Clarus Corp Q4 FY2022 Earnings Call

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's financial results for the Fourth Quarter and Full Year Ended December 31, 2022. Joining us today are Clarus Corporation's President, John Walbrecht; 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 would now 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.

Thanks, Shannon. 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 the 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 February 27, starting at 7:00 pm Eastern tonight. A webcast replay will also be available via the link provided in today's press release as well as on the company website at claruscorp.com. Now, I'd like to turn the call over to Clarus' President, John Walbrecht. John?

Thanks, Cody. It's good to be with everyone. As I reflect on 2022, there is no doubt it will go down as one of the most challenging years in our company's history. An uncertain macroeconomic environment, a tough consumer backdrop, extremely volatile foreign currency exchange markets, and inefficient supply chains presented rough waters for our brands to navigate. We are proud of our team's tenacity and dedication in these uncertain times. So I first want to recognize all the people across all of our brands and their great efforts. As the challenges set in, we acted quickly and pivoted towards the areas of our business that weren't facing the most severe headwinds. Areas of focus included precision sports as well as markets outside of North American wholesale in our Outdoor segment. We also prioritized expense reductions, free cash flow generation, and debt reduction. On the cash side of this equation, we focused on streamlining inventory and cost reductions. This allowed us to generate over $30 million in free cash flow during the fourth quarter, which we used to pay down $28 million in debt. We ended the quarter at approximately 2 times leverage, which is at the low end of our leverage range and we believe it is a comfortable spot as we enter into 2023. Zooming out on the full year, we have much to be proud of as well. We drove record revenue growth, grew our Precision Sports segment by 21%, deepened our specialty retail presence in our Outdoor segment by increasing sales in this channel by 31% in the second half of the year, grew our apparel by 31%, and expanded our direct-to-consumer business by 26%, all while focusing on decreasing our inventory and paying down debt. However, we weren't totally immune to the challenges I just mentioned. Negative impacts associated with foreign currency, inventory destocking at our larger retail accounts in North America during the second half of 2022, and consumer confidence being tested by rapid inflation, along with continued inefficiencies in our supply chains, were difficult for our brands to fully offset. As a result, on a consolidated basis, our fourth quarter sales were $104 million, down 12% or down 9% on a constant currency basis. Breaking down our Q4 performance at the segment level, as mentioned, Precision Sports continued to outperform the market, growing 10%. Our Outdoor segment declined 15% or 11% on a constant currency basis, and our Adventure segment declined 28% or 22% in constant currency. Like last quarter, macroeconomic factors outside of our control continued to hamper our profitability. Specifically, unfavorable movements in foreign currency exchange rates negatively impacted our Q4 adjusted EBITDA by an estimated $3.7 million, while higher freight costs associated with supply chain challenges resulted in an incremental $9.9 million in additional costs. Removing these costs, our consolidated adjusted EBITDA margin would have been 14.1%. We believe elevated trade costs are transitory as supply chains continue to stabilize. In fact, we are making progress in the reduction of lead times back to pre-pandemic levels and container costs are decreasing as well. As such, we currently expect a more normalized operating environment as we move towards the back half of 2023. At this time, I would like to provide additional highlights at the segment level starting with Outdoor. In our Outdoor segment, our focus on Europe and our international global distributor markets, which aren't experiencing the same magnitude of inventory overhangs that the North American market has, allowed us to drive constant currency growth in the fourth quarter of 15% in Europe and 7% in our international global distributors. To provide some context on the level of FX impact we endured in Europe, the strength of the dollar caused a $2.3 million headwind on a constant currency basis in the fourth quarter and nearly $6.6 million for the full year impact. Despite the market challenges and significant foreign currency headwinds, our Outdoor segment experienced a 400 basis point gross margin improvement in the fourth quarter due to activities previously outlined around new product introductions, pricing, channel development, sourcing, and productivity initiatives. Without the impact of the foreign currency headwinds that I just mentioned, our Outdoor segment gross margin would have increased 640 basis points to 41.4%. Apparel continues to be our fastest growing category with sales up 15% for the quarter and 31% for the year. We experienced outsized demand for our outdoor snow shoes led by our Doom Patrol Hybrid and our expanded Recon collections. Our innovative four-way stretch fabric and unique feature sets have been strong drivers for our new consumers in this brand. As we continue to refine and integrate our technical components, fit, and features, we believe this will further increase demand awareness and our overarching growth path. Our direct-to-consumer business also remains a bright spot with fourth quarter sales up 19% year-over-year and up 38% in Apparel alone. We've been very intentional about driving our direct-to-consumer business, doubling down on our engagement with our core community by opening flagship retail stores and executing a long-term investment in e-commerce. Internationally, our Outdoor segment continues to perform well and gain market share. With the lack of microprocessor availability hampering our brand all year and foreign currency exchange headwinds lowering European sales by $2.3 million in the fourth quarter, demand trends are strong for the brand moving forward. We believe this highlights the strength of our relationship with our vast network of European specialty stores and the consumer's desire to remain active in the outdoors. Our international global distributor market, specifically Korea, Japan, and China, reflected a 90% increase in footwear and a 41% increase in our mountain products in the fourth quarter. Overall, the retail channel in these two international markets is much healthier than we experienced in the North American market. In fact, inventory destocking trends with our larger key accounts in North America dramatically reduced their open-to-buys, which was a significant offset to the positive initiatives I just discussed. Based on our continued conversations with our larger key accounts, this is not a Black Diamond specific issue, as our products continue to show strong sell-through. We believe the issue stems from other discretionary categories not geared towards the activity-based consumer. Unlike other retailers we work with globally, there continues to be a challenge for large North American key accounts to ensure a balanced portfolio of inventory. The demand pull forward experienced in 2020 and 2021 due to the pandemic led to an extreme over-indexing of inventory. With the overall demand curve slowing, open-to-buys are delayed until this excess inventory is sold through at the retail level. Within our specialty accounts, however, we continued to chase demand with sales in the channel up 31% in the second half of the year. To meet this demand, we often needed to incur higher-than-anticipated costs associated with air freighting the product. We estimate that we ended the quarter with $3 million in backorder demand globally. This number has come down every quarter since the second quarter of 2022, given the strong sell-through trends and our team's ability to service our accounts at higher levels while chasing the increased demand in headlamps, trekking poles, gloves, and apparel. As we start 2023, we feel confident in our ability to deliver on-time fulfillment of over 95% and being easier to do business with than we were in 2022. Looking forward, we are excited about the recent announcement of Neil Fiske as the new President of BD. He will be responsible for accelerating growth and lifting profitability by capitalizing on attractive expansion opportunities across various categories, channels, and regions. He joins Black Diamond from marquee brands as a leading brand accelerator with a portfolio of 13 brands. As a CEO for almost 20 years, he has extensive experience in outdoor, active, and apparel categories, having led transformational change at marquee brands including Dakine, Body Glove, Eddie Bauer, Billabong International, The Gap, and L Brands. He is an avid outdoorsman and experienced mountaineer, and Fiske brings deep expertise in building brands, driving innovation, and improving operational performance. Please welcome Neil on board. Our focus in our Outdoor business in 2023 will be continuing our commitment to activating and scaling our go-to-market activities. Through a disciplined approach to new product introductions, identifying continuous improvement activities within our supply chain and operations, and increasing the number of touchpoints with our retail partners and consumers, we believe we are well positioned for continued market share gains as we seek to elevate brand awareness and demand for our brand within our targeted markets. We anticipate that supply chains will continue to improve, inventory normalizes, and we will accelerate the segment's growth and profitability. Moving to Precision Sports. Our niche brand positioning and ability to be nimble with product deliveries resulted in another record quarter. We drove another record quarter with sales growth of 10%. Our ability to continue executing in this segment stems from the diversification we have by brand, by vertical, and by geography. Not only do we have two super fan brands in Sierra and Barnes, but both of these brands have strong business relationships across the globe, supporting ammunition, OEM, and component businesses. Our 10% sales growth was driven by prioritization of orders for our OEM partners, both domestically and internationally. Demand for our centerfire rifle hunt products and broader ammunition remains high, limited only by our availability of the brass cases required to load and deliver this product, which continue to create backlog through our wholesale channels. As demand continued to exceed supply for both Sierra and Barnes, we increased capacity in both bullets and loading of ammo, ending the year at our production rate targets of 330 million bullets at Sierra and 110 million at Barnes and an ammo loading capacity of 50 million rounds. As we look to 2023, we anticipate the use of this capacity will mix between OEMs, reloaders, and ammo, but it will also mix from the various calibers. But we do expect to focus on larger centerfire rifle calibers and less on pistol and revolver in 2023. The key driver of any variance in this strategy will be our ability to source product components, mainly the brass cartridges for rifle loads. All things being equal, we will continue to chase growth opportunities in 2023. This stems from our two super fan brands we own. We believe it is inaccurate to lump our precision brands into the broader ammunition market, given our unique product and brand positioning, and our leading specialty market share, premium prices, enthusiast consumers, and growing demand by our various channels worldwide. It is our demand across various diverse geographies and channels that allows us to shift quickly when one channel slows or when the supply chain limits other opportunities. I mean, just coming out of SHOT Show in mid-January, we are feeling confident about the upcoming product launches. At our Barnes brand, we will be launching the Pioneer line, which is a product for lever-action rifles. We expect Sierra will follow with a similar product in 2023. Response we are receiving from the dealers is positive, and combined with our relationship with key distributor partners, we believe we will continue to steal market share in 2023. We are also continuing to see opportunities outside of the domestic market, primarily in Europe, Australia, and South Africa. Now on to Adventure. The challenges we experienced in the third quarter persisted into the fourth quarter. Worldwide new vehicle supply continues to lag demand. Like our Black Diamond business, our larger key distributors of our Adventure products were sitting on too much inventory going into the second half of 2022, impacting the sales velocity. To combat these headwinds, we have improved our organizational structure, enhanced our go-to-market process, professionalized our team via sales force expansion, in store support systems, and fulfillment in our fulfillment center. We have reallocated expenses to the areas that matter most around new product introduction, distribution, and systems. We have also taken over the U.S. and Canadian distribution from MAXTRAX, and in Canada for Rhino-Rack, allowing us to further control these brands in these important markets. We are also onboarding additional sales agencies to create more touchpoints with our retailers. Ultimately, we believe the combination of factors negatively impacting our Adventure segment in the past couple of quarters will be short-lived. Our long-term growth premise for these brands remains unchanged, strengthened by overall industry trends that we witnessed at SEMA in November. We continue to see a global vehicle trend shift towards more SUVs, CUVs, trucks, and side-by-side or utility task vehicles, making outdoorism combined with overlanding the global automobile fashion trend which fits perfectly with our products at both Rhino-Rack and MAXTRAX. Given the relatively young age of these brands within our portfolio, we are still in the process of activating our innovate and accelerate playbook, including meaningful new product introductions and sales channel expansions, both into more specialty as well as outdoor accounts. Activating this playbook forms the basis of our strategy to reaccelerate growth in our Adventure segment. First, we will seek to own the overlanding market globally. Retailer expansion in the mainstream adventure space is just beginning as key retailers launch flagship adventure stores within overlanding as a leading category of focus. We are moving rapidly to build our strategic initiatives as we seek to create an ecosystem of overlanding products for sportsman and weekend warrior consumers. We expect to be introducing updated bike, ski, and kayak racks, luggage boxes, truck bed systems, and awnings, as well as new accessories including storage cases, rooftop tents, duffel bags, and expanded recovery systems. Second, we expect to improve our speed to market through more focused new product introduction efforts, increasing our sourcing efforts, augmenting our engineering and supply chain teams, and leveraging key vendor relationships within the Clarus portfolio. Third, we expect to unlock the U.S. market through an improved direct-to-consumer presence, augmenting the support of our direct specialty dealer setups, providing more touch points of service, and selling through the onboarding of additional sales agencies, improved operation systems, and building out our super fan brand approach to performance marketing and community activation. Finally, as we improve our U.S. expansion strategy, we expect to develop other attractive markets like Japan, Korea, the Middle East, and Europe, which we believe will increase our total addressable markets. We are confident that we are positioning the brands for growth as outdoor adventure through overlanding continues to build momentum globally. As we look ahead to 2023, we believe we have a portfolio of super fan brands with strong growth profiles and significant market share left to target, even in challenging environments. Climbing, backcountry skiing, trail running, hiking, hunting, competitive shooting, and overlanding adventuring are megatrends we do not anticipate changing for the next decade plus. This is one of the most important attributes that we speak for in our super fan brand strategy, and we believe it is a key component of our long-term shareholder value creation strategy. Now, I'll turn the call over to Mike. Thanks, Mike.

Thank you, John, and good afternoon, everyone. Let me jump right into the performance in the fourth quarter. Sales were $104.2 million compared to $118.2 million in the prior year quarter. Sales included revenue contribution of $3.8 million from MAXTRAX, an acquisition completed on December 1, 2021. Reported sales in the fourth quarter were down 12%. Organic sales were down 11% in the fourth quarter, MAXTRAX contributed 2%, and foreign exchange was a 3% headwind in the quarter. On a constant currency basis, total sales were down 9% in the quarter. Fourth quarter sales in the Outdoor segment were $55.3 million versus $65.1 million in the fourth quarter of 2021. If you adjust for foreign currency exchange, outdoor sales would have been down 11% as opposed to being down 15% at Outdoor. As John 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 execution in the key pivot areas of direct to consumer, European, and IGB that John mentioned earlier. Another area of strong execution was apparel, which continues to be our fastest-growing category within the outdoor segment. Sales were up 15% at the apparel category level. This is notable as apparel along with footwear and our direct-to-consumer business represent key strategic growth pillars over the next five years for the corporation. Precision Sports sales increased 10% in the quarter to $30.3 million, and strength in the international business continued in the fourth quarter as our Precision Sports team continued to do an excellent job in fulfilling demand, increasing production capacity, and navigating a challenging sourcing environment. One thing to note, during the fourth quarter, we sold 5 million of nine-millimeter ammo at lower margins than normal and did this in an attempt to reduce inventory and generate cash as the demand for nine-millimeter is expected to remain low compared to the supply during 2023. You'll see this reflected in the segment EBITDA in the fourth quarter, but we expect this to be a one-time decrement given the strategy John discussed. Our Adventure segment contributed sales of $18.5 million, reflecting lower consumer demand given the challenging economic environment, loaded industry-wide inventory to distributor level, and constraints on new vehicle deliveries. Despite these results, our long-term positive view of these brands remains intact. However, during the fourth quarter, due to the reduction in the consolidated market capitalization of the Clarus Corporation and the enterprise value of the corporation, and the lower sales growth and lower EBITDA expectations in the immediate and near-term forecast for the Adventure segment, we determined it necessary to write down the value of the trademark and goodwill associated with the Rhino-Rack acquisition. As a result, an impairment charge of $92.3 million was recorded in the quarter. This non-cash charge is included in operating expenses and we have excluded it from our adjusted EBITDA in the earnings release published earlier today. Moving on to gross margin. Consolidated gross margin in the fourth quarter declined to 34.6% compared to 36.1% in the year-ago period. As John mentioned, we were able to push through significant improvements in the gross margin for our Outdoor segment, though these improvements were offset by inventory optimization at the Precision Sports segment as we cleared out our remaining nine-millimeter inventory ammo. In addition, foreign currency had a negative impact of $3.7 million or 220 basis points, while higher freight costs had a negative impact on gross margins of $900,000 or 90 basis points. Excluding both, gross margins in Q4 at a consolidated basis would have been 37.7%. Selling, general, and administrative expenses in the fourth quarter were $33.1 million compared to $32.6 million in the same year-ago quarter. In both our Outdoor and Precision Sports segments, we were able to push through expense improvements leading to lower SG&A compared to the prior year. SG&A expenses for the quarter also reflected lower non-cash stock-based compensation for performance awards at corporate. This disciplined expense management was entirely offset by the inclusion of MAXTRAX and higher rent and selling investments at the Adventure segment. Net loss in the fourth quarter was $81.6 million or $2.20 per diluted share compared to net income of $14 million or $0.36 per diluted share in the prior year quarter. Net loss in the fourth quarter of 2022 included the non-cash impairment charge of $92.3 million that I just referenced. Adjusted EBITDA in the fourth quarter was $10.6 million or an adjusted EBITDA margin of 10.2% compared to $20 million or an adjusted EBITDA margin of 16.9% in the same year-ago quarter. Lower revenues in the Adventure segment, higher freight expenses, and adverse changes in foreign currency exchange rates all contributed to the reduction in adjusted EBITDA. The 10.2% adjusted EBITDA in the fourth quarter would have been 13.3% on a consolidated basis if you remove the impact of FX and would have been $14.1 million or $15.2 million if you remove the FX impact and the higher freight cost at Outdoor and Adventure. EBITDA in Outdoor was 11.7% for the quarter; it was 23% at the Precision Sports segment in the quarter due to the nine-millimeter inventory liquidation I just discussed. EBITDA was a loss of $1 million at Adventure in the quarter as we continue to deal with unfavorable FX and freight. We do expect the challenges associated with freight to be behind us in the first half of 2023 as we monetize the inventory that carries these higher freight costs. Now let me shift over to liquidity and asset efficiency. Inventory levels declined by 5% from where we ended the September quarter to $147.1 million, which was near our end-of-the-year goal. At December 31, 2022, cash and cash equivalents were $12.1 million compared to $19.5 million at December 31, 2021. Free cash flow, defined as net cash provided by operating activities less capital expenditures for the fourth quarter of 2022, was $30.3 million compared to $5 million in the same year-ago quarter. This reflects our conscious efforts to improve working capital during the fourth quarter. Specifically, we were able to reduce receivables by $10 million in the quarter and inventory by $8 million on a sequential basis. We are committed to generating cash in 2023 through our continued focus on optimizing working capital across all three segments. During the fourth quarter, we paid down $28 million in debt and ended the year with total debt of $139 million. This put us in a net debt position of $127 million with net debt leverage of 2 times on a trailing twelve-month adjusted EBITDA basis, which is at the low end of our 2 times to 3 times target. We expect to stay at that low end of that range in the near future. Under our $300 million revolving credit facility, we have approximately $18 million outstanding and further borrowing capacity of approximately $98 million as of December 31, 2022, while maintaining compliance with our required covenants under our credit agreement. From a tax perspective, we were able to utilize $41 million in NOLs in 2022 and expect to use the remaining $18 million in 2023. That's right. We only have $18 million left of the NOLs. Over the last 10 years, we have worked to strategically balance the utilization of our NOLs to ensure the optimum path for growth while mitigating tax burdens. During this time period, we've been able to realize $220 million in tax benefits from our NOLs. It's quite a testament to the organization's accomplishments in making accretive acquisitions while driving significant cash tax savings for our shareholders. Now I'm going to introduce our 2023 outlook. We 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 expected to range between $35 million and $40 million for the full year 2023. Implicit in these expectations is caution and conservatism considering the challenging macro environment, the higher interest rates, and the uncertain impact these challenges might have on the consumer as we work through the rest of 2023. As a countermeasure to these unknowns, we are focused on further optimizing our SG&A and driving gross margin-enhancing initiatives in order to accelerate the underlying profitability profiles of each of our segments. We also expect to realize further working capital improvements, generating the outlined free cash flow target I just provided. That will result in further deleveraging our business with this incremental free cash flow we're expecting to generate in 2023. This strategy will not only ensure further value creation in 2023 but will also reestablish the baseline businesses and position us for growth both organically and via M&A in 2024. Additionally, this outlook assumes foreign currency exchange rates will stay where they are, specifically the euro at EUR1.05 and the Australian dollar at AUD0.67 to the $1. Based on these rates, we estimate that FX is a $2 million headwind for 2023 compared to 2022 on a constant currency basis. For the first quarter of 2023, we expect consolidated sales to be approximately $95 million, reflecting continued headwinds surrounding unwinding of inventory at our key North American wholesale partners. I'll pause here and hand the call back to the operator as we're ready for Q&A.

Thank you. Our first question will come from Alex Perry with Bank of America. Please proceed.

Hi. Thank you for taking my questions. Just first, any color about how we should think about the growth rates between segments for 2023? Should Precision Sports continue to outgrow? Like I think in the past, you have provided a little bit more detail on sort of segment growth. So any help there would be very appreciated. Thanks.

Alex, I'll start and John can add any comments. But we specifically have not given segment guidance this year. We're really proud of the diversification and strength of the entire portfolio across the three very distinctive segments. Each of these segments is really positioned to grow in 2023. We've done the work to grow these segments and make the investments necessary to grow them. But each are in their different phases of growth. And as you may recall, we last year, we guided Precision. It was probably an underwhelming guide and it ended up outperforming. So we're looking to 2023 with the challenging macro environment and the impact to the consumer and the higher interest rates. We want to leave ourselves some optionality of where we pivot to, because like I said, all three businesses are making efforts to grow. And they're positioned to grow, but we're going to keep some optionality available to as we move through the year and lean into where we see the best opportunities to grow in light of this difficult environment. That's why we've elected not to provide guidance at the consolidated level versus trying to predict how each of these businesses will perform in the year.

Great. That's really helpful. And then just want to clarify. It looks like the $95 million total sales guidance is down a bit from the $113 million you did last year. Any help in terms of how we should think about the margin there versus maybe the 17.4% you did in 1Q 2022? And then my other question was the theme last quarter was retailers were being really cautious with their open-to-buy as they continue to work through inventory levels in competing categories, not necessarily your category. Is this still the case? And is this headwind sort of carrying with you into 2023?

Sure, Alex. It's a great question. Yes. The main driver of that $95 million in the first quarter is really because, as John alluded to, the difficulties with our North American retail partners, specifically in our Outdoor business. As we said in our prepared remarks, their open-to-buys are limited. We're seeing demand for our product, but our big customers in North America are really taming back and right-sizing their inventory levels. And as long as that's going on, despite the tremendous job at specialty or the growth in our international distributors or in Europe or in our new initiatives, when North American wholesale is struggling, that's really the headwind we're facing in Q1. But we think that's transitory in nature. Once they rightsize their inventories, we see that picking up. But we're sitting here almost two months into the first quarter. So we know what's going on here in the first couple of months. So that's really the background to that. From an earnings perspective, I think gross margins and EBITDA margins are both trending favorable compared to what we just posted here in the fourth quarter because of all the initiatives we talked about controlling SG&A, but more importantly, capturing value leakage at the gross margin line, the stabilization of freight, and the more favorable FX than we had prior in the back half of 2022. So we're not giving specifics, but I think we highlighted significant improvement in gross margins at Outdoor and we think a lot of that sticks moving forward.

Great. And sorry, just to clarify, you said EBITDA margins and gross margins will be favorable compared to Q4 for the first quarter, right?

Yes.

I guess just first quickly, for Mike. Just on the EBITDA margin guidance for next year and for the year, how much of that is gross margin expansion versus SG&A rate change? Just can you give us, just clarify that for us first?

No, we haven't been that specific, but it's over 100 basis points of margin improvement compared to where we finished this year on a reported basis. So like I've just mentioned to Alex, those initiatives that we've been driving under Aaron Kuehne's leadership are sticky. So I'd say over 100 basis points.

Got it. Okay. And then, I guess, John, for you. As the leadership bench continues to expand, maybe I know Neil Fiske from his days at Bath & Body Works. He did a good job of kind of elevating the perception of the brand there. He wrote a book Trading Up that I've read. Maybe give us some perspective of the conversations you've had with Neil about what he's focused on or going to be focused on in his first year ahead at Black Diamond. Any kind of broad strokes do you think he's going to be attacking for that particular brand in the next 12 months?

Yes. Fantastic question. Thank you, Randy. Good to hear from you again. As we look to 2023, two aspects that Neil will be focusing on. First and foremost, is continuing to accelerate the Innovate and Accelerate strategy across the brand today, continuing to innovate in the apparel footwear segment as well as the expansion of distribution within headlamps, trekking poles, gloves, packs, you name it. As we look beyond that, the real goal is how do we continue to think about BD, its place in the market space, brand awareness, new category expansion, new retail, more focused on consumer direct and our community-centric model and the long-term competitive growth of Black Diamond beyond what we've achieved up to 2023.

Got it. I guess my last question is, I think on the guidance, you guys talked about the free cash flow generation expectation of $35 million to $40 million. How do you think about the utilization of that free cash? Are you just going to kind of support it in the bank, take a pause on acquisitions for 2023, given the market uncertainty? Change to look at debt paydown or anything like that? Just curious on what you're thinking about in terms of utilization of free cash flow going forward?

Sure, Randy. I'll take that question. We've been clear about our focus on investing in organic growth and pursuing strategic M&A opportunities to identify the next big brand. In the first half of the year, our priority has been on generating cash and reducing debt, while this year we are concentrating on optimizing and enhancing our working capital. Therefore, our approach is primarily internal, aimed at using cash flow for debt reduction. Currently, we have $18 million outstanding on our revolver and about $10 million in required payments on our term loan, totaling $28 million. We expect to start building cash at some point during the year. As I mentioned earlier, we anticipate returning to a more active stance on M&A in the latter half of this year or in 2024.

Thanks. Hey, guys. Good afternoon. I want to talk about Outdoor and the retailer inventory reductions you guys have alluded to throughout the call. Are there any categories in particular that they're heavy on? Or is it pretty much across the board?

Good question, Joe. Good to hear from you. I think that coming out of spring and summer 2022, there was an expectation that some of these new growth categories that have seen explosion during COVID, which could be around family camping, could have been around bike and bike carriers, racks, things like that, ended up heavy as we went into Q3 and Q4, and we saw a shift in a slowdown. I think it just manifested itself in too much inventory in the total system, which just limited open-to-buys and made it difficult to chase those categories that we're continuing to see growth in. For us, those categories were things like tracking poles, headlamps, gloves, and packs, with apparel in the mix. I think apparel, as a whole, was saturated in the market, specifically in the casual side of the business.

Okay. So it was pretty broad-based. On Precision Sport, you mentioned that the nine-millimeter inventory liquidation. Is that done? Or is that continuing here in Q1?

No, that's done. And that was that. We took advantage of the popularity of nine-millimeter and two to three in 2021, and thought it would carry over some in 2022. In 2022, the demand was really around the centerfire hunt and precision, and that's where we chased through all of 2023 and are still chasing into 2023.

Got it. Got it. And one last one for me. Vista, as you know, is splitting up into two companies, sporting and outdoor products. Do you anticipate any change in your relationship with the sporting side?

No. We believe we have strong relationships with Federal and the team. We are partners, providing bullets from both Sierra and Barnes to Federal for commercial loading and their OEM contracts, and they generously assist us with cases and primers.

Hi, thanks for the questions. Maybe a follow-up on Joe's first question around inventory by category. John, you've got a pretty unique portfolio, and you have warm and cold seasonal offerings. Are you seeing any difference in the way retailers are managing or behaving in kind of an end category and active season category like ski and something that will be in demand later in the year?

Yes. What we find is that at the specialty level, where they chase on a weekly basis, they're able to chase whatever the latest, greatest weather trend is. When you have larger accounts who have a normal seasonal cadence, it's a little more difficult to chase open-to-buys in those categories because they already have prescribed bookings going out. We pull off of those with trims, but they anticipate certain seasonal and activity trends shifting in their business. We've seen that impacted in this space, such as in the Rockies, where winter comes later but is much bigger, but warm and dry in New England, which makes it difficult for them to chase.

Got it. That's helpful. And then John, you cut out a few positives around demand, whether it be passive currency, 15% in Europe, or the D2C outdoor growth of 19%. Is that more reflective of kind of the true underlying demand or POS you're seeing out there? Just help us kind of understand that delta given some of the dislocation that's happening from the inventory management.

Yes, very astute on that. Obviously, when we look at the year as a whole, there are areas where we were formed that we couldn't accelerate the business as we had previously hoped, some of it not in our control, which we talk about, whether it's air shipping supply chain or it's FX headwinds or whatever. As you've caught on, the true demand for the brand typically shows up in key growth categories or key growth geographies or in key growth channels, which we're seeing in Europe and IGB or it shows up in our key growth segments, which could be direct to consumer, specialty. And when you see the mix, the mix gives you a sense of, as you're saying, what is the demand for the brand today versus the marketplace. That's why, albeit, we're guiding conservatively because we'll have to in 2023 chase certain channels, geographies, product lines, right, even certain brands or segments. We will do so, and that is our commitment to it. It won't be an easy layup that every category, every brand, every channel, every geography sees the same upside, right? And that’s going to be the challenge for every brand in 2023.

Hi, guys. Good afternoon. So just wanted to spin back to the guidance one more time, just to make sure I understand. So I mean the simple take for me, you're guiding revenue lower by about $30 million, just a tad less than that. EBITDA almost shrinks by about three And I think that implies that you expect some margin improvement, but there's going to be some puts and takes underneath the surface from a segment level, and it feels a little bit like maybe we're relying on a bit more contribution from the Precision Sports segment given that higher margin. And so that mix shift should be helpful. Am I thinking about that in the right way? And then are there other areas? You did talk about 100 bps of gross margin improvement. But where do we see, I guess, opportunity to cut on the SG&A front? Because it sounds like the guide also implies a bit of SG&A cut as well.

We're not talking about cutting a lot of SG&A. I mean, there are a few opportunities perhaps maybe in the Adventure segment. But year-over-year, the SG&A from 2021 to 2022 was actually down at the Outdoor and Precision Sports business. So SG&A is pretty tight. We spent the back half of last year focused on expense control and generating cash and rightsizing inventory. We're not going to get into the details of where we see that from a segment perspective or there are more or fewer opportunities for this segment or that segment. We're going to lean in. We've made investments. All three of them, like I said, have different headwinds, different tailwinds. We're going to lean into that segment where we can achieve the growth. That will be our approach.

We'll say, Matt... Positivity from increases is going to be as much a headwind as it was in 2022. We don't anticipate having to experience as much airfreight. So all those things are positive to the overall EBITDA.

I appreciate your point, John. The airfreight foreign exchange effects are behind us for the second half of 2023, and we've observed normalizing container and shipping costs. I mentioned earlier that we were anticipating approximately a $2 million headwind compared to last year, but overall, foreign exchange had a $9 million headwind compared to the previous year.

I wanted to dig in a little bit more on Precision here for a minute. We've seen a slowdown in nine-millimeter in .223, 556 as well. Are you starting to see some of the beginnings of maybe some slowdown or normalization in the remainder of centerfire rifle, especially as we start to see channel inventory fill up a little better?

Are you seeing that or are you asking?

Yes, asking, are you starting to see any signs of maybe some slowdown in demand, maybe if you speak to what you do in backlog of orders?

Yes. We came out of SHOT Show. The two trends we saw and continue to hear from both the OEM partners, which is a significant portion of our business, as you're aware, which is loading for military or law enforcement under contract or even the commercial side, is continued demand for what we call the big 8 cartridges that start with a 270 and go all the way to 308s and everything in between. And then for us, the big demand around things like 338 from a global international conflict perspective. And so as we said in the prepared remarks, we're going to over-index into those products, channels, regions where the demand is still accelerating and we don't see a slowdown in centerfire rifle. But again, it's caveated by how many shell cases we can acquire as fast as we need them. Our order book is back up to the demand levels we saw coming out of Q3 and Q4. So we're very positive about that. And again, the Super Fan nature of Sierra and Barnes is that we have a unique position in the market. It's super difficult to replace those two brands and what they offer in product.

Okay. And then can you talk about any commodity pressures or easing within Precision? And also, are you starting to see any better availability in brass casings or primers or any other components for loaded ammo?

That message is the same. The sourcing of components, specifically the cases, Mark, is critical. That is the wildcard. That story is no different than it's been throughout 2022. The more cases we can source, the more conversion of bullets we can convert over to ammo. That’s the wildcard. The demand for the centerfire rifle is seeing strong, as John just alluded to, because of the big eight calibers that we're focusing on. And we're not focusing on pistol and revolver with nine millimeter. With regards to commodities, copper is about $4 a ton on the LME right now, and that's right around where we'd expect it to be from a standard standpoint. So we don't see a big headwind or tailwind either way right now from a commodity perspective.

Okay. And the last one, I just wanted to dig into just apparel and footwear. And sorry that I think I missed it. Can you give maybe the growth numbers again that you saw for the full year in those segments or anything else that you can kind of quantify for sales and the strength that we're seeing there?

Yes. We had 31% growth for apparel for the year, 15% in the quarter. We continue to chase demand and growth in footwear, and we don't see either of those categories slowing down in 2023. Obviously, they're not the predominance of our business. But I think even more exciting is the level of apparel growth we saw even through our D2C. D2C was up, and apparel was up even more than our D2C growth. We continue to see strong interest and strong demand for these new categories.

I think when you discussed your expectations for inventory at the end of the year, you mentioned something around $143 million. You came very close to that, but it was slightly higher. I'm trying to connect that with the Precision Sport inventory reduction you mentioned, which affected gross margin. Was there another inventory reduction you expected to achieve that didn’t happen in the fourth quarter? Why wasn't the inventory performance even lower at the year’s end?

Linda, good question. I think it's a good observation. Inventory at Outdoor is slightly higher than we anticipated, primarily because our North American retail and wholesale partners aren't purchasing as much. We currently have more inventory than we intended, but we are addressing that. It's a priority for us, as I noted in the prepared remarks.

And through Adventure as well, Linda. When you look at the overall businesses, we didn't expect to see the headwinds in either Outdoor or Adventure that we experienced.

They're a little closer. John is correct, but they are a little closer to the target. The miss, as you're pointing out, is a little stronger at Outdoor.

So, I mean, I know that this is not the same channel as what you're supplying into. But I mean, when you look at like Walmart, for example, I think their inventory in the most recent quarter was actually flat year-over-year. Like they've declared the inventory reductions kind of completed. So is there just something different going on among your retail customers that's so different from, say, a Walmart? Like can you just talk about it? Is your inventory up still year-over-year but just up less at retail? Or can you give us more color on that?

Smart. I would say that our retailers aren't exactly similar to Walmart, but I think they would all tell you that over the last three to six months they have successfully moved down their inventory towards their targets and their new open-to-buys. And that's why, as we said in looking into the future, we can't tell you by exactly every channel, every geography, but we expect the businesses to see growth now that the inventories have come down. That impacted Q4 so much was big retailers trying to manage every ounce of inventory at the cost of open-to-buy.

So you see that growth in the second quarter or not until the third quarter of 2023?

I think we expect it to start accelerating in the second quarter, but we do think the second half of the year will be stronger.

That's correct.

Thanks. Hi, John. A quick one on the cash flow. Mike, what's the gap between the $60 million EBITDA and the $30 million to $40 million cash flow guide? I guess I'm surprised you don't see working capital opportunity in 2023.

We do see some working capital next year, though we're going to be a higher cash taxpayer. We only have $18 million of NOL left. We utilized over $40 million this year. So that's the main driver.

Okay. And then next question, I guess, for you, John. With Neil coming on board, you spoke to where he's going to focus his efforts with the Black Diamond brand. Maybe you could talk about the incremental bandwidth that provides to you and Aaron. What are the areas that are going to attract your attention and where do you see the opportunity for greatest return on your incremental bandwidth?

Yes. I think as we look to 2023 and beyond, this being a year that we're not as focused on M&A, which obviously was an area of our bandwidth in the past, is really about accelerating the business, new NPI Innovate and Accelerate side along with the operational plans and strategic planning of accelerating the other categories, which we still believe have strong growth.

Hi. Sorry about the third question here, but I just wanted to ask. So the guidance implies a sort of reacceleration in revenue from down 16% in Q1 to down 6% for the year. I know you have sort of the open-to-buy impacting BD in the first quarter. Are retailers' 2H orders up year-over-year for Black Diamond based on your read on the fall/winter 2023 order book, which is causing the implied acceleration in revenue as you move through the year?

Yes. Great question, Alex. So yes, we're able to look forward and see a strong order book for both spring 2023 as well as fall 2023. Obviously, fall is a higher percentage of our business. It's more like 55 to 45 as a mix. And then as we know the acceleration of D2C and even our flagship retail does 75% of this business in the back half of the year and 50% in Q4. We see that often in our direct-to-consumer businesses as well.

Got you. So the fall/winter 2023 order book should be up against this year?

Correct. Yes, correct. In line with this anticipation that the open-to-buy or inventory overhang that we have seen at our key accounts will not be the case in Q3 and Q4 of this year.

So the Q1 is just 2022 product then not chasing sort of winter 2022 product. It's not necessarily indicative of core momentum or demand for your product. It's more of a factor of that which you see that easy as you move through the year?

Correct. We believe that we've had a long winter, as you all know. I mean, we get more snow again this week. But as the season changes over from what was the season in Q3 and Q4 and into spring and summer, you're probably now really looking at April as opposed to February or March. We will see that shift of activity accelerate key categories.

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