CLAR - NASDAQ

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 their 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 1st, 2024 starting at 7:00 pm 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 are 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 the North American businesses 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 Adventure’s home markets of Australia and New

Thanks, Warren. Coming off an unprecedented three 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. Two, we are expanding our geographical footprint in key markets of the U.S., Canada, Europe, Australia, Japan and Korea. Third, we’re 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 the 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 two years supply and demand have been out of balance, and we expect that it will take another six months before the market approaches a closer state of equilibrium. Market adjustments notwithstanding, the Black Diamond brand is strong, we see it 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 to what 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 newer, 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 components 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 touch-points 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 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 SEMA Future Trends, where the light trucks 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 to 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 the 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 to 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 our 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 the 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 markets 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 book. 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 experienced 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 domestic OEM product due to continue 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 Sports segment as well as lower noncash 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, up 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 in 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 2 to 3 times. We expect to stay within this range in the near future. Under our $300 million revolving credit facility, we have approximately $18 million outstanding and further borrowing capacity of approximately $61 million at March 31, 2023, while maintaining compliance with 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 million and $8 million, and free cash flow is still expected to range between $30 million 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 Outdoor and Rhino-Rack USA. I’ll pause here and the call back to the operator, and we’re ready for a Q&A.

Thank you. [Operator Instructions] Our first question comes from Randy Konik from Jefferies. Your line is open.

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 pay-down. 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’d 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.

Yes. Randy, thank you for the question. And so, where we are today is we have two new leaders in both, the Black Diamond and our Australian businesses. If I start with Neil, so Neil has been in the seat for three 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 multiyear look at where we should be, and how we should develop the business. And 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, very excited about that. Similarly, with the Australian businesses, Matt’s been in there for about two 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 is 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 as you’ve heard several times from 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 change overseas that we have, which does impact our margins. But we’re seeing good visibility today for both of those businesses.

Super helpful. 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 whether 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 should be considered in thinking about our modeling? Thanks.

No. Sure, Randy. No. Gross margin should be in that historical range, right, 37% to 39%. That’s how we’re looking at it. The guide, we did guide to $92 million for the second quarter. That implies about $230 million back half compared to $190 million first half of the year, right, on the top-line. And the success in order to achieve that is really dependent upon seeing some improvement in North American wholesale, right, and see that pick up. Also, if we -- as Warren just alluded to, we’re working very diligently to secure shell cases. If we secure those shell cases in the back half of the year, that will definitely help and -- with the top-line results in the back end of the year as well. And those two things alone along with FX will be beneficial in the back half as well. So, those are the kinds of things you got to kind of model in, in my opinion to understand know our guide for the first half of the year compared to what has happened in the second half of the year.

Our next question comes from the line of 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? Thanks.

Sure, Alex. Hey, it’s Mike. I’ll take that. Yes, obviously, top line, we over-performed by a couple of million compared to what we -- what consensus was and what we told you just 60 days ago, which is fantastic. On the bottom line, freight was a big tailwind from 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 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 220 basis-point challenge from product mix and channel. So obviously, when we’re selling less within North American market that hurts our profitability. 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. And that’s really where we saw it, those four categories that the gross profit line that that caused the EBITDA challenges.

That’s really helpful. 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 high -- 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 the 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? Are your fall ‘23 BD order book being up year-over-year or something of that would give you a sort of confidence that -- to hit the acceleration in the guide? Thanks.

Sure, let me run with that one, too. So, it’s a couple of things I just mentioned on the last question. You got to understand one other thing that’s super important note. Historically, the BD business and the Clarus business did about 55% of the top line in the back half of the year, so you got to see that again, in this coming year. And we also historically have done about 50% of our EBITDA in the last three, four months of the year. So you’re going to see a big -- and that’s where the cash flow gets generated as well. And that’s what you have to believe, along with us seeing an uptick in North America wholesale, and also seeing our successful supply agreements for shell cases. If all those things happen, that’s how you reconcile back to kind of this being a, I’ll call it a back to half of the year EBITDA loaded guide.

Hey Mike, this is Aaron. You’re alright 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 is strong and that we’re actually seeing sell-through. What we’re seeing though is that we’re not seeing it in our financial results quite yet, just because of the whole 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 headlines over the recent months of just where people are. And we do anticipate that it’s going to take us a little bit of time here in the next month or two to be able to see some of 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 still haven’t kicked into the full extent that we would anticipate. And so, we’ve implemented a series of different productivity initiatives, we’re very disciplined from a cost standpoint, we’re very -- 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 math is still stable. It’s 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 itself?

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 pool channel and product mix. FX was a headwind. I think it should be better.

Our next question comes from Laurent Vasilescu from BNP Paribas.

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 a framework for the three divisions, but just like, how’s 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 top-line?

We did $115 million in the second quarter last year. So, that to -- to your point that’s down $23 million. It’s a little bit of everything. You’re going to see some weakness across all three segments. And when I say weakness combined -- compared to outstanding performance last year. If you go to the Adventure business, we did $28 million last year in the second quarter, led by strong domain in Australia and even stronger demand in the North American market. 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 here in the first half of the year. 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 amount of revenue as this past quarter at Precision Sports, that’s another $7 million, $8 million of the headwind right there. So, it doesn’t take much to kind of build up that 20 some million dollar decline, right? But it’s really back to what I talked about right off the bat is in the back half of the year with improving conditions in North America, 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 -- we believe the brand is positioned well, it’s just that they got to -- some of our district distribution partners have to work through some of the inventory than they have.

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

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 the word conservative by limiting the amount of guidance we’re giving at the segment level or at the profitability level as we work through baselining each of these brands. And like we said, 60 days ago, we’ll pivot into where the best opportunities are to drive EBITDA and sales growth as we work through 2023 and position us in the best spot to kind of get back to us say normal in 2024.

Okay. Last question. Thank you for that. Last question, Mike, is on the 2H guidance, right, implied, for 2H. It looks like it’s more mid singles. I mean, any framework about -- and not explicitly 3Q, but should it be balanced, is that your viewpoint as today…

No, historically, you’re going to see Q3 outperform Q4. That’s -- Q3 is our big quarter 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 the -- a little stronger than Q4, just based on seasonal and historical patterns.

On growth rates, you’re not -- you’re talking about growth rate, right?

No, I was actually talking dollars. I was talking dollars, I’m sorry.

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

Well, last year -- it’s kind of hard to say that. I think they probably will be because Q4 last year was a non-typical quarter. Last year, we only did $104 million compared to the -- we did $115 million in the third quarter. I would expect those to be -- I think the growth rate in Q4 ought to be stronger. It would actually be stronger. Historically -- I think the trend historically is that the Q3 would be stronger, but I think this year because of the-- once business -- the business has started to see that our customers destocking inventory, last year Q4 is really where we got hammered last year, as you recall. The growth rate this year should be much improved in the fourth quarter.

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

So, just backing up to 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 that you set 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 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 of 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 three leaders and have them pitch their segment, their businesses to each -- to all interested parties, 30, 45 minutes of presentation and a good 15 minutes of Q&A. So, we’d like to organize that. But before we get them out on the road, we definitely want to -- we want to get them comfortable with their business and most importantly, focused on their LRPs and what they’re doing. Keith has been in his seat for over a couple years now. Maybe closer to three at the Precision Sports business but the other two of them have been in their seats for two months and three months, respectively. So we hope to do that. The earliest I see of doing that is September, but definitely if it’s not in September, we’ll get that done in the fourth quarter.

And then just more specifically curious on Outdoor, if you could maybe make some commentary on sell-through trends in Outdoor. And then just health of channel inventory, I mean, obviously, we’re going through a destocking cycle. Any further detail you could 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 in Outdoor for the year?

Yes. So, this is Aaron. 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 the 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 are 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 sheets. What we have seen through the course of Q1 is that we continue to see a lot of progress taking place in terms of the destocking, in terms of what’s going on from the 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 Clarus is that although the demand is there and that the stocking activities are taking place, what is still a little bit opaque for 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’ve provided over the last couple of quarters as well 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 that there is a timing issue where we’ll start to see an acceleration take place, because, once again, when we do channel check 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 casings 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 in this 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 centerfire rifle hunt side of things, where people are really coming to us still for those key categories in their seven to eight cartridges that there’s still high demand for 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, 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 centerfire -- center rifle hunt, but also some of these other nice players, as I highlighted in the 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 of the majority of the miss or the decrease compared to last year.

Our next question comes 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 it got worse. So maybe what caused it to get worse? And any thoughts on vertically integrating to alleviate this?

Unfortunately, when we compare 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, 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 relates to shell case, availability has been a hindrance. And so that is something that we continue to work through. And so, 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 enhanced 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, that’ll help provide additional clarity as to how we think about additional investments, whether it be expanded capacities, or vertical integration, et cetera, et cetera. But in the meantime, what we need to be able 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, right, if we did choose to vertical integrate. That’s a 18, probably closer to 24 months out. So, to Aaron’s point, we have to solve this problem in the now.

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. 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 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. And, as Aaron pointed out, we’re continuing to look at taking additional costs out of the business now. And we’re seeing in some of the areas of -- some resource requirements and so on, the price discipline, the costs have been going down and so on, and we’re really working hard to pick up some margin in those ways.

Our next question will come from 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 two years now, clearly some category challenges in the near-term, you’ve made some leadership changes. But big picture, do you still like this category and see it strategic to the broader portfolio? And then, also curious how you’re feeling about the margin opportunity for that business relative to your initial expectations. And then lastly, interested in perspective on how far along you are in the path of pursuing B2B opportunities for Rhino-Rack and why Rhino-Rack may be uniquely positioned in those B2B market landscapes. Thank you.

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

Yes. You can take it. I know what you’re going to say. 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-road or the automotive enthusiast and that of the Outdoor space. And that’s a very unique position to be in, because it enabled us to build access to a much larger addressable market, but also to capture what we love our activity based consumers on both ends of the spectrum. As you highlighted, 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 is -- has a unique design to it. It’s OE ready. We have some strong B2B relationships already. But they’re not global in nature. They’re more focused regionally, in particular, in the Asia Pacific side of things. But as we continue to roll it out, we also see that the macro trends are very focused on this overlanding adventuring type segment. We saw this in this last SEMA, when Toyota was 100% dedicated in terms of their overall presentation to the overlanding segment, and really finding ways to capture to bringing 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 this type of space that we’re focused on as well. And so what it really comes down to is we’ve got to just continue to weather the storm, there’s some anomalies have taken place, whether it be COVID shutdowns, biblical floods, the lack of vehicle availability, it’s interesting in Australia, they’re still suffering from this. There’s currently 60,000 vehicles in quarantine, trying to get into Australia. And so, not only have consumers in that region been waiting for 6 to 18 months to get a vehicle, but now it’s going to be elongated by another two months, if they work through that process. In the meantime, though, what we have been doing is we’ve been upgrading our team, and highlighted through the through the hiring of Matt, which we’re extremely excited by that consummates this founder led, the 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 increase 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 high-20 to low-30 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 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 as 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, right now our heads 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 systems standpoint, but also personnel. And to answer the last part of your question is, becoming a more global B2B partner for a lot of these guides 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 -- 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 those 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 in Adventure 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.

Yes. 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, are the independents 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 -- some of your key partner dimensions?

Yes. Specialty guys are faring fairly well. If you recall it specifically for the Outdoor space, specialty was really a strong growth driver for us or 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 more of the public facing larger folks that have been able to manage the different open-to-buys or the inventory levels. But some of the larger accounts that we’ve had that are maybe not as public facing that we continue to work with and navigating through, they’re open-to-buy topics or issues. And that’s where we’ve really seen the negative impact over the last Q1, but really for the last six to nine months.

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

Yes. SO, one, the team has done a great job -- 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 UK. But also, despite not having much of a winter season, this comes back to some of the key categories that we’ve highlighted in the past around lights and trekking poles, gloves, packs and our apparel initiative. And those are the key categories that are driving that growth as well. We do anticipate as people are able to get back outside and start to participate in the Outdoor activities such as climbing and hiking, trekking, et cetera, that that will help also drive the core business of our climbing product, but also continue to reinforce those key, top five product categories that we’ve been focused on for the last bit, that are less susceptible to actual weather patterns and whatnot, but are also where we see the greatest growth drivers from an addressable market and just continue to bring more and more consumers into the brand.

Our next question comes from line of 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 trended?

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 reloader. And that’s a market that we’ve been not purposely but that we that we haven’t been over indexing for the last 12 to 24 months. And so, the backlog and 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’ll continue to recalibrate is that we’ve had a lot of changeovers associated with going to those calibers for the green box or for the reloading side of things. And so, we’ll need to get more efficient and more, better with that. But at the same time, what I’m just highlighting is that every time that we make these bullets, the demand continues to refill and the demand is extremely strong. And then that also leads into the OEM side, which is a program business that’s extremely strong. It’s with key partners where we’ve been able to highlight or demonstrate a high degree of partnership and reliability in terms of being able to deliver or satisfy that demand. And so, that’s where we’re seeing a lot of the strong order book that we’ve highlighted before. And that if you take our year-to-date 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 abilities.

And then just as we look at Precision, that’s -- call it if it’s normalized and 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, 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 venture piece, as highlighted, we are seeing strong progression, despite the lower volumes to see the performance that have 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 your objectives from a financial perspective.

And our last question comes from the line of Linda Bolton Weiser from D.A. Davidson.

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

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. Quality is paramount for us. And that’s a nonnegotiable. And so, we have a series of different supply chain partners, call it five or so here domestically, as well, some that are international that are reliable and provide us with those shell cases. 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 on line, 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 the different partners through the course of the year.

Now, 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 the interest in Clarus. We look forward to updating you on our results again in 90 days. Thank you again.