Q1 2023 Clarus Corporation Earnings Call

Speaker 1: Good afternoon, everyone, and thank you for participating in today's conference call to discuss Claris Corporation's financial results for the first quarter ended March 31, 2023. Joining us today are Claris Corporation's Executive Chairman, Warren Canders.

Speaker 1: COO, Aaron CUNY, CFO , Mike Yates, and the company's external director of Invest Relations, Cody Slaw. Following the remarks, we'll open the call for your questions before we go further. I'll let you turn the call over to Mr. Slaw as you reach the company's safe harbor statements within the meaning of the Private Security's Dettigation Reform Act.

Speaker 2: provisions of the Private Securities Litigation Reform Act.

Speaker 2: These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today.

Speaker 2: These four-looking statements are subject to potential risks and uncertainties that could cause the actual results of operations or financial conditions, condition of Clair's Corp, to differ materially from those expressed or implied by the four-looking statements. More information on potential factors that could affect the company's operating and financial

Speaker 2: 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 clariscorp.com.

Speaker 2: Now I'd like to turn the call over to Claris' Executive Chairman, Warren Canders. Warren? Hi, my name is Warren Canders.

Speaker 3: Thank you, Cody.

Speaker 4: Good afternoon and thank you for joining Claris's earnings call to review our results for the first quarter of 2023.

Speaker 4: certain market conditions and headwinds that carried over from 2022.

Speaker 4: Each of our segments experienced sequential top-line improvement throughout the first quarter. Outdoor generated modest growth over the prior year highlighted by increases in our direct-to-consumer and international channels.

Speaker 4: which were mostly offset by fewer shipments to our North American retail partners.

Speaker 4: Do the elevated inventory levels and reduce open to buy dollars.

Speaker 4: Precision Sport started slowly in January as market participants took stock of inventory levels and customer demand across SKUs.

Speaker 4: In aggregate, sales and February and March were off 3% over the same period in 2022.

Speaker 4: We have quickly rebuilt our order book, indicating that we have open demand plus year-to-date shipments that covers more than 70% of our full-year sales target.

Speaker 4: We are seeing a strong focus on specialty components and calibers as our core reloading customers restock.

Speaker 4: while we remain constrained by limited availability of rifle shell casings.

Speaker 4: The first quarter presented a difficult comparison for adventure, given the record performance of the US business in Q1 of 2022.

Speaker 4: The North American market continues to be hampered by promotional activity due to excess inventory at wholesale distributors down to retailers.

Speaker 4: While our North American business was off nearly 70% over the same period last year, we are seeing the clients level off and turn to sequential growth. After a slow January in our adventures home markets of Australia and New Zealand, we saw sales in February and March that we believe represent stabilization.

Speaker 4: More importantly, the operational improvements we implemented are taking hold as we generated gross margins and excess of 40% for the quarter versus 32 and 28% in Q4 and Q3 of last year respectively.

Speaker 4: At the corporate level, I'm pleased with the progress that we have made to upgrade our segment leadership. As Claire has grown from a single brand, Black Diamond, to three distinct segments, we identified the need to shift to an operating model focused on individual entity growth, accountability and performance. The changes that began in late 2022 are now manifesting themselves throughout our organization.?? to our institutional team of our organization.

Speaker 4: We implemented cost cuts in Q1 and Q2, which will save us a million dollars at the corporate level on an annualized basis over 2022.

Speaker 4: as a precursor to our cost-saving initiatives.

Speaker 4: We recognize an inflection point in our organizational evolution.

Speaker 4: Implementing a strategic plan to decentralize and focus on individual segment performance.

Speaker 4: As we look forward, we are establishing baselines in each business, upgrading our talent pool, and driving towards the critical few metrics that we believe matter to operations and shareholder value.

Speaker 4: cash flow generation that pay down and margin enhancement of both the gross profit in EBITDA lines.

Speaker 4: With respect to cash flow generation, we have been working through inventory rationalization, which we expect to normalize by year end. Our budgeting process for 2023 identified the inventory overhang.

Speaker 4: affecting customer channels across all segments. And we have moderated our inbound purchases accordingly.

Speaker 4: Furthermore, as we focus our efforts at the segment level,

Speaker 4: We hired key leaders and outdoor and adventure for each and the initial phases of their long-term planning.

Speaker 4: We are looking forward to sharing their views with you at the appropriate time. Neil Fesk joined as the new president of Black Diamond during Q1.

Speaker 4: An avid outdoorsman and experienced mountaineer, Neil brings deep expertise in building brands.

Speaker 4: driving innovation, and improving operational performance.

Speaker 4: We are enthusiastic about Neal's energy and vision for Black Diamond.

Speaker 4: its place as an iconic brand in the broader outdoor ecosystem.

Speaker 4: Likewise, in March, we hired Matt Hayward to run our Australian Adventure Business. Matt has over 20 years of experience in brand architecture, product strategy, and global marketing operations. He was previously the Chief Marketing and New Business Development Officer at RM Williams, an iconic Australian brand. Prior to that, he was with El Caterton in its APAC operations and Value Add team. He was the Chief Marketing Officer at RM Williams, an iconic Australian brand.

Speaker 4: along with marketing roles at Deckers, Quicksilver, and DC Shoes. With that, thank you for being with us today, and I'll turn the call over to Aaron. Thanks, Warren. Coming off an unprecedented three years of market volatility, shifting consumer spending habits, and supply chain challenges, and a new era of market volatility, I'm Aaron

Speaker 5: We are principally focused on baselining each business segment.

Speaker 5: solidifying our long-term growth objectives, and enhancing the brand teams to ensure we are positioned for success and can sustainably execute our plans.

Speaker 5: The foundation of our brands has always started with our dedicated people and our hallmark approach to product innovation.

Speaker 5: We're excited to build sustainable growth through the implementation of our long-term strategic initiatives.

Speaker 5: Before getting into the individual segments, I would like to reiterate some of Warren's commentary around the baselining of our businesses, as there are overarching themes that apply to our consolidated business.

Speaker 5: First, we are laser focused on the allocation of our capital, behind the rate at which we introduce new product innovations, focused on specific categories of growth.

Speaker 5: 2. We're expanding our geographical footprint and key markets of the US.

Speaker 5: Canada, Europe , Australia, Japan and Korea.

Speaker 5: Third, we're increasing the depth of our presence in these geographies through increased penetration into key channels and segments.

Speaker 5: Specifically, our interactions with the end consumer as we look to expand each of our brands. Finally, we continue to activate continuous improvement initiatives around increased capacities, efficiencies, and the elimination of non-value add activities.

Speaker 5: interactions with the end consumer as we look to expand each of our brands. Finally, we continue to activate continuous improvement initiatives around increased capacities, efficiencies, and the elimination of non-value add activities. Despite?

Speaker 5: The challenging marketplace, we believe we are seeing stabilization several end markets and the initiatives I just highlighted will establish the footing for growth and increase profitability as we come out of 2023.

Speaker 5: Now, turn to specific commentary about each of our segments. First, let me address outdoor. We believe the long-term trends continue to favor the outdoor industry, even as the market settles to a new normal post pandemic.

Speaker 5: Q1 results reflect the strong international demand for the black diamond brand as Europe grew 26% year over year and our international distributors grew 35%, exceeding our expectations for the period. Demand trends are strong for the brand and we believe this highlights the strength of our relationship with our vast network of European specialty stores.

Speaker 5: and the desire for the consumer to remain active in the outdoors. In North America, we are seeing a soft wholesale market continue to settle into a new normal post-pandemic. As retailers work off a backlog of inventory and consumer spending trends towards the middle of the range between pre-pandemic levels.

Speaker 5: and the sharp-demand spike in outdoor categories during the COVID period.

Speaker 5: For much of the past two years, supply and demand have been out of balance, and we expect that it will take another six months before the market approaches a closer state of equilibrium.

Speaker 5: Market adjustments notwithstanding, the Black Diamond brand is strong. We see it in our direct-to-consumer business, where e-commerce grew 28% during the quarter, and comparable store sales lifted 13%.

Speaker 5: We see it in the growth of our apparel and lifestyle categories, which grew 50% year over year.

Speaker 5: We see it in global expansion, and we see it in the talent we are attracting to the business as we continue to strengthen our team at all levels in the organization and across key functions.

Speaker 5: Looking ahead for the year, our top priority remains bringing supply and demand into better alignment across our regions and channels, while reducing our outdoor inventory levels by 15% by the end of this year compared with the end of 2022.

Speaker 5: Also at the top of...

Speaker 5: Our priority list is rebuilding ourselves and go-to-market approach in North America under the leadership of a new VP of Sales for the region.

Speaker 5: Finally, we must balance our focus on short-term operational performance with strategic investments in areas that will drive long-term growth and market share gains, notably in product innovation, marketing, digital, and international. In our precision segment, difficult-resourcing shell casings.

Speaker 5: and heavy inventories of both retailers and distributors in particular with pistol and revolver calibers and the more popular rifle calibers such as 223 mass and otherwise strong order book.

Speaker 5: Someone offsetting this headwind was strengthened our OEM vertical due to the programs we have developed with key partners over the years driven by best-in-class product and the proven ability to be a reliable partner as well as strong demand in our reloading businesses.

Speaker 5: Despite the headwinds in retail, our barn's brand continues to be in height of mad when it comes to center fire rifle cartridges.

Speaker 5: demonstrate world-class terminal ballistics required by the Superfan Hunter.

Speaker 5: Demand for niche, newer or less mainstream cartridges is also still very high, limited only by our availability of the brass cases required to load and deliver this product.

Speaker 5: The response we are receiving from dealers to new product launches like our Pioneer line of ammo, which is focused on lever gun and revolvers, is positive and, combined with the relationships that we have with our key distribution partners, we believe we will continue still market share in 2023. Moving forward, we plan to focus on several initiatives in our precision...

Speaker 5: We will focus on building and fostering key relationships with tier one retailers, wholesalers, and key accounts.

Speaker 5: Given the strength of our brands and diversity of the end markets we serve, we feel strongly that 2023 will present various opportunities to build further momentum within our brands.

Speaker 5: And finally, our adventure segment.

Speaker 5: Headwinds around new vehicle supply, lagging demand, and imbalanced inventory levels at our larger key distributors and retail partners persisted in Q1, impacting sales velocity. Irrespective of these headwinds, we remain excited by the global addressable market for overlanding, which we define as the intersection of the automotive enthusiast with the outdoor super fan. This is supported by the most recent issue of SEMA Future Trends.

Speaker 5: Where the light truck segment which includes pickups, vans, SUVs and CUVs is forecasted to account for close to 80% of all new vehicle sales by 2027. With pickups alone making up...

Speaker 5: nearly 50% of all new vehicles sold. Our commitment to great teams, along with permanent changes to the cost structure, have set the table for an expected sustainable business in the long term.

Speaker 5: With Matt's recent hiring, we have now completed the transition from a founder-led to a management-led organization, and we are committed to a renewed emphasis on being customer and consumer-centric, and bringing to life a new approach to the unique ecosystem that our adventure segment can bring to one's lifestyle.

Speaker 5: The business has strong fundamentals in place, and we expect to invest in the number of initiatives to support our business partners through 2023 and beyond and to drive best-in-class customer service while managing a more challenging macroeconomic environment.

Speaker 5: We have already launched a number of unique product solutions and will be ramping this up throughout 2023. The opportunities outside of Rynorak's home market are coming to fruition as we step into new markets this year like Japan, Saudi Arabia and China. Unfortunately we still do expect...

Speaker 5: the supply and demand imbalance with new vehicles to persist in 2023, particularly in Australia, but we have important initiatives we believe will accelerate our growth. Let me lay them out here.

Speaker 5: First, we'll focus on transforming our product development and innovation processes to drive significant improvement in speed of market and product differentiation. We have a renewed focus on customer and consumer insights to drive an overhauled product hierarchy. A key part of our go-to-market evolution...

Speaker 5: will be how we create and launch products as part of a larger ecosystem of lifestyle demands.

Speaker 5: Next is customer service. With a renewed focus on our key account partnerships and key account programs, the goal is to be the easiest partner to work with within the industry. Our people will be empowered to take action and drive performance with an understanding that there are different business models for different customers.

Speaker 5: Next is digital transformation. We are planning to maximize our operational infrastructure to develop our e-commerce platforms to support both B2B and B2C opportunities. We are aiming to build our distribution strategy around the consumer in a way that will continuously strengthen our premium market positioning and drive pricing power.

Speaker 5: And finally, we will be a data lead in our decisions. We are developing a demand and data-driven operating model that plans, buys, and sells inventory closer to demand.

Speaker 5: Notwithstanding the difficult macro climate and inventory headwinds, we firmly believe our brands are well positioned to achieve their long-term growth targets. Climbing, backcountry skiing, trail running, hiking, competitive shooting, overlanding, and adventuring are mega trends in the outdoor world.

Speaker 5: and we do not anticipate this changing anytime soon. Now I will pass the call to Mike to discuss the Q1 financial results in more detail. Mike?

Speaker 6: Thank you, Aaron.

Speaker 7: And good afternoon everyone. Jumping right into our performance in the first quarter, sales were 97.4 million compared to 113.3 million in the prior year quarter, down 14 percent. On a constant currency basis, total sales were down 12 percent.

Speaker 7: First quarter sales in our outdoor segment were up 2 percent to $52.8 million versus $51.5 million in the first quarter of 2022. If you adjust for foreign currency exchange headwind, outdoor sales would have been up 5 percent. As Erin mentioned, while we've done a good job closing the gap on outstanding black diamond On Thursday, the exploration project well

Speaker 7: be pivoted to in the second half of 2022. The direct-to-consumer market, the European market and our ICD markets.

Speaker 7: Precision sports sales were $27.1 million in the first quarter compared to $33.1 million in the same quarter last year.

Speaker 7: We continue to experience challenges sourcing brass casings for ammunition that inhibited our ability to deliver against our order folk. Inbalanced inventory levels within the more popular pistol and revolver as well as rifle cartridges at retail also impacted sales velocity.

Speaker 7: Irrespective of these headwinds, we still experience growth in Sierra's domestic and international green box categories due to our specific focus to produce bullets to fulfill orders that have been on backorder for over 12 months.

Speaker 7: Moving to barns, we experienced strong demand and sales conversion in our international domestic OEM products due to continued strong worldwide demand for our all-copper bullet.

Speaker 7: The adventure segment contributed sales of 17.5 million versus 28.6 million in the prior year.

Speaker 7: Sales were down 39% on a reported basis and 36% after considering the impact of foreign exchange.

Speaker 7: Sales were down 11.1 million on a quarter-over-quarter basis. The most significant driver of this decrease was from the Rhino-Rack North American market where sales were down $5.7 million. The decline reflects lower consumer demand given the challenging economic environment, higher inventories at the distributor level, and constraints on new vehicle deliveries.

Speaker 7: As Aaron discussed, despite these results, our long-term positive view of the Rhino-Rec brand in the U.S. remains intact.

Speaker 7: Moving on to gross margins. Consolidated gross margin in the first quarter declined to 37.0 percent compared to 39.1 percent in the year ago period.

Speaker 7: Margins did benefit from lower freight cost quarter by 290 basis points, but this was offset by unfavorable FX of 150 basis points, higher reserves for inventory of 130 basis points and unfavorable product and channel sales mix of 220 basis points.

Speaker 7: Selling, general and administrative expenses in the first quarter decreased 4% to $32.8 million compared to $34.2 million in the same quarter a year ago. The decline was driven by discipline expense management at the adventure and precision sports segment as well as lower non-cash stock-based compensation expense.

Speaker 7: for performance awards at corporate. These savings were partially offset by higher investments at outdoor for employee costs and investments in our direct-to-consumer channel.

Speaker 7: Net income in the first quarter was $1.6 million, or 4 cents per diluted share, compared to net income of $5.3 million, or 13 cents per diluted share in the prior year quarter.

Speaker 7: Adjusted EBITDA in the first quarter was 9.6 million or an adjusted EBITDA margin of 9.9 percent compared to 19.7 million or an adjusted EBITDA margin of 17.4 percent in the same year ago quarter. This is exactly what happened in the Dyn we had in ourwat

Speaker 7: The biggest drivers of this decline was a $2.4 million headwind due to the strength of the US dollar and lower volumes that are Precision Sports and Adventure segments.

Speaker 7: Now I'll shift to our liquidity and asset efficiency. At March 31, 2023, cash and cash equivalents were $10.3 million compared to $12.1 million at December 31, 2022. Free cash flow, defined as net cash provided by operating activities less capital expenditures for the first quarter of 2023 was $1.7 million.

Speaker 7: compared to a negative cash flow of 12.7 million of free cash flow in the same quarter a year ago. This is reflective of our conscious effort to reduce inventory, generate free cash flow, and pay down debt. During the quarter, we reduced inventory by 1.3 million.

Speaker 7: We also paid down $2.2 million in debt and ended the quarter with total debt of $137 million.

Speaker 7: This put us in a net debt position of $127 million with a net debt leverage of 2.4 times on a trailing 12-month adjusted EBITDA basis.

Speaker 7: which is at a low end of our range of two to three times. We expect to stay within this range in the near future. Under our $300 million revolving credit facility, we have approximately $18 million outstanding and further borrowing capacity of approximately $61 million at March 31, 2023, while maintaining compliance with the required confidence under our credit agreement.

Speaker 7: EBITDA of approximately 60 million, or an adjusted EBITDA margin of 14.3%. We expect full year capital expenditures to range between $7 and $8 million, and free cash flow is still expected to range between $30 and $40 million for the full year 2023.

Speaker 7: call back to the operator and we're ready for Q&A.

Speaker 1: Thank you. And to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, just press star 1 1 again. Please stand by. We compiled the Q&A roster.

Speaker 1: One moment for our first question.

Speaker 1: Our first question comes from Randy Connick from Jefferies. Your line is open.

Speaker 2: Thanks a lot and good afternoon everybody. I guess my first question would be probably for Warren. Warren, you gave some really clear points on your financial focus for the next few years very much around margins, free cash flow, debt pay down.

Speaker 1: I guess maybe what would be helpful to talk to us, maybe you could talk to us around your vision on the biggest changes or enhancements you expect to see or may expect to see around strategy or strategic direction now that you have.

Speaker 4: New leaders in place around Neil and that over the next few years, that would be very helpful for your vantage point. Yeah. Thank Randy. Thank you for the question. And so. You know where we are, you know, where we are today is we have 2 new leaders, you know, in both the black.

Speaker 4: already to fill in a lot of gaps that we've had. One of the holes that we had was actually in North American sales and all of the folks surrounding that. I'm pleased to say that we now have a very strong...

Speaker 4: Leader in North American sales and some others as well that we've identified. So we've made good progress there. Neil has, as you know, his early background was as a partner at BCG. And we've had the opportunity to review.

Speaker 4: the first iteration of his long-range plan.

Speaker 4: We expect to have that.

Speaker 4: finalized in the next 45 days.

Speaker 4: And then it's about execution. But I am very excited about how he's thinking about the business. There's going to be a focus on those areas that we feel that we can grow at a more rapid pace. So it's just not managing.

Speaker 4: the business for immediate profitability and optimizing that. But really having a multi-year look at where we should be and how we should develop the business. And some of those categories happen to be our strongest categories. urban e- Twitter and Facebook

Speaker 4: And so those would include apparel, which you know about, and Neil's background speaks to that, having been at Eddie Bauer and DeKine, also trekking poles, lighting products.

Speaker 4: packs, etc. So we are focused on those and when you start to include those in the mix, those on balance are higher margin products than the existing products.

Speaker 4: product mix that we would have today. So, you know, we are, you know, very, very excited about that. Similarly with the Australian businesses.

Speaker 4: You know, Matt's been in there for about 2 months now. He's working on his long range plan and. You know, we expect to have similar discussions with him. It's it's our hope that as we refine and conclude those. Plans that we will be able to introduce our management team to you later on.

Speaker 4: this year and have presentations to that effect to outline how we're thinking about those businesses. And what we see is the opportunities, both in the long term and both in the short term and the long term for those.

Speaker 4: for those companies. On the Sierra Barnes side, we continue to work through

Speaker 4: I think that the, you know, as you've heard several times, some discussions about shell casings. We're working hard on that so that we would have.

Speaker 4: Possibly, you know, that. Lock down for us so. But otherwise, you know, it's really the, it's really the mix of business again there and reducing the. You know, the number of change overs that we have, which which does impact our.

Speaker 4: Our margins, but we're seeing, you know, we're seeing good visibility. Today for that for both of those businesses.

Speaker 1: Super helpful. And then I guess lastly, Mike, you know, you reiterated the annual guidance. Super helpful there. I just want to understand. Are there any nuances to be thinking about or that we should be considering either around gross margin.

Speaker 1: or SG&A as it relates to anything to be nuanced throughout the second, third, or fourth quarters that should be considered in thinking about our modeling. Thank you.

Speaker 7: No, sure, Randy. No, gross margins should be in that historical range, right, 37 to 39 percent. That's how we're looking at it. We did guide the $92 million for the second quarter.

Speaker 7: You know, that implies about a 230 million back half compared to a 190 million first half of the year, right, on the top line. And, you know, the success in order to achieve that is really dependent upon us seeing some improvement in normalcy.

Speaker 7: and lift the top line results in the back half of the year as well. And those two things alone along with FX will be beneficial in the back half as well. So those are the kind of things you got to kind of model in to kind of in my opinion to understand our guide.

Speaker 7: for the first half of the year compared to what has to happen in the second half of the year.

Speaker 7: after year compared to what has to happen in the second half of the year. Super helpful. Always go for it.

Speaker 1: One moment for our next question. Our next question comes from Alex Perry from Bank of America. Your line is open.

Speaker 8: Hi, thanks for taking my questions. I guess just first on the quarter, I think sales came in above, but maybe EBITDA margin came in below, sort of what you were expecting. I guess just first, where was the deviation versus when you guided at the end of February , especially on sort of the EBITDA margin? Thanks. Sure, Alex. Hey, it's Mike. I'll take that. Yeah, obviously top line, we overperformed by a couple million.

Speaker 7: compared to what the consensus was and what we told you just 60 days ago, which is fantastic. On the bottom line, freight was a big tailwind, almost 290 basis points. It's really at the gross margin line is where the difference is.

Speaker 7: With the BEAT on the top line and SG&A coming in less than last year, it's all at the gross margin line. freight was a tailwind of 290 basis points, but then we gave up 200 basis points on the flip side through FX being 150 basis points.

Speaker 7: headwind. We did set up 130 basis points worth of reserves for inventory, and we also had a about 220 basis point challenge from product mix and channel. So obviously when we're selling less through the North American market, that hurts our profitability, right? Our profitability at BD is hindered.

Speaker 7: when we're not getting the volume at the North American side of the BD business.

Speaker 7: Because, you know, the European, as I mentioned in the prepared remarks, our European business, our IGD business, our D to C business continue to have outstanding performance, right? And that's really where we saw it. It's those four categories at the gross profit line that cause the EBITDA challenges.

Speaker 8: That's really helpful. And then I guess my second question, you know, maybe a follow up to an earlier question, but you know, depending on the year one queue is typically your first or second highest EBITDA quarter, I guess to get to the EBITDA guide, you know, you have to imply a pretty big acceleration from here, especially in the back half.

Speaker 8: visibility on today that gives you, you know, that you feel confident in that like, are you your fall 23 BD order book being up year over year or something else that would give you the sort of confidence that to hit the acceleration in the guide. Thanks.

Speaker 7: Sure, let me run with that one too. So it's a couple of things I just mentioned on the last question, right? You got to understand one other thing that's super important though. Historically, the BD business and the Claire's business did about 55% of the top line.

Speaker 7: in the back half of the year. So you got to see that again in this coming year. And we also historically have done about 50% of our EBITDA in the last three, four months of the year so you're going to see a big, and that's where the cash flow gets generated as well, right?

Speaker 7: And that's what you have to believe along with us seeing an uptick in North America wholesale and also seeing our successful supply agreement for shell cases. If all those things happen, that's how you reconcile back to kind of this being, I'll call it a.

Speaker 5: there is this difference between demand in the marketplace versus also that of the stocking or the liquidity constraints that some of our retail partners in particular North America facing.

Speaker 5: As we continue to do channel checks and have conversations with our various partners, it's continued to be solidified that our demand is stable and as strong, and that we're actually seeing sell through. What we're seeing though is that we're not seeing it in our financial results quite yet, just because of the whole restocking activity.

Speaker 5: And a lot of these North America retail partners are also constrained from an open to buy standpoint. We've seen a lot of the headlines over the recent months of just where people are. And we do anticipate that it's going to take us a little bit of time here in the next month or two to be able to see some of this start to flow through. And one of the other things that we've seen is that the elongation of the winter season here in North America has also delayed the winter season.

Speaker 5: what we would typically see in terms of strong spring summer deliveries that would already start in March. And those are, you know, those still haven't kicked in to the full extent that we would anticipate. So.

Speaker 5: We've implemented a series of different productivity initiatives. We're very disciplined from a cost standpoint. We're being very diligent in terms of just how we run the business, but also from an overarching revenue and growth standpoint, we are still working through that de-stocking activity, but I think it's just important to highlight that the demand is still stable. It's just that we've got to work through these timing issues. Great. And sorry, just on the 2Q.

Speaker 8: EBITDA margin, should it sort of decelerate versus where the, you know, 9.9% in the first quarter? Or how should we think about, you know, the margin on the 92 million itself? We haven't given a, we're not going to give a guide on that, but it, you know, it should be better, right? It should be better, right? I walk through a lot of unusual.

Speaker 1: Thank you. One moment for our next question.

Speaker 6: Thank you.

Speaker 9: In I.

Speaker 1: Our next question will come from Lauren Vasilescu from BNP Paribas. Your line is open. Good afternoon. Thank you very much for taking my question. And Aaron, it's nice to have you back on the call. I'd just like to understand the magnitude of the 2Q revenue guide down.

Speaker 2: I know you guys are not going to guide or give us a framework for the three divisions, but just how is it down 20%? Is outdoor going to be down sharply as well in the quarter? If so, was there a timing shift into one queue? If you could help us.

Speaker 7: walk through on the 2-2 top line? You know, we did 115 million in the second quarter last year, right? So that, you know, to your point that's down, you know, 23 million dollars, you know, it's a little bit of everything. You're going to see some weakness across all three segments and when I say weakness combined compared to outstanding performance.

Speaker 7: last year, right? If you go to the adventure business, we did $28 million last year, right? In the second quarter, led by strong demand in Australia and even stronger demand in the North American market, right? So five, six million dollars of that decline is right off the North American rhino rack.

Speaker 7: And then same with the...

Speaker 7: precision sports business. Precision sports last year we did over 35 million of revenue, you know, and if we do a similar amount of revenue as this past quarter at precision sports, you know, that's another seven eight million dollars that had went right there. So it doesn't take much to kind of build up that 20 some million dollar decline.

Speaker 7: as Erin just alluded to, in the market here in the US, the demand, the brand is positioned well. It's just that they got to – some of our distribution partners have to work through some of the inventory that they have.

Speaker 2: Okay, helpful. And then piggybacking off of Alex's question, you know, he asked explicitly or implicitly the 2Q EBITDA number. You guide the 2Q revenues and you guide it to 1Q revenues. We just missed 1Q EBITDA.

Speaker 2: Why not? Is there a rationale for not guiding to 2Q EBITDA so we don't miss the estimate numbers?

Speaker 7: We've just, you know, as we, it really gets back down to baselining our businesses. As we work through baselining these businesses in 23, we're taking a very conservative approach with guidance, and you know, we're using the word conservative by limiting the amount of guidance we're giving, right, at the segment level or at the profitability level as we work through baselining each of these brands.

Speaker 2: for that. Last question Mike is on the 2H guidance right implied for 2H it looks like it's more mid singles I mean any framework about like explicitly and 3Q but it should it be balanced is that your viewpoint as today? No, no historically you're gonna see Q3...

Speaker 7: little stronger than Q4, just based on seasonal and historical patterns.

Speaker 2: on growth rates not you're not you're talking about growth rates here right? No I was actually talking dollars I was talking dollars I'm sorry. Okay sorry I was actually asking about growth rates. Should the growth rates be equal in 3q versus 4q?

Speaker 7: Well, last year it's kind of hard to say that. I think they probably will be because Q4 last year was a non-typical quarter. Last year we only did 104 million compared to the...we did 115 million in the third quarter. I would expect those to be...

Speaker 7: I think the growth rate in Q4 ought to be stronger. It ought to be stronger. Historically, I think the trend historically is that Q3 would be stronger, but I think this year because of the, once the businesses started to seed our customers.

Speaker 1: Our next question will come to the line of Matthew Caronda from ROSS. Your line is open. Matthew Caronda, ROSS.

Speaker 4: I'm just curious if there's any early color on how to think about how their segment performance views fit into your 2023 outlook, any notable areas of divergence or convergence. And then just timing this year in terms of when you think we'll be able to hear directly from the business unit leaders on long-term planning.

Speaker 7: Is that something that could happen as early as the second quarter or is that more likely kind of a late back half event? I'll take that. That's easy. I think we've talked, Matt, about doing some type of investors show, probably keep it simple in New York or somewhere, where we introduce the three leaders and have them pitch their segment, their businesses to each to all interested parties.

Speaker 7: for over a couple years now, maybe closer to three, at the Precision Sports business, but the other two have only been in their seats for two months and three months respectively. So we hope to do that. The earliest I'd see us doing that is September , but definitely if it's on September , we'll get that done in the fourth quarter. Okay, great. And then just more specifically, we'll be doing that.

Speaker 7: of channel inventory. It sounded like you made commentary that said we're not gonna clean up inventory in that space until probably third quarter at best. So maybe just what that could mean for sort of the growth inflection.

Speaker 5: between third and fourth quarter or maybe just seasonality and outdoor for the year? Yeah, so this is Aaron and I'll take that one. Specifically to that of the outdoor space or the outdoor segment, here in North America in particular, what we've seen is that really at the beginning of July of last year, we started to see this self-correction and obviously it had a long tail...

Speaker 5: to help partners own balance sheets.

Speaker 5: What we have seen through the course of Q1 is that we continue to see a lot of progress taking place in terms of the de-stocking, in terms of what's going on from a sell-through perspective versus that of what's happening in terms of their inventory positions. There is a dislocation starting to occur where the sell-through data is much more positive.

Speaker 5: and highlights that the de-stalking activities are taking hold. But at the same time, because of what we've seen in Q1, we want to continue to be conservative in our approach as we work through Q2 and Q3, because what is clear is that although the...

Speaker 5: the demand is there and that the stocking activities are taking place. What is still a little bit opaque for us is exactly how people are positioned internally from a open to buy liquidity standpoint and when that's going to start to impact us specifically as a brand. You know, one of the pieces of commentary that we've provided over the last couple of quarters as well is that we don't believe that we are necessarily the driver behind this but more just the overarching space in general and because

Speaker 5: demand for the brand it's just that they've got some internal workings that need to be worked through.

Speaker 4: Okay, got it. And if I could just sneak one more in on precision. I guess I was a little surprised this was down 18% year over year. Just if you could quantify maybe the component availability constraints, maybe the casings constraint that held you back on revenue, that'd be interesting. And also just curious if you could maybe comment on

Speaker 7: Pricing environment for the specialty calibers that you typically provide in terms of loaded rounds What's that? What's the health of pricing look like and this channel inventory in general across the board? Yeah, so when you size up then, you know the decrease at the at the present sport segment You know the decrease was called six million dollars or so

Speaker 5: And all of that was driven by domestic ammo or ammo in the domestic space. Now, some of that is driven based off of just overall market conditions and the demand, et cetera, but it's really because of the shell case availability that we continue to struggle with because where we are – —

Speaker 5: extremely well positioned is within the center fire rifle hunt side of things where people are really coming to a spill for those key categories and there's seven to eight cartridges that you know there's there's still high demand for that we continue to have struggles in terms of being able to to source shell cases for and so what you're seeing in the marketplace with with pistol revolver ammo as well as two to three and even some of the 300 blackout etc

Speaker 5: That's where you're seeing a lot of the price compression or the competition taking place. We don't play in that space a whole lot. If you recall, we did have some of the business that was susceptible to that, where we, in Q4, we were able to move through a lot of the overhang in terms of inventory in that space. And so, our focus really is around how we continue to service the customer and the consumer with those key cartridges and centerfire.

Speaker 5: it is driving the bulk or the majority of the myths or the decrease compared to last year. Okay. Very helpful. That's it. Thank you. Thanks, guys. One moment for our next question. Now let's stream back a little bit.

Speaker 2: new but it sounds like it got it got worse so maybe what caused it to get worse

Speaker 5: And any thoughts on vertically integrating to alleviate this? Yeah, Joe, this is Aaron. Unfortunately, you know, when we compared to last year, we were able to secure Tyus a few more shell cases and had some carryover inventory coming into last year. So that helped alleviate the spread of the virus.

Speaker 5: some of the pressures were, as you saw, right, we had a phenomenal, we had a record year last year within that segment, and trying to replicate that this year with not having all the tools in place as it relates to showcase availability has been a hindrance, and so that is something that we continue to work through. And so, you know, it is, it's something that the team is aggressively working on, and we believe that we'll have a solution.

Speaker 5: over the course of the next couple of months to help us navigate through these waters. At the same time, we continue to look at the allocation of capital and where we want to place our bets in terms of the different growth opportunities, but also the opportunities to drive enhanced profitability across the board. As mentioned, one of the things that we need to make sure of is that we continue to roll up...

Speaker 5: the individual business units and understand where the different opportunities are. And so as we work through the LRP process within the outdoor segment as well as the adventure side of things, I'll help provide additional clarity as to how we think about additional investments, whether it be expanded capacities or vertical integration, et cetera, et cetera.

Speaker 7: But in the meantime what we need to be able to software is the now and today and so that's where our focus is as well. Yeah, the only thing I'd add to that Joe is yeah, right if we did choose to vertical integrate that you know That's a 18 probably closer to 24 months out. So the errands point, you know, we have to solve this problem, you know in the now

Speaker 2: Okay, and maybe a point of clarification for you Mike, the inventory reserve, was that contemplated in your Q1 margin guide? No, it was not.

Speaker 2: Okay, and then maybe one last one from from a leadership standpoint, is there a plan to replace John or will you be effectively assuming his duties Warren, at least in the near term.

Speaker 4: Yeah, yeah, there is there is no intention to replace. John . I will be assuming those duties and. Uh, you know, it's, you know, we're my focus has been on working closely with. With Neil and Matt to ensure that.

Speaker 4: We have the long range plans perfected, and I think you're gonna be excited when we share those with you. But that's been my focus. And so we'll just see how it goes. But right now, we have taken out some other people out of.

Speaker 4: you know, the corporate overhead and as Aaron pointed out, we're continuing to look at, you know, taking additional costs out of the business now and we're seeing...

Speaker 4: In some of our, you know, some of the areas of. Some of our resource requirements and so on the price, you know, the prices have been the costs have been going down and so on and we're really working hard to. To to pick up some margin in those ways.

Speaker 4: are some of the areas of the resource requirements and so on the price, the prices have been the costs have been going down and so on. And we're really working hard to. To to pick up some margin in those ways. Okay, thank you guys.

Speaker 1: Yep. One moment for our next question. Our next question will come from the line of Jim Duffy from Steve, your line is open.

Speaker 10: Thank you. Good afternoon. For me, a big picture question on the adventure segment. I'm curious your thoughts as it relates to capital allocation. So you've owned the Rhino-Rack business coming up on two years now, clearly some category challenges in the near term. You've made some leadership changes, but big picture, do you still like this category and see it's strategic to the broader portfolio?

Speaker 10: And then also curious how you're feeling about the margin opportunity for that business relative to your initial expectations. And then, lastly, interested in perspective on how far along you are in the path of pursuing B2B opportunities for RhinoRack and. You know why RhinoRack may be uniquely positioned in those B2B market landscapes. Thank you.

Speaker 5: Thanks, Jim. I was going to say Warren, do you want me to take this or do you want to jump in? You can take it. I know what you're going to say.

Speaker 5: I should contain. OK. Yeah. So, Jim, we absolutely love this space. When you think about the adventure segment where we believe that we are extremely well positioned is this cross-section between the off-roader, the automotive enthusiast, and that of the outdoor space. And that's a very unique position to be in because it enables us to build access to a much larger addressable market.

Speaker 5: but also to capture what we love, our activity-based consumers on both ends of the spectrum. As you highlight, it's been a bit of a rough go for us, but it doesn't take away from the overarching thesis as it relates to how we think about this business. Because one is we've been able to continue to interact with our key retail partners, but also get feedback from the consumers. They absolutely love our product.

Speaker 5: Our product has a unique design to it. It's OE ready. We have some strong B2B relationships already, but they're not global in nature. They're more focused regionally, in particular, in the Asia-Pacific side of things. But as we continue to roll it out, we also see that the macro trends are very focused on.

Speaker 5: this overlanding adventuring type segment. We saw this in this last SEMA when Toyota was 100 percent dedicated in terms of their overall presentation to the overlanding segment and really finding ways to capture, to bring in the different consumers into the space. As we also highlighted during the prepared remarks, when you look at where the grid is, by far the best clans over the past few months in the world overall, he thought that permanently changed the way we were designed the entire eco utility.

Speaker 5: the trends are going from an automobile standpoint. 80% of the automobiles in 2027 are expected to be focused on this type of space that we're focused on as well. And so what it really comes down to is we've got to just continue to weather the storm. There's some anomalies have taken place, whether it be COVID shutdowns, biblical floods.

Speaker 5: the lack of vehicle availability, it's interesting in Australia, they're still suffering from this. There's currently 60,000 vehicles in quarantine trying to get into Australia. And so, not only have consumers in that region been waiting for six to 18 months to get a vehicle, but now it's going to be elongated by another two months as they work through that process.

Speaker 5: In the meantime though, what we have been doing is we've been upgrading our team, as highlighted through the hiring of now, which we're truly excited by that constitutes this founder-led and management-led transition. But also we've been very focused on instilling other fundamental verticals within that business to make sure that we are geared for not only growth, but also increased profitability. We've been able to see that. I think the sequential improvements that we've seen...

Speaker 5: from a gross margin standpoint, while volumes have still been pretty suppressed, it's pretty impressive when you think about we've gone from, you know, high 20 to low 30 gross margin profiles of Q3 and Q4 of last year to now right around 40 percent highlights that the productivity initiatives that we've implemented, you know, the value creation activities or the value leakage elimination activities that we've implemented are coming to fruition. And so now as we continue to

Speaker 5: work through the market dynamics, but also come out with new products and also enhance the overall awareness of the brand. It really primes us or positions us well to be able to take advantage of not only the macro trends, but also a brand that's extremely well positioned and well respected in the different geographical regions. And so when we think about long-term, you know, our immediately right now our head is down just trying to grind through the different.

Speaker 5: puts and takes of the current environment, but we're very excited by what the future holds because of where the space is going, the way that we're positioned, and the improvements that we've been able to make both from a process and system standpoint, but also personnel. And to answer the last part of your question is, becoming a more global B2B partner for a lot of these guys is also a key.

Speaker 5: key initiative and one of the first things that we've been able to do is we've been able to develop a global partnership with INEOS focused on the EV side of things, but also we've been able through our MaxTrax brand we've been able to develop a partnership with Porsche to also highlight key categories within that space as well. And so we're still in the early days of bringing this all together.

Speaker 7: in the third and fourth quarter of last year.

Speaker 7: So, we are seeing the benefits of what's happening. It's all at the gross margin line too. So it's been possible. Yeah, Erin, I know you've been spending a lot of time in Australia. You answered as I suspected that you might. Thanks for all that perspective.

Speaker 10: Just 1 last question just on the variance in the trends. By region, just starting on North America with respect to the channel inventory dynamics, are the independence in a better position than the larger partners?

Speaker 10: Some of the larger partners we look at in the public landscape seem to be managing inventories quite well. I'm just curious how that dynamic splits across some of your key partner dimensions. Yeah, the specialty guides are referring fairly well.

Speaker 5: As you know, if you recall it, specifically for the outdoor space, specialty was really a strong growth driver for us, who performed extremely well in the back half of last year. And those guys continue to be extremely prudent in terms of how they manage their inventory levels.

Speaker 5: They are a little bit more susceptible to just the ebbs and flows of consumer demand, but also weather and the elongation that's taking place with the great winter that we've had. But we anticipate that we'll continue to see strong performance at the specialty level. And to your point, what you've been able to see is more of the public-facing larger folks that have been able to manage the different open-to-buys or the inventory levels, but some of the larger accounts that we've had that are maybe not as public-facing that have

Speaker 5: we continue to work with in navigating through their open-to-buy topics or issues. That's where we've really seen the negative impact over the last...

Speaker 10: one Q1 but really for the last six to nine months. I see. And then your European business has been really strong despite what's been a non-existing ski season and touring season. Can you speak to what's driving the strength in Europe and the IGD business and

I guess I'm curious, what's the risk those businesses follow a similar cycle to what we've seen in North America where channel inventories overshoot? Yeah, so one, the team's done a great job of, we have a few different markets and diversification in terms of channel mix that's available to us in the European market. We're very focused on the dock markets as well as France and Scandinavia and the UK. But also, despite not having much of a winter season, this comes back to...

some of the key categories that we've highlighted in the past around lights and trekking poles, gloves, packs, and our apparel initiative. And those are the key categories that are driving that growth as well. We do anticipate as people are able to get back outside and start to participate in the outdoor activities such as climbing and hiking, trekking, etc., that that will help also drive the core business of our climbing product, but also continue to reinforce those key top five product categories that we've been focused on for the last bit.

that are less susceptible to actual weather patterns and whatnot. But are also where we see the greatest growth drivers from an addressable market and just continue to bring more and more consumers into the brand. Great. Thank you for taking my questions. We see it. You bet, Jim. One moment for our next question.

Our next question comes from Mark Smith from Lake Street. Your line is open. Hi, guys. Real quick for me, can you just talk about the projectile or bullet business outside of ammunition or loaded ammunition? What are the trends like there? And if you can quantify, maybe year over year, how that business?

Candice? Yeah, Mark. This is Aaron. One of the things that we've been focused on is starting to shift some of our production capacity over to the component side of things. We call it that either green box or black box, which is really focused on the reloader. And that's a market that we've been, not purposely, but that we haven't been over indexing for the last year.

One of the things that we've been doing during Q1, and this is also something that we'll continue to recalibrate, is that we've had a lot of changeovers associated with going to those calibers for the green box or for the reloading side of things. And so we'll need to get more efficient and better with that. But at the same time, what I'm just highlighting is that every time that we make these bullets,

the demand continues to refill and the demand is extremely strong. And then that also leads into the OEM side, which is a program business that's extremely strong. It's with key partners where we've been able to highlight or demonstrate a high degree of partnership and reliability in terms of being able to deliver or satisfy that demand. And so, that's where we're seeing a lot of the strong order book that we've highlighted before, and that if you take our year-to-date invoice amounts plus the order book, we're looking at about 70%.

of the year being spoken for, being highly visible. And so still very strong, still something that we're very focused on and something that we'll continue to try to satisfy to the best of our abilities. Okay, perfect. And then just as we look at precision, that's call it if it's normalizing, maybe at post-pandemic levels here, as that becomes a smaller piece of business, what categories do you see that are at that kind of higher margin that can really kind of make up for that?

As we continue to focus on our direct to consumer channels, as we get into these other categories or accelerate these growth categories from a product standpoint, all of that should be margin accretive and continue to help increase or drive the entire corporation towards our objectives from a financial perspective. OK. Thank you.

Thank you. One moment for our next question. And our last question comes to the line of Linda Bolton-Weiser from DA Davidson. Your line is open.

Yes, hi. So can you please just give us some color on who you buy casings from? And are there plans that you know of in the North American market for capacity to be added for casings such that the situation improves? Thanks.

Yeah, Linda, this is Aaron. I'd rather not disclose who we buy casings from because there are some strategic partnerships that enliven within those transactions. What I'll just highlight is that we're very focused on buying best-in-class casings.

quality is paramount for us and that's a non-negotiable. And so we have a series of different supply chain partners, call it five or so here domestically, as well some that are international, that are reliable and provide us with those showcases. It's just a matter of how we continue to increase the overarching supplier capacity under the volumes associated with those.

the needs that we have and be able to continue to further these partnerships with these different partners through the course of the year.

Okay, thank you very much. Thank you. Now I'll turn the call back over to Mr. Cooney for any closure marks. Thank you very much, Victor. I want to thank everyone for attending the call this afternoon and your continued support and the interest in CLARIS. We look forward to updating you on our results again in 90 days.

Thank you again. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.