficiencies? And how long would you expect it to take that rat to move through the snake, so to speak?

Yes, good questions. And this is Aaron, Jim. So first of all, it has provided us with a little bit better-than-anticipated benefit or lowering of inventory than what we had initially forecasted coming into the year, as to where we would be at the end of Q2. That range is anywhere from about $2 million to $3 million. But at the same time, we have continued to see great strides in the overall management of our inventory levels, and we're pretty pleased with it.

Also, as it relates to the additional costs that will continue to flow through the system, we are seeing that continue to impact us through H2, and potentially into the first quarter or two of 2017. It really depends on how quickly we can eliminate some of these inefficiencies or gain some of the benefits that Mark has articulated, throughout the course of the year.

Okay. And then last one for me. Do you have a confident view as to when you'll be producing such said inventories on the books at the expected cost levels?

As stated, we are dedicating the balance of this year towards achieving those sorts of numbers. So pieces of it will come sooner than that, but what we're calling as the end date for that activity is December 31. When we get into 2017, as noted, the goal is going to be to drive hardware margins, or the product that we manufacture ourselves, beyond those sorts of levels, so that we can get them up to where we really want them. But the balance of this year is to get back to budgeted levels.

Okay. Thank you for that.

Andrew Burns, D.A. Davidson.

Thanks, good afternoon. Just a question on growth potential in the core climbing and mountain categories. As a private Company, you grew at a double-digit pace for a prolonged period of time there via market share gains and new category introductions. And I get the sense, with the renewed focus on hard goods, that, that could ultimately lead to some acceleration in new product introductions in core climbing and mountain categories. So as we move past production issues and the distributor inventory issues outside the US, what do you think the underlying growth could be of those core categories for Black Diamond? Thanks.

My perspective on that question is that, at this point, Black Diamond, within the context of climbing and backcountry ski -- for climbing in particular, since that was your question -- I think that there's probably about 30% of the marketplace that we do not yet penetrate due to product offering. So there is some upside, given the fact that we are not in all of the market categories, and given the growth in the overall climbing category, for us to be able to grow going forward.

So we do have some significant product initiatives that we will be talking about in the future around those sorts of things. But they are still in the -- early in the phase, and we don't want to talk about them too broadly. But there is opportunity, to be sure.

Great, thanks. And maybe one opportunity in particular if you could expand on, the focus on the gym, climbing gyms versus outdoor? Clearly, there's really robust participation growth there. If you have the ability to quantify the equipment market opportunity there, or any color would be helpful? Thanks.

There's no ability on our part to quantify the growth attributable to the gym, to gyms. However, it is obvious to anyone near the sport that gyms are pulling people in at a rapid rate, and a lot of those people are attracted to this brand. And therefore, we have product initiatives around that. We are certainly attracted to that, and do see that as a strong potential. What that means from a quantified perspective, I don't have for you.

Thanks, and good luck.

Mark Smith, Feltl and Company.

Hi, guys. First off, could you just give us any more updates on the headquarters moving to Europe, cost-cutting initiatives that you've got there? And any additional SG&A that we may see lumped in here in the second half of the year from some of those moves?

So I will very quickly just remind everyone of the tactics behind it, and then Aaron can speak to any numbers. But as we've discussed previously, the move was from Basel, Switzerland to Innsbruck, Austria, with a downsizing by about 25% of the size of the office. And a full refocusing on sales and marketing activities and deep integration into Salt Lake City headquarters, as opposed to being more of a standalone sort of activity.

As we've talked about, that move is completed. The staff is just about filled. The office is really beautiful, highly energized, with a brand-new approach towards business, and as stated, a very tight integration into Salt Lake City. So at this point, we've been able to accomplish all of the initiatives associated with the move that we had undertaken. Do you have a comment on the cost piece that we haven't discussed previously?

Yes, so from a cost perspective as it relates to the move of the European headquarters, we are seeing that, that initial $2.2 million or so of SG&A savings is on track of being realized. And as commented in our prepared remarks, we do anticipate that Q3 and Q4, the SG&A spend there will be more representative of what the business will look like going forward, recognizing that Q1 especially had some of these reformation activities still kicking into effect. And so we didn't see the full benefit of that in Q1, but we did see a lot of that already in Q2. But in Q3 and Q4, we do anticipate starting to realize the bulk of these savings, or more the manifestation of our reformation activities.

Okay, perfect. So it sounds like everything is worked into the $49 million that you gave us as guidance for SG&A?

For SG&A, correct.

Perfect. And then just lastly, can you give any update on the apparel reorganization? And then insight into kind of your comfort with inventory levels today, and specifically to apparel?

As it relates to the organization and structure, and as we have discussed, we have recalibrated our revenue expectations, and that therefore all the pieces that follow it -- what the line looks like, who the target markets are, what the products should be and feel and fit and cost like. So that piece is what we've done, and that's been embedded into the organization at this point. So I think from a go-forward perspective, we are appropriately calibrated. And we have the next several seasons lined out pretty well, and continue to work to improve things and drive the entire initiative forward.

There is, of course -- as we have undone this and reduced and recalibrated the strategy, there has been some inventory that we have dealt with over the course of the last while that has -- we have been pushing through -- at slightly reduced margins, of course. But that continues to be a bit of a hangover that we continue to work through over the balance of this year.

And that was something that we did anticipate, or factored into how we looked at 2016. We knew that we'd be dealing with a bit of an apparel inventory overhang, and are actively working through that -- through those inventory levels so that we can come out of 2016 as clean as possible.

Okay. So it sounds like still some negative impact here for the next quarter or two, but as you move through towards spring, we should be cleared up?

Yes, that is the goal.

Excellent. Thank you, guys.

Thank you. And at this time, I'd like to turn the conference back over to Mr. Ritchie for any additional or closing remarks.

Thank you, Catherine. We would like to thank everyone for listening to today's call, and we look forward to speaking with you when we report our third-quarter results, which we'd expect in early November. Thanks again for joining us.

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