Q3 2022 Clarus Corp Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Good afternoon, everyone and thank you for participating in today's conference call to discuss Clarus Corporation's financial results for the third quarter ending September 32022, joining us today are Clarus Corporation's President John Wall brick EVP and CFO .
Judy.
Mikey H and the company's external director of Investor Relations Cody Slaw following their remarks, we'll open the call for your questions to be put into the queue for questions. Please I'll start one one on your telephone.
We will announce your name and the orders received.
Before we go further I would like to turn the call over to Mr. Slow as he reached the company's safe Harbor statement within the meaning of pride.
But securities Litigation Reform Act of $19 95 that provides important cautions regarding forward looking statements. Please go ahead.
Before we begin I would like to remind everyone that during today's call we will be making several forward looking statements and we make these statements under the safe Harbor provisions of the private Securities Litigation Reform Act. These forward looking statements reflect our best estimates and assumptions based on our understanding of information known to us today.
These forward looking statements are subject to the risks and uncertainties.
That faith Clarus Corp in the industries in which we operate more information on potential factors that could affect the Companys financial results is included from time to time in the company's public reports filed with the SEC.
Like to remind everyone. This call will be available for replay through November seven 2023, starting at seven 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 Clarus Corp. Dot Com now I would like to turn the call over to the Claris as President John <unk>.
<unk> John .
Thanks Cody.
Welcome everyone first I want to thank all the teams across all our different brands.
We are incredibly proud of everyone's tenacity and dedication in the face of uncertain macroeconomic environment and tough consumer backdrop.
Our results this quarter demonstrate how resilient superfan brands are and how they continue to take market share even in the midst of down markets.
We delivered market outperformance in our outdoor and precision sports segment and in our adventure segment. While we are experiencing short term challenges due to vehicle delivery shortfalls and strained supply chains. We are confident that we are positioning the brand for growth at outdoor advent.
<unk> through overland being continues to build momentum globally.
On a consolidated basis, our sales were favorable to last year, finishing the quarter up 6% and year to date, 34% ahead of prior year.
On a constant currency basis total sales were up 9% in the quarter.
Breaking down our Q3 performance at the segment level outdoor grew 7% precision sports grew 13% and adventure declined 5%.
Removing the impact of FX, we would have finished the quarter with 11% growth in outdoor our adventure business would have been flat and our precision sports business would still have been up 13% given it isn't impacted by foreign currency.
However, macroeconomic factors outside of our control hampered our profitability.
Specifically unfavorable movements in foreign exchange rates and supply chain challenges negatively impacted our Q3 adjusted EBITDA by an estimated $5 6 million.
In the third quarter, we estimate that foreign currency headwinds reduced both our sales and adjusted EBITDA by approximately $3 3 million.
While higher freight cost associated with expediting our products.
To the different regions, resulting in an incremental $2 3 million of additional cost.
We believe elevated freight costs are transitory as supply chains continue to stabilize and we are encouraged by the reduction in lead times back to pre pandemic levels, while container costs are decreasing dramatically.
While we believe that we will continue to experience downward FX pressure in the short term, we expect the rates will normalize over time. Therefore, we will continue to execute our proven innovate and accelerate super fan playbook.
Removing that FX.
Our consolidated adjusted EBITDA margin would have been 15, 4%.
We have used this market movement to strengthen our relationships with our community of outdoor enthusiasts retail partners.
And our vendor partners.
We remain committed to activating and scaling the go to market activities within each of our brands.
Through a disciplined approach to new product introductions.
Identifying continuous improvement activities within our supply chain and operations.
And increasing the number of touch points with our retail partners and consumers. We believe we are well positioned for continued market share gains as we seek to elevate the awareness and demand for our brands within our targeted markets.
At this time I would like to provide additional highlights at the segment level in order to contextualize, how we have mitigated the challenges without compromising the long term long term opportunities.
Within our brands, our positioning and related price points.
And our our consumer experience.
Starting with outdoor deliveries remained strong in the third quarter, driven by 35% growth in apparel and 7% growth in hard goods, specifically gloves packs ski poles and core climbing equipment.
In order to meet customer demand, we often needed to incur higher than anticipated costs associated with air freight of the product.
We estimated we ended the quarter with $8 5 million plus in back order demand globally and expect to work through this in the coming months.
<unk> sales channel, we continue to see our specialty accounts outpacing big box and national accounts with specialty account sales up 16, 9% in the quarter.
Again proof of market share gains.
Our larger national accounts pulled back on orders industry awhile.
While they contended with bloated inventory levels.
Warehouse congestion and slowing retail traffic.
This resulted in dramatically reduced open to buys mandated at the corporate levels.
This wasn't a black diamond issue as our products continue to show strong sell through while other discretionary categories not geared towards the activity based consumer where meaningful impacted.
As a result, we expect.
The shift to a much more at once driven business with.
With our larger accounts through Q4 and into 2023.
Our direct to consumer business was up 23% year over year, driven by robust demand within our core community of users.
I am proud of our efforts in Europe with sales down only $1 million year over year inclusive.
Of more than $2 $4 million impact from FX alone.
We believe this highlights the strength of our relationships with the vast network of European specialty stores and the desire for the consumer to remain active.
Moving to precision sports are niche brand positioning and approach to maintaining predictable balanced end market results in another record quarter or 13% sales growth during the quarter was driven by a prioritization of board orders for the military and law enforcement.
And the accelerated demand in our international.
Business demand for our center fire rifle Hunt product remains high <unk>.
<unk> only by availability of brass cases required to load and deliver this product.
Which slightly impacted our sales through our domestic wholesale channels.
As we look towards the remainder of the year and into 2023, we expect our blood business to remain stable and our international business could have more aggressive near term growth curve, if the war in Europe persists.
We see opportunities in our ammo initiative and center fire rifle business, partially offset by ongoing challenges in our ability to source materials.
Lastly, the adventure segment results were consistent with what we were seeing from our larger competitors in the space.
New vehicle supply, particularly in Australia continued to lag demand with consumers waiting months for their vehicles and.
And we began to experience similarly difficult conditions in North America as well in.
In addition to limited new vehicle deliveries global economic headwinds, including inflationary pressures and FX impacted.
Our ability to drive growth and profitability in this segment given the relatively young age of these brand within our portfolio. We are still in the process of activating our innovate and accelerate playbook.
Including meaningful new product introductions and sales channel development.
As a point of reference.
We estimate product launches associated with new vehicle introductions.
Ken account for 10 to 15 points of annual growth for these brands.
We believe the combination of factors impacting the quarter will be short lived.
Our growth premise for adventure segment has remained unchanged.
We continue to see global vehicle trends shift towards more Suvs, <unk> trucks and side by sides or utility tasked vehicles.
Outdoors them combined with overland is setting the global automobile OBL fashion trends.
North America, Europe , and the Middle East are years behind the overland market development in Australia.
Market growth opportunities outside of Australia are expected to be multiple times larger than the Australian home market and finally retailer expansion into mainstream adventurism is just beginning as key retailers launched flagship adventure stores within overlapping as a category of focus.
We are moving rapidly to build out our strategic initiatives as we seek to create an ecosystem of overlapping products, we expect to be introducing updated bike ski and kayak rats luggage boxes truck bed systems, and <unk> as well as new accessories, including storage cases rooftop tent double.
Bags and recovery systems.
In addition, the current product portfolio is positioned largely towards a do it for me installation model all future products are expected to include a do it yourself approach, making products accessible to a larger addressable market.
Last week, our team was at the Sema show in Las Vegas for the 2023 product launch.
And it was invigorating to see the growth in the space and the new consumer engagement.
For example, outdoor adventure was the primary focus for the Toyota brand as it launched its new overlapping truck and SUV, including the New Trail Hunter concept version of the tundra.
The trail Hunter will be the new flagship offering even slotted above the T. R. D Pro models targeted at the Ford Raptor and positioned to be the lead in the overlapping space.
This investment by Toyota in their booth currently the largest booths at Sema included the number of vehicles across both Toyota and Lexus brand dominating the voice of trucks and Suvs with many accessories for outdoor ism.
This statement reinforced the view of the market potential in the U S for adventure brands.
Several other manufacturers highlighted the growth of <unk> participating in Blacktop Brown road activities that we are targeting and actively innovating.
We believe the U S market will see significant growth over the coming years as market participants invest millions of dollars and you're broadening the awareness of overlapping and the accessories that come along with it.
Our brands are the originals when it comes to the overland in market the reference brand for the Influencers and the overland communities.
As we look to the remainder of the year and into 2023, we believe we have a portfolio of brands that continue to grow and gain market share even in challenging environments.
They're climbing back country skiing trail running high teen hunting competitive shooting or combining in the mall with their vehicle to go adventuring, we do not anticipate seeing this trend changing for the next decade.
This is the most important attribute that we seek for and our Super fan brand strategy and thus believe it to be a key component to our long shareholders long term shareholder value creation.
Now I will turn the call over to Mike to discuss our Q3 financial results in more detail. Thanks, Mike.
Thank you John and good afternoon, everyone.
Jumping right into our performance in the third quarter sales increased 6% to $115 $7 million compared to $109 million in the prior year quarter. This was driven by our outdoor and precision sports segments. The increase includes revenue contributions of $3 7 million from Max tracks and acquisition.
Completed on December one 2021 organic sales were up 6% in the third quarter Max tracks contributed 3% and foreign exchange was a 3% headwind on a constant currency basis total sales for the Clarus Corporation in the third quarter were up 9%.
Third quarter sales in the outdoor segment increased 7% to $62 $9 million versus $59 million in the third quarter of 2021, if you adjust for foreign exchange outdoor sales would have been up 11% as John mentioned, while we've done a good job closing the gap on outstanding Black.
Diamond orders, we are still constrained by supply and supply chain challenges and logistical challenges that are resulting in inventory showing up late in our U S and European markets.
To address this we spent an incremental $1 $1 million within the outdoor segment to what we would normally spend on air freight during the third quarter, we will need to continue to do this in the fourth quarter given the persistent demand imbalance.
Arm, our apparel business continued to be the fastest growing category with in the outdoor segment with sales up 35% in the quarter.
This is notable as apparel, along with footwear and our direct to consumer business represents key strategic growth pillars over the next five years, so quite a strong quarter for our apparel business. We've experienced a slow start to the winter in North America, which we believe has pushed out some purchasing of cold weather apparel from a traditional <unk>.
<unk> and model into more of a replenishment model. Despite this we expect sustained growth in the apparel category going forward.
Precision sports sales increased 13% to $34 2 million in the third quarter strength in the international business was offset by lower domestic ammo sales due to supply chain constraints around shell cases for the full range of our product.
Our precision sports team continued to do an excellent job working to fulfill strong demand increased production capacity and navigate this challenging sourcing environment.
In the seasonally slower third quarter, our adventure segment contributed sales of $18 $6 million.
Selecting lower consumer demand given the challenging economic environment and constraints on new vehicle deliveries, which impacted new product sales, both in Australia, and the North American market.
Despite these results are long term positive view of these brands remains intact.
Moving onto gross margins consolidated gross margins in the third quarter declined 34, 1% compared to 36% in the year ago period improvements in channel and product mix were more than offset by higher freight costs as well as unfavorable foreign exchange higher freight costs had a negative impact.
On gross margins up 200 basis points, while foreign currency had a negative impact on gross margins of 180 basis points. Excluding both gross margins in Q3 would have been up year over year to 37, 9%.
Selling general and administrative expenses in the third quarter was $32 $3 million compared to 31 $3 million in the same year ago quarter. The inclusion of Max tracked and higher to go higher go to market investments in the outdoor segment were partially offset by lower noncash.
<unk> based compensation for performance awards at corporate.
Net income in the third quarter was $2 8 million or seven cents per diluted share compared to net income of $4 5 million or 13 cents per diluted share in the prior year quarter.
Adjusted EBITDA in the third quarter was $15 $1 million or an adjusted EBITDA margin of 13% compared to $19 2 million or an adjusted EBITDA margin of 17, 7% in the same year ago quarter.
The decline in adjusted EBITDA was driven by lower sales in the adventure segment as well as the heightened freight costs and unfavorable movements in foreign exchange rates to 13% adjusted EBITDA for the third quarter would have been 15, 4% on a consolidated basis. If you considered the impact from FX and would have been <unk>.
17, 4%, if you considered the FX impact and the higher freight cost at outdoor and adventure.
Let me shift over to liquidity and asset efficiency.
Inventory levels were $155 2 million compared to $153 million at the end of the second quarter, we are carrying higher inventory than we otherwise would in an effort to ensure on time deliveries and fulfillment as well as to mitigate supply chain and logistical challenges.
A reminder, our inventory does not go bad, but we are still focused on seeking to reduce our inventory as we close out the year. Our goal is to end 2022, and an inventory position is approximately $145 million. This is inclusive of carrying approximately $10 million of extra inventory in the first quarter of 2000.
<unk> 23 to facilitate growth across all three platforms.
At September 32022, cash and cash equivalents were $10 4 million compared to $19 5 million at December 31, 2021.
Free cash flow defined as net cash provided by operating activities less capital expenditures for the third quarter of 2022 was a negative $13 $6 million compared to a negative $19 8 million.
<unk> quarter, a year ago free.
Free cash flow in Q3.
Negative $13 6 million reflects our continued investments in working capital, including higher inventory and higher accounts receivable. We are committed to seek to generate cash in the fourth quarter as we collect these receivables and through our continued focus on reducing inventory levels across all three segments at <unk>.
Timber 32022.
Total debt was $167 $2 million, putting us in a net debt position of $156 8 million net debt leverage was two two times on a trailing 12 months adjusted EBITDA basis, which is in line with the low end of the two to three times targeted leverage goals that we shared last quarter.
Currently we expect to maintain leverage at the lower end of that target range.
Under our $300 million revolving credit facility, we have approximately $45 million outstanding and further borrowing capacity of nearly $110 million at September 32022, while maintaining compliance with the required covenants under our credit agreement my.
My objective and the fourth quarters to generate free cash flow as we manage working capital and use it to pay down some debt outstanding on the revolver.
Now, let me move on to our 2022 outlook given the lower sales in the adventure segment as well as the volatile foreign exchange market and higher freight costs, we are revising our full year 2022 outlook.
Please note. These revised assumptions now consider a $6 million foreign exchange headwind to sales in the final quarter of the year given the sharp movement in the U S dollar versus the Euro and Australian dollar.
By segment, we now expect outdoor sales in 2022 to increase 1% to approximately $223 million.
Given the continued outperformance in our precision sport segment, we are raising our full year expectations. In this business to now grow 18% to approximately $130 million from $127 5 million. Previously. We also now expect sales from our adventure segment to contribute approximately 92 million.
In 2022 from $105 million previously.
This revision reflects lower consumer demand given the challenging economic environment and constraints on new vehicle deliveries, which impacted the new product sales in both Australia and the North American markets.
Specifically for the fourth quarter of 2022, we expect consolidated sales of approximately $101 million.
On a consolidated basis, we now expect adjusted EBIT to EBITDA in 2022 to grow approximately 4% to $64 million. In addition, we now expect full year capital expenditures of approximately $8 million and free cash flow is now expected to range between zero and a negative $5 million for the full.
The year 2022.
This is primarily due to delays in being able to adjust inventory.
Level.
Historical.
This implies expected positive cash flow of 19% to $24 million in the fourth quarter, driven by an expected improvement in working capital of approximately $18 million in the fourth quarter.
From a tax perspective, we expect to realize $37 $2 million in tax benefits associated with our NOL carry forwards in the fourth quarter prior to their expiration at the end of 2022.
As we look to the remainder of the year and into 2023, we believe we have a portfolio of brands that we can continue to grow and gain market share even in a weaker consumer environment while.
While it is premature to discuss our plans for 2023, we do expect a rebound in certain categories from a revenue standpoint and margins beginning to normalize.
We are being very prudent with our P&L and I'd like to update you on the progress with regards to price cost considerations. So far in 2022, we have increased pricing by approximately 6% across the claris portfolio pricing is sticking and outpacing our material and wage costs.
Inflation, but standard costing variances associated with freight are expected to be a challenge for the remainder of 2022.
We continue to drive towards a series of continuous improvement initiatives around gross margin and further scaling up our SG&A within gross margin. We are focused on capacity and increased efficiencies the elimination of value leakages leakages, primarily around the cost of freight and extra costs incurred with the.
Our supply chain delays, the redesign and resourcing of our product as well as pricing.
Within SG&A, we continue to reallocate and reduce complexities that enable us to scale more quickly eliminating investments in anything we view as nonstrategic to our brand and taking targeted actions to reduce certain fixed costs.
Finally from a capital allocation strategy, we expect to continue to prioritize organic growth accretive M&A, our quarterly dividend and repurchasing of shares in that order.
However, given the extreme volatility in our share price during the third quarter, we took the opportunity to repurchase $527 277000 shares for approximately $7 2 million or an average price of about $13 60 per share that leaves approximately $42 8 million.
Remaining on our $50 million stock repurchase program.
Specifically related to accretive M&A.
Continue to be active in evaluating opportunities given the current economic backdrop, we are seeing more opportunities to consider as well as lower expectations when it comes to price.
This is a key underpinning to our core value creation strategy and one that we are well positioned to activate.
Let me pause here and hand, the call back to the operator as we are now ready for Q&A.
Thank you at this time, we will conduct our Q&A to answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.
Okay.
Our first question comes from Alex Perry.
Bank of America.
Alex Your line is now open.
Hi, Thanks for taking my questions.
I guess, just first you talked a bit about sort of what led to the guide down in the adventure segment, but maybe just help us sort of understand what is leading to the decrease in the sales forecast for the outdoor segment, specifically and then.
Within that would you expect some of the cautious ordering posture that youre seeing from your national accounts sort of persist in two.
2023, and maybe just help us frame, how we should think about these issues being maybe transitory versus pursue longer lasting.
Okay.
I think as we look to the next quarter seeing the macroeconomic challenges that we're facing and more specifically what we've seen at the national and key account levels and that's where we've seen this over at elevated level of inventories going into the holidays carryover from the.
Summers and that has unfortunately, not been allowed allowing us to accelerate the business as rapidly as we had hoped and planned going into Q4.
We continue to see strong momentum with specialty.
I don't think were were as aggressive to think that 69% growth in specialty will continue into Q4, when we look to 2023.
The great thing about <unk> is the preseason booking programs. We continue to see very strong books, both for 'twenty, three which are already in the books and finished that campaign.
At the end of the fall and we have already kicked off our fall 'twenty three campaign and first.
Appointments would give us strong momentum into 2023 key accounts national accounts as well as specialty believed that the inventory situations across the industry as a whole will lessen as they go into 2023, ACF orders and demand will continue.
And therefore.
We continue to see a strong order book, where our concern has just been in the short term of the fourth quarter and the macro challenges that we're facing.
Perfect. That's really helpful. And then I just wanted to ask a bit about precision support that's been an area of outperformance.
You took the guidance up.
For the fourth quarter, maybe maybe some sort of.
Color on.
What led you to take the guidance up and then as we think about that business heading into next year, obviously incredibly difficult comps.
But is that a business that can sort of continue to grow versus fees comps or do you think that.
You will see a bit of.
No deceleration there thank you.
Yes.
So obviously coming out of the third quarter.
<unk>.
We were very scrappy in terms of over indexing on the military and.
And law enforcement side of the business, we were very scrappy on the specialty business relative to bullets, specifically around 30 cows and everything in that size and larger what we saw in Q3.
It was a slowdown for premium brand PNR.
Pistol and the revolver, just because of the glut of pistol revolver inventory and the promotional price is taking place in the market.
As we stated in the script had we been able to get the brass cases to load both at Sierra We don't know, but get more loaded ammo or add bonds, where we do loads specifically the demand for premium Center-fire Hunt rifle was still there we werent.
Well the capture of all as much as we wanted.
We continue to be scrapping, we continue to have lots of demand in the OEM world as well as the reload our world.
That's the raise in the guide that you saw and we looked at two to three.
Wow.
I think as far as we look out to that market this year being.
Ah.
Showcase of the amount of changes that can take place in a window.
I think at this point, we're going to be a scrappy as we can be we still have a order book for 2023 that is very solid we have more demand for the specialty bullets that over the last 12 months, we've been able to not produce in order to over index on those where the demand far exceeded our supply and we're hoping that at some point.
In 2023 brass cases will become more available.
Can we grow that business in 2023, I think the landscape will tell us a lot coming out of the election here later this week.
<unk>.
Both the macroeconomic challenges take place, but I think also the political on restaurant the world. Obviously, we're going to do our best to take as much market share in bullets, and Oems and law enforcement and military with re loaders and in ammo as we can.
Yes currently I would say is remember that we're still very small.
Yes.
1% to 2% of the whole market is what we represent as a brand.
Yes.
Perfect. That's incredibly helpful best of luck going forward.
Please standby, while we queue up the next question.
Okay.
Our next question comes from Joe Ulta Belo at Raymond James Your line is now open.
Thanks, Hey, guys good afternoon.
I guess first question on the adventure segment.
Sales in North America were down significantly I know you mentioned.
The lack of inventory for new truck, but that's been sort of an issue. It's been ongoing here for a couple of years now so help us understand why why that business, particularly in North America was down so significantly.
Yeah, as we get as.
We chase new product, obviously, two sides come out of this first and foremost 80% of our business is based in Australia.
We over indexed in Q1, and Q2 moving inventory to the U S. As we saw Covid lockdowns floods, all the challenges that took place in Australia.
From a new product perspective, we.
A shift at all of our new product launches, believing that in time. These vehicles would come in as we said in the report new product launches represent 10% to 15% of the growth opportunity for us in the United States as well as in Australia.
And just the availability of pickup trucks jeeps toyotas Suvs in that market.
Subsequently around.
End of July beginning of August we saw.
Dramatic slowdown I think based on the macroeconomics across the whole industry, both in Australia and in the U S. As inventories locked up in the automotive aftermarket space and the consumer demand.
<unk> saw a blip for what appeared to be a few months.
We're starting to see the positive demand come back I think it was the end of the summer there and yet wasn't summer yet in Australia, and they had a wet season.
We stay close to the market.
I said, we still feel very optimistic and promising about what's coming as we see the market improving now in Australia going into summer and believing that.
Both into the holidays and into 2023, we will start to see that demand in North America pick up I think to be honest, we had a perfect storm in Q3, and we saw that.
Okay got it and maybe on the apparel business.
I think it was Mike mentioned that Theyre, probably whats occurring is experiencing a slow start to the winter season.
A little more color there would be helpful is that a claris issue or is that an industry issue.
No I think I think what we have seen.
I actually think the 35% growth for Black Diamond apparel is phenomenal I think what we're seeing is we have seen.
Cloud promotional window, taking place in the market early coming out of the summer.
I think a lot of people still had delivery issues in regards to supply chain challenges.
And then it wasn't until literally the last week.
Obviously Q4, not Q3 that we started to see weather across the U S change and start to impact this.
And as you think about outerwear for BD in Q3, and Q4. It is highly driven around insulated rain shells, and then obviously snow sports.
So we anticipate we will continue to have strong growth with apparel.
I think as I said, we're outperforming the market.
But always.
Want to continue to accelerate this business and are very hopeful as we've said that apparel becomes real.
A real driver for our long term growth as we gained market share and we're seeing very strong growth not only of specialty which was up dramatically, but more importantly in our retail growth was up north of 45% and our direct to consumer overall up 23%.
Okay. Thank you guys.
Thank you very much.
A reminder, if you'd like to ask a question. Please dial star one one on your telephone you get into the queue.
Yes.
Next question is coming from.
And a glass Jim at Jefferies. Your line's open.
Anna.
Okay.
Hi, Ann.
Your line is open.
Oh, sorry, I was on mute.
Hey, guys. Thanks for taking my question.
Helpful color on the specialty versus mass dynamic that you're seeing could you update us on.
What the breakdown is for your distribution between the specialty channel and math, yes. So if you look at the North American business, specifically, we do about 40% of our business is in specialty retail what you would know as individuals.
Key time or outdoor shops, we do approximately another 30 plus percent is in national accounts, which includes retailers like Rei and NBC.
And then we do approximately 25% to 30% of our business remaining in in what we would call. Our big outdoor shops was includes Dicks Academy bass Pro Cabela's Sportsman's warehouse.
Ample and it's in the latter two stages, where whether it's warehouse congestion or open to buy cuts due to categories that had massive inventories.
We're highly COVID-19 affected didn't carry over into the summer of 2022, eight up open to buy and massive inventory glut and didn't allow the retailers to chase into the fast turning categories as much as they would like given the shift in the <unk>.
Consumer.
And mainly around what we saw was demand around consumer outdoor activities versus some of the more COVID-19 bumped bigger spaces.
Got it I guess could you unpack that COVID-19 pump space is a little bit more are you seeing a difference throughout your product portfolio, where there's a little bit less demand for certain categories or is it more just.
Just have too much nerve broadly cutting their orders.
I think what I'm, referring to and that is the sum of the outdoor categories that we don't participate in but have big open to buy allocations, which could include family camping tent. It could include.
Outdoor furniture. It could include grills or stoves or list that goes on amex things that had massive growth coming out of 'twenty, one and into 'twenty, two but then and retailers were chasing that.
It seemed at the time enlist demand for these categories.
And then whether is the euro going back or whatever international travel opened up retail traffic slowed and certain of these categories built up very rapidly at retail.
Great. Thanks, Thanks, John and then just one follow up you commented earlier.
Earlier in the prepared remarks that it wasn't a BD problem that there is still strong sell through could you provide some perspective on what that looked like in the quarter.
Yes.
In the box.
Slash outdoor SaaS national accounts, where we see demand growing rapidly and still chasing is in headlamps trekking poles packs gloves.
And.
The combination of us our ability to keep up with demand that exceeded our supply hence the back order situation that we talked about and it's continued.
So it has improved it's continued into Q3.
And then just the inability for.
These big retailers to be able to chase unallocated open to buy to these because of their open to buy already being locked up in products that werent moving.
And it left pegged at retail empty chasing certain of these categories and some cases, we ship direct to store, but not every case can you do that.
Great. Thanks Super helpful.
Thank you.
Please standby for our next question.
Yeah.
Okay.
Our next question comes from Matthew Koranda Roth Matthew Your line is open.
Hey, guys. Thanks, just wanted to get a better sense for how much of the EBITDA cut is coming from Ryan Iraq versus the outdoor segment pretty.
Pretty clear in terms of revenue what to do with these in the Q4, but.
The $14 million cut to EBITDA at the midpoint, just seems like a pretty outsized cut I'm just trying to get a sense for whats weighing on EBITDA in an outsized way is it really Friday, Iraq, that's suffering from sort of lower margin sales or just limited restocking any help there would be appreciated.
Hey, Matt Mike.
Me.
I'll take that one so yeah, we did bring down EBITDA.
$14 million and it's about equal across both outdoor and adventure right.
<unk> volume in.
FX, both both impacting that here in the fourth quarter. So.
About $9 million of FX out there.
In the second half of the year. So we think Theres about 60 of that was about $3 million over in the third quarter and up we expect to see another $6 million of headwind up from an FX standpoint, that's going to impact.
Outdoor a little more than <unk>.
Adventure, but we're also see some lower volume right compared to what we had initially forecasted for the <unk>.
Second half of the year for outdoor so thats.
Overall, I think the volume is going to be about at about a $4 million pressure and FX is probably going to be.
$303 million as well so.
And adventure, it's about the same thing.
Yeah.
Yes.
$3 million of volume in another.
$8 million of FX.
The Aussie dollar kind of came down pretty significantly.
So those are all going to flow through so I'd say, it's about equal between the two segments.
Okay helpful. And then just an outdoor can you guys just put a finer point on it I guess.
Hey, guys, just kind of confusing because it implies like a very abrupt deceleration at outdoor.
<unk> versus <unk>.
And yet you're saying Pos and BD is positive and sort of seasonally things look good. So just could you put a finer point are you seeing positive Pos and BD.
If you are and Theres, just a temporary overhang I guess in the fourth quarter do we have visibility to positive sort of sell in in the first quarter, probably 30, maybe just help us understand that yes, so great questions and various due to the mix. What we are seeing is continued good strong through or pulling.
Sell through at retail in our key categories right. So if you break down Q3, and how we estimate Q4 and obviously.
Yes.
The consumer doesn't know the definitely in Q3 and Q4. So we just extrapolated those trends what we saw was strong demand for specialty what we saw was the inability of.
Bigger accounts to chase as much as SaaS as they would like do either warehouse congestion or open to buy challenges now are we hopeful that will improve.
Yes.
So did we.
Include that in our process, yes, though we are having good sell through at retail.
It's the ability to move product as fast as we can into some of these categories and chase that given that there is a couple of months left in the year.
Do we think it will improve yes, when you look to 2023 and the plans across both national accounts and the key accounts. Our bookings are strong into 2023 and the assumption that they will have is that they will start to eliminate some of the inventory.
Backlog that they've had for Q3 going into Q4, you will see that promotion highly during the fourth quarter as the holiday sales go on in their hope is that that will eliminate some of these overdrafts alright and.
And then at the same time, the belief that as that lessens open to buy for them no different than us moving inventory and providing cash in this site will create acceleration opportunities for them to chase in these other areas and it's really just a shift of open to buy from certain categories to new categories.
Does that helpful. I'll jump back in queue guys. That's helpful. I'll jump back in queue here. Thanks, John .
Yes.
Okay.
Thank you very much stand by as we pull up our next question.
Our next question comes from Ryan Sundby of William Blair Bryan Your line is open.
Yes, Hey, guys. Thanks for the question.
Brian .
John I think you mentioned that <unk> all been the Rhino rack offering from a more of a do it for me to have more of a DIY setup.
Talk a little bit more about what changes are needed for that to happen when we could see that and how big of an anchor a barrier.
For our marketing new retail distribution can be right.
Great question the industry for the last decade, plus has been much more automotive aftermarket, which is typically in the overland.
Adventure segment right anything other than just <unk> on top of your car with Askey.
And that has typically been both based on the vehicles at the time and the process is very much an installed process right.
By the racks I take it to an installer in the Bay.
They will install that on it for me.
Moving forward and where we see the biggest addressable market because we coming out of FEMA and it was very enlightening to see what we have always believed as the process is that more and more people driven by the brands themselves like Toyota switching from what used to be racing Toyota to overland in Toyota will.
Pour a lot of awareness and marketing dollars into this to change the market the consumer will needed to be much more simplistic much more I'll do it myself or the installer will do it very quickly at the retail level and to your question as you expand distribution beyond just automotive aftermarket retailers or specialists.
And the more mainstream outdoor this consumer needs it to be easy and quick and something they can follow on Youtube and do it in a very short period of time and be legos on the rooftop.
And so youll see that from us in our 2023 collections items, we actually showcased at Sema and an allstate sides. As we introduced new store that were easy just turn in lock systems to new rats for back of hedge as well as rooftop to a lot of accessories is include <unk>.
Box is tense bags everything else to make this a very simple from adventure of the weekend, whether it's outdoor activities campaign tailgating you name it.
Great It sounds like a pretty big.
Changes are coming there.
He said thats been part of our shift working on we just you know.
We had a little bit more time and the integration of this but as you knew COVID-19 lockdowns floods, we didn't get as do we.
We werent able to rapidly impact this innovate and accelerate strategy in 2020, and a 21 in early 'twenty two as we had hoped.
Got it Okay and then just can you help me understand.
The full year guidance reduction for adventure.
Or a way to quantify how much of that is good.
As we've seen in the new vehicle introductions.
And how much is coming from something else, whether that'd be softer demand or anything else.
Okay.
The best I can say for you is that typically we see.
Easily 10% to 15% of new sales growth associated with new product introductions.
I think because the market is shifting rapidly and we're seeing dramatic demand for things like jeeps and Jeep Gladiator as well as the new Toyota range, which has been extremely well received and I think will be game changer for Toyota and obviously their vehicles stay around 10 plus years I love it.
<unk> did.
Those new vehicles being postponed it impacted us that impacted us with even the demand for Polaris on just not being able to get side by sides and Thats a major partnership for us.
But obviously unless you can get the new vehicle you don't need the new rack for the new vehicle and we think Thats at least 15 plus of it the rest is inventory and macroeconomic slowdowns in the marketplace, which is probably somewhere in that.
Zero to 10% just in the marketplace.
Got it Okay, and then last one from me just with supply chain lead times coming down and compare costs coming down to.
To that normalization continue.
When do we start to see that translate into more of a tailwind for you.
It doesn't sound like Q4 is that what happened.
I am guessing that youre going to start to see that in Q1 and Q2.
Q1 is the right answer and we have some we have some.
Carryover freight costs due to the difference in our standard costing that I mentioned the variances from our standard costing that will still be absorbing in the fourth quarter, but that should.
That should clear.
23.
Got it great. Thanks, Chris.
Please standby for our next question.
Okay.
Our next question comes from Linda Bolton Weiser of D. A Davidson Lindsay your line's open.
Yes. Thank you.
So I just wanted to kind of square my understanding of your high inventory with the idea that you are still talking about not being able to supply demand in outdoor in certain areas like poles and things like that that you mentioned.
Yet you haven't really high inventory.
I guess im not understanding this idea that you're sort of chasing demand where is inventory too high because I know it doesn't seem like it would be in bullets and ammunition.
Again.
Where is that high inventory and then what gives you confidence that you can work the inventory down as you are putting in your projections for the fourth quarter. Thanks.
Okay, Great question Linda Thank you.
If there is inventory at each level based on what we assumed was the plan by category by segment going into 2022.
So I'll start with easy ones, if you look at bullets in ammo or precision sports.
Yes.
Clearly, we had an over indexing of PNR pistol and revolver ammo sales in 'twenty one.
We have inventory of PNR in 'twenty two.
We continue to move through that.
If this would have been 21, it would have gone out in a month here, it's taken longer because the market is blended on that we continue to sell that yes, just not at the over right that we did while at the same time, we did not have coming into 2022, nor were ever able to make enough loaded center fire.
Rifle to meet the demand and there is that shift in the market.
Neither one bad just lost opportunity when you go to overlay ending.
Given what took place in the Lockdowns in Australia, we moved that inventory from Australia to the U S. You saw the positivity of that in Q1, and Q2, but couldnt do that for the whole year because of the Australia market was pretty cursing up for what is now summer just now starting.
And obviously in order to start those deliveries in Q4, and Q1, which is the Australian summer that inventory as needed.
Inventory in the U S. We continue to chase that we saw a slowdown in Q3, starting around July August September into the market.
NBD.
We continue our biggest challenge there is 35 categories. So we continue to see very strong demand for categories like apparel.
Where we have the inventory and continue to over index on there and there is the perfect scenario of having the right inventory and the market wanting it and that's over indexing clearly the apparel industry is not trending right now at 35% growth.
We're also able to do it across the specialty market, where we don't have to load in.
Tens of thousands of units of lights for example, in one style and one color, which is what we have to do in bigger box or multi door retailers, specifically retailers will have $350 751000 doors and so it's our transition from a specialty retailer to servicing bigger retailers well.
At the same time, although we have that that inventory there a glut of inventory and short term demand slowed down as they focused on carryover inventory not new inventory a lot thrown at you there hopefully that answered it.
Yes.
Are there Linda.
<unk>.
Outdoor probably have $4 million to $5 million too much inventory.
That.
It's just the wrong inventory.
This season.
Where we are in the season precision sports probably has $5 million of too.
Too much inventory right now around some of the PNR ammo that John referred to and then.
Brian Iraq here in the U S. Probably has a couple of million dollars of too much inventory compared to the optimal carrying values of what we'd like to be most efficient with so you add that up you get that $10 million to $12 million off of.
The 155 gets you down to the $143 million, which is probably about the right layers low $1 <unk> is where we think inventory out to be.
And Thats what were trying to work towards what in my prepared remarks, I said getting towards that $145 million of inventory. So.
That's kind of our objective here in the fourth quarter, but.
There'll be some puts and takes as we go through it I'm sure.
Okay. Thank you.
Thank you Stan bonds report next question.
Okay.
Our next question comes from Mark Smith of Lake Street, Mark Your line is open.
Hey, Thanks, guys.
First question for me just following up on the inventory.
Can you just talk about maybe even within outdoor and kind of 35 categories with <unk> how much of that is winter kind of season specific and your comfort level with inventory that might be winter specific.
Yes.
I would say today that our inventory around winter specific product probably represents about 25% to 35% of our inventory.
And and more around what we said in the prepared remarks is really just around the shift to the season.
I don't anticipate.
Often people think winter in Q4, when the reality winter as Q4 and Q1 of 2023.
No.
As we look at another 30 inches of snow. This year. This weekend the Rockies I am very excited about what the winter season will be.
So I'm not worried about that.
I actually think that it's going to mean apparel year.
Over index versus just an equipment year, which we've seen equipment years hard in the last few year during during the last two seasons.
Okay.
And then going back over the precision as we look at this mix of international sales versus domestic.
Can you just talk about was that purely allocation or an opportunistic shift more towards international or have you seen any slowdown domestically and I know you've talked a little bit about the PNR.
But outside of that have you seen any kind of slowdown in demand for precision products domestically.
Good call Mark.
In 'twenty, one 2020, one we did not allocate to international because the demand was so far in excess of our domestic with by our domestic market.
In 2022, we were able to finally allocate some international mainly because we were seeing the slowdown in PNR ammo and there could move the bullets now at the same time starting back in January due to the unrest politically around the world and the war in the Ukraine.
We saw increased demand internationally.
And we've not been able to capture all of that specifically in <unk> and even larger whether it's $303 338 that demand.
We will start to index towards that in 2023 to chase that market because at this moment, we don't see the international demand slowing down.
And so I think it's been a good time for us to shift.
The only weakness that I would say we have seen in our business. So far has been around the PNR ammo that we over index, which is partially within our guide. This year, we knew we over indexed in 'twenty, one and therefore included that in our guide and how we originally started with numbers at 120 to 127 as we.
<unk> defined demand and be able to over index ammo, knowing that that had been over indexed in 'twenty one.
Makes sense.
That makes sense and safe to assume within that PNR that the majority of that is nine mill.
Correct.
Pissed off of it most of it is 9 million yes.
And then the last piece on that you called out bras and kind of continued headwind in fighting to get some additional brass I assume that that is heavily within center fire rifle, but you've had a hard time.
And breast 100% the demand.
We were able to sell what we had in center fire rifle.
Both in tier with the game changer weekend or sold significantly more had we have breath and then we've seen.
As we always hope the superfan brand of Barnes accelerate going into <unk> and we just were not able to have the full range of both Tech and center fire Hunt ammo across the season, what we've had we've been able to sell it over index, we just can't get enough brass and obviously that Brad is more complicated and therefore, there's just not much availability.
Okay, maybe I'll squeeze in one more just as we look at precision.
As we see a slowdown with then a lot of handgun, primarily nine millimeter as well as two to $3 55 to six.
How what opportunities do you have to switch maybe some lines of production over to two other calibers and rounds and away from those that are now.
Heavier inventory throughout the channel.
Yes, so what you will see in 2023 and even towards the end of Q4, though we said as always we will do maintenance. The last two weeks of the year, because we push them. This team and the machines hard but will start changing over.
And focus more on the specialty side, which leans more towards the Oems and leans more towards the re loaders in the Sierra side, what we call Green box, where we have not over indexed in.
<unk> been pushing 30, 30, plus calibers when we have aligned as biggest 220, and then Barnes really focusing towards the OEM side and the caliber opportunities in specialty where Barnes is by far the clear winner whether thats in blackouts, whether thats in.
<unk>, whether that's in more specialty calibers.
Okay perfect. Thank you.
Thank you for your questions I would now like to turn the call back to Mr. Ward for closing remarks.
Thank you Cory we'd like to thank everyone for your listening today.
Yeah.
For the fourth quarter, we appreciate your support and wish you all the best Thank you.
Thank you for joining us ladies and gentlemen. This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Okay.
Okay.
Yeah.
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The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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