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Black Diamond, Inc. (NASDAQ:BDE)

Q2 2014 Results Earnings Conference Call

August 11, 2014, 05:00 PM ET

Executives

Cody Slach - Director of Investor Relations

Peter R. Metcalf - President and Chief Executive Officer,

Aaron J. Kuehne - Chief Financial Officer, Principal Accounting Officer, Treasurer and Secretary

Analysts

Camilo Lyon - Canaccord Genuity

Andrew Burns - DA Davidson

Joe Bess - ROTH Capital Partners

Joe Altobello - Oppenheimer

Sean McGowan - Needham & Company.

Jim Duffy - Stifel

Mark Smith - Feltl & Co

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Black Diamond's Financial Results for the Second Quarter ended June 30, 2014.

Joining us today are Black Diamond's CEO, Mr. Peter Metcalf; the company's CFO, Mr. Aaron Kuehne; and the company's Director of Investor Relations, Mr. Cody Slach. Following their remarks, we'll open the call for your questions.

Before we go further, I would like to turn the call over to Mr. Slach as he reads the company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.

Cody Slach

Thanks, [Kelvin]. 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 growth strategy, including its ability to organically grow each of its historical product lines, its new apparel line and its recently acquired businesses; the company's ability to successfully integrate and grow acquisitions; 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 the trademarks and other intellectual property rights; fluctuations in the price, availability and quality of raw materials and contracted products; 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 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.

And I would like to remind everyone that this call will be available for replay through August 25, starting at 8 PM Eastern Time tonight. A webcast replay will also be available via the link provided in today’s 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 expressed written consent of Black Diamond, Inc. is strictly prohibited.

Now, I would like to turn the call over to the CEO of Black Diamond, Peter Metcalf. Peter?

Peter Metcalf

Thank you, Cody, and good afternoon, everyone. As you saw at the close of the market today, we issued a press release announcing our financial results of the second quarter ended June 30th, 2014. Strong second quarter results were driven by double-digit sales growth across our Black Diamond, POC and PIEPS brands, as well as strong growth across every product category and region. We attribute these results primarily to the successful introduction of new and innovative hard goods products, the rollout of POC's spring '14 road line and the advancement of our apparel offering.

In addition to strong operating performance, we have now completed or nearly completed all of the important strategic steps contemplated by the strategic pivot that we announced last year. Most importantly, we have officially hired an outstanding new leader in Zeena Freeman, in her role as BD Inc. President, Zeena will be taking over all high-level operating responsibility of the Black Diamond equipment, POC and PIEPS brands including the full P&L and it is our expectation that Zeena will succeed me as CEO no later than June 30th, 2015.

The most important part of Zeena’s background is that for the better part – is the better part of the decade gap working across multiple brands and across multiple functions including retail, brand strategy and operations. She brings to BDE a wonderful combination of the leadership, strategic thinking, brand management, consumer product, apparel, and omni-channel expertise.

Most recently Zeena led Sony's global retail and consumer business development. She has precisely the kind of strategic merchant, global GM, and dynamic brand leader that we have been seeking and we see her as perfectly positioned to lead Black Diamond’s fastest growing brands through an omni-channel environment over the next decade.

While we expect Zeena to succeed me as the next CEO of Black Diamond, I intend to remain very involved with the business for the long term both as a Director and as a Senior Executive responsible for public policy, advocacy, activism on behalf of our community of users, as well as playing integral role with our culture and values. I also expect to have a meaningful level of involvement with product and brand positioning.

Secondly, the strategic pivot also contemplated a series of reorganizational steps to simplify our business and improve both our gross and operating margins. With the help of (indiscernible) Consulting Group, we have embarked on a plan to significantly reduce hard goods SKU by approximately 25% to more efficiently utilize and, hence, reduce the size of our global operating platform and rationalize the overall organization.

We expect these efforts to result in an overall cost optimization of our existing business of approximately $10 million by the end of 2016, with full year savings realized in 2017. A significant part of this plan involves developing alternative sourcing strategies climbing hardware, some of which will likely be North American-based, as we seek to improve gross margins and reduce supply change complexity.

We expect these plans to be finalized and initiated during the third quarter and to produce improved growth and operating margins. We also expect to significantly reduce lead-times and work-in-process inventory during 2015 and 2016.

Third, the final part of our strategic pivot is the sale of Gregory, which was completed in July. The sale simplified our business model, allowed us to costs out of our operating platform, significantly strengthened our balance sheet, and enabled us to utilize a meaningful portion of our NOL. We have several months of work with Samsonite ahead of us to transition some important functions out from underneath of our operations and then when these are complete, we expect to realize some expense savings by the end of the year.

Before I comment further, Aaron Kuehne, our CFO, will discuss our financial results for the second quarter. Following Aaron's remarks, I will make some additional remarks and then we'll open up the call for questions. Aaron?

Aaron J. Kuehne

Thanks, Peter, and good afternoon, everyone. The reported results we issued in today's press release are from continuing operations excluding the results of Gregory Mountain Products, the divestiture of which was completed subsequently to the end of the second quarter. I will discuss these results in detail, but, first, I wanted to provide total sales for the first half and second quarter 2014 including Gregory.

Total sales for the first half of 2014 including Gregory increased 8% to $97.5 million compared to the same period a year ago, which was in line with our prior guidance of $95 million to $100 million. Q2 sales, again, including Gregory increased 10% to $42.9 million. From this point forward all of my financial discussion, consistent with our press release, excludes Gregory and discusses continuing operations.

We're reporting sales from continuing operations in the second quarter of 2014 of $34.4 million compared to $29.2 million during the same year ago quarter, an increase of 18%. The increase was primarily due to an increase in the quantity of new and existing mountain, climb and wools products sold as well as the addition of apparel sold by Black Diamond equipment and the launch of POC’s road cycling collection.

Almost every quarter foreign exchange markets contribute some level of volatility to Black Diamond's financial results due to activities across multiple currencies, primarily the U.S. dollar, the euro, the yen, and Canadian dollar.

Due to immense strengthening of foreign currency against the U.S. dollar on a consolidated level second quarter sales were privately impacted by approximately 70 basis points or $193,000. So on the constant currency basis Q2 sales increased 17%.

Gross margin in the second quarter decreased 30 basis points to 35.9% compared to 36.2% in the same period last year. The decrease was primarily attributable to product and channel mix. During the quarter, we experienced a 28% increase in sales to our independent global distributors.

These are sales at significantly lower average gross margins where our distributors incur all of the selling and distribution costs and we believe this reflects very positively on our brand opportunity globally. Excluding FX we're on a constant currency basis, gross margin would have been 35.5%.

During the quarter, discontinued merchandise, or DM, and production and shipping branches had a negative impact of 240 basis points on gross margin which for comparative purposes is an improvement of 40 basis points compared to the prior-year quarter.

Second quarter SG&A which includes – which excludes restructuring, merger and integration and transaction costs was $18 million compared to $16.1 million in the year ago quarter. The increase reflects continuing investments in the company’s strategic initiatives such as BD Apparel, the transition of certain POC distributors into our in-house operations and the launch of POC’s road cycling collection.

Adjusted net income from continuing operations before non-cash items, a non-GAAP term, decreased slightly to a loss of $3.7 million, or a loss of $0.11 per diluted share, in the second quarter of 2014 compared to a loss of $3.3 million, or a loss of $0.10 per diluted share, in the second quarter of 2013.

In spite of 18% sales growth, working capital decreased $2.6 million during the quarter, reflecting more efficient sourcing and inventory management. Compared to June 30, 2013, total inventory increased during the second quarter by approximately 14%, or $7.7 million, as the company is building inventory in anticipation of a rapidly expanding second half of 2014.

At June 30, we had $17.9 million outstanding under our $30 million revolving line of credit with Zions Bank. Total debt stood at $47.3 million, which includes $17.8 million of 5% subordinated notes due in 2017. However, on July 23, we completed the sale of Gregory to Samsonite for approximately $84.1 million. We have since fully paid down our Zions line of credit and paid off our $9 million Zions term note in full.

The Gregory sale is expected to monetize approximately $30 million of our NOL balance, shielding approximately $10.5 million of cash taxes, leaving the balance of approximately $180 million. In December, we expect to pay approximately $11 million to $13 million in income tax associated with built-in gain taxes that could not be offset by our NOL.

Now looking ahead to our expectations for the second half of 2014. We expect sales to reach between $113 million to $118 million which implies year-over-year organic revenue growth in the 15% to 20% range. We expect gross margins to range between 39.5% to 40.5%, which reflects a 1.6% to 2.6% increase compared to last year’s pro forma gross margins. For modeling purposes, we expect to spend between $40 million to $45 million in SG&A, an increase of up to $5.5 million over the same period last year and generate between $3 million to $6 million of free cash flow before giving effect to the tax payment associated with the Gregory transaction previously mentioned.

During the second half of 2014, we are planning to improve restructuring charges associated with the number of margin enhancing initiatives that Peter described. We expect to quantify these specific charges during the third quarter of 2014. For the full year 2014, we expect sales to range between $192 million to $197 million, which implies year-over-year growth of between 14% to 17% and we expect gross margins to range between 38.5% to 39% or 1.3% to 1.8% year-over-year pro forma improvement.

Preliminarily we are currently planning our 2015 budget cycle around year-over-year sales increases of approximately 10% to 13%; however, this is without the influence of our new Black Diamond, Inc. President Zeena Freeman, who will oversee the full P&L.

The sale of Gregory leaves us with an estimate of $45 million of positive cash balance after the repayment of loans to Zions Bank. During the third quarter, we plan to develop a cash-yielding investment strategy supported by a working capital line with Zions Bank for seasonal working capital purposes and I should remind you that our interest income is expected to be free of federal income tax as a result of our available NOLs.

Before I turn the call back to Peter, I would like to address a few further points related to the sale of Gregory Mountain Products. First, the sale of Gregory was an asset sale. We sold the Gregory business, which had just under $12 million of non-cash working capital as well as intangibles in other assets for $84.1 million. The pro forma information provided as part of our SEC filing on July 28th 2014, only reflects the direct revenues and direct expenses of the Gregory business. This does not include any allocated cost associated with the Gregory business that will be taken out of the business over a period of time.

Furthermore, the timing of the pro forma information filed reflected all apparel expenses with little revenues.

Secondly, we did not sell Gregory to raise capital in order to fund our existing business. We believe the existing business will continue to grow its revenue; experience enhanced gross margins and increase in profitability. We did raise capital through the sale of Gregory to fund the development of a very major omni-channel strategy. As a result, we believe that we have sufficient capital to invest simultaneously in our fastest growing brands and in an omni-channel model.

Third, we believe we have some of the fastest growing assets in the outdoor space, and we are focused on revenue growth and improving gross margin. We believe that, in these two categories, we are greater than most of our peers.

And, fourth, consistent with historical policy, we will not provide segment reporting. The business is too complex and integrated. Also, we do not believe this is helpful from a competitive basis. And as a result, we will continue to report our financial results on a consolidated basis.

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

Peter R. Metcalf

Thank you, Aaron. Before opening the call for questions, I have two objectives. The first is to provide you with some insight into our business plans for fall 2014 and spring 2015. And the second, in light of the recent performance of our share price, is to provide you with some big-picture and longer-term perspective.

As I mentioned in my opening remarks, a strong and well balanced Q2 sales growth is a reflection of demand for our new and innovative hard goods products, continued rapid growth from POC, highlighted by the spring 2014 road line launch and our extended apparel offering.

These results were also achieved in a slightly more cooperative global retail environment than we have experienced in several years. We believe this improvement is due to multiple factors, including more normal seasonal weather patterns, cleaner inventories and a somewhat improving economy in several parts of the world.

These improving macro forces helped Black Diamond equipment’s healthy double-digit sales growth during the quarter. We also experienced strong ASAP sales to serve our Asia distributors as well as in Northern Europe where we are benefiting from our recent move to apply several sales agencies in key markets. We also benefited from a diverse innovative product line that we believe meets the needs of our consumer. Such products include new introductions in lighting, trekking poles as well as climbing gear.

In the second quarter, the buzz and brand awareness from POC continued to grow. As we previously announced, POC partnered with the Garmin-Sharp racing team to be the official helmet and sunglass sponsor of the Tour de France competing cycling team. Many of you may have already seen the significant exposure POC has received during the world's largest annual sporting event which tracks an estimated 3.5 billion viewers in over 180 countries around the world.

The visibility that POC brand during the Tour was timed with our road launch of retail. Q2 mark the shipment of the majority of POC’s inaugural road of deep line and the product is sold out on a bookings basis. All indications from our retail confirm that the line is well positioned for the core cycling enthusiasts and our first-year limited distribution and scarcity strategy appears to have played out well. We believe we are making significant progress in the global centralization of our POC and European distribution capabilities.

On the last earnings call, we notified our investors that we successfully closed POC’s two distribution centers in Sweden and Austria and integrated into a single central European 3PL warehouse. The warehouse is now fully operational and we are on track to deliver BD Apparel in Europe out of the same warehouse for fall 2014 and all of the BD, Inc. products by spring 2016.

We successfully converted POCs independent distribution structure in Japan, Canada, France, Holland and Belgium to an independent sales agency structure. This commission based comp structure puts us in charge of building these important markets by allowing POC to control its own sales and marketing effort while providing higher wholesale margins that we can use to fund this investment.

For fall 2014 – fall 2014 is the first season that will completed benefit from these conversions and are reflected in our second half guidance. In the spring of 2015, we expect to grow POC cycling revenue by increasing the number of SKUs and production quantities at AVIP line as well as increase the number of global doors carrying the line.

We expect to introduce 14 new styles and 43 new SKUs and approximately double our door count to a 1,000 doors in 2015. In addition, we expect to launch our second collection of cycling apparel and gear for spring 2015, which we have labeled an appropriate disposition as Race Day. Race Day has approximately 34 new styles including helmets and 135 new SKUs. These expectations would position us to slightly more than double sales related to the road product in just one year.

Spring 14 marked the first retailing – retail selling season of our spring BD apparel, highlights of the line include alpine and crag climbing apparel such as shirts, hoodies, pants, and likely synthetic outerwear. Although the selling season is still underway, especially in some of the mountain town where we have excellent support, our Salt Lake, European and Japanese operations are largely sold out.

Average sell-through in North America was approximately 15 percentage points higher than our fall 2013 launch at the same point in the season. Overall, we believe that our retailers are encouraged with the sellthrough trends and the decision to targeting more athletic fit has resonated well with our targeted user – the core climber and enthusiast.

Our larger retail partners -- with the spring line as our specialty shops, which is very encouraging. However, we’ve recognized our sellthrough rates need to continue to client before we will reach a level that some of our largest partners like RAI consider a requirement for distributing throughout all or most of their stores.

In our direct-to-consumer business, we found ourselves sold out in the majority of the more popular sizes or the more popular products too early in the season. We will certainly take what we’ve learned from this initial spring selling season and apply it to spring 2015. Nevertheless, our online apparel offering continued to help drive solid double-digit sales growth in our D2C business.

We’re also gearing up for the expected delivery of our fall 2014 apparel line next month, which builds the collection through a more meaningful 1,945 SKUs sold through approximately 800 retail doors. Fall 2014 also marks our women’s outerwear launch and will introduce men’s hardshell and down outerwear.

In North America, we are booked to meet our sales goal, and the vast majority of production is tracking to plans. Outerwear and insulation are driving the bulk of our bookings, and the ratio of men’s to women is 60/40, which we are extremely pleased to hit this ratio in our first full year. European bookings are about where we expect after a dry Central European winter. And our smallest market Japan, after a few soft winters, will likely be more ASAP-driven.

Looking towards our fall 2014 apparel line, our marketing initiatives are built on a two-pronged strategy – build brand equity and drive apparel sell-through. The key components of our fall brand equity campaign are positioning BD as a snow safety brand and communicating our brand positioning, use, design, build, engineer, repeat. We expect to be initiating a large integrated digital and print multimedia campaigns with both powder and outside magazines. We’ll also be incorporating video campaigns, print advertising in five digital catalogs.

Finally, we are the underwriter and sponsor of the Mountain Projects mobile app guidebook, which is potentially the most widely downloaded and regularly utilized mobile app for climbing in North America.

Every time you use it, you see our name, headline and hotlink to something on our site. Since Black Diamond partnered with Mountain project, the app has significantly increased downloads and overall impressions of more than 5.8 million for Black Diamond equipment. We are planning to significantly expand our in-store marketing at key retailers to include apparel, windows, brand kits, tech kits and branded apparel body forms and hangers.

We also expect to be piloting a very robust apparel products seeding program to the staffs of our best retail partners as well as conducting a retail co-op program with key largest specialty retailers and expect to have a significant apparel presence through our sponsorship of two of the biggest climbing events in North America this fall.

Looking towards spring 2015, North America's plan to be 60/40 men’s, women’s and while the spring bookings process is still underway, the average shop door has booked substantially over spring 2014. In both Europe and North America, we are substantially ahead of bookings for spring 2015 than we were at this time last year for spring 2014. We are optimistic that these trends well allow our retailers to be more comfortable taking additional inventory.

In Europe and Asia, all terrain sportswear are reasonably strong while tech apparel is a bit more challenged. With that being said, we believe Europe will hit our spring 2015 booking goals and we expect to closely monitor Japan as we are still early in our bookings process there.

To conclude, I'd like to make five important observations. First, today we announced that our Board of Directors has authorized a discretionary stock repurchase program for up to 10% of our stock. It is not our intention to use up our balance sheet to support our shares however; our board wants to ensure that it has the ability to be optimistic if the market presents any unusual opportunities.

Secondly, since initiating our strategic pivot in late 2013, in addition to solid first half revenue growth, the company has executed against all of the strategic objectives including the sale of Gregory, the hiring of a talented new President, and the development of a series of strategic initiatives to improve margins and profitability.

Thirdly, the company realized 84.1 million in cash; a 2.3 times projected 2014 revenue for its slowest growing, in our opinion leave valuable brand. In our opinion the Gregory sale validated our strategy and underscores the value that can be created through long term investment in our fastest-growing brands.

Based on our current revenue guidance and extrapolating the multiple we achieved in the sale of Gregory to our continuing brands and businesses this implies a minimum pretax breakup asset value of greater than $15 per share.

Fourth, under Zeena Freeman’s leadership over the next 12 to 18 months, we expect to develop plans to augment our growth through an omni-channel strategy, which is likely to involve some form of owned retail business and a significant business in our global direct-to-consumer capability. We expect to share these plans with you in more detail, as they develop.

And, fifth, finally, we believe strongly that the company is well positioned for growth. We are entering our second fall season since launching apparel, and POC has successfully expanded its product offering from skiing into cycling. As you can see from our guidance, for the balance of this year and beyond, we are also confident that we can simultaneously grow the business and improve margins.

Perhaps, most importantly, we believe that we have sufficient capital to invest simultaneously in our fastest growing brands and a very measured development of an omni-channel model. Going forward, given the strength of our brands and margins, we are prepared to thoughtfully reinvest a significant amount, if not all, of our ongoing profits in our future growth.

At this time, Aaron and I would like to open the call for a 30-minute question-and-answer session. Operator?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And we’ll pause a brief moment to allow everyone an opportunity to signal for questions. We’ll take our first question from Camilo Lyon - Canaccord Genuity.

Thanks. Good afternoon, guys.

Peter Metcalf

Hi, Camilo.

Camilo Lyon - Canaccord Genuity.

Aaron, there was a comment you made in your prepared remarks, I just wanted to make sure I heard correctly, did you say that you are now planning – the initial planning for 2015 sales growth of 10% to 13%?

Aaron Kuehne

That is correct. Recognizing that, once again, that those plans do have the influence of our new BD President Zeena Freeman, included in those numbers, but that is how we are thinking about it right now.

Camilo Lyon - Canaccord Genuity.

Okay. Maybe you can help me connect the dots because, I guess, hearing that number, I am a little surprised at that number given that you've now sold Gregory, which was the slowest growing part of the business, I would expect that apparel is going to continue to expand its store penetration and its SKU count. And I would expect that POC would also become a bigger part of the business. So I'm a little bit not certain how to get to that lowered growth rate particularly with the sale of Gregory now having been consummated and now having the excess capital to accelerate growth in these other two brands.

Peter Metcalf

Camilo, hi. This is Peter. Let me respond to that. The first point to make is that we have not even launched or even finalized last aspects of fall 2015 for either POC or Black Diamond, so we're being conservative and putting forth these numbers until we have those plans fully developed. Secondly, yes, we have sold the Gregory and we just consummated that sale and we're still in the process of developing our marketing plans on how we're going to grow our bands. And secondly, relative to an omni-channel strategy we need Zeena to be in the saddle a little bit here before we have a plan and know when that plan is going to meaningfully begin to build revenue. So I think you're going to have to just wait for a further update as we get further into this. But that's the number we feel comfortable in giving at this time.

Camilo Lyon - Canaccord Genuity.

Has there been a material change in what you're seeing on the apparel business in Black Diamond apparel that would cause this December to be what it is?

Peter Metcalf

I don't think I would say that. What I would say is that we haven't shipped fall 2014. We are pleased as I’ve communicate with the bookings and we need a good winter. We need to see the impact of our marketing programs, and then as that goes as we hope and anticipate, we may take another look at our forecast for fall 2015.

Camilo Lyon - Canaccord Genuity.

Okay. So maybe it's safe to say that this doesn’t embed any sort of significant growth from the apparel business? I’m just trying to connect the dots as to what is the part this guidance that you do feel comfortable with and what's really being left out and will come into that guidance as this fall 2014 season unfolds?

Peter Metcalf

Yeah. I think the best way to answer at this point in time is that, yeah, typically we wouldn't be giving guidance for 2015 at this point in time but because of the sale of Gregory we felt the need to give some ballpark figures. And we also recognize that we are better off giving conservative guidance and liberal guidance that something we’ve learned from the street very well. And until we have the line, the marketing plans completed for fall 2015, and see a little bit as to how the season takes off, we’re going to at this moment stay conservative in the forecasting.

Camilo Lyon - Canaccord Genuity.

Okay. Is it fair to assume that the fall 2015 apparel line or really all of 2015 apparel will have a greater SKU representation and a greater door penetration than fall 2014?

Peter Metcalf

I don’t – I have to share with you I don’t have the SKU count in front of me. That line is about done, but it’s not absolutely finalized. The SKU count, I believe, does go up modestly. We certainly anticipate having more doors as well.

And then I should add there was one other element that you should be aware of that we are taking into account, as we give these numbers, and that is one of the integral parts of the pivot is the SKU reduction of 25% of hard goods SKUs.

And in that, we have approached that very strategically and thoughtfully with two ideas in mind. One is to improve margins to improve overall profitability of that line. And it is best to maintain growth momentum. But at the same time, when you reduce 25% of your SKUs, you are for the first year acting a bit as a break on revenue.

So our revenue growth in the largest category we’re in, gear and equipment, is going to grow we believe. But it’s also going to have to not only grow in the 75% we’re retaining, it’s got to also make up for the 25% that we are cutting out next year from the line that we’re cutting out because we don’t believe it was overly profitable.

We believe that it hurt margins, and we believe that we can ultimately make that up. But we made a very difficult decision to simplify, streamline and put our focus on a more tightly curated line. But what comes with that is a loss of some revenue.

Camilo Lyon - Canaccord Genuity.

Understood. And lastly just how quickly do you think the new president’s influence can start to impact the business positively? Can it happen in 2015 or does it need to be 2016 when she has some time to season?

Peter Metcalf

I appreciate that question and how I am going to answer it very seriously is that I believe Zeena Freeman can begin to have a positive influence in this business within weeks. How that manifests itself in margin and revenue that will take longer just because of the nature of being in a senior position is the nature of the timelines in the business like this. So she will have, I am confident, a positive influence and effect in this business very quickly and where she can get started and where she can move on and just how her influence can be felt by the senior team and all the brands. But again, to attempt to quantify this moment, her first official day, as relative to revenue or margin I'm going to have to just pass in that question because it's really impossible to answer at this moment.

Camilo Lyon - Canaccord Genuity.

Okay. Fair enough. Good luck with the holiday season.

Peter Metcalf

Thanks very much. I appreciate that.

Operator

We will move next to Andrew Burns with DA Davidson.

Andrew Burns - DA Davidson

Thank you. I was hoping you could provide a little bit more information on the SKU reduction if there is any particular category that's hard to fit whether it’s ski, Mountain, or climb, first half, second half revenues or product mix that would be most impacted? Thank you.

Peter Metcalf

Yeah. Hi Andrew, this is Peter. I think at this point what we’ll say is that it is spreads to all categories. I think that BD being a product-driven company loves product and the team has been better at adding have been subtracting.

So part of this process was a curation process throughout the line. So I would say that there's probably a slight weighting to the fall-winter line. Yeah. There's definitely slight weighting there. I can’t give the exact numbers off the top of my head. But it is definitely weighted somewhat towards the fall-winter and ski line where we wanted to tighten that up more.

Andrew Burns - DA Davidson

Okay. Thanks. And on the idea of outsourcing some of the equipment I’m sure that’s not a decision taken lightly. Can you maybe walk through that decision process and perhaps if you can provide any details of your own facilities in China or the Salt Lake manufacturing? What happens and the timeline of which – any sort of outsource could occur? Thanks.

Peter Metcalf

Yeah. Okay, Andrew, a very good question. So here's how we're looking at it. Seven or eight years ago we and many of our peers in the American manufacturing and consumer products world saw China as a place with an endless supply of very inexpensive labor and the place to make all goods at the lowest prices possible and saw it as the panacea for everything.

And we are at a point now where as we – as both a manufacturer in China, we own Greenfield project and working very closely with a good handful of strong strategic OEM partners or recognizing that especially on the product – and that’s what I’m talking about – that we ourselves are making in China in our own facility that as we’ve studied very carefully now for a full year the macro – the holistic cost – all the cost really involved with everything from the commercialization to the product to getting it back here.

When you really look at that, we have come to the conclusion that a large, large part of that – a majority of that can be repatriated to North America and some of it to, perhaps, other suppliers in Asia and give us higher margins, reduced overhead as well as a reduced response time to our key customers, which we view as very important simply because we’re in a period of just-in-time inventories and in a mode where the larger retailers like to work with forecast versus absolute dollar bookings. And you need to be able to respond to that.

So a significant part of this is looking at what we can bring back into our own facility here and reduce that 60-day back-and-forth lead-time. So it’s a – we’re looking at all the various scenarios. And we do know that some of that will end up back here, but we can’t speak to – at this moment, I can’t tell you what percentage of that precisely.

But we will certainly know that and have our plans finalized by the end of this year, and we will be moving on that very quickly. We believe that we will have this repatriation and redistribution of those products relative to the manufacturing completed by early 2017, or late 2016.

Andrew Burns - DA Davidson

Thank you. I will jump back in the queue.

Operator

And next we will move to Dave King with ROTH Capital Partners.

Joe Bess - ROTH Capital Partners

Good afternoon. This is Joe Bess on for Dave. My first question is, can you talk little bit about the traction of your spring apparel line and any of the significance of some of the promotional activity out there and kind of how you plan to address or do you see it in the future seasons?

Peter Metcalf

Hi, Joe. This is Peter. So, first, let me understand your question. Are you saying that how are we going to reduce discounting with the spring line?

Joe Bess - ROTH Capital Partners

Yes. So we’ve seen quite a bit of discounting online lately and I'm just kind of looking to get a little bit more color on what you can do to kind of offset that in the future seasons?

Peter Metcalf

Yes. Well, let me begin by saying we have very well developed, very didactic map policies that we work to enforce pretty vigorously. And I think overall our retail partners abided by those map policies to the same level that they did with our competition. And then relative to anything going on sale right now this falls within the map policies and I don't believe what is being put out there was being promoted is any more substantial than any of the end of the season sales that your city retailers will have in August as they prepare to bring in winter apparel with many of them bring in, in August.

So it’s a fairly natural process and from what we know relative to sell-through which is I already stated in my remarks, is up 15 percentage point at the time that we put that information together before the show of a winter, we're seeing a positive trend and we don't believe there is a substantial amount of unsold product out there, but, yes, clearing out inventory at the end of every season is a part of the process.

And then relative to next season, for those who were at the outdoor retail trade show last week, they had a chance to meet our new Vice President of Global Marketing Nicolas Bornling, who came to us from Salomon.

He was the head of the global brand for Salomon for many years before he came over to the States to take his position late this past winter. And he presented in a very succinct format what our marketing strategy is for spring, what that themes will be, how we will execute on that, and that is the answer to how you diminish – how much product is left in the channels at the end of each season to be discounted and put on sell.

There always be some that’s just the nature of the beast, but the goal is to have as little as possible and I think we will do that through more robust richer, better integrated, and more hard-hitting marketing programs. That's exactly why we hired Nicolas and that is what he showed in a succinct format to those who were at the outdoor retail trade show.

Joe Bess - ROTH Capital Partners

Okay, great. Thanks for your color there. And then, just a follow-up I think you said that there is modest SKU or style expansion in the spring 2015 apparel line, and then is that what you said? And then also, can you just give us an update on how you're thinking about that style and SKU expansion longer-term?

Peter Metcalf

Yeah. So first for spring 2015, that’s a very robust increase. The line that we're showing and have been showing has been selling and has been getting a very solid response on is what we're entitling at its core from the gym, the climbing gym, to the crag, and it's made up – it's our unique perspective on the unfulfilled needs of climbers, as they cross the spectrum of various active athletic activities that include just wanting to be able to go into the pub or hang out with their friends after a bouldering session or campassing or out at the crag or at the gym.

And we’ve increased the SKU count very substantially. And it’s the launch of our women’s line. It’s our first spring women’s line. I think it’s very strong. So there is a very large SKU count increase. I don’t have those numbers in front of me, but we’ve been very public with those.

Relative to fall 2015, we haven’t absolutely finalized fall 2015. It’s – it is being sampled, and we’re getting ready for that. We do have the numbers. I just don’t have them in front of me. But in our next call, we’ll have that for you.

And then what I should share is that after that we are looking to basically tighten up the curation. We will launch additional collections, but we’re going to curate and hone because I don’t believe we need substantially more SKUs at that point in time. We need to really cultivate the bestsellers and have different versions of that and to continue to build on marketing. But I think we’ll have a very strong line.

Joe Bess - ROTH Capital Partners

Okay. Great. And then can you talk a little bit more about the sale or the rationale behind selling Gregory, given that it seemed like you had – it was a fairly profitable business, even if it wasn’t really one of the faster growing businesses in your portfolio?

Aaron Kuehne

Yeah. So this is Aaron. And when we think about the sale of Gregory, it really comes down to, once again, our focus on the fastest growing components of the business, primarily being BD Apparel and POC.

It’s not to say that we needed to sell Gregory business, because we felt that we had sufficient capital to be able to continue to grow those pieces of the business based off of existing business. However, in order to really expand the business into this omni-channel strategy that's where we felt the need but also the opportunity to be able to raise some capital through divestiture of one of our brands, which, once again, we believe, to be the least valuable of our brands and the slowest growing. For that reason is why we sold Gregory is to be able to take advantage of the opportunity to pursue this omni-channel strategy that we believe will require some element of capital.

Joe Bess - ROTH Capital Partners

Okay, great. And then, Aaron, you talked about guidance for SG&A in the back half of the year about $40 million to $45 million, looks like a little bit of an increase year-over-year, can you talk kind of a little bit higher on a run rate basis, can talk about what sort of expenses are being added?

Aaron Kuehne

Yes. So, first of all, that represents about a $5.5 million -- up to $5.5 million increase year-over-year while we're looking at revenues growing 15% to 20%. And so we believe that this is a good manifestation of the business beginning to take hold and to be able to start leveraging some of these investments that we have put into place. But I will say this, that increase is purely related to, primarily related to POC and BD Apparel. So it's the focus or the investment in those brands to continue to further those businesses along and that's where the increase in SG&A is coming from.

Joe Bess - ROTH Capital Partners

Okay. Perfect. Thank you. All jump back in the queue.

Operator

Next we’ll move to Joe Altobello with Oppenheimer.

Joe Altobello - Oppenheimer

Thank you. Good afternoon, guys. First question, I wanted to go back to the guidance for a second and let me make sure I understand this. It looks at you guys sort of pull down the second half revenue guidance that you back out, what we thought Gregory was going to do, by about $5 million, is that due to slowdown in the base business or is that partly due to the SKU rationalization that you guys are undergoing?

Peter Metcalf

Yeah. So the way that we're looking at the second half is based off of where we stand right now current market trends, it does have an element of the SKU rationalization, because that process, as we announced earlier in the year, had already begun to a certain degree.

Now as we sit here today, we feel more comfortable with where we're at and the direction that we're taking there. But overall, I mean, Joe, this is where we're very pleased with the overall guidance that we're providing. We're seeing the businesses whether it be gear and equipment, apparel or POC and also PIEPS seeing some good growth rates and definitely above the peer group.

Joe Altobello - Oppenheimer

But it is slower than what you thought originally three months ago?

Peter Metcalf

Is right in line. Obviously, you’re doing what the range is, right. And so when you – all-in-all, it's still right in line with how we thought about the business after the last several months.

Joe Altobello - Oppenheimer

Okay, okay. And then, in terms of apparel, I didn’t hear you guys just today but, you still expect that business to triple in size this year versus last year, given the success you’ve had so far in the spring line?

Peter Metcalf

Yes. Absolutely.

Joe Altobello – Oppenheimer

Okay. And one last one and I think Peter you touched on this a little bit but could you tell us about what Zeena’s background you found more interesting or most attractive that would translate into success at Black Diamond? Thanks.

Peter Metcalf

Yeah. Thanks Joe. Sure. If you look at the Black Diamond POC, PIEPS team I think we have a great degree of experience, skill, acumen in the gear and equipment world on a global basis in the wholesale channels. However, as you all know, a very substantial part of our future growth is predicated upon building an omni-channel business, doing that on a global basis and apparel – apparel both for Black Diamond and apparel for POC, which we’ve already launched, and growing that.

Our experience at the senior level and tenure in those areas of global direct-to-consumer, apparel and omni-channel, it’s just not where we would like it to be relative to the ambitions we have. Zeena comes here with an impeccable track record of being a truly global executive, having comfortably moved into leadership assignments in foreign countries – Japan for Sony and in India for an apparel retail startup – proving her capability to get those things going, operate with top-flight senior people, compete and do an excellent job.

So it’s those areas. She just brings a level of experience – leadership experience at a global basis in the apparel, direct-to-consumer, retail world that we just don’t have with our team here. And so she is a perfect complement to what we do have, and she has a great passion for these brands.

She is a nice hybrid between a general manager, a merchant and a marketing brand builder. And she really sees incredible value that resides within, especially with the POC and Black Diamond brands and is, certainly, enthused about what PIEPS has as a supporting brand. Plus, she has a great appreciation for the outdoors and what these markets represent. So it’s all of the – so I just think she is one in a million find for this business.

Joe Altobello – Oppenheimer

Thank you, Peter.

Operator

Next, we’ll take Sean McGowan with Needham & Company

Sean McGowan - Needham & Company.

Hi, guys. A couple of maybe quick housekeeping stuff and then some longer ones. Will you be providing all of the quarters for 2013 on a pro forma basis?

Peter Metcalf

Eventually. Yes.

Sean McGowan - Needham & Company

But only after they've been reported?

Peter Metcalf

No, well, I mean, you can get to first half and second half now with what we provided, right?

Sean McGowan - Needham & Company

Right.

Peter Metcalf

But obviously when we get to Q3 that's when Q3 of 2013 will be presented.

Sean McGowan - Needham & Company

Okay, so not before that?

Peter Metcalf

No.

Sean McGowan - Needham & Company

Okay. Second, Peter, your last comment in your prepared remarks before the Q&A, I want to make sure I understand what you said, did you say, you're prepared to invest all of the profit in growth? What does that mean?

Peter Metcalf

What we're saying is that we're prepared to invest all of our profit into growth if we see the opportunity to do that and we would do that in a very thoughtful, judicious and systematic manner.

Sean McGowan - Needham & Company

Okay. Now going back to Camilo's earlier question, I'm also a little surprised, if you are getting rid of the slowest growing part, then you would be left with one that is slower growing than that we thought it was, is it safe to assume that you're expecting given all the initiatives, SKU reduction, all the cost-cutting stuff that you’ve talked about that the margin on that revenue that you see now in 2015 would be considerably higher as a percentage of sales and what we would see then and what we’ll see in 2014?

Peter Metcalf

It will be higher, yes.

Sean McGowan - Needham & Company

Okay. And then, finally for you Peter, given Zeena’s arrival and the timing of when she takes over as the CEO, what will your role be from that point forward?

Peter Metcalf

Yes, great question. It will be a focus on the areas that, as you know, Sean, I have an incredible amount of passion for – I have a lot of passion for all things Black Diamond. But I can focus on an area that I’m very passionate about, have had very little time to invest in, in the last three years, I think a very defining to especially the Black Diamond brand.

And what I mean by that, when we created this company, we said we – the why behind creating it, a sustainable why is to make a different for a fellow community of users. And how we attack that was two-fold, by bringing forth truly innovative paradigm changing gear equipment and now apparel for the outdoor mountain, canyon, crag, sports, enthusiast, and by champing the issues of great importance of that community.

I'm going to focus on the latter of those two, how do we make a difference to our customers. That’s the why we’re in business, that’s the sustainable why. So my focus is going to be on advocacy activism probably with policy being somewhat of a front person for the brand on board, how we can we accumulate user groups and communities, also very involved with our culture and on boarding new people.

I think that's critical as we grow to make sure that we maintain a culture that celebrates in a tangible manner the vibrancy and uniqueness of these mountain, canyon, crag sports. And I want to have more time to do it. I did it one time, which is to be more involved with product in a myriad of ways, direction, details opportunities, etcetera. As well as, how we represent these brands to the communities that are so passionate about, and still a very active member of.

Sean McGowan - Needham & Company

Great. That what I thought it was. Thank you.

Peter Metcalf

Yes.

Operator

(Operator Instructions) We’ll move to Jim Duffy with Stifel.

Jim Duffy - Stifel

Thanks. Good afternoon, everyone. You guys have given us an awful lot to digest here. So I’m going to ask, I guess, direct questions. We’re all trying to solve here to an underlining growth rate and margin structure for the remaining business. You’ve given us the 10 to 13% objective for 2015.

Is that what we should expect going forward? And then, based on the results of the study of the consultants and their conclusion, what type of margin structure of the business should we be looking to down the road? What’s a reasonable objective?

Peter Metcalf

So, Jim, let me take the first part of your question, and Aaron can talk about margins here in a minute. Right now, we’re in a sort of unique position here with BD relative to growth in that none of the omni-channel initiatives are going to grow any quicker than what we’ve been funding in organic rate next year.

Secondly, though we are excited about the opportunities for apparel growth and POC’s growth in cycling, both of those still are very small and very new relative to the core BD gear and equipment business, which as you can tell from the numbers is growing. But it is not going anywhere near the rate that POC’s road business can grow for us and where it’s going or BD Apparel.

So what you have in 2015 is a situation where you’ve got the largest part of the business growing more slowly. We’re going to work on margins, as we’ve talked about and Aaron would address that. But the apparel part – the BD Apparel, the POC’s new categories – they need to get a bit bigger. They will get there in 2015.

And then we do believe that growth will accelerate at that point between our global investments, the fact that those two entities are now the size of their growth generates an overall higher growth rate for the aggregate and we will begin to benefit from a very thoughtful pace on the channel investment.

Jim Duffy – Stifel

Fair enough.

Peter Metcalf

As it relates to margins, this is part of what we expressed in our prepared remarks is that once again our focus is on revenue growth and enhancing gross margins. And all the initiatives that Peter outlined, we believe, will enhance our gross margins over time, also just through the inherent growth of POC and BD Apparel. We're changing the characteristics of the company. We are changing the margin profile of the company with each of these investments and that's where, yes, we do believe that margins will continue to improve as Peter mentioned. These investments are still relatively small compared to the broader core business of gear and equipment; however, even at that with these initiatives whether it be the SKU rationalization or some of the optimization initiatives that we are taking on, we do believe that those will all have accretive or beneficial impacts to gross margin

Aaron Kuehne

Well, again, just to highlight that one point, there will be a one-year diminution to the revenue lost from the 25% of the SKUs that we are knocking out. We're still growing gear and equipment but, as I pointed out earlier, will ask that question, we have to not only grow those categories, they have to grow fast enough to compensate for the SKUs we knocked out, which, obviously, they will be growing but we have a one-year timeframe where we do feel the diminution of the SKU reduction and then we accelerate out to next year.

Jim Duffy – Stifel

Okay. Let me take a different approach at this. Peter, I found it interesting, you reference comparable price to sales multiples as a reference for the breakup value of the company. How is the board thinking about the value of the equity and improving the value of the equity? Do they see the price to sales multiple as the most relevant metric, or is there an objective to be valued on some measure of profitability?

Peter Metcalf

A very good question, Jim. And I think I was trying to – what we were trying to communicate to you and all of our investors in the community – financial committee is that, we are building very significant and intrinsic value in our invest strategy and how we're growing these bands brands.

And I think the fact that we received the value we did on Gregory, which is – has been our slowest growing brand, we think is an affirmation of that. So then moving onto the guts of your question, we're about growing great global brands that can really become very large in revenue brands.

But it will be done in a very steady way; it will be done with margin enhancement. And so, we're about, right now – we're not about operating income, or retained earnings. What we are about is building these brands integrate brands and we're pleased with the growth where it appears we're going to have this year.

We're pleased with the margin expansion and that's what we’re focus in on margin enhancement and growth and do it in a way that it can keep – that momentum can continue. That it is a robust platform for growth and it's not a quick and dirty sort of growth initiative that ends up running out of steam. This thing should build momentum, and that’s how we’re looking at it. So it’s about – again, it’s about building great brands that can expand, it’s about revenue growth, and it’s about margin expansion.

Jim Duffy – Stifel

And when you say margin, is that gross margin or is that at the operating margin line?

Aaron Kuehne

At this point in time, it’s gross margin. However, let me point out that, if you’re not in the acquisition mode, we can capitalize your acquisitions. You instead grow organically. And that’s what we’re doing with Black Diamond Apparel with POC entering the road category, with apparel, etcetera, or converting distributors which as you know with Gregory cost money and then you add cost. But that all hits SG&A, and you can’t capitalize that.

So what we were trying to communicate today to the financial community is that we can run a very efficient honed business. I did it for 20 years before we went public. We grew this business from less than $1 million worth of equity to about $100 million. And the fact that we have identified how to pull $10 million worth of costs out of here by 2017 in the core business shows we’re honed, lean, efficient, capable operators that I’m very proud of.

And then, at the same time, we know how to build businesses, as we’ve done in our past. That’s how we’ve gotten to this point. And that’s what we’re doing with POC, with BD Apparel and with global distribution. So we don’t see the two as inimical. We can be honed and be cutting cost and scaling and rightsizing one part of the business, while making very meaningful robust investments in the other.

Again, we see the two as complementary, not as inimical. But it is a little bit hard to sort of look at a first-hand until you get that insight but that's how we see it. So we are running an efficient business and at the same time we are building and investing.

Jim Duffy – Stifel

Got it. Thank you.

Peter Metcalf

Yes.

Operator

And we’re going to take our final question from Mark Smith with Feltl & Co.

Mark Smith - Feltl & Co

Hi, guys. First, just a couple of housekeeping items. Aaron, sorry if I missed it, just give us the net cash position today?

Aaron Kuehne

Yes. So after we paid off the line of credit and the term loan, we're seeing on about $45 million in cash.

Mark Smith - Feltl & Co

$45 million in cash and no debt?

Aaron Kuehne

No debt. Well, we obviously have some sub-debt out there and modest line of credit out with our foreign subsidiaries funding POC, but also as discussed, we do expect to be able to generate some free cash flow anywhere between $3 million to $6 million in the back half. And so we are expecting to be able to have about $45 million on hand in order to invest strategically.

Mark Smith - Feltl & Co

Okay. And then, Peter, I think you said all businesses were up double-digits in the quarter, maybe if we dig deeper, was a Black Diamond business excluding Apparel a grower in the second quarter?

Peter Metcalf

Yes, double-digit.

Mark Smith - Feltl & Co

Still double-digit. Okay. And then you just talked a little bit about cash, can you talk about plans for retail stores now with more capital?

Peter Metcalf

Great question, Mark. I know that’s something that’s on the minds of a lot of the Street, not to mention ourselves. That is why we hired Zeena Freeman because we did not have enough bandwidth with the senior team here to be putting together a detailed thoughtful plan that we're ready to execute on that is one of the highest priorities for Zeena Freeman to lead as she gets her feet under her right now is to develop that omni-channel strategy and program and as we develop that we're certainly going to share that with the Street.

Mark Smith - Feltl & Co

Yeah. My last question, when you bought POC and PIEPS, both of those businesses were running mid-40% to almost 50% gross profit margin, are those still similar gross margin today, have you seen any decline, have you seen any improvement in those businesses?

Peter Metcalf

They're still running at those levels and especially for POC as we continue to expand our distribution and takeover certain distributors and bring them in the house and as we think about the omni-channel strategy, we actually expect those to continue to increase over time.

Mark Smith - Feltl & Co

Okay. Perfect.

Operator

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

Peter Metcalf

Great. Thinks so much. Still looking towards the second half of 2014. Our powerful brands and efficient global operational platforms have us well-positioned to continue our momentum where we implement the final initiatives over our strategic pivot.

Ultimately we expect all pivot initiatives to conclude by the end of 2016 and that this rationalization process will begin to manifest itself into healthy, organic growth and improved margins through completion. Thanks again for joining us today.

Operator

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

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Source: Black Diamond's. (BDE) CEO Peter Metcalf on Q2 2014 Results - Earnings Call Transcript

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