Clarus Corp (CLAR) 2016 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 financial results for the third quarter ended September 30, 2016. Joining us today are Black Diamond Inc Chief Administrative Officer and CFO, Aaron Kuehne; Black Diamond Equipment President, John Walbrecht; 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'd like to turn the call over to Mr. Slach to read 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, Kelly. 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 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 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 and contracted products, as well as foreign currency fluctuations; the Company's ability to utilize its net operating 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 of the date hereof. The Company assumes no obligation to update any forward-looking statements to reflect events or circumstances after the date of this call.

I would like to remind everyone the call will be available for replay through November 14 starting at 8 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 formally introduce Black Diamond Equipment's newly appointed President, John Walbrecht. John is an industry veteran with extensive experience that spans over a 30-year career. Prior to joining Black Diamond, he served as the President and CEO of Mountain Hardware, a manufacturer of high-tech active outdoor clothing and equipment and camping accessories and a subsidiary of Columbia Sportswear. Prior to his role with Mountain Hardware, John served as President and CEO of Phoenix Outdoor, an international group of clothing and equipment brands. He also served in senior leadership roles at Spider Active Sports, Timberland and Doc Martens, among others. So with that, I will now turn the call over to John, who will provide some high-level commentary on the third quarter. John?

Thank you, Cody, and good afternoon, everyone. It's a pleasure to be joining you today and I'm honored to be part of the Black Diamond team. At the close of the market today Black Diamond Inc released its earnings for the third quarter ended September 30, 2016. Following my brief opening remarks, our Chief Administrative Officer and CFO, Aaron Kuehne, will review the Company's third-quarter 2016 financial performance and our outlook for the remainder of 2016 year. Following Aaron's remarks I will provide some additional commentary and I will leave some time for questions and answers at the end.

The third quarter was once again highlighted by healthy demand for our climbing and mountain equipment across all geographic regions. The quarter was also characterized by stability within our independent global distributor business, solid execution of our pre-season orders for fall, improved fulfillment rates, and healthier inventory levels which drove strong at-once orders. Our third quarter was also impacted by a weaker euro, higher costs associated with our manufacturing which we repatriated from China back to our US headquarters.

That said, the Company made steady improvements during the quarter in efficiency, quality, and output. We believe that the repatriation has us well positioned us to achieve higher gross margins in 2017 and beyond, along with improved levels of services to our customers and better working capital management. Before going any further, I would like to turn the call over to our Chief Administrative Officer and CFO, Aaron Kuehne, for a detailed financial overview of the third quarter. Aaron?

Thank you, John, and good afternoon, everyone. For clarity, any comparisons made to prior periods are from continuing operations and exclude the results of POC whose sale we completed last October. Sales in the third quarter of 2016 increased slightly to $39.4 million compared to $39.3 million in the same year-ago quarter. Excluding the impact of foreign-exchange, sales were up 3% due to strong climb and mountain equipment product growth across all of our geographic regions.

Gross margin in the third quarter was 31.3% compared to 36% in the same period last year. Foreign currency headwinds accounted for 190 basis points of this decline. Excluding the impact of foreign currency exchange, gross margin was 33.2%. The 280 basis point year-over-year decline in gross margin on a constant-currency basis was the result of a combination of an unfavorable mix of lower-margin products and additional cost associated with the continued ramp of Black Diamond's recently repatriated manufacturing activities from Asia to the US.

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 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 experience from these weaker currencies.

Third-quarter SG&A, which excludes restructuring, merger, and integration and transaction costs, was down 19% to $11.5 million, compared to $14.2 million in the same period last year. This decline is a direct result of the reformation that we announced the last year and the realization of the savings that we forecasted for that restructuring.

During Q3 we incurred restructuring charges of $282,000, associated with our European headquarter relocation and the formal closure of our manufacturing operations in China. We expect only modest incremental restructuring charges for the remainder of the year.

Net loss from continuing operations in the third quarter was $400,000 or a loss of $0.01 per diluted share, compared to a net loss from continuing operations of $50.8 million or $1.55 per diluted share in the year-ago quarter. Please recall the third quarter of 2015 included a discreet charge to income tax expense of $49.9 million related to an increase in our valuation allowance on deferred tax assets.

Adjusted net income from continuing operations, which excludes non-cash charges as well as restructuring costs, was $1.7 million or $0.06 per diluted share in the third quarter of 2016, compared to an adjusted net income from continuing operations of $700,000 or $0.02 per diluted share in the year-ago quarter. Adjusted EBITDA increased 61% to $1.7 million compared to the third quarter of 2015, primarily due to lower SG&A.

Moving on to the balance sheet and cash flows. Cash at September 30, 2016 totaled $96 million compared to cash and marketable securities of $98.2 million at December 31, 2015. During the third quarter we repurchased approximately 278,000 shares of our outstanding common stock for a total cost of approximately $1.3 million, at an average price of $4.52 per share. For the nine-month period, the Company has repurchased a total of 1.2 million shares of common stock for a total investment of $5.1 million.

This meaningful increase in cash at September 30, is largely a result of the Company is continuing focus on inventory control and improved working capital management. September 30, is typically a high watermark for inventory, yet current levels are tracking 17% below Q3 2015, or approximately $9 million lower.

The Company has now permanently eliminated safety stock levels of inventory that we carried in 2015 through the repatriation of manufacturing from China. Needless to say, we believe that we are well on track to achieving the targeted $5 million inventory reduction in 2016.

As of today, approximately $17.8 million remains on our $30 million stock repurchase program and we expect to continue to be 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 September 30, 2016, our NOL balance remained at approximately $166 million.

Total debt was $21.4 million which includes $22.6 million of 5% subordinated notes due in 2017 and $108,000 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.

Our 2016 sales outlook 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 of our Chinese manufacturing assets and ramp-up in Salt Lake City during 2016, we expect gross margin 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. The $49 million includes approximately $4 million of cash corporate overhead expenditures. Finally, all of this guidance assumes the euro will trade around $1.08 for the remainder of the year.

At this point in time it continues to be too early to provide any specific guidance or details around the redeployment of our capital. 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. This concludes my prepared remarks. Now I will turn the call back over to John.

Thanks, Aaron. Since accepting my role just four weeks ago, I have been immersed in the business, spending considerable time with many of the great people that made Black Diamond Equipment and PIEPS the strong brands they are today. During this time I have compiled the following observations that support my decision to join such great brands.

After a period of considerable restructuring I believe strongly that Black Diamond Equipment is well placed for its next phase of growth. Our core categories of climb and mountain are up in every region, as retail sell-through has been strong and our focused apparel businesses has experienced solid momentum. Our direct-to-consumer business continues also to be strong, providing increasing demand for our brands and our products.

Due to increased demand, product availability issues continue to cloud our margins. We are pleased that our Company's in-house manufacturing operations made significant progress during the quarter with respect to both output and efficiency. Our European headquarter transition is complete and we expect the business to be set for profitable growth. Taking all of these highlights together, I believe that Black Diamond Equipment is in a very strong position to build further confidence and consistency with our retail partners.

Now a bit more detail on these discussion points. The repatriation. We have experienced a significant improvement in inventory supply for our core climbing hard goods. Our manufacturing operations here in Salt Lake have shown steady improvement in efficiency, quality and output since the shutdown and transfer from China to the US. We believe that the recall and quality concerns from earlier in the year are behind us and that our overall manufacturing operations are greatly improved.

North America and direct-to-consumer. Our North American business, particularly in the US, continues to perform well due to the continued strength 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 continue to characterize our North American dealer base as solid.

In addition, our direct-to-consumer business is resonating quite well with our core consumers, proving that our brand website is resonating with our followers. We believe wholesale follows e-commerce sales growth and thus, creating optimism and the expectation that our wholesale business is well-positioned for the future.

Europe. Quarter three marked the first full quarter of operations for our new European headquarters in Innsbruck, Austria. The team is exceeding expectations and the organization is now oriented around a channel development sales and service model that focuses on both specialty and strategic accounts. The region benefited from the recovery of back-ordered products, on in-house manufacturing of climbing hardware and the ability to maintain at-once orders for replenishment sales via our inventory availability.

This was a balance by caution across the dealer base for our ski products, given the poor winter conditions that dominate the recent memory. However, we have experienced similar trepidation across all retail bases around the world. Looking toward 2017, bookings in Europe are strong and we credit the entire Black Diamond Equipment European team for their great efforts in execution and positioning the region for what we expect will be profitable growth in such a short transition period.

International global distributors. The stabilization we described last quarter in our independent global distributor business which covers the rest of the world regions, includes large markets like Asia, continued through our third quarter. Solid execution with pre-season orders, healthier inventories levels in several key markets resulted in increased at-once ASAP orders. Significant effort has gone into encouraging distributors to increase their Black Diamond Equipment brand presence and experience with our retailers.

We are seeing more Black Diamond Equipment shop-in-shops and even a new Black Diamond retail store opening inside a climbing gym in Beijing. For the balance of 2016 we will continue to focus our energy on our key partners in Asia, Australia, and Eastern Europe.

Apparel. We have focused on the apparel business in order to speak directly to our core consumer while also achieving industry-appropriate margins. This has been accomplished by more intense focus on our core consumer and by designing products that are more approachable from a fit and price perspective. We have experienced solid momentum from this targeted strategy. Our upcoming sales and marketing program for apparel will be centered around the new breathable insulated First Light Hoody which features Schoeller and PrimaLoft technologies, as well as other similar award-winning products.

Hot products that drove our quarter three performance. I would like to highlight a few products that resonated particularly well during this quarter. As I mentioned, our core climb and mountain products continue to perform strong, so a few of the call-outs.

First, we successfully launched our ropes into the North American market place. This marks Black Diamonds reentry into the stable category for climbing. Second, we successfully launched of new lights, the Lola, the Icon, the Ion and the Sprinter for the holiday season. The Helio carbon skis out of Austria and the Helio carbon ski poles, both of which received awards, as well is great response to their limited early launch. We continue to convert airbag consumers to our JetForce technology, our Cirque Backcountry Ski Packs, PIEPS Micro Beacons and the updated iProbe technology.

As we look forward to spring 2017 we expect several new product launches. In our core climbing business we will continue to focus our efforts on climbing gym consumers. Highlight will include the zone harness and the kids full-body harness, which rounds out our harness assortment for the growing number of families getting into the indoor climbing momentum. We will continue to emphasize climbing accessories that are targeted at the gym climber.

In our apparel business we look forward to updated climbing sportswear and the Liquid Point Shell which is our best selling Gore shell. In our lighting and trekking pole business we continue to be a market-leading leader while taking additional market share. Highlights of this business will include the Iota headlamp which is a super light and compact rechargeable headlamp. We will have updated Icon and Ion headlamps with increased lumens and functionality, as well as updated Alpine series trekking poles and launches into additional women's trekking poles.

Looking forward to fall 2017, our ski category is being curated towards avalanche safety and back-country skiing. Our apparel line is expected to launch new premium taped Gore down ski jackets and down hoodies. And we will continue to focus on climbing sportswear for both the fall and winter gym climbing seasons. Also in 2017, we plan to feature new men's and women's four-season climbing harnesses and a new ultra-light vision harness for Alpine and skiing mountaineering.

PR and awards. On the PR front, Black Diamond equipment continues to win multiple awards, this time for our innovative fall 2016 equipment and apparel. In North America we won two prestigious Backpacker Editors Choice awards for our First Light Hoody and the Helio carbon ski pole.

We won three Backcountry Gear Magazine Gear Guide Select awards for the Boundary 107 ski, the Helio 116 ski and the Helio 95 ski. Our PIEPS Micro Avalanche Beacon was awarded three Skiers Editors Pick. We won Powder Magazine Skiers Choice award for Boundary 107 and the Helio 105 skis.

We were awarded Transworld Snowboarding tech and improved for our Saga 40 JetForce airpack and the new crew glove. We were awarded Best in Show for our Iota Headlamp from GearJunkie.com at the Summer Outdoor Retailer Show. And finally, five of our products were featured in Outside Magazine's buyer guide. The carbon ski pole, the Helio shell jacket, Cirque 45 pack, our heavyweight waterproof gloves and our Razor Carbon Pro ski poles.

In the UK, our Hot Forged Hybrid Hoody and Cosmo Headlamp received the Editor's Choice award from Outdoor Enthusiast. We moderated a web featuring focus on our Helio 88, Helio 105 and Boundary 115 skis on FrancisSkiPass.com. And our Vapor Helmet received best-in-class recognition from Alpin Magazin in Germany, as we continue to connect with grassroots climbing and backcountry skiing audiences through our sports and our community efforts.

In addition, three new Black Diamond Equipment branded gyms opened in the United Kingdom, one in Germany and two in Sweden, all featuring Black Diamond branded concept shops. From a retail marketing perspective in North America we are supporting fall 2016 sell-through with our key distributors through point-of-purchase kits to our top 150 dealers. We installed 11 Black Diamond Equipment brand windows in the US and built six custom shop-in-shop installations in key specialty retailers and climbing gyms around the country.

The fall 2016 Black Diamond tour was confirmed for 12 ski mountaineering and climbing athlete tour stops which will support key ski dealers and climbing gyms here in the US. In Europe we installed new in-store imagery, window display, headlamp displays and apparel tables across Europe in Austria, Switzerland, Germany, France, Italy, Slovakia, and Norway.

Connecting with our community and supporting our e-commerce business with a solid media and advertising strategy continues to make real progress. We experienced an approximate 15% increase in Instagram followers during Q3 to nearly 335,000. Engagement rates continue to rise. We began BD employees Instagram campaign to share our internal stoke and brand point of view. Our Live, Climb, Repeat Instagram hashtag now has over 55,000 photos and 86% increase in just the last five months, driven by our social media strategy.

We launched the women's edition of the Black Diamond boot camp with four video installments featuring some of the best female climbers in the world. And this has created already over 50,000 views. Finally, our fall 2016 advertising campaigns have begun to support apparel. Our First Light Hoody and our Helio Shell and equipment with our Helio skis and our PIEPS Beacon technology in major outdoor and ski publications across North America and Europe.

Before I conclude and open up for questions, please keep in mind that I assumed my leadership responsibility for Black Diamond Equipment and PIEPS just four weeks ago. During this time I have immersed myself in most aspects of the business in both North America and in Europe. Among other things, I have spent time in the factory, in some supply chains, with some of our largest retailers and attended our North American and international sales meetings.

From a timing perspective, I am enthusiastic and fortunate to join Black Diamond at this time. We believe that the Company is completing its reformation and restructuring associated with the repatriation from China and with the sale of the Gregory Mountain Products and POC assets.

I have also recently launched its 2017 budgeting process, as well as we will be completing our three-year strategic plan cycle. We expect to complete those processes and provide an update early next year. In the interim, we hope to continue to drive Black Diamond Equipment and PIEPS business towards a targeted year-end adjusted EBITDA rate of approximately 10%, setting us up for what we expect to be a strong and growing and profitable 2017. I would now like to turn the call back over to our operator for questions before closing my remarks.

(Operator Instructions)

Dave King, ROTH Capital Partners.

Thanks, good afternoon, guys. First off, and congrats on a pretty decent quarter, according to the outlook, particularly in the context of fourth quarter, the implied guidance, I think it is $41 million, call it, at the midpoint. That decline -- or that implies a decline in revenue, I think, versus some of the flat trends you reported in the quarter, constant currency growth even.

Can you talk about what is reflected in that? Any color you can share in terms of October trends? Anything to be concerned about from an in-demand perspective? It sounds like climb and mountain are going pretty well, especially domestically. Maybe you could just give us some color in terms of how to think about that.

You bet. You are exactly right with the way to frame this up as far as the fourth quarter and our expectations. That does imply that we will see a slight decline in the fourth quarter and that is consistent with what we are seeing and is primarily due to this continued recalibration or focused effort with our apparel initiative.

We have been very open about -- as we headed into 2016 we would be taking on that initiative or that activity as far as just right-sizing the apparel initiative and making it more focused on the core consumer. So that is primarily what is being reflected in our guidance and expected results for Q4.

Okay. So then assumedly the offset is climb and mountain equipment is still growing. I would think that is a bigger piece of the business, the climb and mountain, in terms of equipment. Am I just not thinking about it the right way? Is apparel was a big contributor in terms of comparison, for comparison's sake? What's the right way to be --?

Yes. You are exactly correct. We are seeing solid momentum, or solid performance within our core business, primarily that of climb and mountain products. It's just that apparel still represented a good portion for comparison reasons last year versus what we are expecting this year.

Okay. I get it, that is good color. And then in terms of the use of capital, obviously redeploying cash, any thoughts in general that you can share in terms of M&A conversations in terms of how those are going? Then, more importantly, I was encouraged to see further buy-back activity during the quarter. Any willingness there or anything that would cause you to think about your diversification strategy a little bit and maybe consider more aggressive repurchases at this juncture? Anything to precluding you from doing that? Stock still trading at a discount to book? Is it mainly a function of wanting to monetize the NOLs? What are the thoughts there? Thanks.

Very good question, Dave. I will take that one as well. First of all, as it relates to the redeployment, as communicated in our prepared remarks, it is still too early to really dive into the specifics as it relates to that activity. We are definitely still pursuing a redeployment strategy. We have looked at a lot of different opportunities, however, as we all know, it takes time for these things to develop.

As it relates to the share repurchase program, we continue to be opportunistic. We are not going to limit ourselves or put up a certain guardrails as far as that activity. We will continue to be opportunistic. But more importantly we are very focused on the redeployment strategy as well as monetizing or utilizing the NOLs. It fits right in line with what you just described and that is the overall strategy.

Okay, that helps. I will step back and good luck as you close the year.

Thanks, Dave. Appreciate it.

Andrew Burns, D.A. Davidson.

Good afternoon. John, congratulations on your new position. I understand that you just arrived. I just wanted to ask a high-level question, looking at your background, you do have technical outerwear experience and Black Diamond here just resetting that category? As you look into 2017 and beyond, do you see any blowing proof there to actually drive some incremental growth or any areas to put your stamp on from the upcoming season?

I think we believe that apparel is a long-term opportunity for Black Diamond. It fits nicely into both our core category of climb and mountain. We look forward to the future of developing the right team and product mix to be successful with both our specialty and our key accounts in that arena.

Any thoughts on new mountain category opportunities? I think I read an article with a quote from you about sleeping bags, but expanding the Black Diamond brand and adjacent mountain categories, what is the opportunity there?

As we look to development in 2018, in the spring season, we will look at potential other opportunities that are either adjacent to or complementary to what we are already doing in climbing and mountain. As the season kicks off here this week with trade shows and calls, we will start to share some of those ideas with our best retailers. And based on the response, the feedback we get, we will look at opportunities that our retailers believe are right for Black Diamond and for them.

Okay. Thanks and good luck. One more for Aaron, if I can, in terms of the regional margin profile, now that you have your headquarters in Austria, just the thoughts in terms of the margin potential there versus the US. What is going to drive the expansion going forward more from a regional perspective?

Yes. You bet, first and foremost, the team over there, the Black Diamond European team has done a fantastic job with that transition. It has gone according to plan and it has actually exceeded our expectations, it really has. We have a young enthusiastic team that is pursuing a lot of different opportunities for the business and it is very focused on the sales and marketing activities.

One of the reasons for the move from Basel, Switzerland to Innsbruck, Austria was to provide us with a better cost model and mitigate some foreign currency risks that exist over in Europe, especially when prior to the transition we had a cost basis denominated in Swiss francs, whereas now we are denominated in euros. We have been able to realize a lot of the benefits associated with that move in terms of a lower cost basis and also creating a more natural hedge. Actually in Q3 we already saw some profitability peek its head in that region, and that is encouraging,

We will continue to see some margin pressure at the gross margin level, because of the way that the currencies are trading right now, primarily the euro. However, with the right-sizing of the business and transitioning that to a euro-based functional currency, if you will, we are optimistic that region will no longer be a drag in terms of overall profitability, but actually be accretive.

Thanks and good luck.

Appreciate it.

Thank you.

Jim Duffy, Stifel.

Thanks. Hi, guys. John, welcome to you.

Thank you, Jim.

Aaron, a couple of questions for you on the gross margin. Can you isolate the mix factors impacting gross margin and speak a little bit about what those were?

You bet. The mix was about 180 basis point impact, both in terms of product and geographic mix. From a geographic standpoint we saw our independent global distributors actually stabilize and increase. They had a good year-over-year quarter, as well as we continue to see an increase in demand for our climbing and mountain categories, with climbing still facing some challenges when it comes to gross margins associated with the ramp-up of our manufacturing activities here in Salt Lake.

The combination of those two caused a decline of about -- as I say, about 180 basis points on a year-over-year basis. The remaining 100 basis point decline outside of the foreign currency is associated with the movement of discontinued merchandise or inventory that we are cleaning off the books.

Okay. That's helpful, thank you. And then any updates on when you expect to be adequately supplying demand in the categories challenged by the Salt Lake manufacturing?

We continue to work monthly as we strengthen our team, both in output and efficiency. We are optimistic that by the end of the fourth quarter and going into the new year that we will be back on trend. Suffice it that the demand doesn't get further ahead of where we are at from a supply plan. That was the first perfect storm this season.

Got it, okay. Last one, Aaron, the currency assumptions, how do you see the influence on gross margin progressing? When could we expect gross margin to possibly inflect positive?

If you would have asked me this a couple weeks ago, I would've said we were going to start to see that already. But then the foreign currencies have weakened again. As you are aware, 40% of our business is denominated in foreign currencies, with about 25% or so being euro-denominated, 7% being Canadian-denominated and the balance being denominated in pounds, [not in] Swiss francs, for the most part, equally weighted.

[Force] enough we have seen some strengthening of the Canadian dollar compared to the dollar over the last nine months. And we have also continued to be fairly opportunistic with our hedging strategies. So as we head into 2017, I am hopeful that we can start to see some gains there.

However a bit cautiously optimistic, depending on what happens over the next couple of months with the currencies themselves. But I do not expect them to be a drag like they have been on a year-over-year -- or on a comparative basis similar to what we have experienced in 2016.

Thanks for all that color.

You bet. Thanks, Jim.

(Operator Instructions)

Mark Smith, Feltl and Company

Hi, guys. First off, can you tell us where you are at in the process of lowering apparel inventory and when you feel like you will have that right-sized?

We came into 2016 with a bit of an overhang from 2015 and even a little bit of 2014. But the team has been actively involved in moving that product. We have been developing other channels, primarily outside of North America, to help facilitate the bring-down of that inventory.

As we look at it right now we feel like we're in a pretty good shape. Obviously there's still a little more that we'd like to burn off. But we are expecting, at the end of this year, the first part of next year, that we will be in a really solid position as it relates to apparel inventory.

Okay. Second, could you give us a big-picture reminder of fall/winter versus spring/summer, what the impact would be if we were to get good snow here this winter?

We're very fortunate that we are approximately a 50/50 business, with core climbing and core mountain both sustaining year-round. Obviously every brand in the business hopes and prays for a big winter and that will have a positive impact on categories like ski and apparel for us. So we are optimistic about that, but we plan our business on stable retail partnerships and the estimated normal flow of products.

Great. Thank you.

And with no further questions, at this time I would like to turn the conference back to Mr. Walbrecht for closing remarks.

Thank you. We would like to thank everyone for listening to today's call. We look forward to speaking to you more when we finish and report our fourth-quarter results early in the next year. Thanks again for calling in today and for all of the support for Black Diamond.

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