Q2 2023 Clarus Corporation Earnings Call
Okay.
Good afternoon, everyone and thank you for participating in today's conference call to discuss Clarus Corporation's financial results for the second quarter ended June 30th 2023.
Joining us today are Clarus Corporation's executive Chairman Warren Cantor's C O O N Q&A, CUNY and CFO , Mike <unk> and the company's external director of Investor Relations Cody fall.
Following their remarks, we'll open your call for questions before we go further I would like to turn the call over to Mr. Slaw as he reads the company's safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking statements Cody. Please go ahead.
Thank you before we begin I'd 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 potential risks and uncertainties that could cause the actual results of operations.
As a condition of Clarus Corporation may differ materially from those expressed or implied by the forward looking statements.
More information on potential factors that could affect the companys operating and financial results is included from time to time in the company's public reports filed with the SEC.
I'd like to remind everyone. This call will be available for replay through August 7th of 2024, starting at seven P. M. Eastern time 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 Clarus Corp Dot com.
Now I'd like to turn the call over to Claris as executive Chairman Warren calendars one.
Thank you Cody.
Good afternoon, and thank you all for joining classes earnings call to review our results for the second quarter of 2023.
I am joined by our Chief operating Officer, Eric Cooney, Chief Financial Officer, Mike Yates.
I will start by addressing the overall business and corporate strategy and will provide an update on each of our segments and Mike will walk through our financial performance for the quarter.
Our second quarter results were negatively impacted by the continued challenging macroeconomic environment.
Headwinds.
We are seeing Destocking take place, particularly in North America.
The overall promotional environment, coupled with retailers tightening their inventory positions and open to buy dollars weighed on our performance.
We took effective countermeasures during the quarter generating free cash flow of $12 3 million.
Versus $2 3 million during the same period last year.
Okay.
I am pleased that each segment was cash flow positive during the quarter as we rightsize the business is to match expected demand for the year.
Since the beginning of the year, we've undertaken a strategic review of all of our businesses, including our management structure.
During last quarter's call, we highlighted the inflection point in our organizational evolution.
And the strategic shift to.
Seek to decentralize it and focus on individual segment performance.
As part of this strategy, we have made a number of significant changes to date.
Which we expect to contribute to long term value creation.
We continue to evaluate all of our businesses and their strategic initiatives to maximize value.
We believe that some of the parts of our three segments exceeds today's market valuation.
We continue to evaluate our corporate structure and inclusive of the changes we have already made we have a series of initiatives in place that we expect will reduce our normalized corporate overhead by $1 5 million compared to that it's 2022.
Okay.
While we are experiencing a challenging retail landscape. The changes we have made through the first half of this year.
Further cost outs and savings initiatives, we expect to make in the next six months are foundational to our growth strategies.
Our management teams continue to seek to simplify their businesses and invest more dollars into commercializing new products and.
And improving sales channel management.
We have worked with our retail partners carefully to help drive sell through well.
Working with our supply chain partners.
We manage the flow of inventory.
In order to seek to reduce the inventory levels, while ensuring on time deliveries.
Higher levels of fulfillment.
We are excited by the ongoing work of our three segment leaders.
Specifically on outdoor and adventure, we now have two new leaders, we're laying the foundation for anticipated future growth and improved profitability.
Our focus for the balance of the year will be on ensuring that the starting point for next year is optimized organizationally.
And clean from a balance sheet perspective.
Later on in the year, we will be introducing our segment leadership team and their vision for long range plans.
Sure.
Despite the headwinds outlined we continue to see monthly sequential improvement during the quarter.
And outdoor we saw increasing sales each month.
Driven by a strong push in direct to consumer.
Eating our inventory worked out.
While we saw some margin degradation due to off price and promotional activity, we still increased our outdoor gross margins by 440 basis points to 37, 5%.
Achieving our plans to generate cash and further normalized inventory.
I am pleased with the continued performance on our adventure segment.
During the second quarter, we saw continued stabilization in the market for our adventure products, resulting in improved gross margins of 370 basis points to 42, 4% for the Investor segment.
We continue to see normalized levels sales levels in Australia, which we expect to increase in the seasonally stronger second half as we introduce exciting new products.
Adventurers U S business experienced strong growth month over month during the quarter improving sales by 63% over the first quarter of 2023.
Consistent with how others have reported in the channel or precision precision segment experienced sales declines of 27%, while holding EBITDA margins of 26%.
We are taking cost out to match, our expected production and sales levels, which we believe will drive higher margins in the second half.
Okay.
Further we took important strategic steps to seek to stabilize our component supply chain.
Which we expect will enhance our ability to build programs for our partners going into 2024.
To summarize we believe that we have reached the trough in our outdoor and adventure segments and the quick actions, we have taken to right size those segments.
Should set us up for more profitable growth in future periods.
While precision has experienced a slowdown through market dynamics in a normal summer slump, we believe that <unk> season, and the looming election cycle into 2024 should catalyze demand.
With that thank you for being with US today, and I will turn the call over to Aaron.
Thanks, Loren I would like to dive into specific comments on our segment performance.
First let me address outdoor our outdoor segment was impacted by lower consumer demand given the inflationary environment and continued lower open to buys as retail partners rightsize their inventory.
Additionally, our retail partners are acting conservatively in terms of building back inventory, specifically weeks of inventory on hand.
We are seeing key retailers behaved conservatively and shorten up their weeks of supply.
We believe this is due to a bloated inventory levels industry wide.
Specifically private label products, which impact overall working capital and open to buy dollars. However, as we head into Q3, we're starting to see retail purchasing habits normalizes.
But we do expect it will take until year end before the market approaches equilibrium.
Somewhat offsetting this weakness was a 28% increase in our direct to consumer business, which we believe shows the strength of the black Diamond brand, despite the broader retail environment.
Looking ahead for the year, our top priority and outdoor remains seeking to bring 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 to the end of 2022.
Also at the top of our priority list as the goal of rebuilding our go to market approach in North America.
<unk>, our apparel initiative and bolstering our digital presence.
And our precision segment, we experienced lower sales year over year as retail inventory came in line with historical levels.
While CRM bonds were each off approximately 27% over the prior year period, we think it is relevant to take a longer historical view, where bonds was up 5% over 2021 and.
And over 100% during the same period in 2020.
While CRM was down 19% versus 21, it was up 38% over the same period in 2020.
The investments we have made in capacity and our continued partnership with OEM customers and retailers yielded meaningful share gains over the last three years, we continue to see a highly promotional environment for commodity ammunition as consumers look for value.
We're also seeing open to buy dollars tightened as our retail partners remain conservative with weeks of inventory on hand.
We are seeing positives, however, as reloading component availability loosens up which should help our consumers who purchase our green box and black box component bullets for reloading, especially as we head into the season.
Military and law enforcement opportunities are also coming into focus.
As we head into the second half of the year our partners continue to expect current season.
All through for highly promotional activity to subside by year end.
As Warren mentioned, we are pleased with the progress we've made a sharp showcases through a strategic supply agreement that covers this over the next two and a half years, which will improve our ability to drive ammunition programs and better serve our retail and distribution partners going into 2024.
Finally, our adventure segment.
We continued to experience sales improvement each month of the quarter, while substantially increasing our gross margin and EBITDA levels.
And our brands home market of Australia inventory levels have improved with our retail partners and in North America, We continue to rightsize, our sales channels and began to experience. The early signs of recovery that we expected.
For example, we have partnered with several of our strongest retail partners here in North America to support sell through and increase the velocity of their destocking efforts with.
With one of our accounts. This has resulted in a year over year increase of 60% and Rhino Rec branded product sold while the category itself is down high single digits.
These efforts are not only expanding <unk> market share, but also further reinforcing our strategic relationships demonstrating our ease of doing business with.
Accelerating their destocking efforts and further position <unk> for growth.
Just as important our gross margins and adventure for the quarter ended up at 42, 2%.
Which represents the highest margin quarter since mid 2021.
We have made strides to right size direct labor assembly and overhead while reworking input costs in core products for context, our gross margin for fiscal year 2022 was 35, 4% and our 2023 year to date gross margin was 41, 6%.
On sales that were 37% lower than the same period.
Our goal for the remainder of the year.
As to maintain our gross margins, while driving inventories down as we introduce next generation product in Q4 in Australia and globally in 2024.
Our business has strong fundamentals in place and we expect that as our growth initiatives take hold we will see strong operating leverage from the organizational reshaping.
While vehicle levels haven't fully rebounded, we're starting to see green shoots with regards to vehicle availability.
We expect the supply and demand imbalance with new vehicles to persist through the fourth quarter, but we have important initiatives. We believe will accelerate our growth in the back half of the year for adventure.
Let me lay them out here.
First we will focus on transforming our product development and innovation process to seek to drive improvement in speed to market and product differentiation.
We have a renewed focus on customer and consumer insights to drive overhaul product hierarchy.
A part a key part of our go to market evolution will be how we create and launch products as part of a larger ecosystem of lifestyle demands.
Next is customer service with a renewed focus on our key count partnerships and key account programs. The goal is to be the easiest partner to work with in the industry are.
Our people will be empowered to take action to drive performance and deliver on the challenge with an understanding that there are different business models for different customers.
Next is digital next is digital transformation, we are planning to maximize our operational infrastructure to develop our e-commerce platforms to support both beta begin PVC 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.
And finally, we will be data led and our decisions. We are developing a demand or data driven operating model the planned buys and sells inventory closer to demand.
Now I'll pass the call to Mike to discuss our Q2 financial results in more detail Mike.
Thank you Erin and good afternoon.
Jumping right into our performance in the second quarter.
Sales were $83 7 million compared to $114 9 million in the prior year quarter on a constant currency basis total sales were down 26%.
While reported sales were down 27%.
Second quarter sales in our outdoor segment were down 24% to $40 1 million versus $52 6 million in the second quarter of 2022.
If you adjust for the foreign currency exchange headwind outdoor sales.
Three years.
As Aaron mentioned, we are still constrained by lower open to buys from our key North American retail partners due in part to their inventory destocking activities.
Offsetting this decline was continued strong execution in our direct to consumer business at Black Diamond.
Precision sports sales were $25 8 million in second quarter compared to $35 2 million.
<unk> of last year.
In the quarter, we experienced broad based discounting from our competitors and retail partners as the market.
Continue to rightsize inventory levels, our ammunition business has been a significant headwind for the first half of the year on gross margin.
However, we remain very optimistic that precision sports and the market will return to solid demand as we move to the second half of the year supported by the upcoming season.
The adventure segment contributed sales of $17 9 million versus $27 1 million in the prior year quarter and on a constant currency basis sales were down 31% and reported sales were down 34%.
Spike these challenging market conditions. We believe we are starting to see stabilization in the market as sales were up on a sequential basis compared to the first quarter of 2023, and we expect to see sequential improvement in sales in both the third and fourth quarters of.
2023.
<unk> U S business did well during their peak selling season here domestically and some of the cost actions. We've taken have shown up in improved profitability for our <unk> business in North America.
During the first six months of 2023, we've moved to a new headquarters and consolidated our three previous warehouses under one roof in Denver, our North American business. During this period for the first six months of 2023, we incurred over $700000 of moving costs that should not repeat.
Just to be clear the Brian a rack facility in Denver serves as an under one roof solution for the entire adventure segment here in North America housing, our North American headquarters sales and marketing warehousing and assembly.
In Australia sales were strong in April and May but softened in the last few weeks of June as a result of Australians observation at the end of their fiscal year.
Importantly pick back up in July while the market environment and our venture segment still challenging we believe the worst is behind us and we look forward to reporting our business it produces better than 12% adjusted EBITDA margins going forward.
Moving onto consolidated gross margins in the second quarter gross margins declined to 36, 7% compared to 38% in the year ago period.
We experienced a 140 basis point benefit from favorable variances in Brighthouse, but this was more than offset by unfavorable FX of 110 basis points and unfavorable product and channel sales mix of 160 basis points.
From a segment.
Perspective.
<unk> margin at outdoor was 37, 5% in the quarter compared to 33, 1% in the prior year quarter, reflecting a 440 basis point improvement. The primary driver here was the elimination of the high freight costs from 2022, not repeating this year.
Gross margin at adventure was 42, 2% in the quarter compared to 38, 5% in the prior year quarter, reflecting the 370 basis point improvement due to the operational improvements and cost actions taken in the second half of last year, taking hold as well as more favorable FX environment.
Gross margin of precision sports was 31, 7% in the second quarter compared to 44, 9% in the prior year quarter, reflecting a 13 120 basis point degradation. This decrease in gross margins at precision sports was due to the sale of ammunition at lower margin profile.
Due to the promotional pricing environment that the market is currently demanding.
The ammo market has been very tough and it's been a drag on gross margins.
To put this in context I want to share the following during the first half of the year, we use internally produced bullets at Sierra and loaded Sierra ammunition, selling a total of $4 $7 million of Sierra ammunition in the first half of 2023.
We only realized $236000 of gross profit on these sales had these bullets been sold through Sierras OEM channel, we would have recognized additional sites.
<unk> hundred $50000 of growth gross profit, which would have increased gross margins at Sierra by nearly 700 basis points during the first half of the year.
Once the market stabilizes.
<unk>, we would expect margins to normalize for AMOLED products until then we will continue to realize decent margins on our component bullet business.
Selling general and administrative expenses in the second quarter decreases.
$2 million compared to 35 four.
We'll go quarter. The decline was driven by expense reduction initiatives in the outdoor adventure precision sports segments as well as lower sales commissions and lower noncash stock based compensation expense for performance awards at corporate.
Net loss in the second quarter was $2 $1 million or a six cent loss per diluted share compared to net income of $3 8 million or.
Nine of EPS in the prior year quarter adjusted EBITDA in the second quarter was $7 3 million or an adjusted EBITDA margin of eight 7% compared to $17 six.
Our adjusted EBITDA margin of 15, 3% in the same year ago quarter the.
The decline in adjusted EBITDA was driven by lower sales volumes unfavorable product and channel mix and a $1 5 billion consolidated foreign currency exchange headwind due to the strength of the U S dollar.
These impacts were partially offset by the improvements in SG&A during the quarter that I just previously mentioned.
Now, let me shift over to liquidity at June 30th cash and cash equivalents were $11 3 million compared to $12 1 billion at December 31, 2022, as Lorne highlighted in his opening comments free cash flow with outstanding.
Free cash flow defined as net cash provided by operating activities less capital expenditures for the second quarter of 2023 was $12 3 million compared to $2 3 million of free cash flow in the same year ago quarter. We use this free cash flow to pay down nearly $10 million of debt.
And ended the quarter with total debt of $127 2 million. This put us in a net debt position of $115 9 million, resulting in net debt leverage ratio of 2.7.
Seven times on a trailing 12 month adjusted EBITDA basis leaks.
We expect to stay within our stated range of two to three times leverage for the remainder of the year.
Under our $300 million.
All the credit facility, we have approximately $11 $4 million outstanding and further borrowing capacity of approximately 32 million at June 30th while maintaining compliance with the required covenants under our credit agreement.
Our inventories ticked up sequentially by $3 $2 million to a $149 million at June 30th.
As discussed during our prior call on May one of this year. This increase was expected as of June 30th we've taken possession of key inventory specifically at our outdoor business for the prime fall winter selling season.
From a tax perspective, we have over $17 million of Nols remaining and we expect these nols to offset any federal cash taxes due in 2023.
Now, let me move onto our 2023 outlook.
We now expect sales to land within the range of 385 million to $400 million for the full year 2023, and adjusted EBITDA to be in the range of 42% to $50 million or an adjusted EBITDA margin of 11, 7%, assuming the midpoint of the sales and adjusted EBITDA guidance.
We also now expect full year capital expenditures to range between six and a half to $7 $5 million and free cash flow is now expected to range between 30 and $35 million for the full year 2023.
Finally for the third quarter of 2023, we expect consolidated sales to be $100 million to $105 million, reflecting continued headwinds surrounding the unwinding of the inventory at a key North American partners, both at our outdoor and Brian Iraq USA businesses.
And the promotional environment within precision sports segment.
Let me pause here in the call back to the operator as we are now ready for the Q&A.
Thank you Sir at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one that will be compile the Q&A roster.
Our first question comes from the line of Alex Perry with Bank of America. Your line is open.
Hi, Thanks for taking my questions here I guess, just first what areas of your portfolio are you seeing sort of the heaviest destocking from your retailer partners is this mostly BD.
<unk> are you seeing.
Sort of across the board with both sporting goods retailers as well as some of your.
Independence, and what is sort of contemplated in the guidance.
In the second half with regards to that thank you.
Yes.
I'll go ahead and start with that so from a guidance standpoint, we.
We noted in our prepared remarks.
Expect this tough destocking environment to continue.
Through the remainder of the rest of the year. It will take until the end of the year, we think to for it to clear.
Our guidance assumes that it does clear through through the by the end of the year, but it also assumes is that our normal.
<unk>.
Preseason fall winter orders at <unk>.
Black Diamond that they do.
Flow through is as the preseason orders right, we've taken possession of the inventory and we do believe that.
Our key retail partners are in a position to take that inventory.
Come September October November of this year.
Hey, Ross.
This is Eric I'll add a little bit of additional commentary sorry, Alex.
As highlighted it is primarily within the outdoor segment, which is really the black Diamond brand and.
If you take a step back and look at our distribution here in North America, you can kind of from a wholesale perspective, you can slice it up into three different key components, one being that of our national accounts, which represents about 33% of our business key accounts another 33% in <unk>.
<unk> retail.
And what we've really been seeing is that especially our national accounts and key accounts in particular, those that also have private label offerings or their own branded product that is where we're seeing the biggest destocking the largest amount of destocking, taking place and so really its its focus on about 66% of our North America wholesale distribution.
<unk> partners, and just helping them to work through the different inventory levels. The other key piece, that's taking place.
Highlights in our prepared remarks is that.
A lot of these retail partners have been very conservative.
And thinking about how do we think about weeks of inventory on hand, just for context pre COVID-19.
It was typical bit retail partners would carry anywhere from 10 to 10 to 12 weeks of inventory on hand during covenant jumped up to 18 to 20 weeks of inventory on hand, and currently we're sitting at six to seven weeks of inventory on hand, and so what does naturally doing is shifting.
A lot of that risk risk towards the different brands and it is also forcing us to revisit our demand planning process, which we're in the which were in the middle of doing.
We're being very focused on one managing our inventory levels, but also our supply chain in a very dynamic way.
But we have high levels of fulfillment and just are easy to do business with while also driving towards lower levels of inventory and going after that target that we've outlined before and so.
It really is focused on those as I say almost two segments of our of our North America wholesale channel.
And that's where we will continue to focus on building out our own digital presence, but also supporting them with very sell through initiatives to totally accelerate the destocking activities and get to a more normalized level here in the next.
Over the next six months.
That's really helpful. And then my follow up is just on if we think about the guidance here. So I think that <unk> guide implies a sequential acceleration from QQ.
Still down year over year by accelerating is that mostly based on.
What youre seeing from a pre booking and then also I think the <unk> sort of implied guide.
It would imply that it gets even better what sort of within within the sort of <unk> versus <unk> guide.
Sort of give you gives you confidence there. Thanks, Yes. This is earned and again again I will give you a little bit of commentary and then Mike controlling the gaps.
But as we look at the back half, especially for that about door.
As a reminder, we do operate in two six month seasons, the spring summer season than our fall winter season that are supported by pre season bookings and work forward orders by the majority of our key retail partners. What we saw in the first half is that.
We were realizing about 65% to 70% of those foreign orders now historically, we will traditionally realize about 85% to 90% of those foreign orders and then through attrition we will.
<unk> will offset the attrition rates with three plans or <unk>.
Orders that typically come in it so as we thought about planning for the back half we are expecting to see improvements in the realization of our work orders or bookings.
Not expecting it to get back to historical levels of call it 85% to 90%, but we are expecting it to get back to levels call. It 80% to 85%, which is something that we started to see towards the end of June and something that was carried forward through July as well.
Yes, so Alex we.
So our guide implies $204 million to $219 million of revenue in the back half of the year.
From a adventure standpoint in my comments I said, we expect to see sequential improvement in both Q3, and then again in Q4, so we expect to see sequential improvement.
Venture throughout the remainder of the year, our precision sports it depends what we end up doing on how ammo pull through but the Erin.
Aaron referred to the Black Diamond business.
Sure.
We do expect that not to get all the way back, but as I mentioned in.
Answering your first question, we do have a strong order book for our fall and winter goods and that's the inventory I mentioned that we've taken possession for so that should get back into the <unk>.
$60 million.
$65 million range is what we're expecting that to recover too from a topline of BD.
Perfect. That's really helpful best of luck going forward. Thanks.
One moment for our next question.
Our next question comes from Andrew Nicholas Chen with B Riley Your line is open.
Hey, good afternoon, Thanks for taking my question.
First what is it possible to put in perspective, what pls.
Pos was.
Black Diamond for the quarter just to contextualize the difference between the sell in sell through and understand the impact from the retailer destocking or caution with open to buy.
Yes, so from our point of sale perspective, we continue to get feedback to the core categories within Black Diamond are moving well we continue to.
Performed quite well at retail and we are even seeing point of sale data support.
All at high single digit growth rates that were taking place. The problem is that they're still going through a destocking activity, but also so right sizing that various components of their own inventory, which naturally impacted their open to buy and the one thing that we continue to also see that their inventory level specific to that or black diamond or.
Are these sellers are decreasing at a faster rate than what we're also seeing that appointed selling so that continues to provide us confidence that the inventory or the destocking activities are working but it is.
And that will also feed into more normalized purchasing habits here as we get into Q3 Q4.
Got it thanks, and then turning to our precision for.
I think in the Q I saw that on international.
International sales actually underperformed.
As a bit of a shift from.
The recent trend anything to call out there are inventories normalizing internationally after being fairly completed versus the domestic market a.
A lot of this also comes down to just how we're able to prioritize output and capacity.
The team has done a tremendous job really focusing on these three verticals that we've outlined before being that of ammunition.
Our OEM business as well as the component side of things, which is three bucks per CRM black box per Barnes.
Because of the demand that we've seen both domestically and internationally in particular on the component side of things whether it be for OEM with a pre bought some black box. It does require us to think about how we manage capacity and just the sequencing of the fulfillment of orders and so.
We have we have a very strong order book as we look into the next six to nine months.
It really just comes down to how we're able to prioritize and sequence the various fulfillment of those orders.
Actually causes a shift between domestic and international versus a.
A wholesale change in terms of demand or just where the inventory levels are.
Got it so would it be fair to say internationally.
<unk>.
A better place with inventories and then maybe last quarter or a couple of quarter. Today, Yes, yes. No. So we are we are able to provide higher levels of fulfillment on the international side and so the pent up demand isn't as pronounced as it was previously right. I mean, there is a lot of demand that we just weren't able to fill over the last two years because a lot of focus was going in.
Building up your own ammo initiatives across both of the brands, but also fulfilling that.
That was quite insatiable.
And but over the last several months.
And quarters, we've been very focused on shifting a lot of our production to the international side just to make sure that we don't lose market share, but also continue to be that great partner that we've been able to prove that we are in support of those initiatives.
Two additional programs and opportunities into the future.
Got it thanks.
One moment for our next question.
Yes.
Our next question comes from Randy <unk> with Jefferies. Your line is open.
Yes, Thanks, a lot and good evening I guess, Eric can you give us some added perspective on can you talk about this dynamic of moving some national accounts, where there's more of a move towards private label impacting the destocking and the.
Order book.
Maybe give us some some vantage point on where when you have those conversations where are we in that kind of finding that equilibrium on that private label penetration that these accounts are kind of focusing on and thats pushing down orders where is that or we like the eighth inning of that.
And how does that kind of play out over let's say the next four to six to eight quarters in your opinion.
Yes, so I think because of what took place during the pandemic.
A lot of opportunities for some of these retail partners to evaluate that strategy further and to pursue it right. There's a lot of a lot of opportunity to develop once channels, but also wants brands, but I think what it also highlighted as things started to slow down and the dynamics associated with supply chain.
You indicated that and then also shortened and a very quick period of time, what I highlighted is that that's a different ballgame, that's a different business model.
Then then what somewhat are traditionally comfortable with or typical in.
And operating downturn. So what it's done is it has opened up the conversation for us to be able to have more holistic discussions around the positioning of our brands, but also the way that we continue to partner with them whether it be the way that we merchandise product our product offerings, but also even doing shop in shops.
Different types of <unk> that really help drive awareness, but also traffic to their locations, while also helping helping to drive sell through as well and so the discussions have been really focused on just the underlying economics of how we can partner together, but as a result. It also has created this overhang.
But they continue to work through from a working capital and just overall liquidity and availability perspective, that's something that started to rear its head.
In Q2 Q3 of last year.
And has continued to be a headwind worse over the last four quarters. No. One thing that we are starting to see is that those pressures are starting to subside. There are still certain categories that are a pretty massive overhang for folks that.
They anticipate will be an overhang over the next.
Anywhere from a year to two years now of course enough for US those are not categories that we participate in but it does naturally constrained how they think about open to buys and just the weeks of inventory on hand to take hold and so as a result for us in the discussion that we've also been having is just how we as a collective group manage these dynamics, but also how we <unk>.
<unk> with making sure that we have inventory availability, but also helping to support them with sell through while also continuing to build our brand through our own channels and really bolstering up our own business through our own efforts and so.
I think specifically as it specifically relates to our brands.
Good position.
But there are going to be some just natural overhangs that continue to persist through the course of this year and then I think as we get into 'twenty four it will be more normalized recognizing that there will be certain categories that will just continue to be a problem child, but not something that should negatively impact overarching open to buys and also.
Liquidity positions for these retail partners.
Great and maybe lastly can you give us some perspective by.
By segment on how we should how youre thinking about incremental are.
Go forward promotional posture from here just curious on that.
Where youre seeing it.
Yes Les.
Bad.
Get maybe perhaps worse, just give us a little more.
Wrangler color that would be very helpful. Thanks, guys you bet.
So on the outdoor segment will continue to see some promotional levels through the course of the year, we do anticipate that it will get sequentially better.
Based off of inventory levels in the channel than just what we're seeing is people are now transitioning to a different season, starting to annualize a lot of the noise that we've all experienced over the last four quarters on the venture side of things. We're also seeing much healthier inventory levels, we're seeing now.
Both in Australia, but here domestically, our retail partners don't participate in private label and so they came in.
<unk>.
The headwinds in a cleaner position, we have supported them in a pretty substantial way and moving that inventory through the system.
And as a result.
There is a little bit of carryover that will still persist through through Q3, and maybe into Q4, but we actually feel that we're in a pretty good position as it relates to just the promotional environment and how we participate in that and I think that commentary supported by what we saw also with our gross margin improvement both in the outdoor space, but also an adventure.
Despite these overheat.
These overhangs, we are seeing still margin improvement because of the different productivity.
Efficiency initiatives that we've been able to drive through the one segment that could continue to see some overarching headwinds as that of precision sports.
We're getting feedback from retail partners that they do expect that the hunt season will help recalibrate this and start to pull through inventory so that the promotional environment doesn't need to be as pronounced as it has been over the last two quarters in particular, but also as we head into the election cycle that should also help normalize.
Bring to equilibrium to different dynamics associated with inventory and so overall I would say that we should still expect to see.
Our promotional environment for the rest of this year, but I think everyone is very focused on similar to what we are and what we've already communicated as far as just coming into 24 with a very clean balance sheet and just getting a lot of this side gyration behind us that we've all been experiencing for the last four or so quarters.
Yeah very helpful. Thanks, guys.
One moment for our next question.
Our next question comes from Joe <unk> with Raymond James Your line is open.
Thanks, Hey, guys good afternoon.
First question on the promotional environment, obviously got pretty intense here in the second quarter, maybe help us understand.
When that started.
It sounds like it got worse as the quarter progressed, and maybe what Youre seeing here in July and August delegates easing up at all.
Yes, So we started this year.
Yes.
So if we break it down by segment.
We first started to see in the outdoor space and acceleration of the promotional environment towards the tail end of Q1, but really in Q2 and especially in Tel end of May and all of June .
And even as we headed into the first part of July and what's driving that is that.
There was a there was a great deal of effort to try to fault mapping just to keep everything in check and maintain that.
The health of the ecosystem that we participate in but also people are very.
Interested in cleaning up their balance sheets and getting a lot of.
The overhang behind us and so as a result, as we start to come out of the spring Summer season, That's where you started to really see the promotion environment accelerated uptake in terms of intensity, which is to be expected just because once again, we're a year into this and people just want to be done with it get it behind us and get cleanup.
Fastest possible, especially as you head into a new season.
On the precision sports side of things we saw.
The promotional environment really focused on the.
The commodity type.
<unk>, especially nine mill two to three is starting to feed into the 300 blackout type ranges.
But as his product has become more and more available.
We've also seen a.
A stiffer point of view our competition when it comes to the promotional environment and that is something that has really ramped up as we headed into what we call. It the summer swamp and so call. It in May and June but that is still ongoing and something that we expect will continue to see at least through August and September as we head into the harvest season.
On the <unk>.
Adventure side of things the promotional environment has been ongoing really since February or March as people come out of as I say in the last.
The back half of last year and came into the spring season.
Was negatively impacted by the <unk> winter.
Just the wet conditions that were taking place so people start to feel a little bit more pressure to get promotional earlier than what they typically would the nice to give those that those promotions. Those promotions are working and they are accelerating the destocking activities and so.
I would say that it's been layered in depending on the different segments and also the progress that we've seen has been slightly different depending on the segment as well, but it is something that we anticipate seeing through the course of the next two quarters, but it's really it's an effort for everyone to just get their balance sheets cleaned everything recalibrated normalized.
As we head into 'twenty four.
Got it that's very helpful. Eric. Thank you I mean, maybe just a follow up on that.
Is there a way to quantify.
How much.
Stocking across your three segments is costing you in terms of sales this year and maybe kind of to follow up on that.
How confident are you that we're going to be clean by.
By the end of this year.
Well.
In a simple way of putting it if you look at how we re guided the business I think that re guide is directly attributable to the destocking activities and what it's cost us from a revenue standpoint.
We came into the year.
Applying the same approach in terms of how we think about the business forecast at planet.
We did a lot of we had a lot of discussions with top to tops. We have the bookings in place is just that realization of bookings, which is which is circumvented by the destocking activities that has really had a negative impact on the first half of the year and that's where we're optimistic as we head into the back half, but really as we head into 'twenty four.
I think as it relates to just where we're at and the confidence level.
It keeps on being reinforced by by the bookings, but also the conversations that we have with retail partners that.
Everyone is very focused on having this be cleaned up by the end of the year now.
There's a lot of variables that come into play there, but I think everyone is very focused on that everyone's taking a very disciplined approach as are we and the results are demonstrating that with our free cash flow generation that we highlighted that we reported but also just the way that we're planning for the business in May we were taken a little bit.
We're being a bit more conservative conservative even ourselves as we think about our demand plans and just the way we will be managing inventory levels, because we wanted to give things normalized and rebalanced as fast as possible.
Got it okay. Thank you guys.
One moment for our next question.
Our next question comes from Mark Smith with Lake Street. Your line is open.
Hi, guys I just wanted to revisit the international business, just a little bit as that came in a little weaker than we'd expected Eric.
Eric can you talk a little bit about how much of that was maybe supply versus demand how much you wanted to shift and this is across all segments.
How about you wanted to ship internationally versus just demand driven and some of the same macro factors slowing some of the international sales.
So on the international piece a lot of this is driven by programs that we have in place with key distributors, but also key partners that are underpinned are underwritten by law.
<unk> enforcement of military type programs and so when we look at our order book, which might provide additional commentary on but we have a very strong order book, especially as it relates to that of at Sierra.
In essence covers us for those for the bulk of the rest of the year as we think about that business and so the order book is intact order book is there. It's just that there are dynamics associated with when the licensing side of things, but also just getting the logistics all wind up but also how we continue to fulfill on domestic.
Mass and programs that we have.
Desires and obligations to fulfill on as well and so it really does come down to capacity, especially as we think about.
The component side of things and how much how many calls we can produce on a given day, but also how that all ends up in terms of our ability to ship it out.
The demand on the international side continues to be very strong, especially with our our bread and butter type calibers, whether it be a <unk> and a 335 et cetera.
But those are those are programmatic calibers in programmatic.
Orders that we have in place that once again or are there and it's just a matter of can we fill it and win.
And if we look at outdoor business within international can you just talk about puts and takes there.
It was.
Actually I think the lowest since before the pandemic.
Talk about any pressure that youre seeing on international business within the outdoor segment.
The outdoor side on the international piece is really driven by Europe that was a region that had been performing extremely well despite.
The geopolitical risk and concerns, but also the economic headwinds.
Current global spacing in there we're really outperforming.
On a on a relative basis, but also sequentially for an extended period of time and.
And in Q2, it just finally caught up to us.
The order book stayed pretty stable, but what we really saw is that the aesop replenishment side of things just was not there and part of that was driven that we were able to have a high level of fulfillment.
Yes.
We did the pre season orders so that really took place in February and March but as we headed into May and June which are really driven by aesop and replenishment rates.
The orders just weren't there and so in discussion with the team, but also with retail accounts in that region. There just.
They are experiencing a lot of what the U S. Starting to see four quarters ago and something that they are working through the nice thing is that a lot of that is just transitory as we as we transition to the fall winter season.
The bookings are stable and feedback is that they will continue to take them and so for us. It's really just matching up our order book with with inventory supply because if we miss.
The delivery of those.
Open order windows that could start to bring into question our ability to realize the full potential that we have in front of us based off of the order book and so it really just comes down to execution and our ease of doing business with with our retail partners.
Okay, and then back to precision for one more question.
It sounds like you guys feel better about where kind of you're locked in on components and some contracts. There can you talk at all about pricing margins were squeezed here this quarter.
How much of that is really coming from component cost and as you. It sounded like feel better what kind of price increases are you looking at on an components going forward.
So a lot of what we saw from a gross margin perspective was driven by the promotional environment and what Mike highlighted in <unk>.
Prepared remarks associated with the Atmel that we moved.
This is animal that we built in anticipation of.
Being able to sell through it over the last four quarters and it just got to a point, where we wanted to be able to move it.
The bulk of that was either nine mill or two to three.
And Thats been a consistent story for US now for the last three quarters.
There has been some margin pressure as it relates to input costs in particular related to that of components showcases be a primary driver as well as labor, we have been able to plan for that though over the last couple of quarters as it relates to the different price increases that we activated.
In particular in 2022 that is carrying over into 'twenty three and the team has also been very focused on continuous improvement initiatives and have done a great job in increasing capacity, becoming more efficient more productive and finding ways to lower the overall overhead structure of the debt.
Both of the businesses.
What we're also focused on is just mix and making sure that we have good.
Good balance of changeovers versus high runners, but also really focusing on on the on the channels and the calibers are the types of product that we're known for but also naturally come with higher levels of gross margin as well and so that is where we have de emphasized some of them are focused on some of the more commodity base.
Ammunition initiatives are in particular within Sierra.
But also really focusing on our on our OEM and R&R component bullet businesses.
Businesses as well.
Okay, great. Thank you.
Yeah.
One moment for our next question.
Our next question comes from Jim Duffy with Stifel. Your line is open.
Hello. Thank you good afternoon, guys I've got a couple of questions for you first Mike can you give us some help on the inventory mix by category.
Yes.
By segment or by.
Raw materials finished goods.
No by segment.
Yes.
Well, we havent provided that anywhere so.
Okay.
I mean.
We can talk about that.
BD inventories.
It's about $80 million.
Precision sports inventory is.
Around $40 million and the remainder is at adventure so.
That's about a $30 million.
Okay helpful. Thank you and then with respect to BD I'm curious the mix that spring summer that you may have carryover versus fall winter.
Yes.
Thats the inventory, we're moving right that the inventory we are taking a lot of inventory on for fall winter, we're being aggressive in the promotional environment to move that.
Spring inventory and Thats, what Thats, what everyone is focused on over in the outdoor spaces.
Right size that inventory, that's the whole process that we've been talking about but no.
Maybe I don't understand your question sorry, maybe Mike just also to add a little additional commentary this is Aaron Jim.
The way that we've traditionally thought about this from an outdoor perspective is also a function of DM versus.
Online type product.
And one of the things that we've been able to do over the throughout this whole process is that we've been able to keep the DM level is pretty high.
We came out of Q2 was something around four 4 million to $4 $5 million of DM, which is a little bit more elevated than what we've had in the past, but all things considered not that that now is really just a matter how we continue to reshape the highs and lows.
You don't really within the different categories, and that's where the targets that we've outlined.
<unk> inventory levels down 15% really comes into play but it has just continued to be very thoughtful as we go from season to season naturally will have will always be generating some level of discontinued merchandise, but it's how you manage through that process.
Given the sentiment as well by doing pre DM type promotions and just working with retail partners, but also for your own channels of moving that inventory.
Yes.
Okay.
Aaron maybe you answered. This question when you were speaking two weeks inventory on hand at retail and that goes beyond just catch your brands, but a key question for the <unk> ability of guidance in the back half of the year is your confidence that retailers are going to take those both fall winter goods and aren't going to come back and say you know what I'm talking.
Bikes paddle boards hiking shoes, I can't take those fall winter shipments.
<unk> gives you the confidence.
Yes.
Those other categories aren't going to be problematic to your business.
The primary driver of that is just where the weeks of inventory on hand for BD is within retail being at that six to seven weeks.
If we were at call. It eight to 10 weeks or 10 to 12 would be more risk more realistic as tend to flow.
Then there.
Could be a little bit of exposure there call it.
Anywhere from half month, two months worth of inventory, but when you are at six to seven weeks.
Flexibility agility and the pipeline to be able to take that much as well.
And so it really does come down to what's what.
What's on the docket from an order book perspective, and how do we support it with sell through.
Because at that point in time, you're really just getting into replenish type activities, which these guys have open to buy dollars for because they just need to have.
They have the product on them.
And the shelf space around the pegs.
Okay. Thank you and then.
Brian a question around the Susan Sports you demonstrated the economic rationale for owning these businesses certainly that.
The message had been that you were a small player in a large market and share gains could support the top line through the market cycles in the ammo opportunity was kind of a key component of that message I guess I'm trying to understand.
It is simply a cyclical business from here for what was the Miss calculation with respect to ammo.
Is the business proving more.
We're exposed to the cycle than you had initially thought.
Yes that is primarily driven by the inability to consistently deliver.
Full range.
Ammo product that enables us to have a program a programmatic business with these different retail partners.
In essence, we are going out and reselling the wine every month.
Based off of when we get components in place and can actually produce the product as a result, it really makes it more of an E suffered an opportunistic type model versus something that is based off of a program, which is really where we need to be especially in an environment like this.
Lot of promotions, there is ample opportunity to availability of product.
The feedback that we continue to receive from retail partners is it really like how we're positioned in particular the farms brand. The <unk> brand is definitely asset classes as well positioned as premium position and also.
Has a high level of sell through the system and we've got to be able to be more consistent or easier to do business with us by being able to have these <unk>.
<unk> ability on a more consistent basis and in a more leveled manner not in massive weight and that's why.
The supply.
Supply agreement is key.
Very important question why it also gives us confidence that we'll be able to see.
A better run rate on the business as we head into 'twenty four because we will be able to start to develop and execute on these trucks.
Okay that was very helpful. Thank you you bet.
One moment for our next question.
Our next question comes from Matt Koranda with Roth <unk>. Your line is open.
Hey, guys good afternoon.
Follow up on the guidance.
It sounds like the incremental weakness.
Related to the guidance cut is coming from outdoor and precision sports pretty much entirely but just wondering if you could maybe help quantify exactly where the cuts are coming from at the midpoint of the guide for both revenue and EBITDA.
Well at the mid point is obviously, the 392 and a half and the $46 million of EBITDA compared to the $4 20.
<unk>.
$60 million right I mean, obviously, you've gotta taken the first half Miss right we missed first.
<unk>.
Okay.
Thanks.
So obviously that flows through the destocking that we've been talking about in the promotional environment.
The stocking of BD.
North America adventure.
Along with the promotional environment at precision sports that really.
Picked up here in the second quarter.
We see that.
Taken us through hunt season right.
Thats really the those are the main components of where that the drop from the $4 20 guide of $3 92 at the midpoint 392 and a half.
And the corresponding EBITDA on that right as the precision sports business.
It comes down.
Sure.
The promotional environment, there as well as the Destocking of BD, which has been quite promotional as well, that's where that's really the culprit for the drop in the guide.
Okay.
I'll take the rest of those offline and then on the.
Specifically as it pertains to the outdoor segment.
It seems like we're going to end up almost flat in the second half this year versus the second half of 2019, but the DTC business just given some of the stats you guys have thrown out seems like it's grown quite a bit but I'm. Just wondering how are we thinking about share at wholesale are we losing share or we intentionally exiting certain customers.
Is this where the overall, it's our product space is is kind of flat relative to 2019, I mean, how are you thinking about share at wholesale for black Diamond in particular.
I don't think we're losing share at all at the wholesale level I think it's just the Destocking Aaron mentioned the need for some of our big retail partners too.
Move their own branded.
Private label stuff right and our demand that we've seen for through our D to C business is <unk>.
<unk> business was up 28% in the quarter. So our brand we still believe is quite strong and we're seeing the negative impacts from the Destocking right.
That's gone on throughout the first half of the year and as we continue to see it here.
As we speak so as I've mentioned in the last call we needed to see that stop we needed to see shell casings come available, which we've made great progress, but we won't get.
The benefit of that until first quarter of next year and adventure. We think are stabilized right. We think the worst is behind us for that business. So.
I think that's how that's why our focus frankly has on right sizing the balance sheet right sizing inventory Venus strong position, both from operational and a financial.
The stability to grow the business in 'twenty four.
Okay, you mentioned inventory buy.
Maybe just talk about sort of where were.
The inventory breaks down.
In terms of the <unk> balance.
The segments are you a little bit heavier in one particular segment or another or it sounds like youre signaling youre going to be more promotional on the outdoor side of things.
Probably clearing a little bit more promotional.
Promotional.
That is the environment that we're seeing both across cross sell.
Higher portfolio frankly, but.
What we are seeing as I mentioned too.
And just earlier question, but there's about $80 million of inventory at our door that was expected to spike up as I said.
Said that.
I signaled that 90 days ago, and we take possession of that inventory as of June 30th has at least South Asia and we're taking possession of that here in the states now and we'll get it to our customers here.
So they can put it on their shelf hopefully after labor day.
Precision sports is about 40 $41 million of inventory.
Between the two businesses.
That's.
That's a little higher than our target, but our targets.
$18 million to $20 million.
Okay.
Sure.
For the $9 of inventory.
<unk>.
With about a third of that here in North America, and the remainder over in Australia. So that's that's the landscape of our inventory position from our outdoor we are looking to reduce debt.
15%, that's $80 million should be in the high.
<unk> by the end of the year.
Our focus were.
Laser focused on with them. We've reviewed every Wednesday morning, with the BD team and that glide path to get to the high <unk> for inventory at Black Diamond.
<unk>.
Right sizing and focused on the same thing in adventure.
<unk> been focused on bringing down inventory working on product.
Changeover as new products are sunsetting, the old products, and introducing new products and managing that inventory here in the fall, especially in Australia, Aaron mentioned, we're introducing new products and the platform six.
And then that product will come to the North American market in 2024.
So managing that inventory and getting that down again, another key focus so.
We see a path to get that $149 million of inventory back to the low $1 <unk> by the end of the year.
Okay. That's helpful.
And then just lastly, just on on the balance sheet.
What are the other levers we have to reduce leverage I mean, it seems like we're going to be cash flowing with inventory reduction and even with the lower guide there should be cash flow in the back half of the year here.
Are there any portfolio actions you consider in terms of monetizing any particular segment to pay down debt kind of for yourself up.
From from some of the leverage.
That's happening right now we've been good question, we've been focused on leverage and managing inventory. The obviously at two seven times Levered on a on a on a net debt basis.
I mentioned in the prepared remarks, we've been focused on that obviously, if we can achieve these.
$15 million improvement in inventory here between now and the end of the year that will put us in a position where we can pay off the revolver. The revolver has about $12 million.
$5 million outstanding right now.
We will pay that off and then we'll have a couple other payments on the term note as well.
So there's about $18 million of debt that we said we paid between now and the end of the year. The intention is to pay that off.
As we delever the balance sheet.
I think we've been planning pretty significantly from a demand planning and syncing up our demand planned in our inventories.
That's been our focus over the last.
Couple of quarters to make sure which had to happen in order to achieve what I'm trying to do by that what we're all trying to do by the end of the end of the year. So if we in fact do that.
I could see US you know that.
Goal is to be just have the term loan outstanding at the end of the year, which is about $110 million of debt.
And.
Trailing 12 month EBITDA at the midpoint.
That $46 million of EBITDA, you're still we're still right in that range.
Middle of the range to four times Levered, So I mean, I don't think.
We're not in a panic positioned where we need to Sally segment, but in the same breath I'm sure. It's the right price and that's b the boards.
Responsibilities to assess.
Any type of.
Strategic alternatives like that but.
Right now that's.
We're just focused on right sizing inventory generating cash and paying down debt.
Getting into a good strong position from a balance sheet perspective to start next year.
Okay got it so no portfolio actions in the near term it sounds like.
Yes.
Okay. Thanks, guys I'll take the rest offline.
At this time. This concludes our question and answer session I would now like to turn the call back over to Mr. Kenny for closing remarks.
Thank you very much everyone for joining the call and we look forward to.
With you as part of our Q3 earnings call in process.
Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect. Your lines. Thank you for your participation.
Okay.
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Okay.
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