Clarus - Earnings Call - Q4 2013

Transcript

Speaker 0

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Black Diamond's preliminary 2013 results and full year 2014 guidance. Joining us today are Black Diamond's President and CEO, Mr. Peter Metcalf and the company's CFO, Mr. Aaron Kuni. Following their remarks, we'll open the call for your questions.

Before we go further, I would like to take a moment to read the company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking statements. 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 forward looking statements. Potential risks and uncertainties that could cause the actual results of the operations or financial conditions of the company to differ materially from those expressed or implied by forward looking statements used in this conference call include, but are not limited to, the overall level of consumer spending on the company's products general economic conditions and other factors affecting consumer confidence distribution and volatility in the global capital and capital markets the financial strength of the company's customers the company's ability to implement its growth strategy the company's ability to successfully integrate and grow acquisitions the company's exposure to product liability and product warranty claims and other loss contingencies the stability of the company's manufacturing facilities and foreign suppliers the company's ability to protect trademarks and other intellectual property rights fluctuations in price, availability and quality of raw materials and contracted plastics foreign currency fluctuations the company's ability to utilize its net operating loss carry forwards and legal, regulatory, political and economic risks in international markets.

More information on potential factors that could affect the company's financial results is included from time to time in the company's public reports filed with the Securities and Exchange Commission, including the company's annual reports on Form 10 ks, quarterly reports on Form 10 Q and current reports on Form eight ks. All forward looking statements included in this conference call are based upon information available to the company as of date of this conference call and speak only as of date hereof. The company assumes no obligation to update any forward looking statements to reflect events or circumstances after the date of this conference call. I would like to remind everyone that this call will be available for replay through February 2534 starting at eight p. M.

Eastern Time tonight. The webcast replay will also be available via the link provided in today's press release as well as on the company's website at www.blackdiamondinc.com. Any redistribution, retransmission or rebroadcast of this call in any way without expressed written consent of Black Diamond Inc. Is strictly prohibited. Now, I would like to turn the call over to the Chief Executive Officer of Black Diamond, Mr.

Peter Metcalf. Please go ahead sir.

Speaker 1

Thank you, Hafiya, and good afternoon everyone. I hope most of have had a chance to watch some of the exciting Alpine ski events at the Sochi Winter Olympics and witnessed POC athletes, Bodie Miller and Julie Mancusco out there competing on the world stage in their POC helmets. The primary purpose of this call is to review our expectations for 2014. While our fiscal year twenty thirteen audit is in process and not yet complete, during this call, we will provide limited and preliminary high level financial results for 2013 to establish a baseline from which to discuss our expectations for 2014 and beyond. We expect to discuss our actual 2013 financial results detail in March when our audit is complete.

For Black Diamond, 2013 was a significant transition and investment year as we crossed through $200,000,000 in total revenue approximately three years after crossing through $100,000,000 Strategically speaking, we believe 2013 was a year of major accomplishment. Not only did we achieve record revenue, but more significantly in our opinion, we successfully executed against all of the following important strategic objectives. We successfully launched our apparel brand at retail in the fall. We successfully completed the integration of POC and PEETS into our global operating platforms in North America, Europe and Asia. We successfully set up our own distribution business in Japan for Gregory Mountain products.

We completed the construction of our ski factory in China. We successfully launched POC Spring 14 road bike line to the trade globally. We continue to invest heavily in our infrastructure for future growth. And we completed a global profitability study with an outside consultant, confirmed the long term organic growth objectives and initiated a strategic shift toward the fastest growing components of our business and away from acquisition led growth. As a result, we believe that we entered 2014 as a meaningfully larger, more diversified and more profitable enterprise.

We expect that 2014 will be an equally transformative year fueled by global double digit growth, which we expect to result in improved margins and accelerating profitability. So before I comment further, I'd like to turn the call over to Aaron to discuss our preliminary 2013 results and financial expectations for 2014 and beyond. Aaron? Thanks Peter and good afternoon everyone. To put the future

Speaker 2

in context, I want to start with some preliminary unaudited financial results for 2013. We expect to report fourth quarter twenty thirteen total sales of approximately $60,400,000 up 24% from $48,800,000 in the year ago quarter. This healthy increase was broad based across the entire Black Diamond portfolio as we experienced healthy double digit growth across all of our brands, categories and major geographies. For the full year ended December 3133, we expect to report total sales of approximately $2.00 $3,000,000 up 15% from $175,900,000 in 2012. Currently, we expect gross margin in the fourth quarter of twenty thirteen to be around 38 compared to 36.3% in the year ago quarter.

Although gross margin was up, several factors negatively impacted gross margin. These included estimated 120 basis points from discontinued merchandise or DM as well as approximately three ten basis points from unfavorable production and shipping variances and inventory adjustments associated with older discontinued winter seasonal product. We estimate that this was partially offset by a 70 basis point net benefit from total FX. Taken together, these factors offset our gross margin by approximately three sixty basis points. Or said differently, without the negative factors outlined, gross margin for the fourth quarter would have been 10% higher at 41.6%.

Gross margin for the full year of 2013, including a $1,500,000 charge for the PEACH product recall in the third quarter is expected to be around 38.2% compared to 38.2% in 2012. Excluding this charge, we expect 2013 adjusted gross margin to be approximately 38.9%. There were certain factors that negatively impacted gross margin during 2013. These included production variances and inventory adjustments associated with product season changes as well as the impact from discontinued merchandise. Last year, we initiated global plans to improve working capital, primarily through more efficient sourcing and better inventory management.

Thus far, we are very pleased with the results. While revenue in 2013 grew 15%, total inventory actually decreased by approximately $6,600,000 or 11% from $60,700,000 at the end of twenty twelve. We continue to improve the management of our DM inventory and believe that we've exited 2013 with a healthy balance sheet. Using 2013 estimated sales and estimated gross margin as baselines, let us turn your attention to the future, 2014 and beyond. For the year ending December 3134, we anticipate sales between $235,000,000 to $240,000,000 which would represent an increase of 16% to 18% from our expected 2013 sales.

On a constant currency basis, we are forecasting consolidated gross margins for fiscal twenty fourteen to be approximately 39.5% to 40.5%. As you know, BD apparel and POC are both among our fastest growing and higher gross margin businesses. As a result, over time, we expect these components of our business to drive higher year over year gross margins annually for the next five years. While we plan to continue to drive growth in our fastest growing brands through incremental investment, as promised, we also expect to begin generating more profit from accelerating operating leverage in the business over this same time period. As a result, we anticipate the rate of increase in our operating expenses to moderate in 2014, while we continue to invest in Black Diamond apparel and POC.

We expect investments in the form of SG and A to increase up to $12,000,000 during 2014, of which approximately 80% is brand specific investments and about 20% represents investments in our operating platforms. At the same time, we are planning to invest approximately $5,000,000 in incremental capital spending across the business, of which approximately 50% will be dedicated to Black Diamond apparel and POC, approximately 30% will be reinvested in our operating platform and the balance in maintenance CapEx across the other brands. For context, this level of investment is consistent with anticipated build in style and SKU count planned for 2014, which we discussed in our third quarter call. Our fall thirteen launch encompass approximately 25 styles and four forty SKUs. The line is now on the shelves of approximately two forty of our best retail doors and ranges in price from $119 to $399 Our Spring fourteen collection builds the line to approximately 50 styles and six zero eight SKUs and will be available in approximately 400 retail doors, retailing between $32 and 189 Our fall fourteen line raises our total expected commitment to 119 styles and just under 2,000 SKUs, which we expect to be sold through approximately 800 retail doors.

For orders of magnitude, we are expecting twenty fourteen BB Apparel revenue to be about 3.5 times our actual 2013 apparel revenue. From an operating income perspective, we expect to generate positive operating income and to realize an almost four times increase in EBITDA. From a strategic and financial point of view, expect to look back on 2014 as an inflection point in the company's history where apparel expanded to two seasons and the company began to realize the benefits from several years of investment and growth through accelerating profitability from operating leverage and growth. Looking beyond 2014, our longer term planning remains constructed around an expected five year compounded annual growth rate of between 15% to 20% coming from our three primary brands. While achieving these levels is dependent upon a number of internal and external factors outside of our control, We expect these growth rates combined with anticipated increased operating margins will allow us to reach a point during this period where our returns on invested capital begin to exceed our weighted average cost of capital.

During this time, we expect to achieve gross margin improvements from a higher margin product mix and increasing scale. We are so compelled by the organic growth curve in front of us that we expect to focus our resources more on the organic opportunity than on strategic acquisitions. By the end of twenty seventeen, we believe our business will be even more balanced from a geographic, product and seasonal basis. This concludes my prepared remarks. Now I'll turn the call back over to Peter.

Peter?

Speaker 1

Thank you, Aaron. I will attempt to keep my comments brief and allow more time for questions following our prepared remarks. I want to provide you with some color of the fourth quarter, some insights into our thinking behind 2014 and finally some perspective on our tactical positioning for the longer term opportunity. After shifting a significant percentage of their orders from the third quarter to the fourth quarter last year, The majority of our retail partners experienced a solid holiday selling season and took the majority of orders as originally planned. In Europe, conditions at retail have stabilized and have begun to show modest momentum.

This year's winter has overall been more normalized in the past two, which also drove stronger sales and improved inventory at retail. While Black Diamond achieved record fourth quarter, second half and full year sales, we were affected by a slightly lower than anticipated ASAP order rate in the final month of the year due to the mild winter weather in the Western U. S. And parts of Northern And Central Europe. The 24% organic growth reported during the fourth quarter is a testament to our diversity of geography, season and product.

Although these regional weather trends have persisted so far in 2014, we believe Black Diamond is very well positioned to continue our multi year track record of double digit organic sales growth. We exited 2013 with what we believe could be our healthiest inventory levels in several years and our early spring twenty fourteen bookings are strong. Our lineup of new products for 2014 is robust, highlighted by this spring launch of POC's Road Bike collection, continued expansion of apparel and our new JetForce Avalanche technology, which we are planning to make available this fall across each of the Black Diamond, POC and PEEPS brands. Our 24% organic revenue growth in the first quarter was driven by solid performance across the entire product line. We saw market share and volume gains at POC in the face of stagnant helmet sales, the launch of beauty apparel and the solid growth across all of our brands.

The obvious and most compelling story from fall twenty thirteen is Beedi Apparel. The project began approximately three years ago as a greenfield project to leverage the Beedi brand, provide our end users with products for which they had long been asking and to take advantage of Black Diamond's global distribution. We endeavor to launch apparel our way, the BD way in a style and in a manner that we have been launching products and categories for over twenty five years by targeting our core customers. By design, Fall thirteen was a limited and global launch of BE apparel and by every internal measure, the launch was a great success. It was on budget, delivered on time and with extremely limited support from us at retail, most of our styles and sizes sold out by us as planned.

We didn't discount and we achieved our gross margin expectations. Certain retailers discounted product consistent with our policies and consistent with a very typical retail formula. Looking back, we achieved our objectives. Perhaps more importantly, Spring fourteen is sold out and while we are still in the fall twenty fourteen sales cycle, we are excited with our sales momentum and product offering, which recently received an ISPO Gold Award for the cohesive embedded components. For perspective, we expect BD apparel revenue to grow in 2014 to a level approximately 3.5 times that of 2013.

The Spring fourteen line is designed around alpine and crag climbing, which includes shirts, hoodies and lightweight synthetic outerwear. Our Fall fourteen line incorporates innovative designs utilizing fabrics like Gore Tex and Windstopper and it also marks the launch of women's outerwear. We are planning to support our retailers more aggressively in 2014 with investments in merchandising and fixturing that quite honestly didn't make sense in 2013 because of the limited SKUs that we put into the marketplace. POC is also gearing up for a bold new retail product launch with the spring twenty fourteen Road collection. Similar to BD apparel, POC is pursuing its scarcity strategy and we expect its impact in sales be more meaningful as the collection builds into spring twenty fifteen.

However, this is cycling's largest and most vibrant niche and parks expansion into this has been part of the growth strategy for many years. This move into cycling's largest and most vibrant category is supported by two innovative high profile and global marketing initiatives. The first is that of POC partnering with the Garmin Sharp to be the official helmet and sunglass sponsor of the Tour de France team. The Tour de France is one of the largest annual global sporting events produced each year and is watched in over 180 countries by 3,500,000,000 viewers across three weeks in July. This should prove to be exceedingly impactful and benefit POC's subsequent product developments in the bike market.

This includes the recently announced partnership with Volvo. Together, POC and Volvo are cooperating on a myriad of projects from exchanging competencies in safety equipment and research to producing innovative driver cyclist interaction products. Finally, we just unveiled a new JetForce technology at all of the recent trade shows. JetForce simply establishes a new standard in avalanche safety and our approach is truly revolutionary. JetForce uses a lithium ion battery and high powered fan to replace the current canister based airbag systems.

This technology is the result of collaboration across Speedy's gear and equipment business as well as PEEPS engineers and will be launched across the Black Diamond, and PEEPS brand names. This cross brand product development and go to market strategy is one of the first tangible product benefits seen from our combined brand portfolio. While JetForce will not have the financial impact that apparel does, we expect it to solidify Black Diamond's competitive positioning in a core equipment category. During the recent winter trade show circuit, Jetforce received several accolades, including the outside magazine Year of the Show award. With the Peril launch, the POC peeps integration is complete and the business increasingly positioned for an anticipated 15% to 20% compounded annual growth rate over the next several years, we are more committed than ever to our long term vision and are in the midst of a significant strategic pivot, which we discussed briefly when we reported the third quarter.

The pivot is built upon several important strategic conclusions. First, the recognition of and commitment to the idea that each of BD Apparel and POC independently represent the company's most significant long term opportunities for compounded multi channel revenue growth and profitability. Secondly, given the magnitude of the opportunity that we see in POC and BD apparel, we prefer to invest our precious capital resources in the growth and development of our fastest growing assets rather than acquiring additional brands in a marketplace where the attractive brands are trading at historic valuations. Thirdly, the belief that over time e commerce and direct to consumer in some form still to be defined strategic retail distribution model will play a meaningful role in the development and distribution of all our brands and fourthly, a long term commitment to Black Diamond gear and equipment that our customers perceive to be as brand defining. These four principles are the foundation for a four point strategic pivot that is already underway at Black Diamond to the following four initiatives.

First, you will recall that during 2013, we retained an international consulting firm to help us think about our profitability by SKU, product category and geography. To reflect this study in 2014 and beyond, it is our intention to focus resources on brand defining products and categories, where we rationalize the balance of our product portfolio objectives. Secondly, we've retained executive search firm Herbert Mines to help us augment our senior leadership team in brand and general management from a best in class background in apparel, company of brand owned retail and e commerce. This process is in its early stages and is likely to take us six to twelve months to fill the position. Thirdly, for nearly thirty years, we have been and intend to remain committed to our specialty retail partners globally.

Consistent with this commitment, our own e commerce and direct to consumer distribution are also important parts of our business today and will be a critical part of our business in the future. Today, we have two retail stores, one at our headquarters in Salt Lake City and a POP store in Chamonix, France. And today, we know that a strong physical retail presence is important for the brand. We might also consider a series of flagship stores in certain important markets and we can certainly envision a store in store concept in other important beauty markets. As previously shared, 2014 is the year in which we intend to define the role of retail within our strategy.

Fourthly, over time, retail and e commerce are expected to require additional investment. For the time being, we anticipate funding these initiatives from our existing balance sheet and from our existing operations. However, we have also begun to explore strategic alternatives to monetize markets for our Gregory Mountain Products business. We know that Gregory is an extremely valuable asset. We know that it is a coveted lifestyle brand in Japan, Korea and other Asian markets and that it has significant growth opportunities both from a brand extension and from additional geographies.

To this end, we've retained Rothschild to help us explore the waterfront of strategic alternatives. We expect to share more about this process if and when something more material develops. Fifth, prospectively, we believe that all of the pieces of the strategic pivot as outlined work together. By pursuing strategic alternatives to potentially monetize the value of untapped markets for our Gregory business at this time, we are optimistic that we can invest that incremental capital intelligently and accelerate growth rates at POC and BD to levels in excess of our current 15% to 20% compounded targets. At this time, Aaron and I would like to open the call for a thirty minute question and answer session.

We ask that each analyst try to limit themselves to two questions. Thank you. You. Operator? Thank you.

Speaker 0

And our first question comes from the line of Sean Naughton with Piper Jaffray. Please go ahead.

Speaker 1

Good afternoon and thanks for taking the question. Peter, I was just hoping you could talk a little bit about or Aaron talk about the guidance. 2013, we initially talked about 18% to 20% top line growth. We came in a little short of that. Q3, we're talking close to the second half of the range at the low end.

We're a little short. Now we're talking about 16% to 18% top line for 2014. We talked about 20% before. I guess I'll just bring this up because I'm just curious to help get a better explanation of where some of the shortfalls may be coming from and what you guys are doing to address those? Yes.

Sure, Sean. This is Peter. I'll kick it off by saying that the growth that we had in the fourth quarter of 24%, which is brings us within less than 1% of the guidance we gave back in August is something we're very proud of. And we're very proud of it in light of the fact that I mean, just by itself that growth, but very much so in light of the fact that we have had in California and the Pacific Northwest a drought of historical proportions with many of the ski areas not opening until I think the last few days, right, if they've opened. And likewise, we've had in one of the core markets of Europe, Austria and Southern Germany, I think historical dryness there where in one of the more vibrant markets that we're in, we've had very limited ASAP business just because in those two areas that are very important, we've not seen any meaningful snowfall with record warmth and dryness.

And so when you look at that, I do believe that's a great testament to BD's diversity of geographies, product and seasons that we were able to come as close as we did to that revised guidance. So that's something we keep in mind here as we are looking forward now into the next year that we are in a period of somewhat volatile weather. We are have created a product portfolio, a global portfolio, a seasonal portfolio that I think meets the top and bottom end of that. But we just feel at this time that we're better off being a little bit more conservative in our guidance moving forward based upon what we've experienced in the past year. Okay.

That's great. Thanks for the color. And then just secondly on the apparel launch, any additional commentary there around large chains versus small chains online versus brick and mortar international versus domestic? Any lessons you can talk about that were learned there and how those can be applied to 2014? Thank you.

Sure, Sean. I'll say a couple of things. Number one is that as everyone well, most of you are aware, we launched the way we have launched just about every category we've ever entered, which is very specialized product for our core customers. It's niche, it's specialized and it communicates that we have not forgotten who our core customer is. And then as we grow out in a category, we add additional products that appeal to a broader demographic user group.

So I'm pleased with how we launched. I think we did it the right way and it worked well when and as far as its appeal to our core customers. I think moving forward in 2014, clearly what we need to do is augment our merchandising within the stores to make sure that those who come into the store see the product that it's better highlighted, have a greater concentration of it. And the fact that we are now have significantly broadened our offering to products that appeal to a broader demographic hit some of the real sweet spots of the market. It gives us a high degree of confidence that the product is more appropriate for some of the larger boxes and for some of the broader demographic groups that we want to appeal to.

So to that and a more robust spend in various forms of marketing to make sure that our customers both decor and those at the periphery are aware that we are absolutely committed to apparel to bringing forth innovative, beautiful, well designed, well engineered apparel in the same way that we have approached the gear and equipment world. That's something we're very committed to doing to make sure that more people are aware of that. We had a limited spend in marketing this year. We're going to increase that in 2014. Okay.

Good to hear. Best of luck in 2014. Thanks, Sean.

Speaker 0

Thank you. Our next question comes from the line of Sean McGowan with Needham and Company. Please go ahead.

Speaker 1

Thank you. Hi, guys. Following up on the other question, I'm a little confused too about the conservatism in the guidance, which I've got. Mean, is great, not coming up short is great. But if you look at the kind of growth that you've had and you keep saying that you're having in POC and you're adding road helmets this year and I assume ski is growing and the earn out that you have on to the former owners is predicated on growth of over 30%.

I don't know if that slowed. You have this huge increase 3.5 times projected revenue increase in apparel. I don't get how it adds up mathematically to only 16% to 18. So maybe you can just comment on how to make the numbers work. And then related to that, it seems like the number of doors that you're talking about currently being in is a lot less than what you had talked about right before the launch.

I thought the number was closer to 400 and now you're saying two forty. Did you lose those or was it ever close to 400? Okay. Sean, thanks for that. And let me start with the latter question and Aaron will jump in on the former.

So we haven't changed any of our guidance with doors. What we said was that for fall twenty thirteen, we were launching with approximately two forty of our best retailers, best stores around the world. And that for spring, we were building up to approximately and we are shipping now, we just started to 400 doors at retail for spring twenty fourteen and that for fall twenty fourteen that number is increasing to 800 doors on a global basis. And we're sticking with that guidance. That's all materializing as we have guided starting last fall.

So two forty million Okay. I thought it was 400 higher than that. 800,000,000 No, that's pretty much the range we've been giving since sometime middle of last year or last early last fall when we were in New York. Okay. And the other I just if you're saying in the release that all segments will be growing at double digits, I don't I just don't know how to make the math work.

If pockets supposedly a lot higher than that and you're in 3.5x on the apparel, how is the total only 16 to 18?

Speaker 2

Yes. We are seeing good growth coming from all brands and regions. But as we've been seeing coming into the last half of twenty thirteen, the North American region has been a little softer, a little volatile in terms of the buying habits of our retailers. And although we believe that we're well positioned to continue to grow forward with all of our brands that obviously does play into how we think about 2014 and build out our overall forecast. We do anticipate seeing most of our growth coming from the rest of the world region.

I mean, it's going to be well balanced throughout the different geographical regions, but the rest of the world or the independent global distributors will be leading that as well. But it comes back to how we've seen the last half of the year finish up primarily in North America. But once again, goes back to we finished the year very strong with 24% organic growth. And as we look towards the future, we believe we were set up for nice double digit growth.

Speaker 1

Okay. Thank you.

Speaker 0

Thank you. Our next question comes from the line of Joe Altobello with Oppenheimer. Please go ahead.

Speaker 1

Thanks. Hey, guys. Good afternoon. Just a couple of ones I guess. First in terms of the apparel launch and how it went in terms of sell through.

I think Peter you mentioned earlier that it was on it was in line with expectations online with budget. But I think back when we spoke in Salt Lake City, you had seemed like it was a little bit below maybe what you had aspired to and maybe that expectation was higher than the budget. So if you could sort of reconcile your comments today versus maybe your less sanguine comments in Salt Lake City a few weeks ago? Hi, Joe. Yes, think I remember sitting down with you in Salt Lake and what I shared with you was that some of the retailers did better than we had hoped.

Some of the retailers did as we had hoped and some of them did a little bit worse than we had hoped simply based upon what kind of retailer were they, how was the product merchandised, what product did they carry. But overall, no, I mean, we hit our internal numbers. We as I stated earlier, we shipped the product out. We didn't discount any of it. And we're pleased with what we delivered to folks.

And then as I've also said that the sell through varied from retailer to retailer. And again, it was just depending on what type of retailer, what product and how did they merchandise. Okay. So overall, it was a mix across the different channels. But I think on an overall perspective, you were happy with what you said.

Shipped what we had made. We filled the orders and we're sold out of most sizes and styles and colors. So, we achieved our objectives. Okay. Just one for Aaron.

I think you mentioned earlier the gross margin guidance for 2014 you mentioned was on a constant currency basis. Is that correct? Or is that in dollars?

Speaker 2

So it's in dollars, but it's without giving the effect of any FX fluctuations throughout the rest of the year. And that we can't control that. And so based off of where we stand right now, that's the guidance that we're providing for gross margin. Okay. So you're assuming

Speaker 1

that FX stays as is for the rest of the year? Right. Okay. Got it. Thank you.

Thanks guys. Okay, Jeff.

Speaker 0

Our next question comes from the line of Dave Keene with ROTH Capital. Please go ahead.

Speaker 1

Thanks. Good afternoon, guys. I guess just first off in terms of the guidance and trying to dig into that a little bit more. It seems to me as you kind of think about the 16% to 18% growth that appears to be somewhat of an acceleration from the kind of organic growth you had in 2013. Is that fair?

Guess or maybe asking it differently, what was the organic growth for the full year in 2013? Since I think you gave this for the fourth quarter, I'd just be curious what it was for 2013? And then as we think about the different brands, is it fair to assume that POC we could see an acceleration in the growth there from the bike road the road bike launch? I guess that does expect for now.

Speaker 2

So first of all, Dave, this is Aaron. And as mentioned in our prepared remarks for 2013 the full year we grew 15%.

Speaker 1

On an organic basis. Okay. Yeah. With the strongest growth coming in the fourth quarter 24%. Okay.

And as we look forward into next year, we're giving the general guidance and that is a blended growth rate of all the brands and that all the brands are growing equally. Right. So in terms of some maybe so in terms of POC then, I mean, think you've talked in the past about that kind of growing at a 40% or so rate. Is that still kind of the case? Is that what you're also expecting then in terms of 2014?

Should we expect that to be kind of an acceleration then when we look at the road bike launch? Or just given that you're going off a higher base, does that slow a bit? So just I don't think we ever did. Just to clarify, I don't think we ever mentioned 40%. We had talked about 30% growth.

And POX had nice growth. It is going to continue. We anticipate that it will continue to have nice growth as you get larger. The percentages often slow up a little bit. As far as the road bike launch, that is a great launch.

But as I stated in my opening remarks, we are doing that like we do with BD apparel in a very selected way sort of a scarcity to be in the top 100 plus. It's over 100 shops. I don't have the number in front of me, racing shops around the world with very premium product to continue to raise POC's brand profile, so that it can command the kind of premium price points and margins that it does in cycling as it does in skiing. We think that's a great strategy. And at the same time when you launch then you launch in a very premium position that doesn't do as much for your growth acceleration the first year of your launch as it does in outlying years and we've seen that with POC's business and scheme.

Okay. That helps. And then in terms of the follow-up on the apparel launch, it was my impression both coming out of Salt Lake and I guess from other conversation that sell through out of the gate wasn't necessarily as strong as planned or as hoped. It sounds like some of that was varied by retailer. I guess, can you just talk can we get a real time kind of update there, understanding that you talked in the past about or you talked about for other businesses or the business overall that obviously the lack of winter weather out West has been weighing on it, makes a lot of sense.

Now that we're starting to see some of that weather, maybe even some of the weather in the West, have you seen any kind of improvement either for apparel or the overall business? All interesting good questions. And I'll begin by saying that, again, the from our perspective, the apparel from here sold out nicely. We got into the shops who wanted. We delivered pretty much on time to people.

And then the sell through varied. And that's not to be unexpected in the first season of a launch for the reasons that I articulated a few moments ago. What I will share to your question about weather changing is just there's a yes, I mean from parts of Europe to parts of The U. S. There are places where when the snow comes and the cold they wish they had more apparel, more gloves, more mittens, more this or that.

We don't have much of that to ship at this point in time, which we're very happy about. If you're too greedy, you're often less with too much inventory. Relative to sell through, I can stay with assuredness that yes sell through continues thanks to snow and cold etcetera. And the next time to get some idea of sell through in any of this product will be when the winter is really over. As you know right now, I think Atlanta is shut down due to another ice and snowstorm.

And so whatever product is left in the way of winter clothes and apparel there, the sell through just continues to increase. So most people want to know what's the sell through by January 1. That was something we were trying to get a handle on for the trade shows we talked about. And then the next time to really get a handle on it is not until winter is really over. And I don't think any of us know when winter is going be over.

We will definitely do an audit of our retail partners. What I'm pleased to say is that we're going from two forty doors to 800 doors with apparel from fall thirteen to fall fourteen. I don't think there I've been in this industry thirty two years and I can't think of another company that has ever launched apparel with the success that we have that was in two forty of the best stores globally in year one, went from two forty to 800 of the best stores globally in year two and went from a very limited start to what appears like will be about a 3.5 fold increase in sales. So we're very pleased, very excited and psyched that almost all of the shops that we launched with regardless of whether they had the most robust sell through in season one or not they're back because they believe in BD. They think the fall apparel line is beautiful for those I think you were in Salt Lake.

Everyone who started from ISPO to SIA to Salt Lake, we're just blown away by and that included our competitors, major retailers, friends, etcetera. We turned heads. We made an amazing statement and we are incredibly proud of that line, its innovativeness, its aesthetic, its silhouette and how it's turning heads and how people are talking about it. And we are psyched with where we're at with this and where we're going. Perfect.

Thanks so much. Yeah.

Speaker 0

Thank you. Our next question comes from the line of Camilo Lyon with Canaccord Genuity. Please go ahead.

Speaker 1

Thanks. Good afternoon, guys. Just a couple of questions here. So looking at the 14% growth targets you laid out, I'm assuming that that includes Gregory. Can you just talk about what the growth that you're expecting for Gregory is?

And if and once it's sold, what would how would that impact the overall growth rate of the for 2014? Hi, Camilo. It's Peter. Hey, thanks for the question. And as you know, we just don't break it out by brands.

I guess what I'd just share with you is that there is as we look into 2014, yes, there are those brands that are growing more quickly and those brands that are growing less quickly, but we just have made a strategic decision we're not going to break it out. So safe to assume that it's growing slower than the brands you're keeping in the portfolio? I think I'm going to have to say that you're going to have to draw your own conclusions on that from communications and messaging that we've given today in this transcript. Okay. You talked about apparel growth growing 3.5 times 13.

Can you provide what the 13 base is? And then the follow-up to that is what are your current strategies as you dramatically increase the SKU count your channel doors? How do you plan to manage the brand across 800 doors so that it's consistent with the message that you want to convey to your consumer? Yes. So all good questions.

And again relative to the very first one, I'm sure you're not surprised when I say that right now just for competitive reasons, we're not going to give revenue numbers for the categories. But we are trying to give you as much help as possible by talking about SKUs, styles, doors, multiples that sort of thing. So hopefully that's helpful. There's no question that as we get into more doors, we have to be thoughtful in managing this. And I think we were quite successful overall in managing the two forty doors from the perspective of when people could go on sale, how long they could go on sale, what kind of markdowns they could do, when they could do it.

And I'm not saying by any means we're infallible or perfect, but I'm pleased with how it was managed. I was in a lot of stores. I know you and many of our other key investors and analysts were as well. But our dealers and our partners were following the protocol and the rules of the road that we had laid down, which are very similar to those of our premium key competitors. So if you were to go into a store at a certain time of year, we might have some of our product on sale as would some of our competitors.

Relative to the issue of your point of the future maintaining price points, maintaining a premium position for the brand, how do you move DM? The answers are the following. Number one is, one has got to be very rigorous in managing the same things we've managed this year, is when can you put product in sale by what percent for how long and then what date can you go off price and just start clearing? That's number one. Number two, DM is a part of being in this business regardless of who you are and that needs to be managed very thoughtfully relative to who you move it to, what discussions you have relative to what pricing, when they can sell it, when they can market it, where you want to put it, so it's not brand damaging.

Likewise, as we've talked about developing our own retail strategy in 2014, part of

Speaker 2

that will

Speaker 1

include some kind of outlet strategy. Our competitors have that. It's something that is very efficient in moving product at a higher margin in a controlled fashion and people begin to know where those outlet locations are as a way to get that product. In addition to that, as we have in gear and equipment and as our competitors have, you always want to have some core staple items and colors that can be carried through. Those are the categories or product those are the products in specific style that you can carry through some into spring and some into the next season where you can take the risk with your inventory because you know those are going to be a bit more iconic and they have more than a single season life to them.

They've got a multiple season or a two year life to them. So that is a big part of our strategic thinking on how Tim and the team are thinking about the line and managing the line. So that gives you a bit of an overview of our approach to how we are strategically approaching and managing apparel right at this moment. Okay. And just one last final question on Gregory.

Assuming that you do complete the sale, is the cash that you expect to get from that sale, is that cash usage going to be put towards some of the expenses and CapEx dollars that you talked about or that Aaron talked about investing in 2014? Or is that incremental to what the plan currently has? Camilla, I guess, I think the best way for me to respond to that is that what we have just laid out to you in this guidance to you and our investors and analysts is a plan that is predicated upon how we exist at this point in time. And what we're sharing with you is that we are exploring the full waterfront of strategic opportunities that reside in Gregory because of what it represents as an asset and there may be ways to monetize some of that value And that's what we're exploring with Rothschild. If we do move forward on that, then we will be able to talk about how we would use whatever assets we've monetized and talk about how that might affect things.

But I'm just not in a position to talk about it at this moment because we are at this time exploring as I said the full waterfront of opportunities that potential opportunities that resides within Gregory at least we believe so. Understood. Thanks very much.

Speaker 0

Thank you. Our next question comes from the line of Jim Duffy with Stifel. Please go ahead.

Speaker 1

Thanks. Hello everyone. Aaron a few questions on your comments. Can you provide more explanation around the three ten basis points impact of the gross margin from the production and shipping variances in the fourth quarter? For sure.

Speaker 2

So the three ten basis points as you said came from production braces and some shipping costs that were incurred, but also from the inventory adjustment of some older DM product. And so what that represents is that as we experience certain amounts of demand exceeding the current inventory levels that we had, we did have to incur some airfreight costs that are a little bit more expensive than the traditional ocean freight costs that we typically incur and that had an impact. And then also as we looked at our inventory and as we as you know, we've been clearing out quite a bit of DM inventory over the last year. As we looked at our inventory balances at the end of the year, it became apparent there were a few different items that just needed to be adjusted down. And then the production variances relate to the overall ramp up of certain manufacturing activities that we've talked about in the past as well related to certain key innovative products even including that of our skis.

Speaker 1

Okay. And then unless I missed something, I don't think you provided SG and A for the quarter. Can you speak to that? And then it'd be helpful if you could speak in more specifics around the areas of planned investment with the incremental 12,000,000 or I guess it's up to $12,000,000 of incremental SG and A planned for 2014?

Speaker 2

Yes. So we'll get into the specific SG and A amounts for Q4 once our audit is complete. However, what I can give you is a sense of how we believe our SG and A is coming in for the full year. We anticipate once again recognizing that the audit is not complete that will be around $81,500,000 in SG and A plus another $1,000,000 of M and I and restructuring expenses that we've seen throughout 2013 to come up to a full on operating expense level of close to 82,500,000.0 or so. Once again that just giving you a ballpark as to where we're expecting it to come in.

As it relates to the 12 up to $12,000,000 of additional investment, as stated 80% of that is brand focused and the other 20% is more platform oriented. Some of the brand focused investments relate to that of marketing, the augmentation of our sales force, continued R and D, also the launch of the AVIP line for POC as well as the sponsorship that Peter talked about with Garmin Sharp as well as the continued build out of our e commerce and also the continued conversion of distributors for the POC brand in certain parts of the globe.

Speaker 1

Does that include any point of sale support for the apparel product offering? Yes. Looking at those. Okay. Yes.

For both apparel as well as POC apparel. So there's merchandising fixtures for POC as well as for Black Diamond. Thanks. I'll leave it at that guys and I'll hit you with some follow ups offline. Okay.

Thanks, Jim.

Speaker 0

Thank you. Our next question comes from the line of Sean MacKowan with Needham and Company. Please go ahead.

Speaker 1

Yes. I had a follow-up question regarding strategic way of handling a launch and especially was so limited in scarcity factor was supposed to be a big part of it. Could you guys give any thought to having conversations with retailers about making sure there wouldn't be any discounting? I know some manufacturers have a deal with a small number of retailers where they'll take product back if it's limited supply and not necessarily a full policy going forward. I'm just wondering if that entered into the conversations at all?

The as far as taking back inventory, no. We just did not want to incur the cost of that. We did not believe that was necessary because of the size and scale of what went into the shops. And also we felt that the policies we put in place as to when people could go on sale and when they could not and for how long and what percentage and what duration was more than a robust set of policies for them to follow. And I think it worked pretty it worked very well because they were very much in line with a North Face of Patagonia, a Burton eight ks etcetera.

So we're pleased with that. We don't feel that we need to change anything in that regard for fall fourteen. Right. So if we saw on REI or other places 40% to 50% discounting on some items is that really very limited in the number of items that that would apply? It's hard to know how much inventory they have or how many total items they have to sell.

So is that was that just a couple of things here and there in a weird size? Or was that indicative of a broader issue? So first, Sean, me address the question that until after the New Year, nobody could put anything do any kind of dramatic clearance discount and they had to follow our policies at a maximum of x percent off for a limited time etcetera. And what I will say is that someone like yourself who's gone into retail stores use Salt Lake City here going into there before Thanksgiving I think it was at the REI store. There was a round rack with everybody from Arc'teryx to Patagonia to Burton eight ks to Marmot to North Face, etcetera with selected items on sale at $20.25, 30 off whatever the policies were of those folks.

That's part of the retail landscape I think today. Once it gets into January or February depends on the area, the environment and what has gone on then you begin to see retailers discount at whatever rate they want to discount at to clear out depending on how quickly they want to put spring up, what they have left, what sizes. But the level of discount that you're just talking about that I think was quite few and far between, but I'm sure it varies retailers with a few SKUs and styles that occurred at some point. But I doubt we I'm confident to say we're not alone when that sort of thing happens as retailers decide to clear out all the inventory. I know.

When you have a brand new launch and it's very few items, very few styles, very few SKUs, very few doors, yet you really don't I mean, you look on the REI website and they've got something at 50% off. It's not really clear when you're

Speaker 2

sitting there how little they have or

Speaker 1

how much they have. Obviously, didn't have a lot. There wasn't a lot to ship. Wasn't a lot for anybody to have. So it could have been some massive sale.

I just I'm not that part of setting a policy. I'm just thinking maybe it would have been kind of need for the first season to say, hey, such a small number. Let's just we'll take back anything you don't sell and that's the one time only. I'm just suggesting it. I know some manufacturers in other categories of apparel have done that before.

So that's just my $02 Yes. No, I appreciate that perspective. It was something that we had decided we did not want to do. But I certainly appreciate hearing from someone like yourself who covers a lot of competitors and companies in this space to hear that perspective. Okay.

Thanks.

Speaker 0

Thank you. Our next question comes from the line of Howard Rosenkranz with Value Add Advisory. Please go ahead.

Speaker 1

Yes. Hi. Most of my questions have been addressed. Thank you for that. Just a couple of data points.

I just want to make sure I got them. I got on the call a little late. The what was the EBITDA for 2013? I think you commented it will be up four times in 2014?

Speaker 2

Yes. So we haven't this call primarily is related to our 2014 guidance and we'll address 2013 in more specific details once the audit is complete. And so we'll leave it at that.

Speaker 1

Okay. And you commented that apparel and POC you expect to be up one percentage respectively. And I guess that's not off of any specific base in '13 because you're not breaking that out at this juncture. Is that right?

Speaker 2

Correct. We're not. And so as we mentioned on the during the prepared remarks, we anticipate BD apparel and POG being the leaders of our growth for over the next several years. And that's where we're going to put our time and attention.

Speaker 1

Okay. And in terms of how much those are going to be up in 2014? I thought you might have given those out. I apologize.

Speaker 2

No, no worries. We don't break that out for a variety of reasons. We don't segment our business that way. And so we always provide yes, we've never been in the practice of providing that. We don't plan on doing that now in terms of breaking out those percentages specifically by brand or region.

Okay.

Speaker 1

Very good. Thank you. Thanks.

Speaker 0

Thank you. Our next question comes from the line of Eric Delmarger with Half Moon Capital. Please go ahead.

Speaker 3

Hi. My question is related to the covenants on your from the credit side. I know you're pretty close on the EBITDA level. Is that something that you guys have gone back to the lenders with? Or how do you guys look at that related to the current situation?

Speaker 2

Yeah. So we at the end of Q3, we obviously certify that we're good with this and we've been looking at that. And if you do the math we are close, but we are in close communication and working through with our banker to address any needs if at all. But once again, audit is not complete. So we don't it's still too early to tell and we'll address this during our call in March.

Speaker 3

Got you. I mean does that somewhat constrain some of your

Speaker 2

growth plans or spending? No. As communicated, we believe that we're coming out with one of our healthiest balance sheets in recent past at the end of twenty thirteen and that we're well poised to be able to continue to invest into our business the way that we've laid out.

Speaker 3

Got you. A few more general questions regarding, I guess, and forecasting for the business as a whole. I guess early November, so a month into the quarter you guys provided pretty strong indication that you're going to meet the expected 2013 numbers. Implicitly, Q4 was a third of the way through and then here we are with a bit of a miss on that. And then you're now providing pretty precise and I guess fairly ambitious 2014 numbers.

How should we be comfortable with that given kind of the challenges of inherently I guess forecasting such a business?

Speaker 1

So I guess Eric with the I mean to your first point relative to the August guidance, I think we're quite proud that we came within less than 1% of the low end of that guidance, 24% growth despite the fact that into our most robust markets, we had drought in warmth of biblical proportions. So I think we feel pretty good about that. And then relative to this year that we're in, we have I don't know if you guys did the trade show or not, we have launched for this spring between the Black Diamond, Gregory and POC brands some very impressive new product that we believe is a great catalyst to growth. But more importantly, it's the fall growth between the apparel, what we've launched at this trade show, the BD Jet Forest, the new POC line of helmets, the upgrade to skis and whatnot. We've got a very strong line.

So as you look at that and look at the fact that we have cleared out over the last year was painful, but clearing up our balance sheet, moved out a lot of DM. The industry has moved out of a lot of DM that was floating around various distribution channels. We feel that it's a healthier place to be and hence the numbers we're giving we believe are a bit more conservative to take into account that there is volatility out there. But we feel quite good about what we're giving here in the way of guidance in this range.

Speaker 0

Thank you. Our next question comes from the line of Dave King with ROTH Capital. Please go ahead.

Speaker 1

Thanks for allowing the follow-up guys. Just a real quick one. In terms of the comment about spring bookings being strong just a clarification there. How should we think about that strength versus kind of the overall guidance or maybe asking the question differently in terms of that the 16% to 18% top line growth expecting for the year, how should we think about that over the course of the year that trajectory? Thanks.

Speaker 2

Yes. This is Aaron. As you recall, we have a fairly balanced springsummerfallwinter business. At the end of twenty thirteen, we're looking at coming in right around 45 for springsummer and 55% fallwinter. We're going to see that slightly shift a little bit more towards the fallwinter business as we continue to experience solid growth coming from Black Diamond apparel and also from POC.

And so it's going to slightly shift a little bit more towards the fallwinter business. And when I say slightly, springsummer is looking in the low 40s.

Speaker 1

Okay. Thank you.

Speaker 0

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

Speaker 1

All right. I just want to thank everybody for their time today. We're obviously very enthused about what's coming in 2014. We believe that we have positioned the company very ideally for strong growth in 2014 and look forward to what's ahead. So thank you.

Speaker 0

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