Clarus Corp (CLAR) 2018 Q1 法說會逐字稿

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's financial results for the first quarter ended March 31, 2018. Today's call is being recorded. Joining us today are Clarus Corporation's President, John Walbrecht; Chief Administrative Officer and CFO, Aaron Kuehne; and the company's External Director of Investor Relations, Cody Slach. Following their remarks, we'll open the call for 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, Cynthia. Please note that during this 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, including the ability to obtain sufficient financing; financial strength of the company's customers; the company's ability to implement its growth strategy, including its ability to organically grow each of its historical product lines; the ability of the company to identify potential acquisition or investment opportunities as part of its acquisition strategy; the company's ability to successfully execute its acquisition strategy or that any such acquisition 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 successfully integrate Sierra Bullets, L.L.C.; changes in governmental regulation, legislation or public opinion relating to the manufacture and sale of bullets by our Sierra segment and the possession and use of firearms and ammunition by our customers; the company's ability to protect patents, trademarks and other intellectual property rights; any breaches of, or interruptions in, our information systems; 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 carryforwards; 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 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'd like to remind everyone this call will be available for replay through May 21, starting at 8:00 p.m. 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 claruscorp.com. Any redistribution, retransmission or rebroadcast of this call in any way without the expressed written consent of Clarus is strictly prohibited.

Now I would like to turn the call over to the President of Clarus, John Walbrecht. John?

Thank you, Cody, and good afternoon, everyone. It's a pleasure to be joining you. Our first quarter results were a continued reflection that our long-term strategy is gaining momentum.

We grew first quarter sales by 28% compared to the same period last year and experienced 8% plus growth when excluding our Sierra Bullet acquisition. Our climbing category grew 20% due to continued rise in gym climbing popularity. Driving the category was increases and success of our new climbing shoes and the continued growth in our harnesses, ropes, helmets and climb accessories.

We experienced 45% growth in apparel or 75% growth when compared to our in-line apparel business, despite approximately $1 million in orders we were not able to fulfill due to robust demand. This was driven by a strong market reaction to our new rainwear line as well as our bottoms and sportswear programs.

Secondly, we translated this growth into a 390 basis point improvement in our gross margins to 33.5% or 580 basis points to 35.4%, excluding the fair value inventory step-up associated with the Sierra acquisition. The integration of Sierra, favorable product and distribution mix and continued improvements within our sourcing and manufacturing activities continue to drive strong margin growth.

Next, we were profitable on our GAAP net income basis and grew adjusted EBITDA by 590% to $4.3 million. We also generated $6.4 million in free cash flow, which we used to reduce our debt. Given these financial results, we continue to gain momentum across all of our key growth drivers within Black Diamond.

As promised to our retail partners, we also continued to outpace our competition through product innovation, aggressive marketing, editorial impressions, on-time delivery, strong fulfillments and our "ease to do business with" strategy.

We have also continued to make significant progress integrating Sierra into the Claris family and are well underway with our plans to maximize the Sierra brand into its full potential. We experienced a stable book of business during the first quarter, with our domestic OEM and green box partners due to stronger-than-expected consumer demand.

And as announced last week, we are active in executing the sales and marketing plan within our domestic retail accounts, including the hiring of Mayon Sargeant as Sierra's Vice President of Sales, and the onboarding of Outtech as Sierra's national sales agency. Alongside our fast-paced innovations, we expect both Mayon and Outtech will help add to the growing momentum Sierra is experiencing in 2018.

Now on to some of the comments by region. Sales in Europe grew 30% in the first quarter due to a strong winter, which drove demand in our ski and snow safety business. Given the dry winter in much of North America, we were able to allocate some of the inventory to Europe to satisfy this significant demand.

Our independent global distributor market, which covers key regions outside of Europe and North America, including large markets in Asia, was up 57%. Excluding the impacts of the Sierra acquisition, our independent global distributor market was up 24%. This was driven by various initiatives put in place in the second half of last year to enhance their integration with our internal sales meeting and stronger educational efforts surrounding our different product categories.

In North America, sales increased 21%, but declined 6% due to the impact of the acquisition of Sierra Bullets. As we came into Q1 2018, given the favorable winter conditions in Europe versus that of North America, we made the strategic decision to allocate a disproportionate amount of our key snow safety inventory items such as beacons and Jetforce, to the European region in order to satisfy the increased levels of demand in this region.

Although this helped fuel an increase of 30% in Europe, it also limited product availability in North America. As a result, and along with significant lower levels of discontinued merchandise, North America experienced a decline compared to the prior year's quarter. North America in-line business was flat compared to the prior year's quarter.

With that, I'd like to turn the call over to Aaron to speak in more detail about our first quarter's financial results. Aaron?

Thank you, John, and good afternoon, everyone. Sales in the first quarter of 2018 increased 28% to $53.3 million compared to $41.6 million in the same year-ago quarter. And on a constant currency basis, sales were up 24%. Along with the strong category and regional growth dynamics John mentioned in his opening remarks, the increase was due to our acquisition of Sierra Bullets on August 21, 2017, which added $8.2 million to our sales in the first quarter. Excluding the acquisition, sales were up 8%.

To provide some perspective to our consolidated sales results, within our Black Diamond business, we experienced a healthy 17% increase in preseason orders with at once orders growing by 8%. As a result, our in-line business grew in the first quarter by 12%. This was partially offset by a 43% decrease in the amount of discontinued merchandise sold during the quarter, further reflecting the improvements being made on our supply chain, inventory management and streamlined apparel initiative.

In fact, this point also ties in nicely to our gross margin performance. Gross margin in the first quarter increased 390 basis points to 33.5% compared to 29.6% in the year-ago quarter. The increase was primarily due to a favorable mix of higher-margin products, including strong apparel growth and distribution channels, the stabilization of our sourcing strategy and more normalized levels of discontinued merchandise as we expected.

Excluding a fair value inventory step-up associated with the Sierra acquisition, adjusted gross margin increased 580 basis points in the first quarter to 35.4%. And excluding the acquisition of Sierra, gross margin was 33.8%. Selling, general and administrative expenses in the first quarter increased to $17.1 million compared to $12.5 million in the year-ago quarter.

The increase was attributed to $1.8 million in expenses due to the inclusion of Sierra, which includes $0.7 million of amortization expense associated with the allocation of the Sierra purchase price and higher selling expenses in our European operations, which were in direct correlation to 30% sales growth in the region and general costs related to initiatives seeking to increase Black Diamond equipments brand equity and drive new product introductions.

Net income in the first quarter improved to $0.4 million or $0.01 per diluted share compared to a net loss of $1.5 million or a loss of $0.05 per diluted share in the year-ago quarter. Net income in the first quarter of 2018 included $3.2 million of noncash items, $0.2 million in transaction costs and minimal restructuring costs, compared to $1.9 million of noncash items and minimal restructuring costs in the first quarter of 2017.

Adjusted net income, which excludes the noncash items as well as transaction and restructuring costs, increased 635% to $3.8 million or $0.13 per diluted share compared to adjusted net income of $0.5 million or $0.02 per diluted share in the first quarter of 2017. Adjusted EBITDA increased 590% to $4.3 million compared to $0.6 million in the first quarter of 2017.

Moving onto the balance sheet. At March 31, 2018, cash and cash equivalents totaled $2.2 million compared to $1.9 million at December 31, 2017. During the first quarter of 2018, we generated $6.4 million in free cash flow, which was partially used to pay down our debt balance to $14.9 million compared to $20.8 million at December 31, 2017. We continue to generate healthy amounts of cash during April of 2018, generating approximately $3 million in cash and paying down our debt balances to approximately $11.9 million.

I'd now like to address our 2018 financial outlook, which remains unchanged. We continue to anticipate fiscal year 2018 sales to grow 17% to 20% to approximately $200 million to $205 million compared to actual sales of $170.7 million in 2017. On a pro forma basis, as if we had owned Sierra for all of 2017, we anticipate fiscal year of 2018 sales to grow 5% to 7% on pro forma sales of $191.2 million in 2017, which includes high single to low double-digit growth rates at Black Diamond and low single-digit growth rates at Sierra.

On a constant currency basis, we expect sales to range between $197.5 million to $202.5 million or up 16% to 19% compared to 2017. We expect adjusted EBITDA margin to be approximately 8%, which includes $5 million of cash corporate overhead expenditures. This compares to an adjusted EBITDA margin of 3.6% in 2017. And we expect to generate free cash flows of $5 million to $10 million in 2018 after approximately $3 million in capital expenditures, which is dependent upon any necessary increases in inventory to support growth opportunities in the marketplace for spring 2019.

As you may have seen at the close of the market today, we also announced that we have introduced an intended modified Dutch auction tender offer to purchase up to $7.2 million in value of shares of our common stock at a price per share not greater than $7.20 nor less than $6.60. We believe this offer provides an efficient means for shareholders wishing to monetize their stock. We believe it also reflects our continued commitment to enhancing value for all of our shareholders as well as our confidence in the future of the company. The modified Dutch auction tender offer is expected to commence on May 8, 2018, and is currently intended to expire on June 5, 2018, unless extended.

We are also in the process of negotiating a new credit facility where we expect to substantially upsize the overall commitment. We are currently contemplating different proposals with the intention of increasing our credit limit to $75 million, with an accordion feature providing an additional $50 million to $75 million. We believe this will provide us with the ability to continue to grow and scale our business into the future, while providing us with greater flexibility in activating our various strategic initiatives. We also believe this is yet another manifestation that our strategy is working as we continue to improve the fundamentals of the business and gain greater confidence with our business partners.

Although we cannot provide any assurance that we will be able to do so, we are seeking to enter into a new credit facility prior to the end of Q2 2018. As part of our expectation of entering into a new credit facility during Q2 2018, we also anticipate implementing an annual dividend of $0.10 per share or $0.025 per share per quarter at the end of Q2 of 2018. The initiation of a quarterly dividend demonstrates, one, our confidence in the financial management and strength of our company; two, our belief that we are settling into a more natural and consistent rhythm in our business; and three, provides a platform for a broader investor base.

We also believe our high levels of growth, operating leverage and attendant cash flows from operations will allow us to continue to pursue opportunistic M&A while returning capital to stockholders. Ultimately, this strategic decision reinforces our commitment to delivering value to stockholders while investing for future growth. We cannot provide any assurance that we will implement a dividend or the amount thereof, and any planned dividend will be subject to the approval by our Board of Directors.

Before passing the call back over to John, 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 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 March 31, 2018, we estimate that we have available NOL carryforwards for U.S. federal income tax purposes of approximately $157 million. This concludes my prepared remarks.

Now I'll turn the call back over to John.

Thanks, Aaron. Before moving to our strategic outlook, I'd like to recap our first quarter results.

We experienced strong sales growth, driven by our apparel and climb businesses, particularly with products that we innovated and introduced in the past several months. We have translated this growth into continued growth margin improvements, both in the types of channels we sell-through as well as the execution of our sourcing and manufacturing strategies. This has helped drive strong improvements in net income, adjusted EBITDA and free cash flow.

These results are being supported by sales and marketing campaigns that are driving enhanced consumer awareness, which we see in healthy ASAPs and very strong bookings. In fact, this month, you will notice that we are on the back cover of Outside Magazine. While at the same time, we were on the front cover of the Red Bull Bulletin Magazine. And we are well on our way into integrating Sierra and building cash flow to further our acquisition capabilities.

These results set the tone for the remainder of 2018. We are very excited about our brand's momentum heading into the fall '18 season, which we expect will feature the introduction of more than 50 new products across our 3 major categories.

In climb, we continued our innovations with ice, launching the industry's lightest ultralight ice screw; and the new reactor ice tool. New innovations in chalk, which were evidenced by the launch of Pure Gold, a chalk additive that increases moisture absorption by 10x. We also expect the new developments in bouldering pads and bouldering accessories, alongside new colors in our rock shoe collection, will continue to build momentum in the ever-growing bouldering category.

With the growing popularity of backcountry skiing and boarding, Black Diamond continued to push the innovations in our ski and snow safety categories with the new Helio ski collection and the award-winning Boundary Pro series, new BD ultra-light bindings, new Black Diamond beacons, new Whippet ski poles, expanded skins, the new Recon stretch jacket and pant, Helio Active ski touring shell expanded gloves and the launch of our carbon trekking skis with built-in skins.

Finally, mountain continues to see growth, with BD launching numerous different products, including the zipped backpacking light, new packs and the expansion of our award-winning First Light Jacket series.

As we look to the future in spring '19, we plan to launch Black Diamond's most aggressive collection of innovations in the outdoor industry to date, with a plan to release more than 100 new products across all 4 key categories of climb, mountain, apparel and footwear.

In regards to Sierra and moving forward into 2018, we are well underway in our expected strategy to replicate the playbook we are now executing with Black Diamond. In fact, like Black Diamond's category segmentation of climb, ski and mountain, at Sierra, we are focused on compete, hunt, protect and defend. In 2018, we will see our increased focus on product innovation.

As previously mentioned, we also recently hired Mayon Sargeant and Sierra -- as Sierra's Vice President of Sales, and partner with Outtech to serve as Sierra's national sales agency to strengthen Sierra's sales and marketing efforts as we look to increase the exposure and momentum of the brand.

Sierra plans to make investments that will seek to enhance both sales and marketing, including social and digital capabilities, a new print campaign, strengthen our retail partnerships, improving our fulfillment, expanding within law enforcement and military channels and, of course, continue to innovate new products.

Given our momentum, we believe our strategy is both working and will create shareholder value. However, we will still maintain a focus on acquisitions that may benefit from our unique outdoor experience and look forward to updating our shareholders when appropriate.

In the meantime, today's modified Dutch auction tender offer announcement and the anticipated dividend are other examples of our dedication to further aligning our interests with those of our shareholders, and we look forward to continuing our expectation of generating total returns in the future.

I'd now like to turn the call back over to our operator for Q&A before my closing remarks.

(Operator Instructions) Our first question will come from Dave King with Roth Capital.

Looks like you had another nice quarter for the Black Diamond business, so I guess, I have a few questions on Sierra to better understand it. It looks like the margins there, gross margins, that is, were down a little bit. Even if I back out the inventory step-up, is that simply input cost increases or did volumes have an impact? And then, it sounds like the consumer demand side has been strong. How's the demand been on the OEM side?

So I will answer on your demand questions there. We continue to see demand for Sierra, both on the OEM business as well as on the green box business, and that hasn't slowed down. We continue to see that both with current products as well as new product innovations. I will let Aaron answer in regards to the -- your question regarding margins.

Yes, so we -- as noted, we saw or experienced substantial increases in our gross margins, primarily on the adjusted basis of 580 basis points. If you break that down by the different businesses, Black Diamond was 33.8% compared to 29.6% last year. And if you exclude the step up in inventory cost of $1 million or so, the Sierra business actually generated 44.3% gross margins, which are right in line with our expectations there. And frankly, from our perspective, quite solid. And so we actually saw an improved -- compared to our expectations coming into the year, because we were seeing some elevated costs associated with copper and lead pricing. But we actually saw, due to the demand increase, an improvement in the overall efficiency of our manufacturing activities. And also via our hedging activities for copper and lead with our suppliers, it also provided us with additional improvements. So coming out of Q1, we're actually, frankly, quite pleased with the 44.3% posted by Sierra on an adjusted basis.

Okay. Okay, that helps with good color. And then when you expect -- it sounds like you already have some new product introductions for Sierra beginning to contribute. I guess, when do you really expect to start getting a material benefit? And then similarly, post these new hires, et cetera, when should we expect the marketing there to ramp, if at all? Yes, I guess, that's my question.

Okay. So Dave, we will -- we launched our first new product at SHOT Show in January, and we will continue to launch new projects and product innovations for Sierra going into the fall season. Right now, we are booking both the fall season and, ultimately, the spring season. And we can -- we believe that our best opportunities for marketing and speaking to the consumer start with midsummer as we move into hunt season and in -- and throughout the summer competitions. So we look forward to the third and fourth quarters, though we will continue to see this type of growth here in the first quarter and moving forward.

Okay. And then are you -- is the current run rate on the spend for Sierra what you kind of expect? Or are you going to be ramping some of the marketing to support that?

No. Our run rate is where we expect to be, our current run rate.

Okay, great. Okay. And then one last one for me, and I'll step back. In terms of the expanded debt facility, is that -- obviously, there's investments in the business. So besides that, is that an effort to get more acquisitive? What's the current view on that front? How is the environment currently? And then what sort of assets or what industries would make sense?

So as it relates to the credit facility, David, it's purely because of the continued strength in the business that we're seeing greater opportunities with our different business partners to expand that facility, and it's really so that we can continue to be opportunistic on the M&A front. That's really the genesis behind the increased credit facility, nothing more. As you've seen, we're generating healthy amounts of free cash flow, and we plan on doing -- continuing to do so. Recognize the -- for Q2 and Q3, we'll be heading into our seasonal working capital peaks. But outside of that, it's really just so that we can continue to have a platform to operate on and activate the different strategic initiatives that we have in place or would like to be able to activate, and M&A is definitely part of that.

(Operator Instructions) And our next question will come from Chris Krueger with Lake Street Capital Markets.

In your prepared remarks, you indicated that your debt has been paid down. I kind of missed one number. Did you say -- did you give a current number, not just the Q1 ending, but like where it stands today?

Yes, we did, and it's $11.9 million. So in April alone, we generated another $3 million of cash.

Okay. Then last -- over the weekend was a big NRA Show. Did you guys have a presence there? It looks like they had record attendance of north of 80,000 people. Any feedback from that?

We did have a booth at the NRA Show, in which we really talked about gun safety instruction as well as gave tricks and hints on reloading to consumer questions. Our booth was very busy, and we continue to gain momentum for the Sierra brand and for what it uniquely stands for in the marketplace.

Okay, and last question. Last week, one of your larger competitors, Vista, announced that they're putting some of their brands up for sale. Just wondering what your outlook was on that, if that is going to make the market more easy to make acquisitions, bringing the price down? How do you look at that?

Actually, we've always said we believe there is a strength to our management team in the outdoor group area, and we'll continue to look for opportunities that we think align with what we do with Black Diamond and Sierra, and specifically, the outdoor side. We'll look at all opportunities as they come and arrive and see if we think that the strength of those brands and what we bring to the table as a management team and as a group will increase 1 plus 1 to more than 3, in which case we'll look.

Our next question will come from Michael Kawamoto with D.A. Davidson.

Sorry, I jumped on late. But did you give an update on the DTC business and how that's trending and maybe your plans for the channel and where you see that mix trending long term?

We didn't, but can. So first of all, congrats, and welcome to the role and we look forward to working with you. Our DTC business represents about 3% of our current sales. It is an area that, though we use the brand and the marketing to increase our brand awareness and we see it growing into the next quarters, we are a specialty retailer, first and foremost, and so typically provide our best support and strategies to our best retail partners. And DTC is there to ensure that our brand presence aligns with the marketplace and the uniqueness of the Black Diamond brand.

Got it. And then on the apparel side, how has that fall order book been shaping up and maybe how you view the growth in that apparel category going forward?

Apparel is our fastest-growing category. We're very excited about what we're doing in the apparel business, seen by the first quarter here. We continue to gain momentum in the apparel business. It represents approximately 8% to 10% of our business, and we continue to see it growing as a function. And we -- as we've said before, we treat apparel like equipment. The idea that you come to BD for apparel that is specific to your performance, either it's lighter or it's faster or it's stronger than its competition. And therefore, we look at apparel as another way to innovate the equipment business. And it's resonating well with our consumers in each categories of ski, climb and mountain as well as in outerwear and sportswear. This quarter was driven strong by bottoms and sportswear, even though we left well over $1 million on the table and more demand than supply, and the success and the launch of our Stretch Rainwear program. So we will continue to look at that, and we're pleased with the momentum and growth of apparel.

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

Thank you. We'd like to thank everyone for listening to today's call. And we look forward to speaking with you when we report our second quarter results. Thanks again for joining.

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