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Edited Transcript of CLAR earnings conference call or presentation 4-Nov-19 10:00pm GMT

Q3 2019 Clarus Corp Earnings Call

SALT LAKE CITY Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Clarus Corp earnings conference call or presentation Monday, November 4, 2019 at 10:00:00pm 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

* 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

* Mark Eric Smith

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Randal J. Konik

Jefferies LLC, Research Division - Equity Analyst

* Cody Slach

Gateway Group, Inc. - MD & Director of Investor Relation

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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 third quarter ended September 30, 2019. Joining us today are Clarus Corporation's President, John Walbrecht; the 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 statements 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, Gateway Group, Inc. - MD & Director of Investor Relation [2]

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Thanks, Paul. Please note that during this call, the company may use words such as appears, anticipates, beliefs, plans, expects, intends, future and similar expressions which constitutes 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 warranty claims and other loss contingencies; the stability of the company's manufacturing facilities and suppliers; changes in governmental 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; the 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; the 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 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 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 of the date hereof. The company assumes no obligation to update any forward-looking statements to reflect events or circumstances after the date of this call.

I'd like to remind everyone, the call would be available for replay through November 18, starting at 8:00 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 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 a pleasure to be joining you.

Our third quarter continued to be driven by the momentum in our Black Diamond brand with sales up 14% and adjusted EBITDA increasing 13%. On a year-to-date basis, our Black Diamond brand sales have grown 13% while adjusted EBITDA is up 43%. We believe this continues to demonstrate that our innovate and accelerate growth strategy, accompanied by strong financial discipline and operational focus, provides for substantial value creation and a playbook that we can replicate with other super-fan brands.

We experienced growth in every geography, every sales channel and every category. This was led by 61% growth in ski on strong demand across our backcountry portfolio of products, like our new JetForce 2.0 as well as beacons and snowpacks.

As we continue to refine our focus on the activity-based consumer, we see multiple avenues for growth. One of them is backcountry, where we see increasing participation and a consumer appreciation for innovation, performance alongside snow safety.

Apparel also continues to be meaningful, contribute to our growth, up 23% in the third quarter, driven by men's and women's sportswear, technical outerwear and logo wear. Apparel remains one of our fastest-growing categories, and we believe there is a significant runway for continued long-term growth, so much so that we continue to believe that we can become a $100 million sales opportunity over time.

Signifying our commitment to long-term growth in this business, we just appointed Steve McMahon as General Manager of Apparel & Footwear. His past experiences include leading product and merchandising at Adidas, Nike, Under Armour, Skullcandy and Merrell. Steve is an avid skier, has a passion for the outdoors and a love of building innovative and differentiated products, and we are thrilled to have him on our team.

Our climb business was up 7% due to growth in core categories such as carabiners, harnesses, bouldering and accessories, supported by continued positive overall trends in popularity of the sport. Additionally, one of our fastest-growing product category segments within climb is footwear, which continues to gain traction with existing customers, and is bringing new consumers into the brand. Going forward, we also believe there is a large market share opportunity in the footwear space that we can capitalize on through performance-based innovation, focused execution and product extensions.

We have quickly ascended to the #3 player in the rock shoe market, and we have our sights set on an overall footwear initiative also being a $100 million business one day.

In our mountain business, we grew sales by 6% due to market share gains in head lamps, gloves, packs and tents. Our teams continue to design and develop award-winning products within the mountain business, providing retailers and consumers with additional touch points to the brand.

Our commitment to product innovation, new product introductions and an accelerated go-to-market strategy are producing these overall continued strong results at the Black Diamond brand. As expected, bullets and ammunition market softness remained, impacted our Sierra brand during the quarter with sales down 24%.

The cyclicality of this market was a factor we consider when underwriting this acquisition. And despite the current environment, we believe the brand is still outperforming the competition. This is due to Sierra's diversified customer base of retailers, distributors and OEM partners, which is further enhanced by a 250-plus bullet SKU offering.

Due to Sierra's premium products, our margins haven't been jeopardized, which has allowed us to continue our innovate and accelerate playbook regardless of the market demand dynamics. This includes further strengthening the brand's market positioning by investing in product innovations, sales and marketing and foregoing new long-term revenue opportunities like our launch into ammunition. Irrespective of what we believe to be the short-lived market headwinds, Sierra still meaningfully contributes to our overall profitability and free cash flow, and we look forward to various opportunities that we believe will once again reaccelerate the brand sales growth in the near term.

Now on to some regional sales comments for the third quarter. Sales domestically were up 10%, while the category expansion I just mentioned helped drive these results. We also continued to experience strong growth within our key accounts.

Our direct business also performed well with higher levels of online traffic and higher foot traffic in store. We continue to focus our D2C efforts on building awareness for the brand, supporting wholesale in our key markets and creating an elevated consumer experience focused on performance, storytelling, consumer engagement, our athletes, education and the merchandising of the complete offering.

Turning to our international regions. Sales were up 6% due to strength in our BD European operations and Asian Pacific market, specifically our focus on key markets like Germany, France, Austria, Scandinavia as well as Japan, Korea and Australia. This focus is particularly critical as we work to enhance brand awareness ahead of the upcoming 2020 Summer Olympics in Tokyo.

As we've mentioned, it will be the first time that climbing has been an event in the summer Olympics. And given our leading market share in this sport, we are planning to maximize the brand exposure we expect to receive from the various events.

The third quarter was also faced with headwinds brought on by escalating trade wars and the strengthening of the U.S. dollar. While the proactive steps we laid out in early August were expected to minimize the tariffs announced at that time, the impact of additional assessments since then will exceed our mitigation efforts. Aaron will walk you through this in more detail momentarily.

We view these headwinds as transitory. And most importantly, we believe our brands are better positioned for growth than they have ever been. Our commitment to innovation is fueling new and more disruptive products that are being well received by our retail partners and well recognized by trade publications.

In fact, BD has garnered $2.8 billion brand impressions year-to-date, a 9% lift compared to the same period last year. We believe we have earned 66 product awards so far in 2019 and are on track to outpace our 2018 product award total of 72.

Here are a few notable call-outs. Outside Buyer's Guide featured 9 BD products with JetForce Pro named the best airbag and the Boundary Line Mapped Jacket named the best insulated shell. The print issue of popular mechanics named our Icon Headlamp Editor's Choice, while the spotlight received recognition as the best value option.

We won 2019 gear of the year for our deploy shell in Men's Journal. SKI Magazine Editor's Choice recognized our Tour Glove, and Condé Nast's Self magazine recognized our Distance 15 backpack in their Self 2019 Fitness Awards.

We don't often make it into mainstream outlets from Condé Nast, let alone, in inside leading websites. So we're very pleased to receive this recognition.

Irrespective of the awards, we believe the continued focus of our brand will ultimately drive growth -- long-term growth and profitability as well as shareholder value creation.

Speaking of driving shareholder value. As we've discussed on the last couple of calls, the strength we have built across our brand portfolio, which has already driven significant value creation, is being supported by a strategic and disciplined capital allocation policy. Our results, along with expanded flexibility and capacity under our new cash flow credit facility, provides us the liquidity to opportunistically evaluate acquisitions of additional super-fan brands, adequately fund our quarterly dividend and potentially repurchase our common stock.

During the quarter, we continued to be opportunistic in repurchasing our own shares and remain well positioned to explore other measures to drive shareholder value, given $75 million untapped of our $100 million cash flow credit facility.

Now I'd like to turn the call over to Aaron to walk through our Q3 results in more details. Afterwards, I will return to discuss some of the initiatives we believe will support our long-term success. 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.

For the third quarter of 2019, sales increased 8% to $60.2 million compared to $55.7 million in the same year ago quarter. And on a constant currency basis, sales were up 10%. This was driven by 14% growth in Black Diamond.

We saw strong performance across all categories, geographies and channels. This was offset by a 24% decline in Sierra, which was comparing to a third quarter last year that experienced 35% year-over-year growth. The decrease was due to continued headwinds in the bullet and ammunition marketplace, which were felt most prominently in our domestic OEM and international green box businesses.

In the domestic market, military and law enforcement orders have been soft, while our international green box business has been impacted by lower demand in the African and the Australian markets.

Consolidated gross margin was 34.1% compared to 35.7% in the year ago quarter. The decline was primarily due to foreign exchange headwinds from the strengthening U.S. dollar, the impact from recent tariffs as well as channel and product mix.

Foreign exchange headwinds reduced year-over-year gross margin by approximately 80 basis points in the third quarter of 2019 and the impact from tariffs was 60 basis point headwind. Overall, our sales and gross profit in the third quarter were negatively impacted by an unfavorable foreign currency -- by unfavorable foreign currency changes on a transactional basis by $0.8 million.

The primary cost of our inventory is denominated in U.S. dollars while 29% of our global sales are denominated in foreign currencies, primarily the euro, Canadian dollar, Norwegian kroner and Swiss franc.

We attempt to manage our foreign currency risk on a continuous basis through natural hedges and foreign currency hedge contracts. But these hedges will never be a perfect offset to the actual currency movements, especially with the currency volatility we've recently experienced.

In our reported sales and gross profit, our hedges offset approximately $0.3 million of foreign currency exposure in the third quarter. As a result of the strengthening dollar during the third quarter, we now expect foreign currency to have a negative impact of approximately $2.5 million, up from $2.3 million prior on sales and gross profit in 2019 when compared to 2018.

At Sierra, approximately 50% to 65% of our product costs consist of materials such as copper and lead. We seek to actively manage the impact, the commodity costs have on our business, specifically on gross margins with our vendor partners. We believe that we have a sale process in place that enable 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. While we have been effective at prior mitigation efforts, we believe we will be unable to absorb the impact from incremental tariffs. We now expect cost of goods sold in 2019 will be impacted by an estimated $1.2 million, up from $600,000 prior, as a result of products defined in List 4A that went effective September 1. List 4A impacts BD items such as apparel, shoes, tents and helmets. List 4B, which is expected to go into effect December 15, 2019, impacts BD items such as headlamps and lanterns. We have taken this into consideration in our updated outlook, which I will address shortly.

All in, tariff escalations as well as the unfavorable movement in foreign currency, impacted our third quarter adjusted EBITDA by $1.1 million. I would like to reiterate the proactive measures we are taking to reduce as much of the negative tariff impact as possible.

We are focused on 4 primary mitigating activities. First is recosting. We've been working with our vendors to renegotiate costing to offset some of the impacts. Second is resourcing. We're working with our diversified supply chains and coming up with different sources from the product coming out of China. Third is repricing. We're 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. And finally, we are optimizing logistics to bypass the U.S. on international shipments.

Selling, general and administrative expenses in the third quarter were $16.4 million compared to $15.8 million in the year ago quarter. The increase was attributable to our continued investment in Black Diamond brand-related activities of research and development and direct-to-consumer.

As a percentage of sales, selling, general and administrative costs were 27.3% compared to 28.3%, a decrease of 100 basis points, demonstrating our ability to effectively scale our operations.

Net income in the third quarter was $3.5 million or $0.11 per diluted share compared to $4.1 million or $0.14 per diluted share in the year ago quarter. The decline was primarily due to lower sales from Sierra, which carry higher operating margins than our Black Diamond brand and foreign exchange in tariff headwinds. Net income in the third quarter of 2019 included $2.5 million of noncash charges compared to $2.8 million of noncash charges and $100,000 in transaction costs and restructuring costs in the third quarter of 2018.

Adjusted net income, which excludes noncash items as well as transaction and restructuring costs, was $6 million or $0.19 per diluted share compared to $7 million or $0.23 per diluted share in the third quarter of 2018.

Adjusted EBITDA was $6.8 million compared to $7.1 million in the year ago quarter. As a percentage of sales, adjusted EBITDA was 11.2% compared to 12.7% in the third quarter of 2018.

Net cash provided by operating activities for the 9 months ended September 30, 2019, was $5.6 million compared to $7.6 million in the same year ago period. Capital expenditures for the 9 months ended September 30, 2019, were $2.8 million compared to $1.8 million in the same year ago period.

A little more commentary on CapEx. As communicated at the beginning of the year, the increased capital expenditures incorporate additional investments in our ability to create better consumer experiences, innovate and launch new products at a faster rate, increase product -- increase production capacity and to solidify systems for greater insights and scalability. We continue to [implore a buy versus build] approach, focusing on designing and building the best product for our consumers and increasing gross margins along the way. This requires the leveraging of our ever-improving supply chains, implementing continuous improvement programs and vertically integrating certain activities as appropriate.

Free cash flow, defined as net cash provided by operating activities less capital expenditures, for the 9 months ended September 30, 2019, was $2.8 million compared to $5.8 million in the same year ago period.

From an inventory perspective, we finished Q3 2019 with $73.5 million of inventory compared to $64.9 million as of December 31, 2018, and $60.8 million in the year ago quarter. The increase in inventory is primarily driven by increases within the Black Diamond brand, which we expect to decrease substantially as we head into year-end and the first quarter of 2020.

More specifically, the increase has been driven by a couple different factors. First, increased inventory levels associated with the transition of certain in-house manufacturing activities to OEM partners; second, the investment in key product initiatives such as footwear; and three, wrapping up our inventory levels of key product categories at the beginning of each season to ensure higher levels of fulfillment of preseason orders and the ability to provide higher levels of replenishment.

On the Sierra side, we have continued to be opportunistic at managing our cost of goods sold and exposure to certain commodities by advanced purchases of copper and lead.

At September 30, 2019, cash and cash equivalents totaled $1.9 million compared to $2.5 million at December 31, 2018.

From a capital allocation perspective, during the third quarter, we repurchased 243,873 shares of our common stock for approximately $2.7 million or $10.92 per share, leaving approximately $10.8 million remaining on our $30 million share repurchase program, and we continue to pay a quarterly dividend. At September 30, 2019, total debt was $24.9 million compared to $22.1 million at December 31, 2018.

Switching gears to our updated financial outlook for 2019. We are lowering parts of our forecast due to the continued headwinds facing the bullet and ammunition market, the negative impacts from the recent strengthening U.S. dollar and escalating tariffs. As such, we now anticipate sales to grow approximately 7% to $228 million versus 2018.

Within this new sales level, however, is the continued expectation for Black Diamond to increase low double digits as the brand continues to perform extremely well across all categories, channels and regions.

This is a testament to the team's dedication to our innovate and accelerate strategy as well as our compelling core offering and strong consumer following, which has driven balanced growth. However, we now expect sales for Sierra to decline in double digits in 2019, due to market headwinds, we assume will continue for the remainder of this year, more than offsetting new growth avenues like ammo, which is growing nicely, but relatively small.

Given the divergence of both brands' growth trajectory, especially the positive momentum at Black Diamond, it is important to call out that while Sierra is still generating strong relative profits at 30% of our total sales, it will become less of a driver to our consolidated results going forward.

We now expect adjusted EBITDA to increase 6% to approximately $22 million in 2019. This outlook still includes the appropriate amount of investment into our brands to drive awareness and product innovation, and we believe continues to be a testament to the leverage we can drive throughout the organization.

Despite lower sales and EBITDA expectations, we still expect to generate free cash flow from operations of approximately $10 million after approximately $4.5 million in capital expenditures.

Furthermore, 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 existing and significant NOLs for federal income tax purposes.

As of September 30, 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 we've highlighted our results, I'd like the transition to our upcoming product introductions. But, first, I'd like to highlight a strategic announcement we made at the end of the last quarter.

In September, we announced the creation of performance sports division to accelerate the development of sports-enhancing products like skin care, supplements, nutrition and other personal health products for our performance-driven athletes. This newly created division is a strategic focus we've made clear with the acquisition of SKINourishment, and the hiring of Taylor West to lead it reinforces our intentions to compete in skin care and other personal health related categories. Under this new division, we will seek to develop other skincare products, such as sunscreen as well as sport-enhancing supplements, nutrition and other products using natural, organic or alternative ingredients.

We believe we are uniquely capable to do so, given our global brand ambassador team and this -- our commitment to innovation and a strong focus on sales and marketing.

And in Taylor, we are confident we have the right professional to lead the new division. He brings to Clarus over a decade of consumer brand and product marketing experience in various management roles. Most recently, he served as the Vice President of Marketing and e-commerce for KT Tape, where he led several strategic pivots across the country's digital media channels, resulting in significant sales growth for the company's e-commerce site and Amazon presence. Prior to that, he was the VP of Marketing for a premium breakfast food maker, Kodiak Cakes, and also previously served in multiple senior marketing roles for various brands at General Mills.

Beyond this important highlight, we are looking on various initiatives to build long-term businesses that are accretive for our shareholders and look forward to discussing further updates on our year-end calls.

Now onto a product discussion for Black Diamond in the upcoming fall '19 and spring '20 seasons. For both seasons, we have an innovation and comprehensive suite of new product offerings that have already garnered significant positive response. For fall '19, we expect to have over 150 new products slated for launch. Our new product introductions will encompass footwear, apparel and headlamps, trekking poles and packs. And I'm particularly encouraged with our fall apparel line with styles like the deploy jacket, the Rhythm wool tee, the baselayer programs, Stretch Rainwear, the Approach Down jacket, the Vision Down jacket and several others.

Within our ski category, backcountry ski and snow safety continues to be a significant emphasis with the expansion of the most innovative collection of JetForce packs to date featuring the JetForce Pro, the Tour and the Ultralight. These offerings will be alongside an expanded suite of beacons, gloves, ultralight skis, bindings, and new snow outerwear program. This small offering is a combination of the innovate and accelerate strategy we've been implementing over the past 2 years.

Due to the length of the product development cycle, this is the first season where, from start to finish, we have one consistent strategy, starting with the line plan to the catalog, to the trade show events and, finally, to our sell-in to our retail partners.

Now let's discuss spring '20 where we expect to have an additional 125 products launching. Our new product launches will cover climb, mountain and apparel.

Within climb, we are expanding our performance footwear, offering to include both performance as well as lifestyle approach shoes. This extension will complement our climbing shoe line, and we'll expect this to continue the strong momentum we have already generated with our entrance into footwear almost 2 years ago. We expect to initially launch the approach line with one of our national accounts in the fall to test the market, and then we expect to launch globally for spring '20. This will be combined with new carabiners, the new Z4 Cams, the vision helmet, award-winning airnet harness, rock shoes and bouldering accessories.

In our mountain category, we plan to introduce a complete collection of rechargeable lights, new trekking poles and the expanded collection of daypacks. Within apparel, the focus of spring tourney will be on both Alpine and trail running categories with launches of the new Highline jacket, swift pants, rhythm shirt and long sleeve and the new distance running short and deploy jacket.

In climb, we have expanded our stretch denim program with the new Crag Denim, adding to the already successful Forged Denim, and creating a unique denim story made only for the core climbing consumers.

Supporting these product launches will be a marketing campaign focused on accelerating in-store support and consumer engagement via our athletes, events and a more robust digital presence. We also expect to add additional retail locations in certain key markets, elevating the awareness and demand for our brand in a more consumer-centric manner and allowing us to grow our outdoor community and be the provider of equipment, knowledge and experience.

Now turning to Sierra. Despite another decline in sales in the third quarter, we remain intently focused on driving efficiencies in the go-to-market process and continue to innovate and accelerate across all product offerings.

Our expansion into the ammo category is progressing nicely, and our offering has been extremely well received from both consumers and our retail partners. To date, we have launched just 8 cartridges out of the roughly 250 specialty bullets we currently offer at Sierra, and expect to ramp up with several more in the coming months.

These introductions, combined with creating awareness and driving demand for our ammunition offerings, but this doesn't happen overnight. We're working closely with our key partners and our product development and marketing efforts to drive awareness and are encouraged by the results so far. In fact, we will be highlighted with one of the new key strategic partners on the cover of a major publication over the coming weeks, bringing higher levels of awareness to the brand and the new performance of our ammunition products.

Lastly, we have developed a strong partnership with our domestic retailers and see an opportunity to replicate this internationally. Specifically, we have near-term opportunities in Europe and Australia as well as our already developing key relationships to expand distribution and drive increased awareness.

While market dislocations in the bullet and ammunition market happen, I think it is important to remind our investors why we purchased Sierra. First, they are the leading sport bullet manufacturing with a 70-plus-year history. They make the most accurate bullets in the world. Period. This distinction has made them a super-fan brand we seek in every acquisition.

Sierra was accretive the day we made the acquisition. The business generates approximately 40% gross margins and generates free cash flow conversions of roughly 95%, given its limited ongoing CapEx requirements. So it meaningfully drives our margins and our profits higher over the long term. In fact, since acquiring the business, it has already returned nearly $20 million in cash and has quite significant long-term growth opportunities, like ammunition, which I just walked through.

For some perspective, if just 10% of Sierra's bullets were sold as ammunition, Sierra revenue would double and produce adjusted EBITDA of what we estimate to be $20 million.

Other avenues, which remain untapped or at the early stages of development include enhanced marketing and digital capabilities, improved distribution and forging new customer accounts. We are excited by the runway for growth and ahead of us and for the Sierra brand in total. It is important to reinforce that our primary focus continues to be on that of organic growth and increased profitability of our existing brands, as we believe these provide the highest levels of return and 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 a 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, increasing brand awareness outside the core consumer and through assessing our distribution and supply chain platform.

We're 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 our current portfolio has produced and are expected to continue to drive in the future as well as the flexibility and capacity under our existing cash flow credit facility.

Before getting to Q&A, I'd like to reiterate how encouraged I am by Black Diamond's upcoming fall and winter '19 product offerings. As I said, this will be the first full season when our strategy is fully embedded and driving each vertical of our go-to-market strategy. The entire team has been working hard over the last couple of years, and the initial results and the reception to the expanded offerings has been very positive.

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

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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 Randy Konik of Jefferies.

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Randal J. Konik, Jefferies LLC, Research Division - Equity Analyst [2]

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Really helpful call there, script. I just want a couple of questions. So first, I guess, a lot of excitement around the Olympics next year. You gave us some good perspective on the -- almost like free brand advertising to get with your athletes. So are you thinking about anything unique or different to kind of exploit or kind of take advantage of the excitement around the sport entering Olympics next year? Just kind of interested on your strategy there as we approach next year. That's my first question.

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

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Yes. Randy, this is John. 100%. I want to be careful and not give away all my ideas and thoughts to the world, but leave it to say, everybody knows who Apolo Ohno is, though most people don't know anything about short-track skate. We believe that the Olympics will do 2 things that will benefit BD. One, many of our athletes will go from unheard of to household names. And already obviously between athletes like Adam Ondra as well as our climbing athletes in Korea, Japan other markets, we're seeing lots of success. Secondly, I think it will give a great launching off point as it did for Spyder in 2002 Olympics in Salt Lake games for the brand itself to get recognition on a global stage. And so, obviously, how we grassroot the marketing around the events, our athletes engage in the actual activity themselves, we will find ways to authentically build brand awareness during, up to, during and after the Olympics. But the real kicker comes after the Olympics when people are more aware of the climbing sport and more excited about it and the brands associated with it. And that's where we'll see the response from it.

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Randal J. Konik, Jefferies LLC, Research Division - Equity Analyst [4]

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Really helpful. And then I guess following up on that, to think more medium, long term here. I guess this is more for Aaron then. You gave some perspective on the things you're working on from a systems perspective and strategies around to continue to kind of improve your both fulfillment and replenishment. And if we can kind of -- we see the trajectory of BD extremely exciting and positive. Obviously, demand is going to continue to accelerate here. How are you guys? What are the more specifics around the systems or strategies are taking on to kind of improve those fulfillment metrics and replenishment metrics going forward?

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

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So more from a system standpoint or more from the tactics. One of the things that we're extremely pleased by is that we were able to upgrade our North American ERP system this summer without any hiccups and coming well-below budget. Huge kudos to that team, and also just the indication that we have within the organization as it relates to always looking for ways to -- find new ways and better ways of doing business.

One of the things that we've also implemented are certain continuous improvement initiatives throughout the organization more focused around the way that we commercialize our product, being quicker to market, seeing enhanced gross margins coming from each new product introduction or innovation, but also working very closely with our key strategic vendors or supply chain partners as it relates to how we bring inventory in and where. We're also looking at the different logistic regions that we currently operate.

We have a team that's dedicated to that and looking at new ways or fresher ways to be able to increase the speed to market, primarily focused on the European and the international business that we have, where a lot of the inventory currently comes in through different channels, primarily that of our Salt Lake City warehouse, and then also through a 3PL in Asia. But we're looking at different ways at how we can just increase the overall effectiveness and speed up that process. But it really comes down to the way that we think about the line plans, the commercialization process, but also how we interact with our supply chains to, once again, increase the speed and the success and the performance of our vendors, but also the way that we're able to address the various needs from a gross margin perspective and also an overall fulfillment. And that's what you've also seen as a result -- sorry, that's where you've also seen the increases in inventory levels at the beginning of each season. This is something that we started to pick up on a while back and have been pivoting towards of bringing in a little bit more inventory at the beginning of each season, using our balance sheet to be able to support that and then bling it off during the course of the season. We found that, that provides us with higher levels of success rates as it relates to fulfillment and also an enhanced ability to chase replenishment or ASAP orders.

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Operator [6]

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The next question is from Dave King of Roth Capital.

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [7]

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So I guess, first on the guidance, would you say, Aaron, what you're now expecting from a gross margin perspective, and then how much the reduction there is driven by Sierra versus some of the tariffs and FX pressures you talked about?

And then, I guess, as a follow-up to that, given all that we know today about Sierra, FX, tariffs and then the commodity costs you alluded to, how should we be thinking initially at least about next year's overall gross margins?

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Aaron J. Kuehne, Clarus Corporation - Chief Administrative Officer, CFO, Secretary & Treasurer [8]

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You bet. So as you know, we typically guide just to revenue and EBITDA levels. We are seeing some continued pressure on the gross margin piece associated with FX and with tariffs. However, when we think about the updated guidance provided, it is primarily or solely driven by the softness that we're seeing out at the Sierra business. As communicated during our prepared remarks, the Black Diamond business continues to perform extremely well. It's still on track to hit its targets for the year despite some of these headwinds. It's just that with the addition of these headwinds, it's just too much to offset the Sierra softness that we're currently seeing. And so that's why we're coming out with the updated outlook.

As we think towards 2020, we'll provide greater insights as we provide our Q4 earnings and our outlook for 2020. But tariffs is a factor that we're continuing to work through. Our goal is to always see improvements within the gross margin line item. We believe that we have different initiatives across the board that enable us to see or realize those types of improvements. This is just adding another dynamic or another variable that we're currently working through. And I'm extremely proud with the team of how we've been able to progress and make certain improvements along the way, but it still continues to be a pretty good headwind that is currently offsetting some of the improvements that we have scheduled for 2020, primarily associated with the transitioning of our manufacturing activities from Salt Lake to an OEM partner.

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John C. Walbrecht, Clarus Corporation - President [9]

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And obviously, David, our view is that these are temporary and that you can't react fast enough. Though in time, long term, you can react either by moving -- as we said in the prepared remarks, either by moving your facilities to other locations to elude the tariff or your mix or the opportunity of price increases or you name it. And so it just made for a headwind in 2019. It may spill over a little into 2020, but we are rapidly doing everything and necessary to transition this away from this cost.

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [10]

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Understood. Okay. That helps. And then maybe digging into Sierra a bit. I think you guys talked a little bit about what's happening from an end market perspective, I think you talked about domestic, military and international consumers driving some of weakness. But I think one of the OEMs I feel like just talked about a vastly improving commercial business or at least improving off of where things had been. And then you're starting to hear more and more about these military, law enforcement wins for some of these OEMs, are you guys seeing any of that? And just are there any green shoots, if you will, in terms of the market? Just where do we stand in terms of this sort of gun and then ammo cycle more importantly?

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John C. Walbrecht, Clarus Corporation - President [11]

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I think 2 things on there. We have always said that this was a very cyclical business. And I think joking with you, in the past, you've even said that this year, we'll take stomach punches and next year, we'll look like geniuses for doing the exact same thing that we've always done. The market is cyclical. It will come back. It has started to come back in rumors. And I say rumors because a lot of our OEM partners have been sitting on inventories. Nobody is all in demand one for one. They get a request. They then need to build ammo. Then they call us for a bullet and that all happens simultaneously. And so we always say that this probably has a 30- to 60-day trail. And vice versa, when it starts to build off of them, we have a 30- to 60-day trail on the back end. We do anticipate that with the politics that we've heard of and all the rhetorics taking place that not only will you see a demand in law enforcement and military, but we also believe that going into 2020, in the second half of the year, specifically getting in areas like 223s (sic) [.223s], 556s (sic) [5.56s], 9 millimeters, you name it, there will be some stockpiling that will start because of either background checks or just the changes in laws in regards to those weapons.

And this happens -- it happened again in '11, '12, '13. We see this trend. And when we bought it in August of '17, we knew we were on the start of a downtrend of this. But as we said in the prepared remarks, we really believe that Sierra is a super-fan brand. And over the last 18 months, sticking with innovation and acceleration has helped us to gain market share. And the tide will come back. And our goal is, at that point, making these investments and these accelerations will only be to our benefit. And like I said, 12 months from now, hopefully, you'll be calling us geniuses for doing the same thing we're doing today.

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Operator [12]

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Our next question will come from Jim Duffy of Stifel.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [13]

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A couple questions on Sierra. I just want to dig in on that. So john, what are the sightlines to return to growth there? I know you're expecting a bounce next year, but in what quarter would you expect to see that? How do you see the cycle playing forward in 2020? Can that last more than a couple of quarters? What's kind of like the underlying run rate of the business thereafter?

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John C. Walbrecht, Clarus Corporation - President [14]

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I think we're always conservative on this. So my view is that this takes a quarter or 2 to start to ramp back up. Having not owned it previously, I don't know how fast that response is. I can look at the past numbers and see it. I do believe this time that, potentially, we can be stronger and longer because I don't believe this is going to end in a neutral game when it comes to the change in laws. I don't think this is one thing where there's going to be just rhetoric and move. I think that for the right reasons, there are going to be instilled changes in either background checks, laws, the outlawing of certain weapons or whatever. And so it will perpetuate this a little longer. I don't think we're ever going to have a stalemate, where neither side chooses to move and just waits for elections. I think both are going to have to compromise and come together, in which case I think it actually elongates this model.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [15]

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Okay. And then earlier in the call, you outlined a framework for doubling the business. Beyond the cycle, is there a good kind of multiyear revenue objective for this business we should think about?

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

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I think the way we've looked at it is, like you said, today, if you look at our trailing results of 2018, we finished the year somewhere around 220 million bullets. So if you acquired 10% of that in ammunition, given the price difference between the bullet and the cartridge, that 10% would yield about a doubling of the business with similar EBITDA and margin parameters. And then after that, I think it's -- the opportunities to continue to drive forward with ammunition in specific categories of uniqueness that align with the Sierra brand. And I think that's the opportunity. And obviously, that's -- while at the same time, innovating bullets at the same pace that we have done, just innovating bullets and developing ammunition simultaneously.

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [17]

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Understood. And then, Aaron, I wanted to ask on the tariffs a little bit. You had prior thought, $600 million exposure for the year, would you expect to recapture that in 2020 from mitigation efforts? And I know you talked about a total now of $1.2 million tariff expense for '19. That incremental tariff, what's kind of the right way to think about the run rate equivalent to that number on a 12-month basis?

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Aaron J. Kuehne, Clarus Corporation - Chief Administrative Officer, CFO, Secretary & Treasurer [18]

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Yes. So you're right. So initially, under List 3, it was $600,000. We were feeling good about...

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James Vincent Duffy, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [19]

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Oh, $600,000, sorry.

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Aaron J. Kuehne, Clarus Corporation - Chief Administrative Officer, CFO, Secretary & Treasurer [20]

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Yes, no problem. We were feeling extremely confident about being able to mitigate at least 75% to 80% of that. It's still a bit too early to get into the details on List 4A and 4B as far as the different mitigation activities that are taking place and where we expect that to be, but we do anticipate that we'll be able to offset at least about 30% of the tariff impact or the tariff situation during the course of 2020. I'll frame that up for us in terms of the overall 2020 impact as we get into that window of time, but it is something that we're aggressively working through. We feel optimistic that this is truly transitory, and it's just going to take another 6 to 9 months or so to be able to get some things finalized and rightsized in the manner they'll mitigate the negative impacts.

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

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I think it's important, Jim, that Aaron has set a very aggressive goal to do everything within the team to literally get this down to a 0 impact long term. So this is not something we're willing to just accept and say it's the new world order. But say, Hey, it is transitory. We make changes. We shift, refactorize, reproductize, whatever, in order to eliminate these leakages on the business.

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Operator [22]

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(Operator Instructions) The next question will come from Mark Smith of Lake Street.

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Mark Eric Smith, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [23]

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Another question just on Sierra. Can you give us any additional insight into how that kind of core green box retail business is doing versus the OEM business?

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John C. Walbrecht, Clarus Corporation - President [24]

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Yes. I think -- well, I can only give it from the perspective of Sierra. I think that, like you said, the overall we've seen, a dip in the quarter, of about 24%, more of that driven by the OEM business, which is highly driven, at this point, by military and law enforcement given the partners. In the green box business, our business has been impacted in low single digits. And so we've really driven hard at that, which, at this point, our view is that we know we're gaining market share in the mix. And we'll continue to do so at the Board level and then the ammunition level. And I think we will track that market relatively closely to determine at what point the consumers's buying behavior changes in that space.

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Mark Eric Smith, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [25]

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Okay. And then we know that it's still small but can you quantify at all the impact of the ammunition business?

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

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Well, like as I said, it's small. It's -- the initiative for us was really targeted on what really becomes the fourth quarter of 2019 because it's, we launched, as you recall, GameChanger. When we launched it, we launched 5 calibers initially into delivery for fall, which is hunt season for bullets or rifle hunting just kicked off this last week in parts of the country and some still to come. Right now, it's just 5. By Christmas, we have 8 in the works and soon by SHOT Show, a couple more. So we'll be at the GameChanger at 10, and then we'll be launching [Prairie Enemy] and the environment ammunition at SHOT Show as well as some other interventions in and other category. Like I said, ultimately, our goal is to really target on those 80-20 bullet that we think align with the ammunition opportunity, with the goal that, at some point, it should be 10% or more of our bullets into ammo. But it's -- we're going to be very distinct about that process because we make the very best bullets in the world, and we can't do anything in that world to jeopardize that positioning.

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Mark Eric Smith, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [27]

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Okay. And then last one for me. Can you just talk about your appetite for share repurchases and maybe how active you guys have been since the end of the quarter?

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Aaron J. Kuehne, Clarus Corporation - Chief Administrative Officer, CFO, Secretary & Treasurer [28]

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As communicated, this is the fourth priority of our capital allocation process. We'll continue to be opportunistic with it, but there's no set or defined approach or a number that we're looking to do over a certain period of time.

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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 the closing remarks.

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

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Thank you. We'd like to thank everyone for listening to today's call, and we look forward to speaking to you when we report our fourth quarter and our full year results. Thanks, again, for joining us. Goodbye.

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Operator [31]

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