Q3 2020 Clarus Corp Earnings Call
Good afternoon, everyone and thank you for participating in today's conference call to discuss Claris Corporation's financial results for the third quarter ended September Thirtyth 2020.
Joining us today for Aclaris Corporation.
Our aclaris corporations, President John Walbrecht, Chief administrative officer, and CFO, Aaron Kuni and.
The company's external director of Investor Relations Cody So I'll.
Following their remarks, well open the call for your questions before.
Before we go further I would like to turn the call over to Mr. SLA as he reads the company's safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking statements Cody. Please go ahead.
[music] Thanks area.
Please note that during this call. The company May use words, such as appears anticipates believes plans expects intends future and similar expressions, which constitute forward looking statements within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Forward looking statements are made based on the company's expectations and beliefs concerning future events impacting the company and therefore involve a number of risks and uncertainties. The company cautions you that forward looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward looking statements.
Potential risks and uncertainties that could cause the actual results of operations or financial condition of the company.
To differ materially from those expressed or implied by the 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 disruption and volatility in the global currency capital and credit.
Markets, the financial strength of the company's customers the company's ability to implement its business strategy.
The ability of the company to execute integrate acquisitions impact is a global climate change trend global climate change trends may have in the company and its suppliers and customers the companys exposure to product liability or product warranty claims and other loss contingencies disruptions and other impacts to the company's business as a result.
COVID-19 pandemic and government actions in restrictive measures implemented in response.
Stability of the company's manufacturing facilities and suppliers as well as consumer demand for our products in light of disease epidemics and health related concerns such as Koby 19 changes in governmental regulation legislation or public opinion relating to the manufacture and sale of bullets, and ammunitions buyer, Sierra and barn segment and the possession.
Use of firearms and ammunition by our customers the company's ability to protect patents trademarks and other intellectual property rights the ability of our information technology systems or information security systems to operate effectively including as a result of security breaches viruses hackers malware natural disasters vendor business interruptions.
Our other causes.
Our ability to properly maintain protect repair or upgrade our information technology systems or information security systems or problems with our transitioning to upgraded or replacement systems the impact of adverse publicity about the company and or its brands, including without limitation through social media or and connect.
Action with brand damaging events and or public perception fluctuations in the price availability and quality of raw materials and contracted products as well as foreign currency fluctuations the company's ability to utilize its net operating loss carry forwards changes in tax laws and liabilities tariff legal regulatory political and economic.
I'll make risks and the companys ability to maintain a quarterly dividend.
More information on potential factors that could affect the Companys financial results is included from time to time that accompanies public reports filed with the Securities and Exchange Commission, including the company's annual report on form 10-K quarterly reports on form 10-Q, and current reports on form eight K. All forward looking statements included in this call are based.
Upon information available to the company as the date of this call and speak only as the date hereof. The company assumes no obligation to update any forward looking statements to reflect events or circumstances. After the date of this call.
I'd like to remind everyone. This call will be available for replay through November 16th starting at eight P.M. Eastern Tonight. A webcast replay will also be available via the link provided in todays press release as well as on the company's website at Claris Corp. Dot com any redistribution retransmission or rebroadcast of this call in any way without the expressed.
And consent of Claris Corporation 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 hope everyone has seen healthy.
No 2020 has been a challenging year our portfolio of Super premium brand has consistently shown that through any deferral environment, whether it be a bad Windsor and economic recession. We're now a global pandemic. We will continue to perform this was proven again.
Third quarter results.
As indicated in our pre announcement a few weeks ago. Our Q3 results showed the strength of our well diversified brand portfolio.
Total sales increased 7% with record results for our CRM brand reach.
We generated 9.1 million in adjusted EBITDA, and 5 million in free cash flow, which.
Build our cash balance to $17 million.
These results.
We tie back to our well defined strategy of preserving brand equity, while continuing to execute our innovate and accelerate playbook across all the brands portfolios.
Me address this further by speaking about our specific brand and business performance.
Black Diamond sales continue to improve and ended the quarter down on the 8%.
Slide 19 is still hampering the returns of the normalized retail order patterns, particularly domestically. So much of our sales were in the form of replenishment or at once orders.
This is despite an otherwise strong consumer demand as people thought the outdoors drain pandemic related restrictions or concerns in fact in Europe Black Diamond sales actually increased 11% with growth in every category.
In our international distributor business, we made the decision to transition to more markets, Spain, and the United Kingdom.
Through our in House direct agency model, we're always looking to drive more direct contact with both our retailers and our consumers and this move is fully aligned with this strategy.
The transition reduced black diamond sales by approximately 2.5 million in the third quarter, but actually we'd expect to more than make this up in the future. Once it is fully internalized, we expect to start selling directly in the UK in the fourth quarter of 2020, and then in Spain in Q2 of next year.
For the brands as a whole by category climb was down only 1% mountain was down 7% and ski was down 9%.
Facing market over saturation and aggressive promotions by other brands. We are pleased to report that apparel was down only 22%.
Well apparel remains a key strategic growth initiatives.
It is important to note that the other categories make up roughly 90% of our sales are non perishable and are viewed as a necessity for activity based consumers.
Additionally, as we stated in the initial start of co bid last March.
We decided to not aggressively.
Aggressively promote the black Diamond brand using off price haptics, leaving this would actually strengthen our competitive position long term.
We believe the category results I, just mentioned shown the resilience of our products in this current environment.
Complementing our retail partners, we continue to drive strong sales in our direct to consumer business, which included sales online and through our retail stores.
For the third quarter total direct consumer sales were up 24% and up 31% just online.
We continued to experience improved activation in our E Commerce channel.
Due to more effective prospecting and re targeting in order to drive higher levels of site traffic.
We also continue to prioritize full price selling with a focus on storytelling to capture the consumers' interest during this.
Their increase time at home and online.
Within our own retail locations traffic was down significantly due to kogut conversions were up nearly double proven in innovative products and strong engagement wins out.
In our Europe business, we experienced record sales of 15.1 million up 135%.
Sales growth was across broad based across all geographies and channels both.
Well bullets and ammunition.
A continuation of our external demand drivers, such as social and simple uncertainties and unrest as well as the upcoming U.S. election drove very strong domestic demand.
We also returned to growth internationally in both our green box and OEM businesses due to the local markets finally opening up following their cobot concerns.
Last but certainly not least we experienced strong traction in our ammunition business with sales up 2.7 million or more than 3200% increase since last year.
We are extremely pleased with the role on the brand mediation initiative supported by game changer, very enemy sport Master and now the outdoor master collections each.
Each of these new collections highlights the Super fan falling within the CR brands, creating unmatched precision and accuracy in a full ammo cartridge.
We are not only pleased with our topline growth, but also our ability to still be extraordinary level of demand.
This time, we feel confident that just demand for our new ammunition collections will continue deep into 2021.
In early October October we had in the barn bullets brand, our newest superfan brand to our platform.
Wants has been an industry leader in both technology and innovation since the early 19 thirties and hold strong brand awareness amongst the core hunting enthusiast accomplish.
Complement Gerry consumer to those of the Seer brand much of which are focused on long range precision and accuracy.
Consumers have long trust bonds to be the ample of choice for all their hunting needs.
They are the leader in led street monolithic copper bullets in ammunition and have what we believe to be an untapped market potential.
In fact Barnes is already developing a strong pipeline of new technology to be launched in 2021.
Already catalyzing, our innovate and accelerate growth plan.
Early retail response to the acquisition has been very encouraging and we are quickly fill in the order book, we expect numerous financial and operational synergies to rise during the integration and we will use our strong balance sheet you execute upon the most parties most effectively together.
Together with the era Barnes gives us a leading specialty board and ammunition platform targeting our sights on this segment being more than 100 million in sales overtime in generating 20% to 30% adjusted EBITDA margins with high free cash flow conversions.
The acquisition cost caps off our strategy to build the leader in specialty premium bullets in ammunition and also demonstrates our ability to patiently wait for strategic assets to attract value that we expect to drive growth and maximize our returns on invested capital.
We look forward to seeking further acquisition efforts need in similarly accretive strategic areas, but outside of the board and ammunition market.
We expect to continue to drive our ways of momentum into the fourth quarter Gennine generating revenue of approximately 67.5 million to 69 million.
For Black Diamond, we're still true.
Tracking towards topline results being down high single digits, which has communicated previously would put us around the 2017 and 2018 levels.
Which were approximately $160 million and 170 $77 million respectively.
Variables that could deviate from this trajectory of recovery on the downside to our course retail and consumer response to what appears to be the second wave of Coke.
On the upside we're expecting a strong back country snow season.
Regardless I think it's important to reiterate the fact that the vast majority of our black diamond products, our non perishable and tend to be viewed as essential as to our activity based consumer.
And there will certainly be long to get outdoors snow starts this fall.
In our Europe business, we would expect domestic trends to continue their strong trajectory given the broader social and political environment.
We also expect to benefit more modestly from the acquisition of bonds in the fourth quarter as we continue to work through the integration efforts as we work to establish their relationships processes and ordering cycles that were severed when Remington entered bankruptcy.
We expect to have these activities completed by the end of the year or in early 2021.
It is still difficult to tell one our consolidated business will be fully normalized but we do believe consumers will continue to be loyal to authentic brands that focus on their core users.
Being the business made up of Superfan brands, we feel well positioned to handle the uncertainty in the future.
As noted in our growth playbook include seeking to further build our brands.
Our marketing position by investing in product innovation shrinking in our go to market strategy via sales and marketing and pursuing novel, New long term revenue opportunities.
Diversification of our portfolio across new product expansions geographies and channels has been one of our highlighted stream that is proven to be unique to the market.
Moving forward, we will continue to seek to invest in our direct to consumer channels, including E Commerce and flagship retail.
This focus has proven to build both increasing revenue and awareness, while preserving our brand equity.
In fact, we are proud to announce our next flagship Black Diamond store retail store in Big Scott Scott, Montana slated to open later this week.
Yes.
Lastly, we will continue to seek to leverage the strength of our balance sheet as we evaluate our long term growth opportunities.
Our primary focus is to maximize your granite growth and profitability of our brands.
We believe this focus along with taking a strategic and disciplined approach to our capital allocation will provide the highest levels or return on invested capital.
And as demonstrated this quarter, we regularly evaluate opportunities to acquire similar well positioned superfan brands to add to our portfolio.
We believe the growing demand in our brands.
Our fast growing direct to consumer channel and our team's ability to execute our innovate and accelerate strategy through the course of the pandemic has positioned us well for the future.
With that I now turn the call over to Erin Kennedy, our CFO, who will provide additional commentary on our performance in the third quarter and more detail on our game plan for the rest of the year. Thanks, Aaron. Thank you John and good afternoon, everyone jumping right into it for the third quarter of 2020 total sales in Q.
The 7% to $64.5 billion.
By brand Black Diamond sales were down 8% and see ourselves were up 135%.
The decrease in Black Diamond was primarily due to lower levels of retail demand due to cope at 19.
John touched on the factors that are offsetting that's such a strong strong brand equity product with less shelves instability or fashion risk our ability to fulfill orders a return to growth in Europe, and the strong E commerce business that is tailored to todays consumers needs.
The 135% increase since year was due to strong growth across the board.
Jim Green box international domestic and ammunition.
Consolidated gross margin in the third quarter decreased 50 basis points to 33.6% compared to 34.1% in the year ago quarter due to unfavorable impacts under supply chain and logistics as a result, as a result of cobot 90.
During the quarter, we experienced a 30 basis point margin tailwind from foreign foreign exchange overall, our sales and gross profit in the third quarter were positively impacted.
By foreign currency changes on a transactional basis by $279000.
With 30% of our global sales being denominated in foreign currencies, we attempt to manage our foreign currency risk on a continuous basis through natural hedges and foreign currency hedge contracts.
Euro.
Approximately 45% of for profit costs consists of materials, such as copper and left.
We seek to actively manage the impact.
The commodity costs have on our business.
Particularly on gross margins with our vendor partners. We believe that we have a sound process in place that enables us to mitigate this risk for a period of six to nine months out.
Another point on gross margins, specifically surrounding the impact from the trade war, our cost of goods sold were negatively impacted by approximately $220000 in the third quarter.
Our efforts to mitigate the negative bit tariff impacts continue to be on plan as we continue to decrease the amount of black diamond products source other China from 38% to about 27%.
Selling general and administrative expenses in the third quarter increased 14% to $18.7 million compared to $16.4 million in the year and the year ago quarter, primarily due to higher stock based compensation blacked.
Black Diamond brand. This year may was down 11% due to cost saving initiatives and Crs unit was up 14% due to the 135% sales growth. We are quite pleased with the expense management at both brands given their respective performance.
Net income in the third quarter was $1.2 million or four cents per diluted share compared to net income.
$3.5 million for 11 cents per diluted share in the year ago quarter. The decrease included $6.6 million of noncash charges and $1.4 billion in transaction costs compared to $2.5 million noncash charges and minimal transaction the restructuring costs in the same year ago quarter.
Sure.
Adjusted net income in the third quarter was $9.2 million were 30 cents per diluted share compared to an adjusted net income of $6 million or 19 cents per diluted share in the same year ago quarter adjusted.
Adjusted EBITDA in the third quarter increased 34% to $9.1 million compared to $6.8 million in the same year ago quarter.
Let me now shift to our liquidity.
September Thirtyth 2020.
Cash and cash equivalents totaled $17 million compared to $21.5 million last quarter and $1.7 million as of December 31, 2019.
During the quarter during the third quarter, we generated free cash flow defined as net cash provided by operating activities less capex of $5 million compared to a cash outflow of $4.9 million in the third quarter in the third quarter last year.
We also raised $11.5 million from three of our top 10 investors to bolster our financial strength and support our growth.
Total debt was $41.1 million and we're remaining access to roughly $38.9 million on our revolving line of credit.
Our net debt leverage ratio as of September Thirtyth EPS was 1.3 times.
We are comfortable servicing our 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 and fixed charge coverage ratio requirements in full compliance with our current debt covenants for the remainder of the year.
Please note our balance sheet as of September Thirtyth reflects the full purchase price of the barns full its acquisition of $30.5 million, even though we closed the acquisition in a few days after quarter close.
As expected inventory levels continue to decline and were $8.5 million below where we're where we had to 2019.
We have adjusted the flow of goods in line with expected future demand and continue to maintain strong relationships with our supply chain partners, where we can dynamically manage our inventory levels with demand.
On the Sears side, the business continues to experience significant output and greater efficiencies. So we remain in a strong position there.
Now turning to updates on or mitigation efforts from a financial perspective.
We continue to be focused on strong liquidity, the health of our balance sheet and generating maximum operating cash flow.
And the quantitative factors, we laid out earlier in the year remain intact.
Total operating expenses will be reduced by an estimated $9 million in 2020.
This has accelerated the first ship towards more of a digital presence sharpened our focus on key product categories improved operational efficiencies and driven a tighter connection with our distribution and supply chain partners.
Similar to our top line expectations. These cost reductions are expected to recalibrate, our EPS, usually within black diamond to levels that we experienced for that business exiting 2017.
We did decide to convert our recent quarterly.
Dividend back to a cash dividend as we continue to recover from the height of dependent but we believe that we have made great progress stabilizing the business across our diversified portfolio of brands and today's results are proof.
We continue to believe Clarence is well positioned both strategically and financially to navigate the cobot pandemic, we remain optimistic that consumer demand and retail orders will get back in sync as our partners get more confident about the shape of an extended recovery.
The current uncertainty created by the virus and the second wave means that visibility to a recovery path is limited there are many factors outside of our control like consumer and retail buying behaviors, which makes it difficult to provide specifics beyond 2020, but.
But I'd like to reiterate some of John's comments on our current business conditions and our priorities for the rest of the year.
As mentioned earlier the demand environment in RCR businesses continue to.
Continue to improve significantly we would expect as high demand to continue for the remainder of the year and likely into 2000 2021 or both.
Both in our domestic green box in the OEM businesses as our domestic partners restock their inventory as well as within our ammunition initiative.
For Black Diamond as more of our retailers continue to see their operations improve and consumers become more comfortable trafficking in those locations.
Our sales are expected to follow but.
But we've built nice optionality in our own direct business and the ability to fulfill when our customers need us most which should provide some resilience to any pro long stay at home mandates or virus spikes.
We.
As for the rest of 2020 strategic decisions will be prioritized around maximizing the organic growth and profitability of our brands. We shrunk. We believe this will provide the highest levels of return on invested capital.
But we will prioritize our strong balance sheet liquidity and the preservation of shareholder capital first and foremost before turning the call back to the operator for today I would like to recognize the performance and commitment of our great team Aclaris and our thoughts continued to be with those around the world suffering from the virus operator, we are now.
For Q and a.
Thank you Sir as a reminder to ask a question that you need to press star one on your telephone once again that is star one on your telephone to ask a question.
And our first question will come from Randy Konik with Jefferies.
Hello, guys. Good afternoon, how are you.
Good how are you.
Great that's great.
Quick question. So first question any color on it seems like obviously on the BD side of things businesses kind of picking up I think you said it was up in Europe, just any color on how we should be how you're seeing things for orders and a customer posturing.
For spring 2021.
I think we're positive about bring 21 we've.
We've seen momentum moving in spring 21, I think we as we've said.
Watching retailers very closely we.
We not only monitor sales per week, but more importantly inventory positions at each of our meat retailers and consistently the theme that we have seen the bookings continue to move up.
The business leans more and more towards Asap and those sales are increasing in the market inventory position that our retailers are way down and sales. We said sometime between now and as people load into spring 21, which effectively is probably march given the expectations.
This winter.
Sometime between now and then retailers will have to kind of re re fit all of their inventory levels to keep up obviously can't keep running negatives on inventory growth on sales and eventually you know not the to not get separated too far. So we're seeing that I think retailers are.
Still a little conservative as to how they planned this out now that there is a second wave you know maybe today's announcement by Pfizer on the vaccine was well give confidence on that maybe the holiday season, which seems to be kicking off strong.
At some point here.
Retailers and brands will come to a new norm of normalization in inventory levels and demand will start to align with consumer demand.
Hopefully that helps it thank you.
Helpful. And then just on CRM and barn side of things.
Can you talk about how Barnes gives you potentially more capacity or.
Really give us a pit maybe some picture about what the capacity kind of looks like today, obviously it seems as if you're in a position of demand far outstripping supply in capacity, so maybe give us some mosaic or thoughts around how that's playing out in terms of getting more capacity more supply to the market.
Okay. So obviously everybody would tell you that in the bullets in ammo world that.
That demand is far in excess exceeding what is capacity out there and thats from everybody.
So I think you have to look at capacity and break them down separately. If you look at the Sierra model, we've been investing in machinery as well as being smarter and smarter about our lean manufacturing in placements.
And the way in which we're really driving long runs and so our goal there is to continue to keep the pace we're at.
On the bullet side and increase our capacity both through machines as well as through efficiency on the ammo side.
Through partners with Oems as well as our own loading to keep chasing that but to be honest with you. We doubt in 2021, we won't be able to catch up to what that full demand is.
And we're accelerating that as fast as I think anybody else in the market or faster indicates a barnes because of it.
Management and ownership with Remington there is more capacity an opportunity there.
And we are staffing up in terms of people.
Our looking at additional machinery as well as how do we utilize the current capacity we have to reaccelerate that business. Fortunately the superfan never lift left that brand.
And we think there's significant capacity upside it well manage both in bullet, but also in ammo in 2021. So that's part of the integration and transition that we're doing is ramping that up.
And is there and said in the report using our balance sheet to help accelerate that brand here in the short term.
Super helpful. Thanks, guys.
Your next question comes from the line of Jim Duffy with Stifel.
Thank you good afternoon. Thank you guys.
Well good.
I wanted to start on Black Diamond can you talk about fourth quarter trends, you're seeing in differences in domestic versus international markets are there are different dynamics, we should we should consider for each market and then I'm curious your inventory position than snow sports product to chase demand that might carry into the first half.
21.
And building on Randy's question.
Can you comment for the Black Diamond brand on just the state of channel inventories in the spring.
Summer would spring summer goods, John it sounds like the retailers are really managing those lean.
Yes, so to answer all your questions one I think obviously.
Mark It is dealing with with co bid and either you know shutdowns or mandates a little differently.
Without question. The overall global theme is outdoor is dumb is on the rise.
In each market, it's slightly different given the the climate or whatever it is but you know I would say in in the third and fourth quarter. We are seeing a surge for outdoor is that has been translated into things like headlamps trekking poles gloves, even hi outdoor.
I mean equipment, obviously to your next question, we are seeing the surge in that country.
And you know it snowed in Utah This weekend in.
In the valley, probably about four inches it out to about 27 inches and the mountains were already you know out with many many people. So we are expecting as as have the trends are very strong that country.
Markets.
We are we have been chasing this in every aspect from ski Poles gloves outerwear snow safety equipment skin you name it bindings.
We will do our best to achieve a maximum opportunity. This last winter in servicing that market I think the.
One of the things we are learning.
BD and this was kind of one of our expectations of coming out of Kobe. It is that a rising tide rises all ships suffice it that all those ships can take that if they cant chase. It then obviously it really throws things into WACC and we've seen that and I think one of our our dictates has always been deliver on time have good fulfillment.
Easy to do business with feed the easiest partnership fulfill for someone and you will gain that business and now it's literally chasing and Aaron and the team have done a great job of managing our supply chain and maximize the net to this opportunity and then your final piece, yes, all the retailers are run in extreme.
Lee lean and inventory going into holiday and leaning more on whether its drop ship from us or just Asap orders and we are seeing Asap orders surged dramatically obviously, it makes a little tougher to forecast because it's not planned in the model.
For spring 21, you know.
We're seeing that take a turn we're seeing in Asap orders continue begins this spring, we think and and obviously you've been seeing pre season orders now coming back and being revisited and we do believe as I said to Randy in the earlier call that sometime between now and March retailers are going to have to load and significantly.
On inventories to keep up with consumer demand you can only run that lean quick turn mentality on inventories so long.
[noise] [noise] that's great. Thanks for all that perspective, John but I wanted to ask on the sphere of Barnes business.
You know how does that business split between Asap and forward orders and can you comment on your visibility into 2021, how far out into 21 is capacity spoken for with orders.
I would say that right now because demand so far exceeds capacity for the whole industry as a whole.
That it really doesn't matter between.
What we would call pre season orders are Asap orders at this point, it's totally based on availability in the market. You continue to we continue to receive orders from retailers as well as OEM, but they believe it's all predicated on your ability to you know to get manufactured to the to the bullet demand.
They all know is is more than than supply and then on the ammo. It's just all down to the components.
We see positive trends going on and and we lived to keep track of pre seasons, but like I said in this business.
It's really all moved Asap, especially now that there is not even a shot show moving on in January.
Got it and last winter and maybe you mentioned I missed it but could you speak to where you expect inventory levels at year end.
I did not but.
Based off of how things are trending we do anticipate that inventory levels will be very consistent with what we're seeing today.
Okay, what we reported at the end of Q3 others.
As John mentioned, you know one of our focus is just making sure that we continue to fill the gaps where appropriate obviously on the CRM side, we will continue to.
Focusing on increasing our overall capacity not necessarily from a machinery standpoint, but from a from a personnel or from a direct labor side of fees will be doing the same thing out a barnes and then on.
For Black Diamond, we feel that we have a steady flow of inventory that's properly calibrated for not only the recovery that we're seeing but also the increased demand, especially what the back country and also making sure that we don't see any.
Any hiccups associated with the with the new year and the way that the logistics in the ports are coming together with Chinese new year, and what people are expecting there, but overall, we anticipate that the inventory levels will be fairly consistent with what you saw at the end of Q3.
Thank you guys.
I appreciate it.
Your next question comes from a line of Lauren.
Now lets skew with Exane BNP.
Paribas.
Good afternoon, and thank you very much for taking my questions gentlemen, congrats on the acquisition of Barnes.
I'd love to hear a little.
Any commentary high level about your M&A strategy strategy going forward would.
Would you be interested in potentially pursuing further acquisitions in the in the bullets ammunition space or do you think your that business has set from organic standpoint and are there any verticals you would you would really like to touch upon going forward.
Yeah, I would say we.
We have been watching Barnes for over two years and that was always a hope and our strategy, believing that Sierra plus Barnes would literally pinnacle.
Pinnacle the top two premium bullet ammo manufactures in the marketplace and that we could build long term strategic growth opportunities off those two brands Ferrari that chapter today, it's closed.
In terms of the brand perspective of it.
For future acquisitions, our real focus is on more superfan brands in the outdoor space activity base that align with our consumers and our retail partners and our understanding and our strategy to innovate and accelerate brands that we know.
I have a super core consumer, but haven't haven't really focused on the go to market opportunity and we see more opportunities there than maybe they're able to see or able to exercise.
Ideally, we will stay in the outdoor space.
And like you said more mountain based when possible.
That's great to hear.
And a little bit more near term question here, but Eric did you parse out the revenue and EBITDA contribution from bars in the fourth quarter.
No we did not.
So for Bard's.
Weve highlighted that this is a business at the end of June Thirtyth was doing roughly $22 million revenues, we anticipate that we'll be able to start to ramp that up but we are still working through an integration process associated with that business. As John mentioned, you know there are certain activities that were separate because of the Remington bankruptcy that were in the process.
Repairing or rebuilding.
And then also from a from an EBITDA perspective. Please note that we've the way that we've talked about this in the past. This is a business that we expect once we get.
Up and going we will be generating anywhere from 25% to 30% EBITDA us.
Very helpful. And then my last question in terms of the fourth quarter.
And how should we think about the gross margin and then as you know it was pulled back for for the third quarter.
Are there any puts and takes we should think about in terms of estimate does it.
Whether its marketing or integration costs with with Barnes.
Yes. So as you may excluding part is going to be fairly consistent to what we saw in Q4 of last year.
There will be a little bit of noise, just from an integration side of things as we work through that process with Barnes.
From a gross margin perspective Q4 as anticipated.
Not only will we continue to see the strong growth and performance coming out of the CR Barnes businesses now, but also strong continued strong growth with our direct to consumer business and heart and.
More favorable product mix and so as a result, we do expect to see.
Nice recovery of our gross margins compared to what we saw in Q3, you get back on track with continue to fine you know to see.
Margin accretive or margin enhancing activities taking place.
That's great to hear thank you for all the color.
Your next question comes from the line of Matt Koranda with Roth capital.
Hey, guys. Thanks for that.
Doing well how are you guys.
Right.
One of the cover BD for a moment just your commentary around BD I guess suggests.
You know if you're at the midpoint of the guidance range that you've been providing you'd be closer to sort of 53 million or so in revenue in fourq, you, which is down a touch year over year, but everything you say I guess in the Q and a portion of this call seems to suggest theres quite a bit of strength given that inventory positions are relatively lean at the in the retail channel back country.
Ski demand is really strong so I'm just curious what factors would hold you back from getting toward the higher end of the ranges that you provided for BD and that sort of the upper 170 range for the full year, Yes, I think the only thing we've said everyone. It is.
I think too to the markets anticipation in some cases may be surprised but.
The second wave of co bid and just how that plays in.
One part you could be very positive about the growth of that country to be very positive that you're moving into the fourth quarter, which normally represents a strong surge because the holiday shopping because of the retail growth a D to C opportunities our own retail retail is catching up on inventory.
Conservatively and we our goal is to always.
Under promise over deliver and our view is that look you know.
In prep to these write ups during these write ups.
Here in Utah than last night Governor Herbert came out and.
To put new new.
Gauge lines on Utah relative to mask mandate socializing the whole thing because we've been searching not only in Utah, but obviously around the country. So that we just put that into the conservative view, we have no idea what occurs over the next six weeks you know as this goes on in the marketplace and obviously, we've already seen that in.
Europe as well and you now have to be careful obviously you know.
Our Q2 results would be extremely tough.
You know and we don't think it's that part, but as you know the UK other markets have already shutdown for weeks.
You know, we see it surging in central Europe in that country's and just not sure.
Ultimately how that impacts the consumers' ability to get out to shop, right and transitioning through the holiday window. So yes, there's some upside yes potentially is there some risk yes, unbeknownst to managing in a pandemic.
Theres fair Gotcha.
And then I guess that leaves depending on how much we want to give you a credit for on on the BD side.
And we can back that out of I guess, the you know the 67 and a half to 69 million in revenue guidance that would leave somewhere around 15 million and contributed.
Contributed from Sarah and Barnes in the fourth quarter, which I guess.
What I'm curious about is are we expecting Sierra to drop sequentially, just given I know it was a super strong quarter at Sierra with like $15 million in revenue, but given all the demand commentary you guys have provided that sounds very strong and industry sort of still trying to keep up with.
With overall demand I would expect to sort of drag that out for the next quarter or so at least I'm in why shouldn't we be doing bad and what is what's in the plan for Barnes I guess as well that would be helpful to understand yeah. So so in fairness to all those questions. Good good reading in the numbers and the tea leaves obviously, there is a conservative view on co.
When it comes to Sierra we anticipate to maintain flat to where we're at right now and what we're projecting than what we saw on you know in the back half of the second quarter and in the third quarter, and we don't see that changing given demand today.
In the bars seats in fairness, we acquired a business.
An asset transaction out of a bankruptcy and a lot of things that.
Would have been put into place in the second and third quarter in order to maximize the fourth quarter were not put into place in the second and third quarter because of either financial limitations strategy vision ordering components you name it and so you're obviously chasing towards that do we anticipate that that Barnes will have revenue of course.
Yes are we ready to project Barnes to perform the way we have managed Sierra no.
And it's going to take a little bit of transition that's not going to happen overnight.
Well, we publish their plan.
Both the capacity and frankly, the strength to be a great performer in you know in time.
And we're going to race like Crazy to get there we're just.
Putting out conservative now so that again, we you know.
We under promise over deliver.
Fair enough and then one more if I could sneak one and.
Just on barn, specifically.
How much slack ammo capacity do they have and how quickly can you convert that capacity to produce Sierra branded ammo would that be in the plan for next year, what would that imply I guess, if we got to sort of a normalized or annualized run rate of production on their equipment, where could we be with the ammo business.
So call it next year or so another two years out so.
Yes lots of trick question than they are in a positive way so.
Is there capacity, yes, as the brand been held down without question.
You know if you extrapolate that business out it it's probably a mid twentys to low thirtys number on today's trajectory or whatever it was.
One of what drives next year is in the ammo business is not just the bullets you can make flooded the componentry to make all the ammo in demand at the marketplace and projecting that out and secure in that the timeline and the vendor support for all those items, we we know.
Long term, we can accelerate this bank brand similar to the performance we've done with the era that is our expectation goal a lot of that is going to be determined in the next you know three to six months on how demand continues in the market and then our ability to secure both the kamada.
Indeed, as well as the components to accelerate that as quickly as we'd like.
Excellent does a great job and I'll jump back in queue.
Okay.
Your next question comes from the line of Ryan Sundby with William Blair.
Hi, guys. Thanks for thanks for taking my question.
With with the DTC channel up 24% during the quarter I think up 31% online is.
Is there a way to help us think about how that shook out between BD at Sierra to given kind of how different the growth rate during the quarter and then I guess more broadly just given the broader uptake we're seeing in the commerce undercover 19, and some of the growth you've done today is there a way you can kind of help us understand where your DTC penetration for today.
And where do you think thats also overtime.
Yeah, So just to backup and define that one that is all under the BD brand. So 24% when you combine retail which is obviously had an impact during cobot those.
Though still very positive and then online up 31% that does not include anything from Sierra Barnes online D to C revenue.
The second side of that and you know there's a fine line we walk here.
Within our DTC. Our goal is to continue to create super fans in the community and accommodation of new web site better interaction more content, we've seen that.
But it's also at the same time to keep a level playing field with our best retailers and not erode our retail partnerships by off price competition from our own brand.
Today, he represents about 10% to 12% of our business. We believe long term with the consumer trends that probably should represent 25% to 30%. We will continue to add flagship stores, which we think support the omni channel, which obviously has a positive impact that the flagship retail store, but also has a lot.
Term impact to the consumer on through E com.
We also believe that a rising tide of brand awareness through E com through flagship retail actually helps our retailers our retail partners perform better with the brand just more demand more products and then if we've always said.
If you've been to the trade show, we have a booth that ballpark 6000, 7000 square feet of product and you know it doesn't even fit everything we make within the brand of the 600 pages plus of the catalog, there's not a retailer in the country who will allocate.
Rightfully 7000 square feet, we don't even do that within our own flagship stores.
So clearly there is a lot of product out opportunities out there that allow us to have channel management as well as product segmentation to the consumers some things online some things through wholesale something's available in retail and all and only online as such so we'll continue to celebrate that I think the most.
Citing for US is that through this the interaction of arc Super fan consumer to our website has seen very strong growth in the number of visits time conversion on our site.
Thats just the function of.
Interacting with the brand at a higher at a higher cadence.
Got it.
Very helpful and then John I guess just.
With retailers, so focused on replenishment and running inventories Wayne does that force you to have to kind of change your approach to innovate and accelerate this year I guess is there still demand out there new product and how do we think about that influencing what you can control your power.
Yeah, It doesn't actually change the brand strategy at all and that's the great team about a super fan brand of why we love our our portfolio.
We believe we can take any super fan brand, obviously some of them closer to harp too was distribution relationships with retailers, the consumer or whatever but every super fan brand followed if they manage it well follows the exact same strategy innovate new products going to accelerate that the shift in the ace that doesn't change our.
Innovate and accelerate strategy and it doesn't even change the amount of new products that we try to innovate in the market innovation in the market may be a function of ability to work with factories in Asia or supply chains, because the co bid, but it doesn't slow down our desire to innovate.
Were really changes in how we service that market from a from a forecasting communication to our retailers to understand the trends they are seeing from their own consumers early enough often enough.
So that we can project knowing that they're not going to put as much pre season orders in because they're running leaner inventories in hopes of having higher inventory turns and be in much more more focused on their cash flow positivity. This at this moment.
We just have to be more in tune with those retailers to project that in order to maximize the opportunity and.
What we believe will occur from this is that rather than being he'd seen as a boat on the rising tide that rises when the tide rises that black diamond is becoming the rising tide itself and becoming a strategic competitive advantage through a lot of these big retailers, who are leaning on us or not.
Lets through D to C or retail or our ability to to participate with them work with them and deliver at a faster cadence.
As becoming critical to their long term success.
And we believe that's going to translate.
Into more market share now more markets here next year and as the market. We normalize is that market share will then translate into more revenue.
Got it makes sense. Thanks.
Your final question comes from the line of Mark Smith with Lake Street capital markets.
Hey, Mark Hey, guys how are you there.
Oh I apologize if some of this has been asked already but just look at it it was.
Really good Barnes and capacity.
Just talk about increasing any kind of ramping there is most of that investments in people and processes or is or how much of that comes down to capital equipment and investments that you need and it's kind of machinery and tooling. There yeah. I mean, we always will look at that Mark.
But thats always that's a third solution. The first solution you have to look at is do you have the right people to maximize machines you have today and obviously you know that's a function of how many ships how many people how faster they churn in the efficiency. The second is are you.
Are you maximizing from a lean perspective, the machines you have and a are you picking the right demand are you maximize and are you doing long runs versus short runs and changeovers and then finally, if youve maximize both of those in cannot create any more opportunity then by default you have to look.
Get buying additional machines at the Sierra level, we've worked on all three of those simultaneously as we as you know from previous discussions with those literally for the last 18 plus months in prep to that knowing that you know none of these things come on fast.
And you have to have you know very disciplined long term approaches to this indicates a barnes and this is the difference between these two brands in the case of Sierra when we acquired Sierra We would say it was in a very neutral position did it have back order, yes was or opportunity. Yes that was the brand held down no bread brand actually per.
Formed well and the retailers only request is more innovation more acceleration perfect Thats, a super fan brand in the case of Barnes.
Remington.
Probably didnt treat it the same way the Super fan brand and financially could make the investment in order to innovate and accelerate at the same pace, we would like and so therefore, it's kind of been held down a lot harder than than Sierra It will take a little bit more to get it going but once it gets going to know that you know out of the station.
It will have a lot of upside in momentum. So we're going to focus on the first two we're going to focus on maximizing the people and we're going to focus on maximizing the current capacity when those two and our plans can't get to where we are we believe the opportunity isn't the opportunity isn't driven by our vision of it is really driven by the demand of the order.
From our retailers, our OEM partners they set the pace because they tell us specifically each month, what they want from us and our goal is a brand that the Super fan brand is to deliver that and people get confused it's not a financial plan. The financial results are just the outcome of the strategy is just live up to the expectations retailers isn't that.
We can't reach their goals and their demand then we will look at what that comes out from a machinery or capex issue, but thats not our first and foremost role and we don't think that the lowest hanging fruit at this moment.
Okay, Great and then looking at Black Diamond you know as we look at winter sports, especially in Europe can you talk a little bit about trends that you're seeing today and then I think that we focus a lot on North America and Europe, but can you talk also any trends and kind of what businesses like what you're seeing in Asia or anywhere else in the world.
Yeah, I think I think two things that we continue to see that as the brand continues to gain momentum and that what we've always expected that this equipment in house would start to trend late with more and more super fan brand consumers into new category opportunities, which has led us to.
Footwear apparel packs loves his opportunities and we're seeing those surges in the business, obviously you know.
You got to you got to caveat that with that we're still seeing serves as our equipment. So that the growth is not solely on the on the apparel footwear, perhaps the upside obviously winter is surging and we're seeing that.
Already and we.
We expect it to be a big winter year.
You know backcountry ski probably represents about 7% of the industry. It will probably double this year, but it will feel like it represents 50% of the industry because the amount of tension it will get.
And our goal is to maximize the all the opportunities of that in the short term, but realize this is a long term play for this brand continued to gain market share as rapid use you can good years and bad years continued to innovate Nick celebrate that maximize our opportunity to deliver on time and have some with our retailers and so obviously chase NIM.
Suntory in segments as fast as we can.
But there will come a point this season that you know, we will probably run out of skin beacons Abbvie sets binding skis you name it no matter how many reorders, we put in the season has a window.
I think the same is true of Asia, you know Asia has been a little bit behind because of coconuts had longer impacts over there.
And they'll start to see these surges come back.
Do you think you're going to like the things that really started off and opened up in Europe, and then came to the United States and that will eventually come come to the AG markets.
The you know three to six month lag there's all this starts to come back.
Okay and then the last one for me to squeeze one more in just retail stores you guys have been you know you've opened more over the last year or so here can you talk about what you've learned and then kind of your appetite to continue opening retail stores, yes.
Yep. So I think what we've learned is that two of our expectation is that our super fan brand.
Slide the experiences and that consumer wants to buy equipment in order to have the best days in the mountains or to do something you've never been able to do or have an experience and retail flagship stores in destination markets Park City Bozeman, Montana Jackson in Wyoming in places like that.
At the consumer gets not only learn about the profit forget the instruction and engagement with the brand that allows him to have the best days out there and that's what's critical for us the amount it in there.
Vince engagement now obviously during co, but thats been lessened, but to our surprise, though traffic had been weighed down our conversion has been a lot higher and consumers getting out and they're learning online or you know through through other.
Opportunities Instagram Youtube whatever about our products.
We're positive on it obviously, we're very cautious about where we put stores are in negotiation on the space of the stores because that's obviously the biggest cost how well, we manage that communication and the cadence.
We like what we're doing we're going to be Super smart about as we continue to expand and look for opportunities not only domestically but internationally.
Okay, great. Thank you.
At this time. This concludes our question and answer session I would now like to turn the call back over to Mr. Albrecht for closing remarks.
Okay. Thank you guys for todays meeting we really appreciate the time, you've taken with US we look forward to speaking to you again after the fourth quarter and our thoughts on moving forward in 2021 and beyond thank you.
Ladies and gentlemen, this does conclude today's teleconference.
You may disconnect your lines at this time, thank you for your participation.
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