Clarus Corporation (NASDAQ:CLAR) Q2 2023 Earnings Call Transcript
Clarus Corporation (NASDAQ:CLAR) Q2 2023 Earnings Call Transcript August 8, 2023
Operator: Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's Financial Results for the Second Quarter ended June 30, 2023. Joining us today are Clarus Corporation's Executive Chairman, Warren Kanders; COO, Aaron Kuehne; and CFO, Mike Yates; and the company's External Director of Investor Relations, Cody Slach. Following their remarks, we'll open your call for questions. Before we go further, I would like to turn the call over to Mr. Slach as he reads the company's Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.
Cody Slach: Thank you. Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we make these statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to potential risks and uncertainties that could cause the actual results of operations or financial condition of Clarus Corporation 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 SEC.
I'd like to remind everyone this call will be available for replay through August 7, 2024, starting at 7:00 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?
Warren Kanders: Thank you, Cody. Good afternoon, and thank you all for joining Clarus' earnings call to review our results for the second quarter of 2023. I am joined by our Chief Operating Officer, Aaron Kuehne; and Chief Financial Officer, Mike Yates. I will start by addressing the overall business and corporate strategy. Aaron will provide an update on each of our segments, and Mike will walk through our financial performance for the quarter. Our second quarter results were negatively impacted by the continued challenging macroeconomic environment and related headwinds. We were seeing destocking take place, particularly in North America. The overall promotional environment, coupled with retailers tightening their inventory positions and open-to-buy dollars weighed on our performance.
We took effective countermeasures during the quarter, generating free cash flow of $12.3 million versus $2.3 million during the same period last year. I am pleased that each segment was cash flow positive during the quarter as we right-sized the businesses to match expected demand for the year. Since the beginning of the year, we have undertaken a strategic review of all of our businesses, including our management structure. During last quarter's call, we highlighted the inflection point in our organizational evolution and the strategic shift to seek to decentralize and focus on individual segment performance. As part of this strategy, we have made a number of significant changes to date, which we expect to contribute to long-term value creation.
We continue to evaluate all of our businesses and their strategic initiatives to maximize value. We believe that the sum of the parts of our three segments exceeds today's market valuation. We continue to evaluate our corporate structure. And inclusive of the changes we have already made, we have a series of initiatives in place that we expect will reduce our normalized corporate overhead by $1.5 million compared to that of 2022. While we are experiencing a challenging retail landscape, the changes we have made through the first half of this year and the further cost-outs and savings initiatives we expect to make in the next 6 months are foundational to our growth strategies. Our management teams continue to seek to simplify their businesses and invest more dollars into commercializing new products and improving sales channel management.
We have worked with our retail partners carefully to help drive sell-through, while working with our supply chain partners to dynamically manage the flow of inventory in order to seek to reduce inventory levels, while ensuring on-time deliveries and higher levels of fulfillment. We are excited by the ongoing work of our three segment leaders. Specifically, on Outdoor and Adventure, we now have two new leaders who are laying the foundation for anticipated future growth and improve profitability. Our focus for the balance of the year will be on ensuring that the starting point for next year is optimized organizationally and clean from a balance sheet perspective. Later on in the year, we will be introducing our segment leadership team and their vision for long-range plans.
Despite the headwinds outlined, we continued to see monthly sequential improvement during the quarter. In Outdoor, we saw increasing sales each month, driven by a strong push in direct-to-consumer, aiding our inventory work down. While we saw some margin degradation due to off-price and promotional activity, we still increased our outdoor gross margin by 440 basis points to 37.5%, achieving our plan to generate cash and further normalize inventory. I am pleased with the continued performance on our Adventure segment. During the second quarter, we saw continued stabilization in the market for our adventure products, resulting in improved gross margins of 370 basis points to 42.4% for the Adventure segment. We continue to see normalized levels -- sales levels in Australia, which we expect to increase in the seasonally-stronger second half as we introduce exciting new products.
Adventure's U.S. business experienced strong growth month-over-month during the quarter, improving sales by 63% over the first quarter of 2023. Consistent with how others have reported in the channel, our Precision segment experienced sales declines of 27% while holding EBITDA margins at 26%. We have taken cost out to match our expected production and sales levels, which we believe will drive higher margin in the second half. Further, we took important strategic steps to seek to stabilize our component supply chain, which we expect will enhance our ability to build programs for our partners going into 2024. To summarize, we believe that we have reached the trough in our Outdoor and Adventure segments, and the quick actions we have taken to right-size those segments should set us up for more profitable growth in future periods.
While Precision has experienced a slowdown from market dynamics and the normal summer slump, we believe that hunt season and the looming election cycle into 2024 should catalyze demand. With that, thank you for being with us today, and I will turn the call over to Aaron.
Aaron Kuehne: Thanks, Warren. I would like to dive into specific comments on our segment performance. First, let me address Outdoor. Our Outdoor segment was impacted by lower consumer demand, given the inflationary environment and continued lower open-to-buys as retail partners right-size their inventory. Additionally, our retail partners are acting conservatively in terms of building back inventory, specifically weeks of inventory on hand, where we are seeing key retailers behave conservatively and shorten up their weeks of supply. We believe this is due to bloated inventory levels industry-wide, specifically private label products, which impact overall working capital and open-to-buy dollars. However, as we head into Q3, we are starting to see retail purchasing habits normalize, but we do expect it will take until year-end before the market approaches equilibrium.
Somewhat offsetting this weakness was a 28% increase in our direct-to-consumer business, which we believe shows the strength of the Black Diamond brand despite the broader retail environment. Looking ahead for the year, our top priority in Outdoor remains seeking to bring supply and demand into better alignment across our regions and channels, while reducing our outdoor inventory levels by 15% by the end of this year compared to the end of 2022. Also at the top of our priority list is the goal of rebuilding our go-to-market approach in North America, baselining our apparel initiative and bolstering our digital presence. In our Precision segment, we experienced lower sales year-over-year as retail inventory came in line with historical levels.
While Sierra and Barnes were each off approximately 27% over the prior year period, we think it is relevant to take a longer historical view where Barnes was up 5% over 2021 and over 100% during the same period in 2020. While Sierra was down 19% versus 2021, it was up 38% over the same period in 2020. The investments we have made in capacity and our continued partnership with OEM customers and retailers yielded meaningful share gains over the last three years. We continue to see a highly promotional environment for commodity ammunition as consumers look for value. We're also seeing open-to-buy dollars tighten as our retail partners remain conservative with weeks of inventory on hand. We are seeing positives, however, as reloaded component availability loosens up, which should help our consumers who purchase our green box and black box component bullets for reloading, especially as we head into the hunt season.
Military and law enforcement opportunities are also coming into focus. As we head into the second half of the year, our partners continue to expect hunt season to pull through for highly promotional activity to subside by year-end. As Warren mentioned, we are pleased with the progress we've made in short shell cases through a strategic supply agreement that covers us over the next 2.5 years, which will improve our ability to drive ammunition programs and better serve our retail and distribution partners going into 2024. Finally, our Adventure segment. We continued to experience sales improvement each month of the quarter, while substantially increasing our gross margin and EBITDA levels. In our brands' home market of Australia, inventory levels have improved with our retail partners.
And in North America, we continue to right-size our sales channels and began to experience the early signs of recovery that we expected. For example, we have partnered with several of our strongest retail partners here in North America to support sell-through and increase the velocity of their destocking efforts. With one of our accounts, this has resulted in a year-over-year increase of 60% in Rhino-Rack branded products sold, while the category itself is down high single-digits. These efforts are not only expanding Rhino-Rack's market share but also further reinforcing our strategic relationships, demonstrating our ease of doing business with, accelerating their destocking efforts and further positioning Rhino-Rack for growth. Just as important, our gross margins in Adventure for the quarter ended up at 42.2%, which represents the highest margin quarter since mid-2021.
We have made strides to right-size direct labor, assembly and overhead, while reworking input costs in core products. For context, our gross margin for fiscal year 2022 was 35.4%, and our 2023 year-to-date gross margin was 41.6% on sales that were 37% lower than the same period. Our goal for the remainder of the year is to maintain our gross margins while driving inventories down, as we introduce next-generation products in Q4 in Australia and globally in 2024. The business has strong fundamentals in place, and we expect that as our growth initiatives take hold, we will see strong operating leverage from the organizational reshaping. While vehicle levels haven't fully rebounded, we are starting to see green shoots with regards to vehicle availability.
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We expect the supply and demand imbalance with new vehicles to persist through the fourth quarter, but we have important initiatives that we believe will accelerate our growth in the back half of the year for adventure. Let me lay them out here. First, we will focus on transforming our product development and innovation process to seek to drive improvement in speed to market and product differentiation. We have a renewed focus on customer and consumer insights to drive 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 to be the easiest partner to work with in the industry.
Our people will be empowered to take action to drive performance and deliver on the challenge with an understanding that there are different business models for different customers. Next is digital 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 the pricing power. And finally, we will be data-led in our decisions. We are developing a demand and data-driven operating model that plans, buys and sells inventory closer to demand. Now, I'll pass the call to Mike to discuss our Q2 financial results in more detail.
Mike?
Michael Yates: Thank you, Aaron, and good afternoon. Jumping right into our performance in the second quarter. Sales were $83.7 million compared to $114.9 million in the prior year quarter. On a constant currency basis, total sales were down 26%, while reported sales were down 27%. Second quarter sales in our Outdoor segment were down 24% to $40.1 million versus $52.6 million in the second quarter of 2022. If you adjust for the foreign currency exchange headwind, Outdoor sales [indiscernible] 23%. As Aaron mentioned, we are still constrained by lower open-to-buys from our key North American retail partners, due in part to their inventory destocking activities. Partially offsetting this decline was continued strong execution in our direct-to-consumer business at Black Diamond.
Precision Sports sales were $25.8 million in the second quarter compared to $35.2 million in the second quarter of last year. In the quarter, we experienced broad-based discounting from our competitors and retail partners as the market continued to right-size inventory levels. Our ammunition business has been a significant headwind for the first half of the year on gross margin. However, we remain very optimistic that Precision Sports and the market will return to solid demand as we move to the second half of the year, supported by the upcoming hunt season. The Adventure segment contributed sales of $17.9 million versus $27.1 million in the prior year quarter. And on a constant currency basis, sales were down 31% and reported sales were down 34%.
Despite these challenging market conditions, we believe we are starting to see stabilization in the market as sales were up on a sequential basis compared to the first quarter of 2023, and we expect to see sequential improvement in sales in both the third and fourth quarters of 2023. Rhino-Rack 's U.S. business did well during their peak selling season here domestically, and some of the cost actions we've taken have shown up in improved profitability for our Rhino-Rack business in North America. During the first six months of 2023, we moved to a new headquarters and consolidated our three previous warehouses under one roof in Denver for our North American business. During this period, for the first six months of 2023, we incurred over $700,000 of moving costs that should not repeat.
Just to be clear, the Rhino-Rack facility in Denver serves as an under-one-roof solution for the entire Adventure segment here in North America, housing our North American headquarters, sales and marketing, warehousing and assembly. In Australia, sales were strong in April and May, but softened in the last few weeks of June as a result of Australians' observation of the end of their fiscal year. Importantly [Technical Difficulty] picked back up in July. While the market environment in our Adventure segment is still challenging, we believe the worst is behind us, and we look forward to reporting a business that produces better than 12% adjusted EBITDA margins going forward. Moving on to consolidated gross margins. In the second quarter, gross margins declined to 36.7% compared to 38% in the year ago period.
We experienced a 140 basis point benefit from favorable variances in write-offs, but this was more than offset by unfavorable FX of 110 basis points and unfavorable product and channel sales mix of 160 basis points. From a segment perspective, gross margin at Outdoor was 37.5% in the quarter compared to 33.1% in the prior year quarter, reflecting a 440 basis point improvement. The primary driver here was the elimination of the high freight cost from 2022, not repeating this year. Gross margin at Adventure was 42.2% in the quarter compared to 38.5% in the prior year quarter, reflecting a 370 basis point improvement due to the operational improvement and cost actions taken in the second half of last year taking hold, as well as more favorable FX environment.
Gross margin at Precision Sports was 31.7% in the second quarter compared to 44.9% in the prior year quarter, reflecting a 1,320 basis point degradation. This decrease in gross margins at Precision Sports was due to the sale of ammunition at lower margin profile due to the promotional pricing environment that the market is currently demanding. The ammo market has been very tough and has been a drag on gross margin. To put this in context, I want to share the following. During the first half of the year, we used internally produced bullets at Sierra and loaded Sierra ammunitions, selling a total of $4.7 million of Sierra ammunition in the first half of 2023. We only realized $236,000 of gross profit on these sales. Have these bullets been sold through Sierra's OEM channel, we would have recognized an additional $550,000 of gross profit, which would have increased gross margins at Sierra by nearly 700 basis points during the first half of the year.
Once the market stabilizes, we would expect margins to normalize for our ammo product. Until then, we will continue to realize decent margins on our component bullet business. Selling, general and administrative expenses in the second quarter decreased [Technical Difficulty] compared to $35.4 million in the year ago quarter. The decline was driven by expense reduction initiatives in the Outdoor, Adventure and Precision Sports segment, as well as lower sales commissions and lower noncash stock-based compensation expense for performance awards in corporate. Net loss in the second quarter was $2.1 million or a $0.06 loss per diluted share, compared to net income of $3.8 million or $0.09 of EPS in the prior year quarter. Adjusted EBITDA in the second quarter was $7.3 million or an adjusted EBITDA margin of 8.7% compared to $17.6 million or an adjusted EBITDA margin of 15.3% in the same year ago quarter.
The decline in adjusted EBITDA was driven by lower sales volumes, unfavorable product and channel mix and a $1.5 million consolidated foreign currency exchange headwind due to the strength of the U.S. dollar. These impacts were partially offset by the improvements in SG&A during the quarter that I just previously mentioned. Now, let me shift over to liquidity. At June 30, cash and cash equivalents were $11.3 million compared to $12.1 million at December 31, 2022. As Warren highlighted in his opening comments, free cash flow was outstanding. Free cash flow, defined as net cash provided by operating activities plus capital expenditures for the second quarter of 2023 was $12.3 million compared to $2.3 million of free cash flow in the same year ago quarter.
We used this free cash flow to pay down nearly $10 million of debt and ended the quarter with total debt of $127.2 million. This put us in a net debt position of $115.9 million, resulting in a net debt leverage ratio of 2.7 times on a trailing 12-month adjusted EBITDA basis. We expect to stay within our stated range of 2 times to 3 times leverage for the remainder of the year. Under our $300 million revolving credit facility, we have approximately $11.4 million outstanding and further borrowing capacity of approximately $32 million at June 30, while maintaining compliance with the required covenants under our credit agreement. Our inventories ticked up sequentially by $3.2 million to $149 million at June 30. As discussed in our prior call on May 1 of this year, this increase was expected.
As of June 30, we've taken possession of key inventory, specifically at our Outdoor business for the prime fall/winter selling season. From a tax perspective, we have over $17 million of NOLs remaining, and we expect these NOLs to offset any federal cash taxes due in 2023. Now, let me move on to our 2023 outlook. We now expect sales to land within the range of $385 million to $400 million for the full year 2023 and adjusted EBITDA to be in the range of $42 million to $50 million, or an adjusted EBITDA margin of 11.7%, assuming the midpoint of the sales and adjusted EBITDA guidance. We also now expect full year capital expenditures to range between $6.5 million to $7.5 million, and free cash flow is now expected to range between $30 million and $35 million for the full year 2023.
Finally, for the third quarter of 2023, we expect consolidated sales to be $100 million to $105 million, reflecting continued headwinds surrounding the unwinding of inventory at our key North American partners, both at our Outdoor and Rhino-Rack USA businesses, and the promotional environment within Precision Sports segment. Let me pause here, hand the call back to the operator as we are now ready for the Q&A.
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