Q1 2020 Earnings Call

Ladies and gentlemen, today's conference call is scheduled to begin momentarily until that time all lines will remain on musicals. Thank you for your patience.

[music].

Joining us today, our class corporations, President John celebrate chief administrative officer and CFO.

In Chile, and the company's external director of Investor Relations Cody slots.

Following their remarks, well open the call for your question.

Before we go further I would like to turn the call over to Mr. fall. If he reads the Companys safe Harbor statement within the meaning of the private Securities Litigation Reform Act. This 1995 that provides important cautions regarding forward looking statements Cody. Please go ahead.

Thanks Angela.

Please note that during this call. The company May use words, such as appears anticipates believes plans expects intends future and similar expressions, which constitute forward looking statements within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.

Forward looking statements are made based on the company's expectations and beliefs concerning future events impacting the company and therefore involved a number of risks and uncertainties.

The company cautions you that forward looking statements are not guarantees in the actual results could differ materially from those expressed or implied in the forward looking statements.

Potential risks and uncertainties that could cause the actual results of operations or financial condition of the company to differ materially from those expressed or implied by forward looking statements used in this call include but are not limited to the overall level of consumer demand on the company's products general economic conditions, and other factors affecting consumer confidence preferences and behavior.

Your disruption and volatility in the global currency capital on credit markets financial strength for the company's customers companys ability to implement its business strategy the ability of the company's execute integrate acquisitions the impact that global climate change climate change trends may have on the company and its suppliers and customers.

The company's exposure to product liability or product warranty claims and another loss contingencies.

Disruptions and other impacts to the company's business.

As a result is a cold at 19 global endemic and government actions and restrictive measures implemented in response.

The other companies manufacturing facilities and suppliers as well as consumer demand for our products in light of disease epidemics and health related concerns such as the covert 19 global pandemic.

Changes in governmental regulation legislation or public opinion relating to the manufacture and sale bullets and ammunition by RCR segment, and the possession and use of firearms and ammunition by our customers.

The company's ability to protect patents trademarks and other intellectual property rights.

Hey, breaches over interruptions in our information systems fluctuations in the price availability and quality raw materials and contracted products as well as foreign currency fluctuations companys ability to utilize its net operating loss carry forwards changes in tax laws and liabilities tariffs legal regulatory political and economic risks.

And the company's ability to declare a dividend.

More information on potential factors that could affect the Companys financial results is included from time to time in the company's public reports filed with Securities and Exchange Commission.

Polluting the company's annual report on form 10-K quarterly reports on form 10-Q, and current reports on form 8-K.

All forward looking statements included in this call are based upon information available to the company as a as of the date of this call and speak only as of the date hereof.

The company assumes no obligation to update any forward looking statements to reflect events or circumstances. After the date of this call I'd like to remind everyone. This call will be available for replay through may 25th starting at eight P.M. Eastern Tonight.

Cast replay will also be available via the link provided in todays press release as well is on the company's website Eclairs Corp. Dot com.

Any redistribution retransmission or rebroadcast of this call in any way without the expressed written consent of claris is strictly prohibited.

Now I'd like to turn the call over to the President of Claris, John Walbrecht John.

Thank you Cody and good afternoon, everyone I'd like to open the call my recognizing the amazing efforts of each of our employees as we navigate to cope with 19 pandemic from a position of strength.

Our global team has shown exceptional leadership and collaboration as we address this unprecedented precedent event I'm also extremely proud of how the morale of our employees has been unwavering as each person demonstrates a high degree of engagement and our various business activity.

Throughout our history in both good times and in bad Claritas attacked our business with the climbers mentality in climbing one is faced with adversity on every cent.

Well there can be unpredictable and holds can be fan sickle, but with experience determination and a good blade partner one can overcome the walls adversity, we're approaching the current business environment with the same mentality.

Focusing on our core tried consumer will help both black Diamond NCR I've continues to strengthen our community and drive momentum for our brands.

We are we believe we're well prepared as any company to weather the storm as we continue to push towards our goals.

We began 2020 with great momentum.

After a record financial results last year.

However in the final few weeks through the quarter or Black Diamond brand experienced dramatic global slowdown as our retail partner shut their doors and cancelled their open orders.

Due to cobot 19.

Leading up to that point on revenue and earnings were trending in line with our expectations for the quarter.

These declines were somewhat offset by improving demand in RCM Sierra business late in the quarter, which highlights our product diversity, but in no way made our result immune to the pandemic.

At the onset of the virus, we devised a plan to focus on three things first and most importantly, our people.

Second the preservation of brand equity and third maximizing liquidity with liquidity, which together, we believe we'll make as emerge as even stronger company.

First is our people since mid March we have enabled all office employees to work remotely and this has minimal disruption to our overall operations.

So those employees at Sierra and those that work in the distribution that had been deemed essential we have implemented significant health checks and precautionary measures to protect their wellbeing.

In addition, we have reiterated our commitment to what we call our top rope fund well and existing for a while this fund was created to help our employees dealing with hardships times like these represent the reason the fund we started and we are more than happy to support our employees in their needs.

Our second focus has been the preservation of brand equity.

In light of the World crisis like the one we are facing now moving product quickly at the extensive margin is often the strategy of less diversified and less durable brands, but one we will not pursue.

Acclaris brand equity amongst the core consumer is our life blood, we're supporting our retail partners through a difficult period and this includes the integrity of our pricing our supply chain and distribution, our operating well, enabling continued shipments to our wholesale and distributor partners in those channels in geography that.

Still remain open.

In our direct to consumer business Q1 sales were up 16%.

Our overall direct to consumer strategy, which encompasses our web sites and both our strategic physical locations continue to perform well and reinforces the it initiative into the future.

We continue to experience improved it activation and our ecommerce channel due to more effective prospecting and retarget need in order to drive higher levels of site traffic.

We prioritized full price selling with a focus on storytelling using our athletes to capture the consumers interest during their increase time at home and online.

The consumers looking for newness.

And then optimism mother brand message and BD delivered.

Well still strong Q1 topline growth in our direct business wasn't as robust as it could have been due to the sudden co bid related demand shock, but it was what was also due to the overall promotional industry environment in March.

Instead of chasing the Baltimore website, we decided to only run to let promotions that we were within our minimized advertised price policy again to protect our brand equity.

We expect our well performing ecommerce business, along with third party sites of our wholesale partners many of which are currently operational.

To carry more weight in 2020 as a percentage of our total sales offsetting some of the weaknesses that will be felt at traditional retail.

Finally, we are focused on our liquidity, which was strong leading into the crisis and will speak about this in more detail momentarily, but at the end of the first quarter, we had nearly 13 million in cash and access to approximately 28 million an incremental liquidity with a modest long term debt balance that we are comfortable.

Servicing.

Well no take a few moments to discuss our perspective on the macro economic environment and additional details of how players will leverage its strength.

Feed moving forward.

At the moment it is difficult to know when normalized business returns and I doubt there will be one play bulk applicable to all regions.

But what we do expect is for the consumer to remain loyal to authentic brands that stay true to the core even during a crisis like this.

Well this is already shown in our DNA Aclaris. We believe there are other attributes of our business that play well into the dynamic environment. We're currently facing.

First given the uncertain retail landscape.

We believe being a super fan brand owners represents a distinctive advantage for claris.

In past crises.

Our core tribe has shown to be very loyal to our brand over the last three plus years that we have been together as a team. We are focused on our innovate and accelerate playbook, regardless of the market dynamics. This playbook includes further strengthening our brand market positioning by investing in product innovation.

Sales and marketing and pursuing new long term revenue opportunities.

As an example, just last week, we announced that our new high line straight shelf for spring 2020 has been awarded the editors outside magazine gear of the year in their new summer, but buyers guides. This alongside other notable innovation.

Include our new engineered shock.

Which has an exclusive technology that allows for super.

Fast drain also in liquid.

Our playbook also has included bolstering our global distribution network and flexible supply chains that we have built over many decades.

Increasing manufacturing CAD capabilities at Sierra and driving efficiencies throughout our operations.

We believe this provides the structural elements to benefit from what we believe will be increased staycations hires levels of interest in health wellness and the outdoors.

We also think these mega trends play well when the consumer heads back outside after many weeks understand home ordinances.

Second we have a diverse portfolio of products across geographies and channels with over 100 years have combined to brand equity.

Our offering spans 30 single product categories and there was no single one that accounts for more than 15% of our annual sales.

This diversity provides a balance of sales across both the fall and winter and spring and summer sports season.

And our brand are truly global with nearly 50% of ourselves generated and over 50 countries outside the U.S.

In addition, while apparel and footwear are key strategic initiatives, where we believe substantial growth opportunities still exists. It's an important note that we currently represent only 14% of our business.

The remaining 80 per 6% isn't equipment.

That is non perishable and viewed as necessities for our activity based consumers.

These products are not driven by seasonal fads, but instead are rooted in best in class design engineering testing and functional feature sets that enable to use it do have his or her best days in the mountains.

We have market leading positions within most of our equipment categories supported by highly engineered product that is backed by an unmatched heritage ingrained in the sports that we serve.

Third we have a strong and growing direct to consumer business, our focus on the consumer through our direct business over the past two years is now providing as a competitive advantage.

Consumers just started to spend even more time online and our team has done an excellent job authentically connecting with our consumers to build even stronger long term brand affinity.

We will continue to invest in a robust direct to consumer sales engine to help grow the brand in key markets and then the digital space, where consumer targeting advertising in storytelling can quickly bring relevant scale to businesses like ours with such compelling products.

Fourth due to our discipline across the different businesses, we've been able to create operationally in both black diamond and here a bit brands.

For Black Diamond is part of our mitigation efforts in response to Cobot 19, pandemic, we've reallocated and eliminated over $9 million Ines DNA.

This is accelerated our shift towards a more digital presence.

Sharpened our focus on key product categories.

And improved operational efficiencies and driven a tighter connection with our distribution and supply partners.

Force here I during the last few years, we are focused on improving efficiencies and increased capacity in fact over this time capacity has increased by approximately 30%.

Lastly, we will continue to leverage the strength of our balance sheet as we evaluate our long term growth opportunities.

As we have previously just gosh.

Primary focus is to maximize the organic growth and profitability of our brand.

We strongly believe this will provide the highest level returns on invested capital.

We also take a strategic and disciplined approach to our capital allocation.

We regularly evaluate opportunities to acquire similar superfan brands to complement our portfolio.

And where we can deploy our unique innovate and accelerate brand strategy.

While we will be sensitive to the market and economic environments as well as our leverage we expect to target acquisitions over the long term that provide access to new product groups and consumer channels or can diversify us within the outdoor in consumer markets.

Super fan brands, not only have leading product marketshare and brand strength among diehard consumers.

But also provide recurring revenue sustainable margins and strong cash flow to be accretive to our earnings.

They must be well run businesses. This will ensure we are enhancing value or the company and continue to be careful stewards of the shareholder capital along with funding our quarterly dividend and repurchasing of our common stock.

Ultimately, we believe our diversified brand portfolio global distribution platform and fast growing direct channel is well positioned to navigate the current challenges and evolving consumer landscape.

Above all we have great confidence in our team's ability to extend the unprecedented times. It is in our DNA you just simply who we are.

With that I'll now turn the call over to Aaron Cooney, Our Chief Financial Officer, who will provide additional commentary on our performance in the first quarter as well as provide more details on our game plan for the rest of the year think there. Thank you John and good afternoon, everyone.

I would like to start by really reiterating John's comments regarding her team.

This company was made up of committed and resilient people and we have seen the very best of them over the last couple of months.

On today's call.

I will provide more details on the first quarter results and then expand upon or priorities moving forward.

The strong momentum established in Q4 2019, including mid teens growth from Black Diamond was interrupted by the onset of totaled 19 for the first quarter of 2020 cells of $53.6 million were on plan for the first two months of the quarter before the impact of the pandemic bye.

Brand Black Diamond sales were down, 13% and fear or sales were down 12%.

The decrease at Black Diamond was solely due to the co. Good we waited demand for use in the final weeks as the quarter widespread shutdown of retail stores with many key markets, including North America, Europe and Asia.

Had a significant impact on March cells. Also included in these sales results was the deferral of $1.3 million in revenue.

Sure you keep distributor during Q1, we agreed to take back inventory due to our transition to an in house model. One quarter. Early this is planned to take place in Q2 Q3, but due to the global pandemic, we decided to accelerate all of this into Q1 to ensure there was no lots in coverage.

Somewhat offsetting the declines as John mentioned, our direct to consumer business was up 16% in our pro business was essentially flat.

Well cells NCR were also down 12% the demand environment has improved since the beginning of 2020 at the start of 2000.

Started the year the industry was still experiencing softness what's your felt most prominently in us domestic and international OEM businesses.

With Tobin spreading into international markets earlier in the quarter before arriving in the U.S. and those retail markets not being deemed a central as they have been here, we did not benefit internationally from some of the stockpile buying trends.

Which brings in the U.S.

We began to see the demand lift domestically in mid March, particularly in their agree box business and this positive trend has continued into our second quarter.

Consolidated gross margin in the first quarter was 34.6% compared to 36% in a year ago corridor. The decline was due to inefficiencies in our supply chain and logistics activities beauty covert 19. In addition, foreign exchange headwinds reduced year over year gross margin by approximately 55 basis.

Points, well terrorists reduced year over year gross margin by 35 basis points. Excluding these two impacts gross margin was nearly flat, which we feel is a when given the cells do leverage within the quarter.

Overall, our sales and gross profit in the first quarter were negatively impacted by unfavorable foreign currency changes on the transactional basis by $400000. Their primary costs of our inventories denominated in us dollars well, 30% of our global cells are denominated in foreign currencies.

Primarily the Euro Canadian dollar Norwegian Krone Swiss franc, we attempted manage our foreign currency risk on a continuous basis through natural hedges and foreign currency hedge contracts, but these hedges will never be a perfect offset to the actual currency movements, especially with recent currency volatility.

In our reported sales and gross profit our hedges offset approximately $300000 of foreign currency exposure <unk> exposure in the first quarter.

At Sierra approximately 45% of our product costs consistent consist of materials such as copper in wed we seek to actively managed the impact that commodity cost job on our business specifically on gross margins with our vendor partners.

We believe that we havent sound process in place that enables us to mitigate this risk for a period of six to nine months out.

Approximately 60% of our 2020 consumption is locked in that predetermined rates. The remaining 40% is benefiting from today's attractive commodity pricing.

Another point on gross margin specifically surrounding the impact from the trade war our cost of goods sold were negatively impacted by approximately $300000 in the first quarter our efforts to mitigate the negative tariff impacts continued to be on plan. We continue to decrease the amount of black diamond products.

Source out of China from 38% to now 27%.

Selling general and administrative expenses in the first quarter declined to $17.4 million compared to $17.6 million the year ago quarter, reflecting our ability to adjust quickly to an unplanned downtime in the business in the final month of the quarter.

Soon after the pandemic, yet we implemented a set of majors to bolster our financial screens. Most of these will show in our results going forward. So I'll address our accident shortly.

On the collections front, we have evaluated our accounts receivable on an account by account basis and do not believe we have much exposure.

Which is a testament.

To the durability of our account based in our industry.

But our Q1. This unique includes a conservative increase of $400000 in our allowance for doubtful accounts to roughly $900000, which is a modest step up to our historical write offs of around $200000 per year.

Net income in the first quarter was $36000 were zero cents per diluted share compared to $3.8 million or 12 cents per diluted share in the year ago quarter.

The decrease included $2.4 million of noncash charges, and $300000 and transaction costs compared to $3.1 million of noncash charges and minimal transaction in restructuring costs and the same year ago corridor.

Adjusted net income in the first quarter was $2.7 million or nine cents per diluted share.

Compared to $6.9 million were 23 cents per diluted share in the same year ago quarter.

And adjusted EBITDA on the first quarter was $3.6 million compared to $7.3 million in the same year ago corridor. The decline was primarily due to the for MACI cobot driven demand for black Diamond in the final weeks as the quarter.

Let me shift to our liquidity our balance sheet was strong entering 2020, including a clean inventory position.

At March 31, 2020, cash and cash equivalents totaled $12.8 million compared to $1.7 million at the end of 2019, breaking this down during the quarter, we drew approximately $9 million and cash from or line of credit a generated free cash flow defined as net cash.

Provided by operating activities less capital expenditures of $2.2 million.

We ended the quarter with inventory down roughly $4.3 million from the end of 2019 and have adjusted the flow of goods in line with expected future demand.

We will likely see our inventory go higher in Q2 due to the cliff nature of the Kobin 18 pandemic. However, we have strong supply chain partners, where we can dynamically manage our inventory levels appropriately with demand.

As such we anticipate that it will right size in Q3 in Q4, and we feel comfortable where we're headed.

On this year inventory side, we prepaid for a portion of our copper needs at the beginning of the year.

So it was still a bit elevated at quarter end, but that business is currently experiencing significant output and great efficiencies. So we are in a strong position there.

From a retail footprint.

Perspective, it's important to note that we own our own campus here in Salt Lake, which also houses one of our six retail locations.

For our other five stores, we have favorable lease agreements that we were comfortable servicing.

At the end of the quarter, we had $32.1 million drawn under revolving line of credit with remaining access of $27.9 million. As a result, total debt was $32.1 million compared to $22.7 million at the end of 2019.

This equates to net debt to trailing 12 month.

Adjusted EBITDA of roughly 1.36.

Versus a covenant of 3.0 cents.

And we are comfortable servicing or debt requirements that are attractive rate of LIBOR, plus 150 to 225 basis points.

Based on our current projections, we expect to be well within our leverage at fixed charge coverage ratio requirements and in full compliance with debt with our current debt covenants for the remainder of the year.

Now turning to future mitigation efforts from a financial perspective, we're focused on strong liquidity the health of our balance sheet and generating maximum operating cash flow we've taken the following steps.

As John mentioned.

First we planned operating expenses.

We'll be reduced by an estimated $9 million for the remainder of 2020, including organizational changes.

John also mentioned this is also accelerating or shift towards more of a digital presence sharpening our focus on key product categories improved operations improved operational efficiencies and driven a tighter connection with or distribution in supply partners. Overall. These cost reductions are expected to recalibrate, our excuse me.

Primarily within black diamond to levels, we experienced heading into 2018.

There is also important to call out black Diamond topline results around this timeframe sells for black Diamond in 2017 in 2018 were $160.3 million and $176.7 million respectively.

Second we postponed approximately $2 million of nonessential capital expenditures of the $5 million scheduled for 2020 until business conditions stabilize.

What are the capital expenditures that we will continue forward with will include the planned investments in or high growth direct to consumer business.

Finally, we temporarily replaced the company's quarterly cash dividend with the stock dividend.

We expect these disciplined actions will result in over $13 million of cash preservation in 2020.

Subsequent subsequent to the first quarter end, we borrowed $20 million under the term loan portion of our credit agreement and use the proceeds to partially pre down amounts outstanding on our revolver.

We had a drawdown deadline on or term loan of May threerd. So we took the opportunity to access the capital is it provides the company an incremental $20 million of liquidity for a total of $80 million.

In addition, as previously disclosed on March 10th 2020.

We entered into stock purchase agreement to acquire STB Corporation.

Given the recent events surrounding cope the cobot 19, global pandemic and the economic uncertainties in the United States and globally as a result, each of the parties to the purchase agreement agreed that the purchase agreement had expired on April Thirtyth 2020, and was no longer effective.

To our recovery path is limited there are many factors outside of our control like when people return like when people return to work and what they're buying behaviors will reflect which makes it difficult to provide specifics on or 2020 outlook. As a result, we are withdrawing our guidance issued on March.

And we'll revisit this when conditions stabilize.

But I would like to comment on our current business.

Conditions in our priorities for the rest of the year.

As I mentioned earlier, the demand environment and in or interfere business improved significantly in the final two weeks of or first quarter, particularly in our domestic green box retail business. We would expect this heightened demand to continue for the remainder of the year. Both in are both in our domestic green box business and.

Some of our domestic OEM partners begin to restock their inventory depletes.

As for the Russell 2020, strategic decisions will be prioritize around maximizing the organic growth and profitability of our brands.

We strongly believe this will provide the highest levels or return on invested capital.

But we will prioritize our strong balance sheet liquidity and the preservation of shareholder shareholder capital first and foremost.

Before turning the call back to the operating for acuity I want to reiterate or comments and praise for the performance and commitment of our great team at cleaners, and our thoughts continued to be with those around the world.

Suffering from the virus operator, we're now ready for acuity.

Thank you Terry ladies and gentlemen, if you have a question at this time. Please press the star and the number one key on your test tone telephone. If your question has been answered argue with terminals yourself from the Q. Please press the pound.

Our first question is on the line of Randy Konik with Jefferies. Please go ahead Sir.

Yeah, Thanks, a lot and good afternoon guys.

Thanks, Randy question.

Hey, John.

I guess a question for Aaron.

Yes, maybe walk again through the dynamic of the inventory in terms of you kind of you said, obviously near term or be a little elevated maybe give us some perspective on it just some thoughts on gross margin impact on that or not and then how do you think about the long long range management of inventory.

As you kind of trends issue more towards the DTC side, just give us a little bit more flavor that'd be really helpful to start thank you.

You bet, so coming into the year one of our focus is was continuing to focus on the optimization of our inventory levels, while also ensuring a higher level fulfillment, especially for our DTC business. This is something that we commented on even during our Q4 earnings call.

As cobot 19 hit.

It became apparent that we'd have to start to recalibrate some of the inventory demand planning or buys to accommodate.

The decline that a bit in demand that we were forecasting so as a result, we started immediately interact with our with our.

Supply partners and dynamically worked through how how we'd be able to manage through this process and so.

Overall, I feel extremely proud with what we've been able to do so far through the quarter being able to bring down or inventory levels by $4.3 million, but naturally not all of the inventory purchase orders that we that we had placed for not only spring 20, but also fall twentyth, we've been able to recalibrate immediately and so as result.

As we head into Q2, I do anticipate that we'll see an increase in inventory.

Especially in June, but then as we're able to continue to manage through that process I do believe that those inventory levels will be properly recalibrated to right size for the size of the business that we expect to have as we head into Q3 in Q4 part of that those ensuring that we also are properly positioned for recovery and not only so that we can.

Satisfy demand for our direct to consumer business, but also for our retail partners and so that really sheds light or highlights. This route that we have within our supply chain and also the great partnerships that we have with our with our supply partners.

This dynamic ability to be able to manage through the ups and downs and also to ensure that we can continue to.

Maintain a certain level of inventory, while also not missing out on the opportunities that may present themselves.

And Randy the second part of the question you asked was about margins the great thing for B B is that because 86% of our businesses equipment a care BGR in April and a Caribbean you're in October hasn't changed in valuation than the market since footwear apparel line represents 40.

Teen percent of our business and it's really focused on more equipment apparel.

It and the amount of product that we have an inventory in those products is part of the reason why early on we were able to make the strategic decision not to chase pricing and the retail market down the bottom of the rabbit hole in discounting so to your long term question.

Our goal is to maintain our margins through this process by not changing our brand equity or the positioning of our product from a price perspective.

Very helpful. Then my last question I guess back to John would be for you John.

He brought the word process so.

Can you give us many perspectives on.

Process changes that have come about because of coal that that you wouldn't beijing being more permanent in the way you're kind of managing the business are running the business and how you kind of that communicating that today. So the troops just give us some perspective on most any process changes that are kind of was going to be taking patent taking place and I think I'm going to become potentially more permanent.

Nature. Thanks, Yes, I would say the first thing I would say is that during these crisis you get Super Smart to focused on the things you can control and not worry about things you can't control. So you don't waste time, I would say second to that.

We're very much about the positive in the integration with our core consumers. This whole time, and thus we communicate early and often both to our employees as most of the market.

Clearly reaching out to many of our accounts either at the rep or the management or even the senior team level.

And then as Aaron is this has stated being very smart about your partnerships in a bigger way most the times brands only talk about partnerships as in their retail partnerships and for us our supply chain and our global distribution market is just as important to us and being able to reach out to our long term.

Partners, where in certain categories, we own the lions share of market.

And work with them to ensure that we are making prudent plans in in our movement of inventory to ensure that we're not sitting on too much inventory and that were planned in these things out in a prudent way and level setting and I would say that.

Clearly the way in which we've managed with our accounts from a financial perspective on the accounts receivable and how we've been managing that and our goal to be the easiest to do business with with our accounts.

And being very engaged an upfront with them on a regular basis.

I think our sales team has stayed very very engaged with all of our accounts along the way.

And that process won't change I think the way in which our social media.

Has maintained its it engagement with our Super fan brands in fact, we've been seeing 1% to 2% a week increase in our social media in Instagram Facebook.

Which is just done unheard of and the level of engagement.

And a lot of that has translated both into a very strong community statement. The statement that we came out with which was live now climb labor live now run later live now ski later whatever on engaging our athletes in that statement.

I would also say that the way in which we've you know engaged at even higher level I didn't know, what Aaron said and that our employees.

You know you always you always measure character buy out people respond when you know either they don't after a one there put under extreme strain.

And this crisis has proved to be very true BD and what we called the climbers mentality.

And the team engaged it up at a level unseen before and.

On a passionate about BD it about our core consumers about the sports we serve about the retail partners in our factory partners.

And really work Super hard in this process and it shows in every area of the business financially as well as the communication level. So hopefully that gives you some I'm sure I've missed a few more in there.

But I think the same approach we've always said to you Randy is you maximize the whole by man maximizing every individual input and that we literally.

From a team perspective looked at every single team, whether its finance supply chain logistic B to C manufacturing innovation R&D sales marketing you name It and said guys new time, new pause what is the best way, we can react as a brand and continued to build brand equity while.

Driving a profitable business and that's how we approached it and I think thats worked really well for our team.

Really helpful. Thank you thanks, guys.

Your next question is on the line of Mark Smith with Lake Street Capital. Please go ahead.

Hi, guys.

First one for me can you talked a lot about apparel and footwear and kind of what percentages of sales can you talk about the inventory levels within those categories and kind of your comfort level with that.

Yes, we can obviously and it and you can read it in the current reports from retailers and or brand.

There is enormous amount of apparel.

In the marketplace and will be for the next I would guess at least 12 to 18 to 24 months I think we've seen that in the athletic shoe business in the drop off.

Currently we are still see in a positive on the outdoor footwear side of the business.

But I would also say that because our product in equipment focused mark that and we've managed our inventories in line with our business and been very good about that and you know I would say some criticized that last fall because it actually meant that we sold out early in a in times when maybe we could have had more AD we put more.

Risk into it.

That our equipment approach to apparel will actually sustain isn't this process and we've actually seen in a time when some of our retailers have been in blood Bath repricing wars with brands, we've actually continue to see good growth with our online retailers with apparel. During this process now that's in in a micro cap.

Some of those who are online retailers as opposed to those without closed doors, but you know as you all know a deployed jacket that you enjoy is the same deployed jacket, whether its spring or fall.

Yeah, absolutely and then second hand, breaded, managing our inventory so that we don't create excess DM, you know, making sure that our retailers are able to carry over the products and maintain those margins. It's been a very smart strategy for our sides.

Okay.

Looking at retailers can you just give us a big picture view of what you kind of stalled late in the quarter and then maybe where we're at today on per set of retailers closed talk a little bit about you know the stores that you have you and if you're starting to see some movement on on some of these retail locations opening.

Yep. So if you look at our account base it really breaks down into four segments.

You have our national accounts, which may be guys like an Oreo NBC and of course right when it hit.

They they did the right thing and close their doors you have some of our accounts, which I would call key accounts, which may be playing in other areas. We're able to stay open. During this time period, though in may be less traffic and maintain their business. Then you have retailers that I would call.

Key accounts or specialty online retailers guys like it back country Dot com.

As an example that we're able to maintain and continue to drive their business. During this as best as possible and then you had specialty retailers and we'll obviously a lot of specialty retailers due to their state logistics or ordinances close their doors and so that's started as as a referred you early mid March and then got really have.

By the end of March is everything got to quarantine.

Some of those as we said online retailers in some of the big multi hunting fishing outdoors, we're able to stay open some now coming back it's just a sums, especially accounts in certain states have been able to start opening.

More will start to open over the next two to four weeks.

And then some of the national accounts that have started with either curbside or doors in locations. I think today, you know Dick's will say they have about maybe coat approaching 200 retail stores will be opened through May and then ultimately working towards more as the year goes all as the months go on.

Hi, it's probably targeting sometime in early June you know with some.

Curbside pickup in March in May.

So I think each retailer dependent upon their saturation of accounts by certain states.

We will change that obviously, you know Montana has a little different effect, maybe the New York City.

But you know I think people are are seeing demand for example, we've opened up our stores here in the Rocky Mountains.

In Utah, and Colorado in our store in Anchorage.

And we're getting a very positive warm response by those consumers. Obviously, we are social distancing in those stores being very very.

Very surgical in our in our approach to cleanliness and all the details associated with it but where the environment has opened up you know, we're taking we're engaging with the consumer and there's clearly some some pent up consumer demand to get back out the outdoors and use outdoors is as the new social distancing.

Okay and then my last one for me maybe talk about the importance of indoor climbing gym said, it's been a great growing segment, how important is that to your your sales.

And any insight that you may have on on how far out before research see some some openings potentially there.

Yeah, so climbing gyms and we've talked about this in many of our meaning climbing gyms have always been one of this great anomaly of the business without question climbing gyms boomed over the last three to five years.

And introduce a new consumer till the model of climbing what we all jokingly called vertical yoga became extremely popular climbing gym through through the cobot 19 closed down almost immediately in mid March and going into the beginning of April.

Some of the Jim's have started now open the upward plan to here in May I think it'll be a little bit of a slower process as they figure out how to you know engage with the consumer at the demand it had before while maintaining social distancing that best cases.

Yeah, I will tell you that climbing gyms helped drive the awareness for climbing, but as you offer that we've often said climbing gyms don't represent a lot of retail.

You know, it's it's the NN out and the experience on the wall or you know in the bouldering.

You know, obviously chalk and interesting chalk sales and and our new engineered shock using.

An alcohol base to provide some sort of of anti bacterial while climbing is kind of started to kick off and we'll see some movement from that.

I think fortunately because outdoors on we're gonna see of growth in outdoor climbing here rapidly going into the summer months and they may not be until social distant seen or fall or a little more separation from this starts to take off in the fall climbing gyms. That's that's my prediction.

Okay, great. Thank you guys.

And again, ladies and gentlemen, if you would like to answer your question. Please press star one your telephone keypad again, best our wine to asking question.

Your next question is from the line of Dan Jaffee with Stifel. Please go ahead.

Thanks, Good afternoon guys.

Couple of questions for you John just to start can you talk about the products that are selling well for you in the DTC business step in your view that consumer appetite.

Currently is that those categories that are more applicable to staycation type demand.

Yes, I think one other things where we've seen starting with in April we started with April fools around.

Now all the initiative of outdoor condo, we've launched live now climb later interestingly enough I would say helmet.

Cancer care BGR is quick draws ropes harnesses of all seen you know demand as people go to the outside world for sport climbing where the Jim is missing.

Clearly you know more and more people have done trail and so we're seeing it in backpacks and trekking poles and Headlamps and those things.

You know we've been able to maintained in the apparel piece, it's not as as a higher percentage as it was but you know we've opened up our retail onto our surprise retails done well.

But a lot more equipment and I think thats been our story on this is that the Super fan has to come to was there is no alternative for occam other than BD.

Caribbean years, harnesses helmets things, where we own a lot of the market share.

I think people are really focusing on that.

You know it's interesting I think the market would have reacted a lot different that this happened and we've been quarantine in October November December. The now you know and people coming out of it in December versus now coming out of it in may with the summer activities.

So today you know it's been highly equipment driven footwear, you know I had to our two are surprised you know.

Outdoor footwear, even though I know athletic footwear has taken a hit outdoor footwear is is holding its own but that's again because people are getting out where we live specifically getting out to the mountains as their way of social distant team, but be inactive.

Makes sense.

For a moment, how you plan merchandise this into the balance because a year and concentrated the buys mortar core item categories, where you thinkers.

You know more shelf life.

Yes, that's exactly how we've been planning is really focusing in the.

Our most core items were.

The items that you would expect BD the have in stark and to make sure that we have sufficient availability, but also curtailing some of the.

Some of the friends type items just to protect the downside, but also just to continue to optimize the inventory position and our our cash conversion cycle. This is a real blessing that the during this time you know it that that we have an inventory that you know when everything has been slow to.

Put on pause the 85 plus percent of our inventory is non perishable.

And it doesn't change you know harness in black or Navy blue or bright blue doesn't really have a change of value regardless of the color or the process, whereas as you probably are very aware you start building up spring 20 products that didn't go to retail or get sold out plus fall 20 proud.

Thats plus bring 21, that's now in the weeks away from starting to sell and you quickly find you've got three times the inventory going into a market that has maybe one third or half of one third of the demand at the moment.

Got it.

And then shifting gears to corporate development for the moment moving beyond the skippy opportunities seems wise given the circumstances that gives you some dry powder for opportunities that may come along.

In disruption from the crisis, how do you guys think about being in the market for new opportunities when might we be able to see that.

Would you like see.

Better visibility that Eric capital as good as ours.

Thank you know Aaron mentioned in his his words were very where we've always been very clear about the focus on Super fan brands, because again superfan brands and we believe this will have the highest value because it's going to play out twofold. One they have the most loyal consumer that is going to be loyal to that brand.

Sure regardless of the crisis.

Irregardless of a recession or other things I may not go out to eat, but I'm definitely going to keep climbing even if it means I'm going to build some sort of timing apparatus in my basement.

The other side of that is that we literally believed that super fan brands maintained their most that protected business. During these crisis times and so we're going to keep our eyes engage doneness, we still love the SK be business. We just all for all the right reason said if you know.

It wasn't the appropriate moment in time, though it may be the right brand.

We will continue to look at you know all others that open ended this and like you. We you know.

We hope there's not but we expect there will be opportunities.

Very good I'll leave it at that guys. Thank you.

Your next question is spending a lot of Matt Koranda with Roth capital. Please go ahead.

Hey, guys. Thanks, just wanted to start off with the another question on inventory surprise surprise.

So.

I think he has got a nice start talking about sort of the what you're doing a control inventory at the BT level, and then apparel as well, but just wondering if you could comment on sort of equipment inventory.

Retailer distributor level in your comfort levels there.

I know you don't want to dilute brand equity with sort of the price cuts.

But what are you, saying in terms of sort of early Pos data from retailers that have opened if at all.

In terms of willingness for retailers and distributors to restock football and beyond what's the environment like.

I think twofold I would say first off that our retailers are probably.

I would say medium to high stocked at this point on BD, but as they open up.

Just as we deal with our store you know I think the demand for equipment over excess you know inventory in other categories will be to our benefit.

I think the other side is that retailers appreciate that equipment.

If you want to maximize at once business, while limiting the future of having to go off price on a product that may become perishable either in one three or six months equipment becomes a safer bet.

And equipment, you know within BD speaks to 30 plus categories. So it's all over the spectrum.

If you lived in the Rockies right as soon as Cove. It hit we saw ski business and the backcountry Beacon get packs all that kind of stuff take off as people decided that social distancing meant that country scheme.

So I think retailers are going to be Super Smart I think they're going to A. I think I would conclude that retailers are going to focus on fewer brands because those brands are going to be the ones that represent more and more importantly, 80 20 rule is going to become evident maybe it becomes 90 10.

And I think then they're going to work, they're going to focus their buys on products wed just like you as or as an investor or you know, they're going to look and say I my investing in products that were my opportunity just to be successful in attaining margin through this product is going to be high.

And I think thats going to both lead to BD and its success you know both prior to this and through this.

So and we started to see that is we now are in during May and people are open. It up we're good at were seen Asap orders coming back.

Which I'm not sure that's consistent across the whole industry.

Right good there.

And then shifting gears. This year are really quickly I know you guys mentioned green box.

You know sort of outperforming a toward the latter part of the quarter.

But I'm curious.

Just on the sort of the OEM.

Well that business.

What's the environment like in terms of ramp up for you guys to meet the sort of some of the wrap up your customers know OEM and do we see.

Sort of order levels.

Increasing through the rest of the year, how does it play out.

On that front.

The possible and I'm not asking for guidance here, but is it possible. It kind of reached the I guess the high water Mark that you guys said in 2018, Sarah with the bullet business doing better.

So I'll take first of all the capacity side of things in the John will will talk about the market dynamics a little bit more.

As mentioned note as it relates to the overall capacity of fear of when we bought the business.

Or since the time that we bought the business, we've been able to increase capacity by 30%.

We've also started and we've also been able to increase our operational efficiencies in a dramatic way over the over that period of time as well and so as we're starting to see the markets stabilize and come back in terms of higher levels of demand. We feel like we're in a really good position to be able to satisfy once again dynamically the demand that me that may.

Come.

Our way over the course of the over the rest of your in fact, we're getting to the point, where it's time to start adding some additional direct labor within the plant.

I'm sure that we have that capacity not only from a in equipment standpoint, but also from a labor standpoint.

Okay. So on the second half of that so if you look at our business and you know well give a little bit idea, what's taking place in whereas the driver and this is true of the second the first quarter. The ended the first quarter, but also true running into the second quarter.

That.

A third of our businesses International International is impacted by covert even sooner than North America was and so that's where we saw you know the softness in fear of bullets in the first quarter in fact, though the market was soft green box in OEM for for Sierra was flat in the first quarter NR naked.

Give was impacted by the international so we were already and our belief, beating the market at the at the moment, we've continued to keep that gas down on bullets and ammo and those are important both of those initiatives for us on the Green box side, we continued to see strong growth in both green box bullet.

And Green box ammo in the retail format and that's retail at both the distributor level, but also at the retail level with backstroke Abella as Academy Gander you name it in the mix.

On the OEM level as Aaron said, our capacity has there been primed knowing that at some point the inventory levels at the Oems, which represents guys like federal BH, a fig you name it Wouldnt get would get pressured on and that has happened going out of the the end of the first quarter and why.

Well into the second quarter and we intent we anticipate that's going to continue up now are we weren't ready to tell you that means we're going to hit the whole high watermark of the past will that's got to pull the covance impact on it as well as a political discussion later in the fall yet to be determined.

But I can tell you that we see positive momentum and more importantly, you know from a financial result, our capacity is up but even more important is the profitability at the efficient level at Sierra ready for both the increase demand, but also to be you know more more at the contribution margin of it.

And we've seen strong sell through growth better than anticipated from a market perspective in both bullets that even more exciting in the ammo side of our business and again, we haven't goal to continue to grow our ammo said the business ultimately to 10%. It is nowhere close to that at this point, but it's gaining momentum.

Equally at the pace that we were hoping you're expecting going into 2020.

Very helpful guys can I sneak one more end just on Opex I know you mentioned savings expected.

Of 9 million.

The helpful just to get a little bit more color on where some of that comes from I would imagine there's a significant amount of marketing discretionary travel expenses can cut down on so maybe just bucket it out for us in terms of where the savings is coming from and then.

Yeah, just in terms of cadence of when you fully realize the 9 million. It sounds like you said you're already done with the actions.

So can we just sort of.

The chop off.

I realize it's a number of 9 million for the rest of the year by quarter or what's the what's the right way cadence was to model it.

Yes, so you're exactly right. We have identified the 9 million and have already put that into action with most of it being fairly evenly spread over the course of the remainder of the year.

When we looked out you know the different levers available to us some of it naturally is discretionary in nature such as.

You know some the marketing spend and also some savings associated with trade show cancellations that have taken place, but we've also taken opportunities to scale back certain levels of compensation as it relates to new hires that we had planned where we'd put those on pause for now but then also.

Some other variable type expenses, whether it be from the commission side of things due to lower demand, but also.

Reduced travel, but more importantly, we've really looked out some of the organizational and operational side of things, where we felt that this was a good catalyst to reset some of the.

Components, we came into.

Some of the initiatives that we're looking out for the year now you know as we came into the year, we felt extremely comfortable with the way that we were allocating dollars. However, obviously considered covered my team. It's a need for us to just revisit some of that and so you know through a variety of different activities in that.

No one functional department was immune to everyone participated in some in the cost saving program in.

One form or fashion, but we've been really focused on you know as we mentioned that the scrip refocusing on the digital side refocusing were sharpening our focus on the innovation side of things as well the operations and just you know driving continuous improvement programs throughout the throughout the organization and ensuring that the organization structure is we can.

I would bring it accordingly based off of how were you know how we're viewing the business today.

Okay very helpful. I'll leave it there. Thank you guys.

Thank you.

At this time this concludes our question and answer that.

To turn the call back to Mr. wall, Brad for closing remarks.

Thank you very much we'd like to thank everyone for listening to todays call and we look forward to speaking with you. When we report our second quarter 2020 results in August Thanks, again for joining today.

Thank you.

Ladies and gentlemen, this concludes todays teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

You got this now next time you're in good.

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Okay.

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