Clarus Corp (CLAR) 2023 Q1 法說會逐字稿

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's financial results for the first quarter ended March 31, 2023. Joining us today are Clarus Corporation's Executive Chairman, Warren Kanders; COO, Aaron Kuehne; CFO, Mike Yates; and the company's External Director of Investor Relations, Cody Slach. Following the remarks, we'll open the call for your questions.

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

Thanks. Before we begin, I would like to remind everyone that during today's call, we will be making several forward-looking statements and we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to potential risks and uncertainties that could cause the actual results of operations or financial condition of Clarus Corp. to differ materially from those expressed or implied by the forward-looking statements. More information on potential factors that could affect the company's operating and financial results is included from time-to-time in the company's public reports filed with the Securities and Exchange Commission.

I'd like to remind everyone this call will be available for replay through May 1, 2024, starting at 7 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 at claruscorp.com.

Now, I'd like to turn the call over to Clarus' Executive Chairman, Warren Kanders. Warren?

Thank you, Cody. Good afternoon, and thank you for joining Clarus' earnings call to review our results for the first quarter of 2023. I am joined today by Aaron Kuehne, our Chief Operating Officer, and Mike Yates, our Chief Financial Officer. I will start by addressing the overall business and corporate strategy. Aaron will provide an update on each of our business segments, and Mike will walk through our financial performance for the quarter.

Our consolidated performance for the quarter highlights the resilience of our portfolio, given the uncertain market conditions and headwinds that carried over from 2022. 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, which were mostly offset by fewer shipments to our North American retail partners, due to elevated inventory levels and reduced open-to-buy dollars.

Precision Sports started slowly in January as market participants took stock of inventory levels and customer demand across SKUs. In aggregate, sales in February and March were off 3% over the same period in 2022. 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. We are seeing a strong focus on specialty components and calibers as our core reloading customers restock, while we remain constrained by limited availability of rifle shell casings.

The first quarter presented a difficult comparison for Adventure, given the record performance of the U.S. business in Q1 of 2022. The North American market continues to be hampered by promotional activity, due to excess inventory at wholesale distributors down to retailers. While our North American business was off nearly 70% over the same period last year, we are seeing declines 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. More importantly, the operational improvements we implemented are taking hold as we generated gross margins in excess of 40% for the quarter versus 32% and 28% in Q4 and Q3 of last year, respectively.

At the corporate level, I'm pleased with the progress that we have made to upgrade our segment leadership. As Clarus has grown from a single brand, Black Diamond, the 3 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. We implemented cost cuts in Q1 and Q2, which will save us $1 million at the corporate level on an annualized basis over 2022.

As a precursor to our cost-saving initiatives, we recognized an inflection point in our organizational evolution, implementing a strategic plan to decentralize and focus on individual segment performance. 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: cash flow generation, debt paydown, and margin enhancement at both the gross profit and EBITDA lines.

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 affecting customer channels across all segments, and we have moderated our inbound purchases accordingly.

Furthermore, as we focus our efforts at the segment level, we hired key leaders in Outdoor and Adventure who are each in the initial phases of their long-term planning. We are looking forward to sharing their views with you at the appropriate time.

Neil Fiske joins as the new President of Black Diamond during Q1. An avid outdoorsman and experienced mountaineer, Neil brings deep expertise in building brands, driving innovation, and improving operational performance. We are enthusiastic about Neil's energy and vision for Black Diamond and its place as an iconic brand in the broader outdoor ecosystem.

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 R.M. Williams, an iconic Australian brand. Prior to that, he was with L Catterton, in its APAC Operations & Value Add Team, 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 3 years of market volatility, shifting consumer spending habits, and supply chain challenges, we are principally focused on baselining each business segment, solidifying our long-term growth objectives, and enhancing the brand teams to ensure we are positioned for success and can sustainably execute our plans. The foundation of our brands has always started with our dedicated people and our hallmark approach to product innovation. We're excited to build sustainable growth through the implementation of our long-term strategic initiatives. 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.

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. 2, we are expanding our geographical footprint in key markets of the U.S., Canada, Europe, Australia, Japan, and Korea. Third, we are increasing the depth of our presence in these geographies through increased penetration into key channels and segments, 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. Despite the challenging marketplace, we believe we are seeing stabilization in several end markets, and the initiatives I just highlighted will establish the footing for growth and increased profitability as we come out of 2023.

Now, turning 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. 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 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 and the sharp demand spike in outdoor categories during the COVID period. For much of the past 2 years, supply and demand have been out of balance, and we expect that it will take another 6 months before the market approaches a closer state of equilibrium.

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

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. Also at the top of our priority list is rebuilding our sales and go-to-market approach in North America under the leadership of a new VP of Sales for the region. 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, difficulty sourcing shell casings and heavy inventories at both retailers and distributors, in particular with pistol and revolver calibers and the more popular rifle calibers, such as .223, masked an otherwise strong order book. Somewhat offsetting this headwind was strength in 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.

Despite the headwinds in retail, our Barnes brand continues to be in high demand when it comes to centerfire rifle cartridges, as our all-copper solutions continue to demonstrate world-class terminal ballistics required by the super fan hunter. Demand for niche, new 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. 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 to steal market share in 2023.

Moving forward, we plan to focus on several initiatives in our Precision segment. First, we are working to shore up component sourcing challenges associated with shell cases. Second, we are working to refresh the Sierra ammunition lines later this year. Third, we will continue to create more dealer and consumer touchpoints for both brands. And finally, we will focus on building and fostering key relationships with Tier 1 retailers, wholesalers, and key accounts.

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.

And finally, our Adventure segment. 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 seamless future trends, 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 nearly 50% of all new vehicles sold.

Our commitment to great teams, along with permanent changes to the cost structure, has set the table for an expected sustainable business in the long-term. 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.

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. We have already launched a number of unique product solutions, and we'll be ramping this up throughout 2023.

The opportunities outside of Rhino-Rack'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 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.

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 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 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.

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.

And finally, we will be a data-led in our decisions. We are developing a demand and data-driven operating model that plans, buys, and sells inventory closer to demand. 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 megatrends in the outdoor world, and we do not anticipate this changing anytime soon.

Now I will pass the call to Mike to discuss our Q1 financial results in more detail. Mike?

Thank you, Aaron, 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%. On a constant currency basis, total sales were down 12%. First quarter sales in our Outdoor segment were up 2% to $52.8 million versus $51.5 million in first quarter of 2022. If you adjust for foreign currency exchange headwind, Outdoor sales would have been up 5%. As Aaron mentioned, while we've done a good job closing the gap on outstanding Black Diamond orders, we are still constrained by lower open-to-buys from our key North American retail partners, due in part to their inventory destocking activities. Partially offsetting this decline was continued strong execution in the first quarter in the key markets where we pivoted to in the second half of 2022, the direct-to-consumer market, the European market, and our IGD markets.

Precision Sports sales were $27.1 million in the first quarter compared to $33.1 million in the same quarter last year. We continue to experience challenges sourcing brass casings for ammunition that inhibited our ability to deliver against our order flow. Imbalanced inventory levels within the more popular pistol and revolver, as well as rifle cartridges at retail, also impacted sales velocity. 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.

Moving to Barnes, we experienced strong demand and sales conversion in our international and domestic OEM product due to continued strong worldwide demand for our all copper bullet.

The Adventure segment contributed sales of $17.5 million versus $28.6 million in the prior year. Sales were down 39% on a reported basis and 36% after considering the impact of foreign exchange. 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. As Aaron discussed, despite these results, our long-term positive view of the Rhino-Rack brand in the U.S. remains intact.

Moving on to gross margins. Consolidated gross margin in the first quarter declined to 37.0% compared to 39.1% in the year-ago period. Margins did benefit from lower freight costs this 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.

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 disciplined expense management at the Adventure and Precision Sport segments, as well as lower non-cash stock-based compensation expense 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.

Net income in the first quarter was $1.6 million, or $0.04 per diluted share, compared to net income of $5.3 million, or $0.13 per diluted share, in the prior year quarter. Adjusted EBITDA in the first quarter was $9.6 million, or an adjusted EBITDA margin of 9.9%, compared to $19.7 million, or an adjusted EBITDA margin of 17.4% in the same year-ago quarter. The biggest drivers of this decline was a $2.4 million headwind due to the strength of the U.S. dollar and lower volumes at our Precision Sports and Adventure segments.

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 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. We also paid down $2.2 million in debt and ended the quarter with total debt of $137 million. 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, which is at a low end of our range of 2x to 3x. 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 covenants under our credit agreement.

From a tax perspective, we have over $17 million of NOLs remaining and we expect these NOLs to offset the majority of federal cash taxes due in 2023.

Now moving to the 2023 outlook, we continue to expect sales of approximately $420 million and adjusted 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. For the second quarter of 2023, we expect consolidated sales to be approximately $92 million, reflecting continued headwinds surrounding unwinding of inventory at our key North American partners both at Outdoor and Rhino-Rack USA.

I'll pause here, hand the call back to the operator, and we're ready for Q&A.

(Operator Instructions) Our first question comes from Randy Konik from Jefferies.

Yes. 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 around -- very much around margins, free cash flow, debt paydown. 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 new leaders in place around Neil and Matt over the next few years, that would be very helpful from your vantage point. That's it.

Yes. Randy, thank you for the question. And so where we are today is we have 2 new leaders in both the Black Diamond and the -- and our Australian businesses. If I start with Neil, so Neil's been in the seat for 3 months as of today. We have made many hires 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. And I'm pleased to say that we now have a very strong 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 the first iteration of his long-range plan. We expect to have that finalized in the next 45 days. 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 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. Some of those categories happen to be our strongest categories. And so those would include apparel, which you know about, and Neil's background speaks to that, having been at Eddie Bauer and Dakine also trekking poles, lighting products, packs, et cetera.

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 product mix that we would have today. So, we are very excited about that.

Similarly, with the Australian businesses, Matt's been in there for about 2 months now. He's working on his long-range plan and we expect to have similar discussions with him. 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 this year and have presentations to that effect to outline how we're thinking about those businesses and what we see as the opportunities both in the long-term and both in the short-term and the long-term for those companies.

On the Sierra, Barnes side, we continue to work through the issues. I think that the -- as you've heard several times, some discussions about shell casings, we're working hard on that so that we would have possibly that locked down for us. So -- but otherwise, it's really the mix of business again there and reducing the number of changeovers that we have, which does impact our margins. But we're seeing good visibility today for that -- for both of those businesses.

And then I guess lastly, Mike, 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 or SG&A as it relates to anything to be nuanced throughout the second, third or fourth quarters that you should be considering in thinking about our modeling?

No. Sure, Randy. No, gross margins should be in that historical range, right, 37% to 39%. That's what -- that's how we're looking at it. The guide, we did guide $92 million for the second quarter. Now that implies about a $230 million back half compared to $190 million first half of the year, right, on the topline. And the success in order to achieve that is really dependent upon us seeing some improvement in North American wholesale, right, and see that pick up. Also, if we -- as Warren just alluded to, we're working diligently to secure shell cases, right. If we secure those shell cases in the back half of the year, that will definitely help and lift the topline results in the back half of the year as well.

Those 2 things alone along with FX will be beneficial in the back half as well. Those are the kind of things you've got to kind of model in to kind of in my opinion to understand our guide, right, for the first half of the year compared to what has to happen in the second half of the year.

Our next question comes from Alex Perry from Bank of America.

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.

Sure. Alex, it's Mike. I'll take that. Yes, obviously, on top line, we overperformed by a couple million compared to what we -- 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 of 290 basis points, it's really at the gross margin line is where the difference is. 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, 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, we're -- that, that hurts our profitability, right? Our profitability at BD is hindered when we're not getting the volume at the North American side of the BD business, because the European, as I mentioned in the prepared remarks, our European business, our IGD business, our D2C business continue to have outstanding performance, right. And that's really where we saw it at those 4 categories at the gross profit line that caused the EBITDA challenges.

And then I guess my second question, maybe a follow-up to an earlier question, but depending on the year 1Q is typically your first or second highest EBITDA quarter. I guess to get to the EBITDA guide, you have to imply a pretty big acceleration from here, especially in the back half. I guess, first, maybe any help on what sort of margin -- EBITDA margin we should be expecting on that $92 million of sales for 2Q? And then in terms of what gives you confidence on that sort of 1H-2H split? Is there something that you have visibility on today that gives you that you feel confident in that, like your fall '23 BD order book being up year-over-year or something else that would give you sort of confidence that to hit the acceleration in the guide?

Sure. Let me run with that one too. So it's a couple of things I just mentioned on the last question, right? You've got to understand one other thing that's super important though, historically, the BD business and the Clarus business did about 55% of the top line in the back half of the year. So you've to see that again in this coming year. And we also historically have done about 50% of our EBITDA in the last 3 or 4 months of the year. So you're going to see a big -- and that's where the cash flow gets generated as well, right? 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 back half of the year EBITDA loaded guide.

Hey Mike, this is Aaron. You're all right if I jump in real quick on that one as well?

Sure.

Alex I think it's also important to highlight that there is this difference between demand in the marketplace versus also that of destocking or the liquidity constraints that some of our retail partners, in particular, in North America are facing. 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 those that as we're not seeing it in our financial results quite yet just because of the whole destocking activity. And a lot of these North American 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 anticipate it that's going to take us a little bit of time here in the next month or 2 to be able to see some of the 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 what we would typically see in terms of strong spring, summer deliveries that would already start in March and those are -- those still haven't kicked in to the full extent that we would anticipate.

So 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 destocking activity, but I think it's just important to highlight that the demand is stable. It's just that we've got to work through these timing issues.

Great. And sorry, just on the 2Q EBITDA margin. Should it sort of decelerate versus the 9.9% in the first quarter? Or how should we think about the margin on the $92 million in sales?

We haven't given -- we're not going to give a guide on that, but it should be better, right? It should be better, right? I walked through a lot of unusual. We wrote off some inventory. We had core channel and product mix, right, FX with the headwind. I think it should be better.

Our next question comes from Laurent Vasilescu from BNP Paribas.

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. Can you -- I know you guys are not going to guide or give us framework for the 3 division. But just like how is it down 20%? Is Outdoor going to be down sharply as well in the quarter? And if so, was there a timing shift into 1Q, just if you could help us walk through on the 2Q topline?

We did $115 million in the second quarter last year, right? So that -- to your point, that's down $23 million. It's a little bit of everything. You're going to see some weakness across all 3 segments. And when I say weakness combined -- compared to outstanding performance 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 $5 million, $6 million of that decline is right off the North American Rhino-Rack space.

If you jump over the Outdoor, you're going to see a continued assumption that we're making that North American retail is going to stay weak right here in the first half of the year, right, and that's a significant headwind relative to last year as well. And then same with the Precision Sports business.

Precision Sports last year, we did over $35 million of revenue, and if we do a similar an amount of revenue is this past quarter at Precision Sports, that's another $7 million, $8 million of headwind right there. So it doesn't take much to kind of build up that $20-some million decline, right. But it's really back to what was -- what I talked about right off the bat is in the back half of the year with improving conditions in North America and improving access to some of the shell cases and the stabilization in the venture business both, as Aaron just alluded to in the market here in the U.S., the demand that we believe the brand is positioned well, it's just that they got some of our distribution partners have to work through some of the inventory that they have.

And then just kind of piggybacking off of Alex's question, he asked explicitly or implicitly the 2Q EBITDA number. You guide to 2Q revenues and you've guided to 1Q revenues. Street just missed 1Q EBITDA. Why not -- is there a rationale for not guiding to 2Q EBITDA, so we don't miss the Street, so we don't miss the numbers?

We've just -- 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 we're using a 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, right. And like we said, 60 days ago will pivot into where the best opportunities are to drive EBITDA and sales growth, right, as we work through 2023, right. It position us in the best spot to kind of get back to, I'd say, normal in 2024.

Okay. 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 -- and I'm not explicitly and 3Q, but should it be balanced is that your viewpoint as today Black Diamond --?

Historically, you're going to see Q3 outperform Q4, right? That's a Q3 our big quarter, right, as we move inventory. We'll build up inventory here in June and July, and then we'll ship that out in July, August and September. So you're going to see Q3 should be a little stronger than Q4, just based on seasonal and historical patterns.

On growth rates, not -- you're not -- you're talking about growth rates here, right?

No, I was talking dollars, I'm sorry.

Okay. Sorry, I was actually asking about growth rates. So the growth rates being equal in 3Q versus 4Q?

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 we did $115 million in the third quarter. I would expect those to be -- I think the growth rate in Q4 ought to be stronger. It would actually be stronger. Historically, I was -- I think the trend historically is that Q3 would be stronger. But I think this year, because of the-- once business -- the business has started to see our customers' destocking inventory last year, Q4 is really where we got hammered last year, as you recall. I think the growth rate this year should be much improved since the fourth quarter.

Our next question comes from the line of Matthew Koranda from ROTH.

So just backing up to the kind of the broader strategic vision. As you look at the segment leader plans preliminarily, 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 sort of long-term planning. 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 investor show, probably keep it simple in New York or somewhere, where we introduce the 3 leaders and have them pitch their segment, their businesses to each, to all interested parties, 30, 40, 45 minutes of presentation and then a good 15 minutes of Q&A. So, we'd like to organize that, before we get them out on the road. We definitely want to -- we want to get them comfortable with their business and most importantly focus on their LRPs and what they're doing, right? Keith has been in his seat for over a couple years now, maybe closer to 3 at the Precision Sports business, but the other 2 have only been in their seats for 2 months and 3 months respectively. So we hope to do that. The earliest I 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, curious on Outdoor, if you could maybe make some commentary on sell-through trends and Outdoor and then just health of channel inventory. I mean, obviously we're going through a de-stocking cycle. Any further detail you can provide either maybe segmentation among customers, mass versus specialty and sort of health of channel inventory. It sounded like you made commentary that said, we're not going to clean up inventory in that space until probably third quarter at best. So maybe just, what that can mean for sort of the growth inflection between third and fourth quarter or maybe just seasonality and Outdoor for the year.

Yes. 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's had a long tail to it. But coming into this year, the indications were highlighting that things were starting to get recalibrated and that we were starting to see a normalization.

However, what is overshadowing some of this is that, one, the elongation of the winter season, but also just the continued work through of open to buys and liquidity within the retail partners' own balance sheet. What we have seen through the course of Q1 is that we are -- we continue to see a lot of progress taking place in terms of the destocking, 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 and highlights that the destocking 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 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.

One of the pieces of commentary that we 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 of the different dynamics that people are working through. We just got caught in the wash cycle and therefore, it's going to require some of this to get cleaned out and we do believe it is a timing issue where we'll start to see an acceleration take place because once again, when we look -- when we do channel checks ourselves and have communication with the different retail partners, it's clear that our product is moving and that there is demand for the brand. It's just that they've got some internal workings that need to be worked through.

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 casing constraint that held you back on revenue, that'd be interesting. And also just curious, if you could maybe comment on pricing environment for the specialty calibers that you typically provide in terms of loaded rounds. What's the health of pricing look like and just channel inventory in general across the board?

Yes, so when you size up the decrease at the Precision Sport segment, the decrease was, call it $6 million or so. 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 extremely well positioned is within the center fire rifle hunt side of things where people are really coming to us still for those key categories.

And there's 7 to 8 cartridges that, there's still high demand for it, that we continue to have struggles in terms of being able to source shell cases for. And so, what you're seeing in the marketplace with pistol and revolver, ammo as well as 223 and even some of the 300 blackout, et cetera, 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 center rifle hunt. But also some of these other niche players, as I highlighted in the prepared remarks around like the new Pioneer line, that's focused on the lever action and revolver side of things as well.

And so it is having a negative impact on this. We are aggressively working through how we can mitigate and overcome those challenges, but it is driving the bulk or the majority of the miss or the decrease compared to last year.

Our next question will come from the line of Joe Altobello from Raymond James.

I guess, I'll start with Precision Sport. Obviously, the supply chain challenges that you guys saw this quarter, nothing really new, but it sounds like it got worse. So, maybe what caused it to get worse? And any thoughts on vertically integrating to alleviate this?

Yes, Joe, this is Aaron. Unfortunately, when we compared to last year, we were able to securitize a few more shell cases and had some carryover inventory coming into last year. And so that helped alleviate some of the pressures where -- 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, it is -- it's something that the team is aggressively working on and we believe that we'll have a solution 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 and enhance profitability across the board.

And as mentioned, one of the things that we need to make sure of is that we continue to roll-up 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 be expanded capacities or vertical integration, et cetera, et cetera. But in the meantime, what we need to be able to solve for is the now and today. And so that's where our focus is as well.

Yes, the only thing I'd add to that, Joe, is, yes, right, if we did choose to vertical integrate, that's 18 months, probably closer to 24 months out. So to Aaron's point, we have to solve this problem in the now.

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.

Okay. And then maybe one last one 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?

Yes, yes, I'll -- there is -- there is no intention to replace John. I will be assuming those duties and -- it's -- we're -- my focus has been on working closely with -- with Neil and Matt to ensure that, we have the long range plans perfected and I think you're going to 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 the corporate overhead.

As Aaron pointed out, we're continuing to look at taking additional costs out of the business now. We're seeing in some of our - in some of the areas our 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 pick up some margin in those ways.

Our next question will come from the line of Jim Duffy from Stifel.

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 2 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 strategic to the broader portfolio? And I'm 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 Rhino-Rack? And why Rhino-Rack may be uniquely positioned in those B2B market landscapes?

Thanks, Jim. I was going to say, Warren, do you want me to take this or do you want to jump in?

Yes, Aaron, you can take it. I know what you're going to say, but you can take it. Yes.

Okay. 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, but also to capture what we love or 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. 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. And -- but as we continue to roll it out, we also see that the macro trends are very focused on this over landing adventuring type segment. We saw this in this last SEMA when Toyota was 100% dedicated in terms of their overall presentation to the over landing 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 trends are going from an automobile standpoint 80% of the automobiles in 2027 are expected to be focused on -- 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 that have taken place whether it be COVID shutdowns, biblical floods, the lack of a 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 -- into Australia and so not only have consumers in that region been waiting for 6 months to 18 months to get a vehicle But now it's going to be elongated by another 2 months as they work through that process.

In the meantime, though, what we have been doing is we've been upgrading our team, as highlighted, through the hiring of Matt, which we're extremely excited by that consummates 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. And we've been able to see that.

I think the sequential improvements that we've seen from a gross margin standpoint, while volumes have still been pretty suppressed, it's pretty impressive when you think about we've gone from high20 to low30 gross margin profiles of Q3 and Q4 of last year to now right around 40% highlights that the productivity initiatives that we've implemented, 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 build 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, our -- I believe right now, our head is down just trying to grind through the different 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, you know, becoming a more global B2B partner for a lot of these guys is also a 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, but we've already been able to demonstrate some quick wins that make us extremely excited by what's in store for us over the next couple of years.

Jim, it's Mike. I'll just add, we did over 9% EBITDA in the first quarter at Adventure, right, compared to losing 5% and 3% in the third and fourth quarter of last year. So it is, we are seeing the numbers, the benefits of what's happening -- it's all at the gross margin line too. So it's been positive.

Okay. Great. Yes, Aaron, 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. Just one last question just on the variance in the trends by region, just starting on North America with respect to the channel inventory dynamics, or the independence in a better position than the larger partners. 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 your peer key partner dimensions?

Yes, the specialty guys are faring fairly well. As you know, if you recall, specifically for the Outdoor space, specialty was really a strong growth driver for us. It 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. 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, you know, more of the public facing larger folks that have been able to manage the different open-to-buys or the inventory levels. But -- you know, some of the larger accounts that we've had that are maybe not as public facing that we continue to work with and navigating through their open by topics or issues. And that's where we've really seen the negative impact over the last one Q1, but really for the last 6 to 9 months.

I see. And then your European business has been really strong despite what's been a non-existent ski season and touring season. Can you speak to what's driving the strength in Europe in 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?

Yes, 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 dark markets as well as France and Scandinavia and the U.K. 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, 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, et cetera, that, that will help also drive the core business of our climbing product, but also continue to reinforce those key top 5 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.

Our next question comes from Mark Smith from Lake Street.

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 even if you can quantify, maybe year-over-year, how that business trend is?

Yes, 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 re-loader. And that's a market that we've been, not purposely, but that we haven't been over indexing for the last 12 months to 24 months. And so the backlog in the order book is extremely strong for that.

One of the things that we're working through is just how we balance that in terms of being able to fulfill that order book while also satisfying the strong OEM business that we've highlighted as well, while also ensuring that we continue to support our ammo initiatives. And so one of the things that we've been doing -- during Q1 and this is also something that we will 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 we'll need to get more efficient and more better with that, but at the same time what it's just highlighting is that every time that we make these bullets, the demand continues to refill and that 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 invoiced 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 ability.

Okay, perfect. And then just as we look at Precision, let'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 the great margins that you drive out of precision? Is it really apparel, footwear, or are there other places where you see some strength coming that can make up for maybe some margin loss in Precision business?

Yes, so the Adventure piece is highlighted. We're seeing strong progression despite the lower volumes, to see the performance that it produced in Q1 is extremely encouraging. But also as we work through these plans on the Outdoor side of things, 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.

And our last question comes from Linda Bolton-Weiser from D.A. Davidson.

Yes. 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?

Yes, Linda, this is Aaron. I'd rather not disclose who we buy casings from, because there are some strategic partnerships that lie within those transactions. What I'll just highlight is that, we're very focused on buying best-in-class casings. You know, quality is paramount for us, and that's a non-negotiable. And so, you know, we have a series of different supply chain partners, call it 5 or so here domestically, as well as 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 or the volumes associated with those relationships, but also the different calibers that we're able to obtain.

We are aware of folks making investments in increasing capacity, and that's also what's extremely encouraging for us is that as this additional capacity comes online, we believe that we're in a really good position to be able to capture the needs that we have and be able to continue to further these partnerships with these different -- with the different partners as you know, through the course of the year.

Thank you. And I'll turn the call back over to Mr. Kuehne for any closing remarks.

Thank you very much, Victor. I want to thank everyone for attending the call this afternoon and your continued support and interest in Clarus. 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.