Clarus Corp Q3 FY2021 Earnings Call

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's Financial Results for the Third Quarter Ended September 30, 2021. Joining us today are Clarus Corporation's President, John Walbrecht; Executive Vice President and CFO, Aaron Kuehne; 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 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.

Please note that during this call, the company may use words such as appears, anticipates, believes, plans, expects, intends, future and similar expressions, which constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on the company's expectations and beliefs concerning future events impacting the company and therefore, involve a number of risks and uncertainties. The company cautions you that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. Potential risks and uncertainties that could cause actual results of operations or financial condition of the company to differ materially from those expressed or implied by the forward-looking statements used in this call include, but are not limited to, the overall level of consumer demand for the company's products; general economic conditions and other factors affecting consumer confidence, preferences and behavior; disruption and volatility in the global currency, capital and credit markets; financial strength of the company's customers; the company's ability to implement its business strategy; the ability of the company to execute and integrate acquisitions; the impact that global climate change trends may have on the company and its suppliers and customers; the company's exposure to product liability or product warranty claims and other loss contingencies; disruptions and other impacts to the company's business as a result of the COVID-19 global pandemic and government actions and restrictive measures implemented in response; the stability of the company's manufacturing facilities and suppliers as well as consumer demand for our products in light of disease epidemics and health-related concerns, such as COVID-19, changes in governmental regulation, legislation or public opinion relating to the manufacturing sales bullets and ammunition by our Sierra segment and the position and use of firearms and ammunition by our customers; the ability of the company's ability to protect patents, trademarks and other intellectual property rights any breaches or interruptions in our information systems; the ability of our information technology systems or information security systems to operate effectively including as a result of security breaches, viruses, hackers, malware, natural disasters, vendor business interruptions or other causes, our ability to properly maintain protect, prepare or upgrade our information technology systems or information security systems or problems with our transitioning to upgraded replacement systems; the impact of adverse publicity about the company and its brands, including without limitation through social media, or in connection with branding, damaging events and public perception; fluctuations in the price, availability and quality of raw materials and contracted products as well as foreign currency fluctuations ongoing disruptions and delays in the shipping and transportation of our products due to port congestion, containership availability and/or other logistical challenges. The company's ability to utilize its net operating loss carryforwards changes in tax laws and liabilities, tariffs, legal, regulatory, political and economic risks; the company's ability to maintain a quarterly dividend any material differences in the actual financial results of the Rhino-Rack acquisition as compared with expectations, including the impact of the acquisition on the company's future earnings per share. More information on potential risks that could affect the company's financial results is included from time to time in the company's public reports filed with the SEC, including the company's and our report on Form 10-K, Form 10-Q, and current reports on Form 8-K. All forward-looking statements in this call are based upon information available to the company as of the date of this call and speak only as of the date hereof. The company assumes no obligation to update any forward-looking statements to reflect events or circumstances after the date of this call. I'd like to remind everyone this call will be available for replay through November 22, starting at 8:00 p.m. Eastern 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. Any redistribution, retransmission or rebroadcast of this call in any way without the expressed written consent of Clarus Corp. is strictly prohibited. Now I'd like to turn the call over to Clarus’s President, John Walbrecht. John?

Thank you, Cody, and good afternoon, everyone. Thank you all for joining us today on our third quarter earnings call. We've had another exceptional quarter driven by our portfolio of well-diversified Super Fan brands and supported by continued favorable trends in the outdoor industry. I'd like to thank our team of colleagues across our brands for their continued hard work and execution towards such strong and profitable growth. For the third quarter, we reported sales of approximately $109 million, up 69% versus last year and adjusted EBITDA more than doubled to $19.2 million. Both metrics set new records, and I'm happy to share that it is our fifth consecutive quarter reporting revenue and adjusted EBITDA growth. Despite having to face the toughest supply chain environment in our history, we increased gross margins by 240 basis points year-over-year and by 520 basis points to 38.8% on an adjusted basis. This performance was driven by our continued focus on, first, connecting directly with our community of users through a digital-first approach; second, a high degree of operational excellence, and finally, our devotion to maintaining an easy-to-do business mentality with our partners and of course, our Super Fan brand, which continues to be highly sought after by our outdoor enthusiasts around the world. To provide a bit more color on how we are managing the difficult supply chain environment, we continue to seek to leverage the recognition of our Super Fan brands to strengthen our relationships with both retail and our vendor partners. As an example, in Black Diamond, we continue to chase product availability in our seven core product categories. This allowed us to isolate the needs of our supply chain on the components that move the needle, which enabled us to maximize product availability. Additionally, we believe that our size relative to some of the larger outdoor players has allowed us to be more nimble when it comes to our supply chain. We have been able to quickly pivot and adapt in a dynamic environment leading us to these continued strong results. As this quarter shows, suppliers prioritize the formation of long-lasting and productive partnerships with Super Fan brands like ours that are best poised for sustainable long-term performance. We continue to see that in good times and bad times, Super Fan brands remain resilient. Our brands are gaining market share across all of our leading categories and bookings remain strong across our portfolio as we head into 2022. I'd like now to provide a summary of the key drivers that supported our outstanding Q3 results. At Black Diamond, favorable consumer trends in the outdoor market led to a 20% year-over-year increase in sales for the quarter. By category, Ski was up 20%, Mountain was up 18%, and Climb was up 14%. Hard goods growth of 19% was driven by double-digit and triple-digit growth across the product portfolio, including particular skis, lighting, climbing shoes, harnesses, key poles and gloves. Our footwear and apparel businesses, which are included in the business categories above, were up 33% and 28%, respectively. Again, apparel is our fastest-growing category at BD and our apparel as equipment positioned has resonated well with our consumers. We continue to innovate and accelerate our apparel offerings whether that's through next-generation material innovation or advancements in technical aspects of our products. In fact, across the BD brand, we expect to introduce over 150 new products for 2022, ranging from award-winning skis and snow safety equipment to climb hard goods, apparel, footwear, packs, new headlamps and trekking poles. Due to the fact that we continue to prioritize inventory allocations to our wholesale partners first, and focus on our sacred seven core products, heightened demand meant that our direct-to-consumer business was impacted by the lack of inventory. So the low double-digit growth we experienced in this business during the quarter was lower than we normally expect. As we activate our digital-first strategy, we continue to refine our activation efforts, focusing on performance marketing, balancing an approach of search, top of funnel, paid social and email retargeting. These efforts are expected to further position our e-commerce business for accelerated growth once we can fulfill the increasing demand. We will also continue to accelerate our community-centric model through the opening of our Black Diamond flagship retail stores in Jackson, Wyoming, Burlington, Vermont, and Bend, Oregon over the coming months. Moving to our Sierra segment, which includes both the Sierra and Barnes brands, we generated sales of $30.3 million, up 100% from Q3 2020. This performance reflects broad-based sales growth across both bullets and ammunition. Strong domestic tailwinds in the third quarter continued including growing participation in outdoor hunting and indoor shooting ranges. For Sierra and Barnes, we continue to focus on increasing daily output to meet demand. Since acquiring Barnes a year ago, we have already doubled bullet production to a run rate of 110 million bullets. Similarly, Sierra has increased its bullet production by 89% since we acquired the brand in 2017 to a run rate of 350 million bullets a year. While it has been difficult to keep up with the surge in demand, we've been prioritizing increases in output. We are now starting to work on commercializing two years of R&D innovations that we have put on pause. We are pleased to announce that as part of our innovate and accelerate strategy, we have some new ammo classifications and other innovations coming down the pipeline for late 2022 and 2023. This strategy continues to be critical as we seek to further reinforce our position in the marketplace as the leading provider of specialty premium bullets and ammunition. Moving to Rhino-Rack. We reported sales of $19.6 million in the quarter. This is a strong result on its own, but when you consider that Australia, the brand's dominant market, was in severe COVID lockdown the entire quarter. It's a tremendous achievement and a compelling case for the resilience of Super Fan brands. At Rhino Rack, we have identified a clear and defined strategy for growth. Most importantly, we intend to expand Rhino Rack's product penetration in North America where we can seek to capitalize on our existing network of key distributors and dealers and leverage those relationships to grow the brand domestically. We also believe we have plenty of opportunities for continued expansion in the home markets. Today, we believe Rhino-Rack has number one market share in Australia and New Zealand, but less than 1% market share in the United States. That leaves significant white space for us to solidify Rhino-Rack as the leading overland brand in North America. To date, we've had many positive conversations with potential new retail partners in North America. This has traditionally been a space served by the outdoor aftermarket, but given the growth of the category, it's a perfect extension for many of our outdoor retailers to include as part of their assortments. So it's great to be in this position as our retailers start chasing demand, and we believe we have a strong brand to offer. In the immediate term, however, we are focusing on prioritizing product availability to ensure on-time deliveries and better fulfillment amongst our current accounts given supply chain headwinds. Looking forward, we are also assessing ways to expand the brand's direct-to-consumer penetration through a digital-first initiative and build even stronger OEM partnerships that provide for cross-selling opportunities. Overall, we believe that Rhino-Rack is proving to be a great entry point to the growing overland and vehicle accessory category. Overlanding is an incredible popular space right now and an increasing number of people want to go outdoors, getting from black tops to brown roads as the premier provider of highly engineered automotive roof racks, trays, mounting systems, luggage boxes, carriers, and accessories we expect Rhino-Rack to capitalize on the trends in this category, whether organically or through new product launches or through strategic M&A. Speaking of new product launches at SEMA last week, we launched the new RECON Pioneer deck, a versatile truck bed system similar to our over-the-cap pioneer rack, to much anticipation. Before passing it to Aaron, I'd like to state that we believe our third quarter epitomizes our Super Fan brand mission within Clarus. Our well-diversified portfolio of brands is resonating well with the core consumer and growing market share on the back of strong innovation and the booming trend in outdoorism. This performance is driving margin expansion and high free cash flow conversion, which we are using to reinvest in growth and to opportunistically acquire other companies with the same Super Fan defining characteristics as our current portfolio. We see this mission continuing to pay dividends for our customers, our partners, and our shareholders and feel fortunate that the market timing is right. I'll now turn the call over to Aaron Kuehne, our Chief Financial Officer and Executive Vice President, who will provide additional commentary on the performance in the third quarter and details on our increased 2021 outlook. Thank you, Aaron.

Thank you, John, and good afternoon, everyone. Sales in the third quarter increased 69% to a record $109 million compared to $64.5 million in the same year ago quarter. The increase includes revenue contribution of approximately $13.2 million from Barnes, an acquisition Clarus completed on October 2, 2020, and $19.6 million from Rhino-Rack, an acquisition we completed on July 1, 2021. Third quarter sales increased 18% on a pro forma basis compared to the same year ago quarter. Q3 2021 results for Black Diamond experienced growth across all geographies, sales channels, and categories as we continue to see more and more of our consumers spending more time outdoors. North America experienced the most pronounced growth, benefiting from the recovery in the outdoor space, and as John mentioned, taking market share by being able to fulfill inventory across our core categories. This was especially in our national accounts with that business growing at least 82%. The $2 million or 13% year-over-year increase in the Sierra brand was due to strong domestic demand for our industrial OEM products and continued strength in ammo. Sierra's ammunition business was up nearly 140% in the quarter. While our goal was to achieve 10% of Sierra sales through ammunition, we were nearly at 40% in the quarter. Barnes contributed $13.2 million of sales in the third quarter with domestic Black Box, ammo, and OEM leading pro forma sales growth of 80%. We continue to work on increasing output levels through new and improved processes in order to fill more orders and meet surging customer demand. Rhino-Rack contributed $19.6 million of sales in which, as John mentioned, is a great outcome given the COVID lockdown imposed throughout its home market of Australia. We experienced strong year-over-year growth in New Zealand as well in the U.S., albeit from a small base. Consolidated gross margin in the third quarter improved 240 basis points to 36% compared to 33.6% in the year-ago period and up 520 basis points to 38.8% when stripping out the inventory step-up associated with the Rhino-Rack acquisition. Improvements in channel and product mix drove the bulk of this margin performance. In Q3, we experienced technical challenges and the inclusion of Rhino-Rack, which contributed $7.7 million, and Barnes, which contributed $1.7 million. The remaining increase was attributable to the company's investments in brand-related activities in sales, direct-to-consumer, marketing, and warehousing and logistics all focused on supporting strategic initiatives around expanding distribution, elevating brand awareness and being easier to do business with. The increase was partially offset by a decrease in stock compensation of $1.1 million during the 3 months ended September 30, 2021, compared to the prior year. Net income in the third quarter increased to $4.5 million or $0.13 per diluted share compared to a net income of $1.2 million or $0.04 per diluted share in the year-ago quarter. The improvement is primarily attributed to our profitable sales growth, along with the $6 million net benefit associated with the partial release of our valuation allowance on our net operating loss deferred tax assets. Adjusted net income in the third quarter increased to $18.1 million or $0.50 per diluted share compared to an adjusted net income of $9.2 million or $0.30 per diluted share in the year-ago quarter. Adjusted EBITDA in the third quarter increased to a record $19.2 million with an adjusted EBITDA margin of 17.7% compared to $9.1 million or a margin of 14.1% in the third quarter of 2020. Now I'll shift to our asset efficiency and liquidity. Inventory levels were at $118.7 million, up 44% from where we ended last quarter and roughly 74% higher than where we ended 2020. However, please keep in mind that this number includes $25.9 million of incremental Rhino-Rack inventory that isn't reflected in the comparative figures. We continue to work with our supply chain partners to dynamically manage our inventory levels to seek to meet demand. We are using our strong balance sheet to increase product availability to keep pace with the elevated demand. For context, we are carrying an additional $5 million of inventory at Black Diamond in an effort to offset the current elongated process of moving inventory from our supply chain partners to our warehouses. Although it has resulted in higher levels of working capital, we are confident that our strategy of increasing the size of our pipeline will better position us to satisfy demand with higher levels of fulfillment and in a timelier manner. Our past two quarters' results proved the strategy is working. Within Sierra and Barnes, we have purposely increased our baseline inventory levels by an additional $8 million focusing on raw material and component availability. This has enabled us to protect our supply chains and corresponding production of core items while opportunistically hedging the cost of rising commodities. Such benefits are partially reflected in our reported gross margins. At September 30, 2021, cash and cash equivalents were $10.2 million compared to $17.8 million as of December 31, 2020. During the third quarter, we had free cash flow defined as net cash utilized or provided by operating activities less CapEx of a utilization of $19.8 million compared to a generation of $5 million in the year-ago quarter. The decline primarily reflects the proactive inventory increases to mitigate supply chain constraints as well as transaction expenses related to Rhino-Rack. We expect free cash flow to rebound in the fourth quarter as product moves out in the cadence of our inventory purchases normalize. At September 30, 2021, total debt was $190 million, putting us in a net debt position of $179.8 million. Net debt leverage was 2.7 times on a trailing 12-month adjusted EBITDA basis. This provides a nice lead into some important topics we want to reiterate related to our capital structure. Overall, the strength of our brand portfolio continues to be supported by a strategic and disciplined allocation policy. We are extremely pleased with the direction of our businesses, which inherently provides us with additional growth opportunities for us to evaluate both organically and through M&A. As we have historically shown, we will continue to seek to utilize our balance sheet as the first and foremost way to grow. We have a business with increasing levels of EBITDA and strong recurring free cash flow. We also have great relationships with our banking partners who are extremely supportive of our strategic initiatives. We are owners and operators that are committed to being shareholder-friendly and responsible in how we run the business, including the amount of leverage we take on. We believe there's an optimal balance here with the leverage to raise between 2 times to 3 times. At times, we might extend this a bit higher. However, it will always be with a clear path of how we bring it back down to within this range over the course of a 12-month period. There might come a time where we will look to access the capital markets for additional liquidity, but it will be with the expectation of activating what I've just described in terms of pursuing our strategic initiatives, being shareholder-friendly and running a disciplined business with a responsible amount of leverage. To this point, on October 29, we closed a public offering for 2.75 million shares of common stock at $27 per share plus 400,000 additional shares in the overallotment option, providing gross proceeds of $85.4 million. We intend to use a portion of the net proceeds to fully repay approximately $65 million in aggregate principal amount under our revolving loan facility. This will provide remaining pro forma net debt leverage of less than 2 times. The remaining portion of the net proceeds will be used for general corporate purposes, including capital expenditures and potential acquisitions. Given our strong performance during the quarter and as communicated in our preannouncement, we are pleased to have announced that we are raising our full year financial outlook. We are now expecting consolidated 2021 sales to grow 62% to $362.5 million compared to 2020. This is an increase from the guidance that we shared last quarter of $350 million. By segment, we now expect 2021 Black Diamond sales to increase 27% to $217.5 million. This is an increase from the guidance we shared last quarter of $215 million. We expect Sierra sales, which includes Barnes, to increase 99% to $105 million compared to 2020. This is up from the $95 million we guided to last quarter. We continue to expect Rhino-Rack to contribute approximately $40 million to the second half of 2021. On a consolidated basis, we now expect adjusted EBITDA in 2021 to grow approximately 155% to $57 million compared to 2020. Last quarter, we had guided to $52 million. We continue to expect Rhino-Rack to contribute approximately $6 million to our consolidated adjusted EBITDA outlook. In addition, we continue to expect capital expenditures of approximately $8.5 million. We are proud of the strong operational and financial foundation we've built as an organization over the years. And once again, we have shown that our innovate and accelerate playbook and our commitment to Super Fan brands is the key to our success and allows us to prosper regardless of the external market environment. Operator, we are now ready for Q&A.

We have our first question coming from Jim Duffy with Stifel.

Great execution during the quarter. Congratulations on the successful offering. I wanted to start with a question on the Sierra and Barnes business. Thanks for the detail on the contribution of ammo. Looking at the annual guide, the fourth quarter implies a sequential decline from the third quarter. Are there some timing dynamics we should be considering that would explain that?

Yes. Jim, this is Aaron. I hope you're doing well. We are currently working on several areas, including increasing our capacity and successfully keeping up with demand. At the same time, we need to focus on preventative maintenance as we progress through the quarter, which will allow us some flexibility as we enter the new year. Historically, the fourth quarter tends to be slower as our OEM partners adjust their inventory levels and after the hunting season. However, we've managed to fulfill orders effectively as we approach the holiday season. The main goal is to create some additional space to handle maintenance on our machinery and plant operations, ensuring we're well-prepared as we move into 2022. Essentially, this reflects a planned pause to allow us to address these maintenance needs.

And then as it relates to the ammo contribution, $12 million in the quarter, is that a good figure to think about for future quarters? Or would you expect to continue to build on that contribution?

I believe that the 40% to 50% range, based on the development of the order book and our current position, would remain a reliable benchmark for us as we consider the upcoming months.

Remember that, Jim, is a balance between a higher percentage of that in the Barnes brand and a lesser percentage of that in the Sierra brand in the marketplace today. And obviously, as Aaron said, chasing up with components into 2022 and beyond. As we've mentioned in previous calls, it hasn't slowed down at all, and we don't anticipate it based on order demand in the book going well deep into 2022 and beyond.

Great. And then one more, if I may, I'll let someone else jump in. But on Rhino-Rack, I'm just curious, the key milestones we should be watching for as you look to realize your full potential in the U.S.

Yes, part of the integration process involves building up inventories following the COVID lockdown in Australia in 2021. This is necessary to ensure on-time delivery and strong fulfillment for our current retailers. This is the first priority. We expect to see growth as we align supply with the increasing demand. Secondly, we will also see growth through the addition of new accounts as we tap into the expanding segments of overland outdoors and blacktop to brown roads initiatives, along with outdoor retailers joining this growing overlanding market. The third focus is on accelerating through our innovate and accelerate strategy, which will lead to more award-winning new products. For example, we recently received recognition for our stoic product. We will continue with our proven approach of delivering on time, maintaining good fulfillment, being easy to work with, and driving innovation to enhance our growth.

We have our next question coming from the line of Laurent Vasilescu with Exane BNP Paribas.

Congratulations on an exceptional quarter. I want to ask if you've experienced any shifts in revenue from the third to the fourth quarter due to supply chain constraints, similar to what we've heard from other outdoor companies. Are you anticipating that fourth quarter revenues might spill over into the first quarter as a result of these supply chain issues?

I mean, obviously, as we chase this and it's a very dynamic market today. We'd be wrong to say that we didn't have revenue in Q3 that trailed into Q4 just in order to meet supply or fulfillment. And the same will be true obviously, we take all that into account when we give you quarterly and annual guidance. And our goal is to try and accelerate through our scrappiness and the wins that Aaron and his team have been able to do from a supply chain perspective to accelerate to that and capture as much as we can. I think because of our scrappiness. We've seen an increase in our demand as we become more valuable or gaining more market share through this transition and the growth of outdoor-ism. And so yes, some has moved. It will always keep shifting out until the day supply can meet all the demand in the market. And at this moment, we don't see that happening in 2022, though, as we said in the notes here, we have a strong order book for 2022.

Okay. Great. And then on the BD front, with the direct-to-consumer initiative, you've got a great website. But as you mentioned, John, you were alluding to the new store opening store openings or 3 store openings on your website that showcase those store openings. I'd love to hear how many stores you think you can get to on the BD side? And how much do you think direct-to-consumer revenues could represent for BD over time?

Yes. I mean we're always a yes and yes philosophy. So obviously, today's market of what we call consumer-centric message or what we really refer to in Black Diamond is community-centric. That's really what's driven the initiative behind the flagship retail stores, especially in towns like Burlington, Jackson, Wyoming, Park City, Bend, Oregon, Big Sky Montana; Boulder, Colorado. When we finish 200, we will be at approximately eight stores in the U.S. and one in Europe. We've already got plans for expansion in 2022. Long-term, I think we probably there are to 25 Super Fan communities out there that align with our brand and our activities. And long term, we think that while continuing to grow all aspects of our business in all channels and all regions, we think that there's probably a 30% opportunity in direct-to-consumer. And that's really driven by this new consumer outdoorism meeting what deflation could and more and more online engagement with the brand.

That's great to hear. And then the last question, Aaron, I'd love to ask about Rhino-Rack. In the 10-Q release tonight, shows that Rhino-Rack had an EBIT loss of $3 million, which I believe includes the $80 million in transaction costs. Hence, tell me if I'm wrong here, but I think the on adjusted basis, generated $5 million of EBIT on $19 million of sales, which I think implies a 20% EBIT margin. I'm just trying to reconcile that versus the June 1 press release, which implies the EBITDA margin in the high teens. Any color on how we think about the EBIT or EBITDA margins for the full year would be very helpful.

Yes, we anticipated some integration challenges with that business, and our guidance was $40 million in revenue plus about $6 million in adjusted EBITDA, aligning with the mid-teens. This is still consistent with its performance. We did notice some decrease in efficiency due to the lockdown in Australia, but it hasn't affected our long-term goals of reaching high teens to low 20% adjusted EBITDA margins. Additionally, the 10-Q shows inventory step-ups of $3.1 million for the quarter, with an expected $1 million to $1.1 million in Q4. There will also be significant increases in amortization and depreciation. Therefore, evaluating this business from an adjusted EBITDA standpoint is essential, particularly given the various inputs related to the transaction and purchase price accounting adjustments.

We have our next question coming from the line of Anna Glaessgen with Jefferies.

First one, can you expand a little bit on your point about how being nimble has helped you navigate the current supply chain landscape? Do you have maybe greater flexibility in sourcing versus some of these larger players, perhaps more duplicity along the chain? Just any perspective here would be really helpful.

Yes, Anna, this is Aaron. This really emphasizes one of the key aspects of our strategy within the Clarus portfolio. We are very consumer-focused and prioritize making it easy to do business with us. We apply the same principle to our vendor partners, which is why we refer to them as partners. Over the years, we've developed genuine partnerships aimed at mutual growth. Our capital structure allows our brands to operate independently, enabling us to make quick decisions and assess situations rapidly. This agility helps us unlock various opportunities within our supply chains, allowing for faster inventory movement and increased capacity to address supply chain challenges like port congestion and container availability. In contrast, some of our competitors may lack this flexibility due to centralized oversight of their supply chains, which can involve multiple approval layers to make adjustments. Our approach allows us to manage our businesses more efficiently and respond swiftly without needing extensive approvals for additional purchasing flexibility across our brands and supply chains.

I think the other side is when you have Super Fan brands that every quarter continue to provide and improve sustainable long-term growth, it's really easy for your, as Aaron said, your vendor partners to allocate time, resources space capacity to those brands that continue to meet or exceed their expectations. And we'll be with them long-term through this process. Now COVID, tomorrow economic challenges or supply challenges or whatever they may be, and look at it and say, wow, these guys are really long-term with us, and therefore, we should lean into them as they continue to lean into us.

Great. And then it's really good to hear bookings remain strong across the segment. Could you maybe put this into historical context where you'd be at this point in the year? Or maybe put another way, how does go forward visibility compare as you think about demand?

Yes, each quarter is a new record for us in terms of bookings. One key to our success has been our ability to innovate, even during the challenging last 18 months, and to be prepared with further innovations as things stabilize, like in Sierra and Barnes. Our strong engagement with both retail and vendor partners has provided us valuable insights and robust bookings throughout 2022. We are currently in the process of fall '22 bookings and beginning preparations for spring '23. We feel very positive and will remain closely connected to our retailers, continuing to adjust our plans to meet rising demand at all brand levels as we move from 2021 into 2022.

We have our next question coming from the line of Matt Koranda with ROTH Capital.

Has gone runs well. Just wanted to start in BD. You guys mentioned, I think, John, you mentioned 150 new product introductions in 2022. Maybe could you give some context on how that compares to 2020 and 2019 in terms of new product intros? It sounded relatively high? And then how much of a growth tailwind does that provide in '22? And then just any more commentary you can provide on sort of the product mix we should expect in '22 if it's going to be relatively different than prior years in terms of apparel or footwear or whatnot, that would be helpful.

Yes. After launching the innovate and accelerate strategy for the brand in the fall of 2017, we finished 2020 with just over 350 new products. So, while 150 new products this year is not as strong as our past performance, we have been more strategic in focusing on what we call the sacred seven categories. These categories continue to show strong market share growth, and we aim to stay at the forefront despite challenges from COVID and supply chain issues that our retail partners face. Looking ahead, we see robust growth in both direct-to-consumer and e-commerce channels, particularly in apparel and footwear, which are entry categories. Items like gloves and packs also show growth, indicating that consumers are embracing outdoor activities. In the long term, we anticipate that our mix will shift to include less equipment and more soft goods, while we continue to innovate and accelerate in both areas of the business.

Okay. Makes sense. And then on Rhino-Rack, 2-part question. I guess, any anticipated near-term impact or hangover, I guess, as I might put it from the Australia lockdowns that we've just come out of either supply chain or just sort of hesitancy on wholesale stocking orders related. And then it was good to get an update on progress in you guys moving into the North American retail channels, and it sounds like a great opportunity. But I'm wondering if maybe we could put a finer point on when we should expect to see more meaningful North American distribution for Rhino-Rack? I mean is it sounds like you're signaling it's not in the very immediate term, just given you want to keep up with existing customers. But is it more like a mid- to late 2022 event where we should see some North American distribution build or just given kind of the near-term to medium-term supply chain tightness, it's probably more likely a 2023 event.

Yes. We believe that the integration and the lockdown situation in Australia, which lasted until just weeks ago, had some impact. We considered this while planning for the remainder of Q4 and our guidance. We are now accelerating our efforts in the market as we expect to see similar developments in Australia as they emerge from the lockdown, particularly with the approach of summer in the overlanding market. In the U.S., our primary goal is to catch up on supply to meet the increasing demand in the North American market. We aim to partner effectively with our key retail partners to ensure timely deliveries, maintain strong fulfillment, simplify business interactions, and boost our business opportunities. Regarding your question on expanded retail opportunities in North America, we are currently planning for the second half of 2022, depending on product availability and allocation to our existing retail partners. In the worst-case scenario, this will allow us to plan better for 2023, but we anticipate beginning to accelerate our growth in 2022.

We have our next question coming from the line of Joe Altobello with Raymond James.

Just kind of following up on that line of questioning, the lack of inventory is not new, and it doesn't sound like it's going to get better anytime soon. It's probably going to be with us for some time. Does that push out the timing of the expectation of your DTC penetration?

No. I think there's twofold that takes place in this. Obviously, our goal is yes and yes. I think part of this is the acceleration through the marketing aspect and really making that what we call the digital first strategy come to live in all of our communications. And that just to be clear, that's just as important and relevant to our wholesale key partners as it is to our DTC efforts. We believe that 1 plus 1 equals 3 or 5 or 7 in that case. We continue to have very aggressive goals, both in our direct-to-consumer and our retail expansion alongside what we're doing in wholesale. We continue to be, as Aaron said, very scrappy on chasing our availability as much as we can and keeping up with that. Given our order book and our success to so far in DTC, we continue those growth rates continuing and our goal is to really do as best as we can to deliver on time and be as successful in all channels in all regions as we can, and it's short-term, it's an allocation exercise, long-term it's really just about the size of the pipeline and how soon and aggressive we are about chasing that and focusing on those key items that continue to not yet find a feeling in the marketplace.

Okay. So it sounds like you do expect DTC to see some significant improvement in terms of overall percentage of sales in '22?

Yes.

Okay. Okay. And then just a follow-up on that. Your margins have taken a very nice step function up this year. We're looking at, call it, 16% EBITDA margins year-to-date, and I think you've been running around 10% over the last 3 years. How sustainable is that I know there's a lot of puts and takes on '22. For example, you just recently only took pricing. But as you look ahead to '22, what's the opportunity to take those margins even higher next year?

Yes, this is Aaron. There’s an opportunity for further growth. The positive aspect is that all our growth drivers within the portfolio come with higher gross margins, which also translate into increased flow-through to adjusted EBITDA. Reflecting on the past nine months, our progress is primarily due to scaling our Black Diamond business and refining our product, channel, and geographic mix. Additionally, we've been executing various improvement initiatives focused on commercial excellence, enhancing our product design and commercialization, and strengthening our vendor partnerships despite rising input costs like freight. This underscores the teamwork, collaboration, and planning that have facilitated these improvements. Furthermore, the growth from Sierra and the inclusion of Barnes have also led to increased EBITDA levels. We’ve achieved substantial profitability improvements in these two businesses, alongside significant growth, which stems from a disciplined approach to our go-to-market and operational strategies. We expect to replicate this success with Rhino-Rack and any future acquisitions. This situation illustrates the effectiveness of the Clarus operating model, emphasizing our business management, organization, and focus on key growth drivers. We aim to connect with the end consumer, incorporate their feedback to ensure we’re delivering top-quality products, and implement best practices to enhance gross margin and related EBITDA.

I think the summation that Aaron just said is to be very competitive and continually look for ways to have continuous improvements that add up and this idea of 1% a day every day over a long period of time, really builds and has an increasing value to everything we do.

I was just going to say one last comment because I think this is important to note, I think it really iterates also how we manage these businesses on a stand-alone basis, where we have dedicated teams across the different brands that are responsible for their plans, but also responsible for finding ways to improve upon each of these businesses, and that provides us with a lot of confidence in terms of our ability to grow and scale these individual businesses, but also to be able to add on to it via M&A, but also to be able to further progress the entire Clarus portfolio.

We have our next question coming from the line of Ryan Sundby with William Blair.

Congratulations on the quarter. I just wanted to follow up on the lockdowns in Australia. Did you have to shut down production for Rhino-Rack because of that, or is your commentary more focused on retail shutdowns and possibly limited mobility?

Yes, the lockdowns began shortly after we acquired the business in early July and lasted until early October. As a result, we had to halt our operations in Australia, which at times reduced our production capacity to about 10% to 15%.

No skeleton level.

It was very minimal. As a result, that led to some challenges impacting our EBITDA levels. However, the team has done an outstanding job managing the situation, maintaining high morale, and restoring production levels along with the various aspects of the business. This effort sets us up to get back on track to where we were prior to acquiring the business and where we anticipate being able to take the business.

One interesting point, Ryan, is how Super Fan brands perform during challenging times compared to easier periods. When you have a strong market share and the market improves, you're likely to succeed. However, it’s noteworthy that after acquiring the Super Fan brand, we observed it outperforming even in tough conditions. This has heightened our enthusiasm about the potential opportunities as we move forward, particularly now that the market has started to open up in Australia.

Got it. That's great. And then just the decision to prioritize product availability among the seven core categories. Can you talk about what percentage of sales, that where it would be for you guys? And maybe work things for the rest of the business? Should we expect to see a drag on sales given that kind of focus from the smaller...

Yes. I don't want to give away the secret sauce here, but our market share is in our products. I mean there may be competitors listening to this. But obviously, what we saw and have seen is we continue to see very strong growth in apparel and footwear, and those are really inclusive to what's taking place in outdoorism today and a real entry into the brand. We continue to see strong growth in categories like gloves and packs. And as we move up, apparel and footwear, we still approach them as apparel as footwear, footwear, apparel as equipment, footwear as equipment. But they're pretty entry level. Then we focused on packs and gloves and the nature of BD, we get a little more technical there, right? We believe we make the best gloves in the business, and our packs are really specific to the activity level. And we accelerated that. And then you get into our equipment world, which starts with Alpine snow safety doesn't get any more technical than that, core climbing equipment doesn't get any more technical than that. And then these two categories where we have leading technology and market share in headlamps and trekking poles, and we have not found the ceiling. And so that became effectively our core seven focuses. And they are the areas where during this new exploded outdoorism our retailers have leaned even more into was there are areas where we know we can continue to innovate at a pretty rapid rate across all of those seven categories bringing out new products in each of them and accelerating our market share while also using them as a loud beacon to our digital-first strategy with the consumer. And so that's what we've leaned into beyond that, the secret sauces and the products we pick and drive, but the real goal is we knew those and vice versa, they're ones where the retailers want heavy from us, the consumers want heavy from us. And then we have really strong vendor partners that have the opportunity for us to accelerate in those categories as well.

And I think it's also important to highlight that this didn't catch us by surprise. These are initiatives that we've been working on for an extended period of time, but in particular, related to the supply chain topics. One of the first things that we did back in last year when COVID really started to hit is we wanted to be the voice of calm not only within the building but also our retail partners, but also with our vendor partners. And by the approach that we took, which we won't get into too many details here, that really positioned ourselves well to be able to respond to the recovery activities or the market response that's been taking place. But because of also our approach in this alignment internally and our ability to really focus on these key initiatives that John outlined, we were having these conversations in November of last year.

With both the vendor partners and the retail partners letting them know that it was going to continue to accelerate on both sides and that we would increase our supply chain, our planning so that we could be there when other vendors could not perform.

And as we work through the process, I'll tell you one of the most important things here for especially our supply chain side of things is to be able to show confidence, consistency, and credibility in how you perform and how you're going to interact with them at the partnership level. And we were able to pull certain levers that enabled us to gain capacity not only for a period of time but for the entire year of 2021. And really lock step our way through this because although we didn't have complete clarity as to the different puts and takes that would take place, we knew that these initiatives were in line with where we wanted to take the business. And that as a result, we could flex our balance sheet and go deeper with these items to ensure that we have the highest level of product availability that we possibly could as we work through this process.

And since the hangover has not finished coming out of 2021, as we probably all hoped to expect it. And it looks like supply chain impacts will probably impact us through, if not most, all of 2022. This has really set us up this initiative in late '20, all through '21 is really shattered up strong to be a very viable partner to our best retailers and our consumers going deep into 2022.

We have our last question coming from the line of Mark Smith with Lake Street Capital.

I wanted to look quickly into ammo just on kind of commodity and component challenges, anything where you've seen significant price increases or that you may be having a problem sourcing?

Yes, ammo remains a significant driver of demand in the marketplace, much like the rest of our supply chain. We noticed this trend beginning as far back as late fall 2019 when market activity started to pick up. Aaron and the team accelerated our efforts in copper, which has allowed us to optimize Sierra in 2021. With the acquisition of Barnes, we have successfully doubled that business due to our well-planned supply chain. There continues to be more demand for ammo than we can meet. We have been proactive and strategic in our planning and allocation efforts through our partnerships to secure the brass, primers, and other necessary support to drive these categories forward. While allocation remains key, our current order books and market projections for the next 12 months suggest the entire industry will face challenges and must remain agile to seize opportunities across all calibers and cases.

Okay. And then just as we look at supply chain and port issues and everything going on, we talked a lot about North America, but are you seeing similar pressures in getting goods into Europe or other markets?

We experienced similar pressures in August, but they have eased somewhat. Our global approach has helped lessen these constraints compared to North America. While challenges do exist elsewhere, our comprehensive strategy means we are seeing the same advantages in Europe as we are in North America. This positions our brands, especially the Black Diamond brand, favorably as we navigate Q4 and look ahead to the next year.

We have our last question coming from the line of Linda Bolton-Weiser with D.A. Davidson.

I was curious about the gross margin, which was quite impressive this quarter. Can you break down the mix effect or provide any quantification on that? I understand that the rapid growth of AMO likely contributed. Also, did pricing play a role in the expansion of gross margin this quarter? Should we anticipate a further increase in gross margin in the fourth quarter?

So let's address the last question first in that I think what we've been able to produce on an adjusted basis in Q3 is a good litmus test or benchmark as we think about Q4. We did see a lot of progression within each of the businesses from a gross margin perspective. And so it's a little bit tough to get too granular on the different puts and takes, but just note that this is a carry of focus for ours. Not only do we want to be able to grow the business, but we want to be able to do it profitably. And because of the way that each of our brands is positioned, we feel that we have that ability to do so through the innovation cycle, through pricing efforts, but also through the different mix components that we've been discussing, but also through our efficiencies. And so if you think about it, we take a very holistic but yet very disciplined approach in terms of how we approach the market for each brand. And we believe that as a result of that, we've been able to demonstrate significant margin expansion because of those efforts. And so to answer your question, yes, it does reflect some price increases coming from the Sierra, Barnes side, that whole element has been pretty well socialized throughout the industry as far as what's taking place. It does not reflect anything on the rest of the businesses, which will take place here as we head into Q4 and also in the new year. But it really comes down to our ability to continue to innovate and accelerate into higher margin products areas, but also to be able to really instill an operational excellence format or concept to drive higher levels of margin throughout the business. And as a result, we feel that they're extremely sustainable. This is not a one and done type anomaly or topic instead it's something that's ingrained in each of our businesses and something that we feel to be sustainable, and we'll continue to be an area of focus.

Thank you. At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Walbrecht for closing remarks.

Super appreciate the engagement and all the questions this afternoon. We'd also like to thank everyone for listening to today's call, and we look forward to speaking to you again when we report our fourth quarter and our full year 2021 results. It is going to be a huge winter, guys, a lot of snow and a lot of excitement in the industry today. So we look forward to giving you more reports on that as Q4 end. All the best.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.