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Edited Transcript of CLAR earnings conference call or presentation 6-May-19 9:00pm GMT

Q1 2019 Clarus Corp Earnings Call

SALT LAKE CITY May 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Clarus Corp earnings conference call or presentation Monday, May 6, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aaron J. Kuehne

Clarus Corporation - Chief Administrative Officer, CFO, Secretary & Treasurer

* Cody Slach

Liolios Group, Inc. - Director of IR

* John C. Walbrecht

Clarus Corporation - President

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Conference Call Participants

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* David Michael King

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* James Vincent Duffy

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Michael Milton Yuji Kawamoto

D.A. Davidson & Co., Research Division - Research Associate

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Presentation

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Operator [1]

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Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's financial results for the first quarter ended March 31, 2019. Joining us today are Clarus Corporation's President, John Walbrecht; Chief Administrative Officer and CFO, Aaron Kuehne; and the company's external Director of Investor Relations, Cody Slach. Following their remarks, we'll open the call for your questions.

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

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Cody Slach, Liolios Group, Inc. - Director of IR [2]

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Thanks, Gigi. Please note that during this call, the company may use words such as appears, anticipates, believes, plans, expects, intends, future and similar expressions which constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on the company's expectations and beliefs concerning future events impacting the company and, therefore, involve a number of risks and uncertainties. The company cautions you that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. Potential risks and uncertainties that could cause the actual results of operations or financial condition of the company to differ materially from those expressed or implied by forward-looking statements used in this call include, but are not limited to, the overall level of consumer 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 and integrate acquisitions; the company's exposure to product liability or product warranty claims and other loss contingencies; the stability of the company's manufacturing facilities and suppliers; changes in government regulation, legislation or public opinion relating to the manufacture and sale of bullets and ammunition by our Sierra segment and the possession and use of firearms and ammunition by our customers; company's ability to protect patents, trademarks and other intellectual property rights; any breaches of, or interruptions in, our information systems; fluctuations in the price, availability and quality of raw materials and contracted products as well as foreign currency fluctuations; company's ability to utilize its net operating loss carryforwards; 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 company's financial results is included from time to time in the company's public reports filed with the SEC, including the company's annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

All forward-looking statements included in this call are based upon information available to the company as of the date of this call and speak only as 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 would like to remind everyone that this call will be available for replay through May 20, starting at 8 p.m. eastern tonight. A webcast replay will also be available via the link provided in today's press release as well as on the company's website at claruscorp.com. Any redistribution, retransmission or rebroadcast of this call in any way without the express written consent of Clarus Corporation is strictly prohibited.

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

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John C. Walbrecht, Clarus Corporation - President [3]

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Thank you, Cody, and good afternoon, everyone. It's great to be joining you today.

The momentum of 2018 continued into the first quarter of 2019 with sales growth across every brand, category, geography and channel. Sales were up 15% to a record $61 million due to our continued dedication to product innovation as well as better order fulfillment and effective marketing campaigns. Aiding our strong first quarter performance was the favorable winter weather that extended late into the season in both the U.S. and in Europe, which drove 49% year-over-year growth in our ski category. Sales growth was also due to the shipment and strong sell-through of the new Black Diamond beacon products, which you may recall, we moved from the fourth quarter of last year into first quarter of this year. Additionally, our mountain and climb categories, were both up 12%, further supporting a quarter that experienced solid performance across the board.

Accompanying strong top line results was continued gross margin expansion, with 60 basis points of improvement compared to our adjusted gross margin in the first quarter of 2018. Increases like this have been a familiar trend as we continue to make great strides on delivering truly innovative product to our customers on time, improve sourcing and our supply chain activities and more importantly, our increased operational efficiencies.

We also continued our focus on efficient brand investment allocations, which led to selling, general and administrative expenses increasing only 3% in the quarter, significantly below that of our 15% sales growth. This resulted in meaningful growth of both net income and adjusted EBITDA as well as adjusted EBITDA margin increasing 370 basis points to 11.8%. Our financial discipline has allowed us to reinvest in our brands to drive increased product innovation, higher levels of brand awareness and demand, all of which we believe strongly position us for the long term.

Now I'd like to dive into our category results within the Black Diamond brand. Starting with ski. Sales in the first quarter were up 49% due to the strong winter I just referenced. As we laid out on our first -- on our last call, we were chasing demand with our winter products, including our avalanche safety gear. This continued throughout the first quarter as we saw increased demand and consumer willingness to wait for the new products. Additionally, as we expected, there was pent-up demand for the Black Diamond beacons, which we began shipping in the first quarter and have been well received both on our retail partners as well as our end consumers.

Turning to apparel. Apparel in the first quarter was up 18% driven by continued strong demand for bottoms, logo wear and sportswear. The first quarter was a relatively tough comparison for the apparel category as the first quarter of last year saw the introduction of our best-selling Stretch Rainwear line. That said, we continue to see positive strong momentum across the offering of apparel and remains one of our fastest-growing categories with what we believe is still a significant runway for continued long-term growth.

Our mountain business was up 12% due to the strength across gloves, lighting and packs. Our mountain business continues to be an area of strategic focus where we believe we are underpenetrated from both a product and a distribution standpoint on a global basis. Given the large addressable markets for each of these product categories, we are encouraged by the continued strong performance and only see further opportunity to grow our share.

Our climb category was up 12% in the first quarter, driven by the strength of our carabiner line and the continued positive overall trends and popularity within the climb industry. Additionally, one of our fastest-growing product segment within climb is that of footwear, which continues to gain traction with existing consumers and is bringing new consumers into the Black Diamond brand. Our footwear business grew 60% in the first quarter, led by continued strong momentum within our rock climbing line. Going forward, we believe there's a huge market share opportunity in the footwear space that we can seek to capitalize on through continued innovation, focused execution and additional product extensions, more on this later.

Turning to Sierra. We experience strong organic growth within the Sierra brand, with sales up 7% for the first quarter of 2018. This was achieved despite a broader overall firearm and ammunition market declining at an estimated low double digits. The go-to-market improvement we've been implementing at Sierra continue to drive market share-leading results.

Now on to some regional comments for the first quarter. Sales domestically were up 19% due to solid performance in both wholesale and the direct-to-consumer channels. Within wholesale, Black Diamond key accounts experienced strong demand across all of our major categories, again, led by ski. The strength in our key accounts were aided by our efforts to foster deep relationships with these retailers, including providing market and visual merchandising support as well as partnering with them on first-to-market product launches.

In our international regions, sales were up 11%. Europe had a strong preseason bookings, which led to increased replenishment orders. Japan, Korea and Australia continue to be markets where we believe we have substantial long-term growth opportunities. These markets have favorable trends surrounding the outdoor activities and, in particular, when it comes to our climbing, mountain and apparel products.

Our strong performance in the first quarter was a great start to 2019 and furthers the momentum we've built across the brand portfolio. We have an extremely compelling product offering for the spring and fall 2019 seasons, and we expect we'll continue to propel our brands forward, drive awareness and grow our market share. On top of this, we believe that our mindful capital allocation strategy, which is focused on quarterly dividends, share repurchases and the opportunistic acquisition of additional super-fan brands, provides the opportunity to drive outsized returns for our shareholders.

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

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Aaron J. Kuehne, Clarus Corporation - Chief Administrative Officer, CFO, Secretary & Treasurer [4]

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Thank you, John, and good afternoon, everyone. Jumping into our results for the first quarter of 2019. Sales increased 15% to $61.2 million compared to $53.3 million in the same year ago quarter. And on a constant currency basis, sales were up 16%. Along with the strong category and regional growth performance John just mentioned, the increase was driven by 16% growth in Black Diamond and 7% growth from Sierra. Gross margin in the first quarter increased 250 basis points to 36% compared to 33.5% in the year ago quarter. The increase was primarily due to favorable brand mix and an inventory fair value adjustment that was incurred in the first quarter of 2018. This was partially offset by foreign currency exchange headwinds from the strengthening of the U.S. dollar as well as impacts from channel mix given the strong momentum we see in our independent global distributor network. On a more normalized basis, gross margin in the first quarter of 2019 increased 60 basis points compared to an adjusted gross margin of 35.4% in the first quarter of 2018, which is adjusted for the aforementioned fair value inventory step-up associated with the Sierra acquisition.

Overall, our sales and gross margins were negatively impacted by $0.8 million by unfavorable foreign currency changes on a transactional basis. The primary cost of our inventory is denominated in U.S. dollars while 33% of our global sales are denominated in foreign currencies, primarily the Euro, Canadian dollar, Norwegian kroner and Swiss Franc. We intend to manage our foreign currency risk on a continuous basis through natural hedges and foreign currency hedge contracts. Although we have hedges in place for the different cash flows denominated in foreign currencies, these hedges will never be a perfect offset to the actual currency movements, especially with the currency volatility we've recently experienced. These hedges also do not protect our financial statements from that translation impact we experienced from these foreign currencies.

In our reported sales and gross margin, our hedge has offset approximately $0.3 million of foreign currency exposure in the first quarter. We now expect foreign currency to have a negative impact of approximately $2 million on full year 2019 results when compared to the prior year.

At the Sierra level, approximately 50% to 65% of our product cost consist of materials, such as copper and lead. We actively manage, with our vendor partners, the impacts the cost of commodities has on our business, specifically on gross margins. We believe that we have a sound process in place that enables us to mitigate this risk for a period of 6 to 9 months out.

Another point on gross margin, specifically surrounding the current trade war. Based upon the tariffs enacted to date, we expect cost of goods sold in 2019 will be impacted by an estimated $450,000, which we are in the process of seeking to mitigate. While it is still unclear if additional tariffs will be levied, we do believe we'll be able to absorb the current proposal in our model. In addition, we are focused on 4 primary mitigating activities. First is resourcing. We are working with our diversified supply chains in coming up with different sources for product coming out of China. Second is repricing. We are working with our retailers to pass along some of the costs. Given our pace of recent product innovation, however, these conversations are a natural progression and, we believe, will have a positive outcome. Third is recosting. We have been working with our vendors to renegotiate costing to offset some of the impacts. And finally, we are optimizing logistics to bypass the U.S. on international shipments.

Selling, general and administrative expenses in the first quarter were $17.6 million compared to $17.1 million in the year ago quarter. And as a percentage of sales, SG&A declined 350 basis points to 28.7%. We continued our focus on the reallocation and scaling of our SG&A to drive strong brand growth in areas we believe will grow and support the brand but also generate the highest return on invested capital.

Net income in the first quarter increased significantly to $3.8 million or $0.12 per diluted share compared to $0.4 million or $0.01 per diluted share in the year ago quarter. Net income in the first quarter of 2019 included $3.1 million of noncash charges and $0.1 million of transaction and restructuring costs compared to $3.2 million of noncash charges and $0.2 million in transaction and restructuring costs in the first quarter of 2018.

Adjusted net income, which excludes noncash items as well as transaction, merger and integration and restructuring costs increased 82% to $6.9 million or $0.23 per diluted share compared to $3.8 million or $0.13 per diluted share in the first quarter of 2018. Adjusted EBITDA increased 69% to $7.3 million compared to $4.3 million in the year ago quarter. As a percentage of sales, adjusted EBITDA increased approximately 370 basis points to 11.8% compared to 8.1% in the first quarter of 2018.

Net cash provided by operating activities for the first quarter of 2019 was $5.7 million compared to $7.3 million in the year ago quarter. And capital expenditures in the first quarter were $1 million compared to $0.9 million. Free cash flow, defined as net cash provided by operating activities less capital expenditures, for the first quarter was $4.7 million compared to $6.4 million in the year ago quarter. The decrease in free cash flow was solely driven by timing differences associated with the changes in our working capital, as our profitability increased significantly.

Now moving on to the balance sheet. At March 31, 2019, cash and cash equivalents totaled $2.5 million, unchanged from December 31, 2018. At March 31, 2019, total debt was $18.3 million compared to $22.1 million at December 31, 2018.

Now switching gears. Our 2019 financial outlook remains unchanged from what was provided on the last call. As a reminder, we operate our business on two 6-month seasons, spring/summer and fall/winter. At this point in the year, we believe it is prudent to maintain our outlook despite our strong first quarter performance, but we will be revisiting this at the end of the second quarter. To reiterate, sales are still expected to increase approximately 8% to $230 million compared to $212.1 million in 2018. This assumes sales for Black Diamond to increase high single digits to low double digits and Sierra to increase low single digits. We still expect adjusted EBITDA to increase 20% to approximately $25 million in 2019 for a margin of approximately 10.9% compared to 9.8% in 2018.

With this margin expectation, we expect to cross the 10% adjusted EBITDA margin threshold, which was a long-term target we introduced a couple years ago, and is further proof that our operating strategy is working and that our brand portfolio is on solid footing. This outlook includes the appropriate amount of investment into our brands to drive awareness and product innovation, and we believe is a testament to the leverage we can drive throughout the organization. We also expect to still generate free cash flow from operations of approximately $10 million after approximately $4.5 million in capital expenditures, which incorporates additional investments in our ability to create better consumer experiences, innovate and launch new products at a faster rate, increase production capacity and to solidify systems for greater insights and scalability.

As announced earlier today, we terminated our ABL facility with JP Morgan Chase bank and entered into a new $100 million cash flow facility with them. The facility includes a syndication with 2 additional banks. Our new cash flow credit facility provides us with increased flexibility in capacity, which we believe will aid to maximize our -- aid in maximizing our growth and capital allocation strategies. Additionally, we have a sound capital structure and a strong balance sheet in place and our new credit facility adds to that strength.

Before passing the call back over to John, as a reminder, our common stock continues to be subject to a rights agreement that is intended to limit the number of 5% or more owners and, therefore, reduce the risk of a possible change of ownership to maximize the value of our NOLs. Any such change of ownership under these rules would impair our existing and significant NOLs for federal income tax purposes. As of March 31, 2019, we estimate that we have available NOL carryforwards for U.S. federal income tax purposes of approximately $141 million.

This concludes my prepared remarks. Now I'll turn the call back over to John.

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John C. Walbrecht, Clarus Corporation - President [5]

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Thanks, Aaron. Now that we've highlighted our strong results for the first quarter, I'd like to transition to a product discussion for the upcoming fall '19 and spring '20 seasons.

For both seasons, we are doubling down on those categories where we believe there is significant runway for growth and an opportunity to grow our market share. These include footwear, apparel, gloves, trekking poles, packs, amongst others. For fall '19, we expect to have over 150 new products slated for launch. And for spring '20, we will continue this momentum with another 125 plus slated for launch.

Now turning to fall '19. As we discussed on the last call, Black Diamond's fall '19 offerings have already garnished significant attention and awards at the recent trade shows. The new product introductions, including the Vision Down jacket, which is our strongest and warmest down jacket; the Approach Down, which is our lightest down jacket; and the Boundary Line Mapped Jacket, which has a stretchable base layer that provides active thermal regulation and moisture management are just a few of the new apparel items. We have also some major updates in gloves with the Solano-heated glove, which deploy supplemental battery-powered heat as well as new ski gloves and technical liners. This is the glove that won the ISPO Gold Award.

Backcountry skiing and snow safety continues to be a significant emphasis of Black Diamond with the expansion of our most innovative collection of JetForce packs to-date, featuring the JetForce Pro, the Tour and the new Ultralight. The collection has also already won numerous awards from the Outdoor Retailer ISPO shows earlier this year. Finally, the latest innovations in headlamps, trekking poles, ultralight apparel and packs, Black Diamond has built an exceptional and expansive offering for fall '19.

Moving forward into spring 2020. For spring 2020, with the inclusion of climb in the 2020 Summer Olympics in Tokyo, we will see significant momentum within the climb industry. We are excited to introduce the expansion of our footwear, offering to include approach shoes. We have experienced rapid growth in the footwear category at a much faster pace than we had originally planned, and we expect that this expansion, which is a natural extension of our performance footwear line, will fuel this momentum. We expect to initially launch the approach shoes at REI this coming fall to test the market and then expect to launch globally for spring 2020. We have previewed the approach shoe lineup at various trade shows and already have received extremely positive feedback.

We also expect to release new and refreshed products across climb, mountain and apparel. We're excited about the anticipated launch of a complete new carabiner line as well as the new C4 protection, a broader range of harnesses, an expanded line of headlamps, new trekking poles, expanded packs as well as new technologies within bottoms and sportswear in the apparel category. Supporting these product launches will be a marketing campaign focused on accelerating in-store and consumer engagement via our athletes, events and more robust digital presence. We also expect to add additional retail locations in certain key markets, elevating the awareness and the demand of our brand in a more consumer-centric manner.

Looking forward to Sierra. Turning to Sierra, the brand continues its streak of strong results in the quarter despite the further contraction of the broader bullet and ammunition market. This dynamic is rare in our space and is a testament to Sierra's brand strength, high-performing and innovative products and most importantly, its consumer loyalty. Also with our recent expansion into the ammunition category, we have another avenue to further drive awareness and market share gains. The ammunition carries on the tradition of long-range accuracy that Sierra so far has deservedly earned, and we look forward to leveraging Sierra's brand strength in this large adjacent product category. We anticipate more ammunition extensions to follow in later 2019 and beyond.

Looking ahead, in the face of market headwinds at Sierra, we will focus on what's in our control, that which is continued product innovation, international expansion, building strong relationships with our consumers, enhancing our go-to-market process and driving efficiencies in our operations.

For SKINourishment, we expect the platform we have built at Clarus will provide growth opportunities for SKINourishment's existing portfolio while targeting other sport-enhancing products using natural, organic, cannabis-infused or alternative, all-natural ingredients. We believe we're uniquely capable to significantly grow the SKINourishment brand and product portfolio given our global brand ambassador team and our distribution footprint, our commitment to innovation and a strong focus on sales and marketing in our go-to-market process. We are in the early days of this integration process as well as enhancing the brand's go-to-market process, and we expect to start generating benefits from our strategy in the second half of 2019.

In terms of future M&A, it is important to reinforce that our primary focus continues to be on the organic growth and increased profitability of our existing brands as we believe these provide the highest level of returns on invested capital. With that, being said, a main component of our capital allocation strategy is opportunistically acquiring super-fan brands. Our opportunistic approach to M&A continues to be supported with a steady pipeline of opportunities, whether they be tuck-in to our already existing portfolio or another leg to our consumer-facing activities.

As a reminder, we define super-fan brands as brands with leading product market share and significant awareness amongst the core consumer. These brands typically have extensive growth opportunities through market share gains through increasing brand awareness outside of the core consumer and through accessing our distribution and supply chain platforms. We are constantly looking at brands that will fit in well with our current portfolio.

Supporting our ability to make strategic acquisitions are the profitability and cash flow improvements of our current portfolio has produced this year as well as expected to continue to drive in 2019 with our increased flexibility and capacity under our new cash flow credit facility that Aaron mentioned.

Before getting to Q&A, I'd like to reiterate how encouraged I am with the overall strength of our brand portfolio and more importantly, our team's successful execution of our long-term strategic plan. Our results over the last several quarters are proof that the changes we are making to the business are working and are aiding our brands in growing their awareness and their subsequent market share. We are intently focused on driving innovation through all of our product categories to provide a compelling offering to our consumers. We are leveraging our core strengths within each brand in the product development process, which is one of the reasons why our new products have been so well received at retail, with consumers and to the industry trade. This focus has been the backbone of our strong results over the last several quarters and was evident in the first quarter. I'm confident in our ability to remain on this path, which combined with our solid capital allocation policy, will continue to drive outsized value for our shareholders.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Jim Duffy from Stifel.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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A couple of questions for you. Nice work on the quarter. I'm wondering if you can kind of disaggregate the ski component of the business and bring it down to what type of trends you saw in the spring business component of the first quarter. And related to that, do you think about your business in 2 seasons? What's the outlook for the spring business as a whole?

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John C. Walbrecht, Clarus Corporation - President [3]

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I think -- I'll answer the first part and let Aaron follow on to answer the questions that I don't catch. Obviously, we saw a momentum in the first quarter with ski and snow safety, and we posted that. And of course, ski doesn't trend over into the second quarter into our season. But we continue to see the momentum in climb, in mountain, and apparel and footwear in what we would call traditional spring categories, and even within mountain, growth in trekking poles, headlamps, packs. And our belief, as I've always said, is rather than try and blow this up 1 category, 1 season, 1 geography, 1 channel, we really try and focus on delivering each and every business category segment in each calendar quarter as if it was our only business. And wherever the winter trends play in our favor, sometimes great and in other cases, not so much.

And in regards to the second half of the year, we're optimistic about how things are going. Obviously, we just finished the prebooking stage of that, and so a lot will transpire between now and when we start shipping in fall Labor Day window. But we were strongly optimistic and positive about how the bookings were coming in.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4]

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Great. And then next question is on the SG&A. How did you guys do it in the quarter? Just terrific leverage. With that type of sales growth, I would have thought maybe a lot of variable costs and so forth would make that more challenging. Can you dig in some on the key areas where you're finding SG&A savings?

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Aaron J. Kuehne, Clarus Corporation - Chief Administrative Officer, CFO, Secretary & Treasurer [5]

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Yes. So one of our focuses has always been on that of reallocation. And despite coming into the year with a certain budget or plan, every day, we look -- we relook at what we believe to be opportunistic in terms of maximizing the value proposition of the various brands within the go-to-market process, and that's where we still made substantial investments or saw increases. But then on the operational side, we continue to be very focused on the operation -- on operational efficiencies. And so as a result of the growth that we saw, we obviously didn't cut expenses but we were able to garner quite a bit of leverage by just being prudent and disciplined in our approach, continued to invest in the areas that we believe provide us with the highest levels of returns but also continue to look at ways of how we can optimize but also ensure scalability within the supporting activities. And so this is just the manifestation of a sound strategy and approach but also the great work of a great team that continues to embrace these elements and these values that we're instilling in the business.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [6]

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Great. Really nice work. Last one for me, and I'll let someone else jump in. Aaron, you had previously spoken about having 55-45 split of the year. Is that still how you're seeing things playing out as we think about [indiscernible].

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Aaron J. Kuehne, Clarus Corporation - Chief Administrative Officer, CFO, Secretary & Treasurer [7]

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Yes, that's still correct.

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Operator [8]

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Our next question is from Dave King from Roth Capital.

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

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Maybe first on the EBITDA guidance. Aaron, did you say how much or how we should think about the 11% EBITDA margin between gross margin and the ability to leverage SG&A as the year progresses?

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Aaron J. Kuehne, Clarus Corporation - Chief Administrative Officer, CFO, Secretary & Treasurer [10]

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We didn't get into that, Dave. We've kept our outlook pretty consistent with that of last year where we focus on, one, the top line revenue guidance along then with the EBITDA and EBITDA margin guidance. We did provide some additional color or commentary the last call where we highlighted that we made substantial improvements or gains when it came to gross margin in 2018. And we knew that 2019 would be a little bit more difficult to be able to realize those same type of improvements in gross margins, just concerning some of that transitional activities from a sourcing and supply chain activity that we have going on. We do believe that those transitional activities will benefit us, starting in Q1 of 2020. And so as a result, we view 2019 to be more in line or more consistent with that of 2018. And that's why you see the 60-basis point margin improvement in Q1 on an adjusted basis.

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [11]

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Okay. So then it sounds like it's sort of similar to last year's level, similar to the improvement you saw maybe [indiscernible].

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Aaron J. Kuehne, Clarus Corporation - Chief Administrative Officer, CFO, Secretary & Treasurer [12]

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Yes, yes. We have a few different initiatives at play where we believed -- continue to drive gross margin improvements. And this is a focus, holistically, that we have, where we look to maximize through our product design, the position, the repricing, et cetera, et cetera, but also to optimize on the back-end through our sourcing and supply chain activities. And we have a major initiative at play taking place right now, with some of our Black Diamond hardgoods that is progressing well. But as I say, we really won't see the benefits of that until Q1 of 2020.

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [13]

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Okay. Perfect. Then turning to Sierra, for the quarter, do you have the breakdown between green box and OEM, and anything you could highlight on those fronts? And then have you begun shipping your own ammunition yet? Or when should we start seeing it in stores?

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Aaron J. Kuehne, Clarus Corporation - Chief Administrative Officer, CFO, Secretary & Treasurer [14]

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Yes. So we stay away from getting down into the specific breakouts between OEM and green box. Just know that, holistically, it's a 50-50 split. We did see continued improvement -- one of our initiatives, coming into 2019, was focusing also on the international side. As we've discussed before as we bought the business, we knew that one of the opportunities was the go-to-market process, which we focused on domestically, and we saw the benefits of that. Coming into 2019, we also placed more emphasis or leaned into more of our international partners, and we saw the benefit coming from there as well. And to answer your question on the ammo side, yes, we did start to ship some of our ammunition, albeit quite insignificant to the overall results. You'll see most of the shipments will start to occur late Q2, early Q3.

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [15]

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Late Q2, early Q3. Okay. So when you said you did, did you mean you saw a little of that in the first quarter or is that you're saying, as of May 6, you've started to ship a little bit?

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John C. Walbrecht, Clarus Corporation - President [16]

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In the first quarter, we did ship a little bit.

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Operator [17]

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Our next question is from Michael Kawamoto from D.A. Davidson.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [18]

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Congrats on a good start.

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Aaron J. Kuehne, Clarus Corporation - Chief Administrative Officer, CFO, Secretary & Treasurer [19]

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Thanks, Michael. Appreciate it.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [20]

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Yes. So you noted that ammo industry was down, I think, low double digits. Just curious what you're hearing from your partners domestically and the retailers on their outlook for the rest of the year in the category. Then I'd imagine that the part of the market that you play in is in better shape than the industry as a whole. Is that still the case?

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John C. Walbrecht, Clarus Corporation - President [21]

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I think what everyone -- last SHOT Show, the perception of the marketplace or the hope, I would say, was that we would see a flat Q1 and a Q2. And that by Q3, Q4, whether it was the political momentum or just we don't hit rock bottom and new product innovations, marketing, the buzz, hunt season, that we'd start to see a lift. I think now, as you're seeing the numbers posted by other ammunition and/or weapons manufacturers posting that the quarter was softer than expected and probably ranged in the low double digits to mid-double digits of -- in the teens on a decline.

I would say, from us, we believe that point of difference is constantly putting out new innovation and keeping the gas down. And as we move into fall, we'll continue to do that, both with our OEM partners where we continue to be very innovative in product as well as in our offerings to consumers. And I think now the industry is hoping that by Q3, Q4, it starts to be flat, and maybe late in the year, some positive back. I think that's the best-case scenario in the marketplace right now. Our belief is that it's always been about market share, both through our OEM partners and to our consumers, that at the end of the day, it's create consumer-desired products, you'll work through the marketplace.

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Michael Milton Yuji Kawamoto, D.A. Davidson & Co., Research Division - Research Associate [22]

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Got it. That's helpful. And then just on your point about innovation, can you maybe share some initiatives you're working on maybe the ammunition side or in bullets or anything like that?

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John C. Walbrecht, Clarus Corporation - President [23]

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I think two things. We're working with our OEMs on a regular basis to determine where there are unique opportunities for what Sierra offers from a bullet perspective, which is precision and accuracy. And then obviously, from the ammunition, we launched into GameChanger. We'll continue to expand that as an offering. And then I think the other side is we're continuing to look for additional opportunities in ammunition in tandem with our OEM partners where we can launch innovative, new technologies to the marketplace. And so we're very pleasantly pleased with how that's developing going into the rest of 2019 and 2020.

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Operator [24]

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(Operator Instructions) And our next question is from Chris Krueger from Lake Street.

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Unidentified Analyst, [25]

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This is [Mark] on for Chris. Just a couple of quick ones here. Just can you give us any more insight into the impact from winter weather and snow conditions? And maybe touch on the quality of inventory as you came out of the season.

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John C. Walbrecht, Clarus Corporation - President [26]

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Okay. I think we're always careful about inventory to begin with. I think it was a good winter. I don't leave all of it up to the winter. Our team developed some very award-winning innovative products, both in snow safety packs as well as in beacons, and we saw growth in that, likewise, in ski and gloves and other categories. I think the market is -- because the winter was good, I think the market is clean. And I think the industry has probably seen that in bookings for fall '19. And sometimes, it goes your way. And globally, we had a decent winter. It wasn't phenomenal but it was enough around the globe in Asia, in Europe, in the U.S. to help the retailers.

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Unidentified Analyst, [27]

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Okay. And then just kind of following up on Sierra here from some other questions. As we look at -- we're early into another presidential election cycle, if we were to see increased demand coming into that cycle, how much lead time do you really need to build into and meet higher demand?

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John C. Walbrecht, Clarus Corporation - President [28]

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I think we would say to you that because this is an expected type of trend and we're staying close with the OEM partners and our retail partners, I think we get as early a glimpse as we can. Our goal at Sierra is to make sure that we are doing everything in our possibility, both for innovative products as well as our production planning and efficiency, that we can maximize the opportunities that we get, whether the market is down, flat or growing.

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Operator [29]

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

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John C. Walbrecht, Clarus Corporation - President [30]

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Thank you, operator. We'd like to thank everybody for listening to today's call. As we have said previously, we believe great teams build great brands. And a huge kudos to the BD team for the product innovations, the Sierra team for the product innovations, [PIEPS] and now moving into SKINourishment. We're excited for the year, and we look forward to speaking to you again when we report our second quarter results. Thank you.

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Operator [31]

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