Clarus Corp Q1 FY2023 Earnings Call

Thanks. Before we begin, I would like to remind everyone that during today’s call, we will be making several forward-looking statements. And we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to potential risks and uncertainties that could cause the actual results of operations or financial condition of Clarus Corp. to differ materially from those expressed or implied by the forward-looking statements. More information on potential factors that could affect the Company’s operating and financial results is included from time-to-time in the Company’s public reports filed with the Securities and Exchange Commission. I’d like to remind everyone this call will be available for replay through May 1st, 2024 starting at 7:00 pm Eastern time tonight. A webcast replay will also be available via the link provided in today’s press release as well as on the Company’s website at claruscorp.com. Now, I’d like to turn the call over to Clarus’ Executive Chairman, Warren Kanders. Warren?

Thank you, Cody. Good afternoon and thank you for joining Clarus’ earnings call to review our results for the first quarter of 2023. I am joined today by Aaron Kuehne, our Chief Operating Officer, and Mike Yates, our Chief Financial Officer. I will start by addressing the overall business and corporate strategy. Aaron will provide an update on each of our business segments, and Mike will walk through our financial performance for the quarter. Our consolidated performance for the quarter highlights the resilience of our portfolio, given the uncertain market conditions and headwinds that carried over from 2022. Each of our segments experienced sequential top line improvement throughout the first quarter. Outdoor generated modest growth over the prior year, highlighted by increases in our direct-to-consumer and international channels, which are mostly offset by fewer shipments to our North American retail partners due to elevated inventory levels and reduced open-to-buy dollars. Precision Sports started slowly in January as market participants took stock of inventory levels and customer demand across SKUs. In aggregate, sales in February and March were off 3% over the same period in 2022. We have quickly rebuilt our order book, indicating that we have open demand plus year-to-date shipments that cover more than 70% of our full-year sales target. We are seeing a strong focus on specialty components and calibers as our core reloading customers restock while we remain constrained by limited availability of rifle shell casings. The first quarter presented a difficult comparison for Adventure given the record performance of the U.S. business in Q1 of 2022. The North American market continues to be hampered by promotional activity due to excess inventory at wholesale distributors down to retailers. While the North American business is off nearly 70% over the same period last year, we are seeing declines level off and turn to sequential growth. After a slow January in Adventure’s home markets of Australia and New Zealand, we saw sales in February and March that we believe represent stabilization. More importantly, the operational improvements we implemented are taking hold as we generated gross margins in excess of 40% for the quarter versus 32% and 28% in Q4 and Q3 of last year, respectively. At the corporate level, I’m pleased with the progress that we have made to upgrade our segment leadership. As Clarus has grown from a single brand, Black Diamond, to three distinct segments, we identified the need to shift to an operating model focused on individual entity growth, accountability, and performance. The changes that began in late 2022 are now manifesting themselves throughout our organization. We implemented cost cuts in Q1 and Q2, which will save us $1 million at the corporate level on an annualized basis over 2022. As a precursor to our cost-saving initiatives, we recognized an inflection point in our organizational evolution, implementing a strategic plan to decentralize and focus on individual segment performance. As we look forward, we are establishing baselines in each business, upgrading our talent pool, and driving towards the critical few metrics that we believe matter to operations and shareholder value: cash flow generation, debt pay-down, and margin enhancement at both the gross profit and EBITDA lines. With respect to cash flow generation, we’ve been working through inventory rationalization, which we expect to normalize by year-end. Our budgeting process for 2023 identified the inventory overhang affecting customer channels across all segments, and we have moderated our inbound purchases accordingly. Furthermore, as we focus our efforts at the segment level, we hired key leaders in Outdoor and Adventure for each in the initial phases of their long-term planning. We’re looking forward to sharing their views with you at the appropriate time. Neil Fiske joined as the new President of Black Diamond during Q1. An avid outdoorsman and experienced mountaineer, Neil brings deep expertise in building brands, driving innovation, and improving operational performance. We’re enthusiastic about Neil’s energy and vision for Black Diamond and its place as an iconic brand in the broader Outdoor ecosystem. Likewise, in March, we hired Matt Hayward to run our Australian Adventure business. Matt has over 20 years of experience in brand architecture, product strategy, and global marketing operations. He was previously the Chief Marketing and New Business Development Officer at R.M. Williams, an iconic Australian brand. Prior to that, he was with L Catterton in its APAC operations at the value add team, along with marketing roles at Deckers, Quicksilver, and DC Shoes. With that, thank you for being with us today. And I’ll turn the call over to Aaron.

Thanks, Warren. Coming off an unprecedented three years of market volatility, shifting consumer spending habits, and supply chain challenges, we are principally focused on baselining each business segment, solidifying our long-term growth objectives, and enhancing the brand teams to ensure we are positioned for success and can sustainably execute our plans. The foundation of our brands has always started with our dedicated people and our hallmark approach to product innovation. We’re excited to build sustainable growth through the implementation of our long-term strategic initiatives. Before getting into the individual segments, I would like to reiterate some of Warren’s commentary around the baselining of our businesses as there are overarching themes that apply to our consolidated business. First, we are laser-focused on the allocation of our capital behind the rate at which we introduce new product innovations focused on specific categories of growth. Two, we are expanding our geographical footprint in key markets of the U.S., Canada, Europe, Australia, Japan, and Korea. Third, we’re increasing the depth of our presence in these geographies through increased penetration into key channels and segments, specifically, our interactions with the end consumer as we look to expand each of our brands. Finally, we continue to activate continuous improvement initiatives around increased capacities, efficiencies, and the elimination of non-value add activities. Despite the challenging marketplace, we believe we are seeing stabilization in several end markets, and the initiatives I just highlighted will establish the footing for growth and increased profitability as we come out of 2023. Now, turning to specific commentary about each of our segments. First let me address Outdoor. We believe the long-term trends continue to favor the outdoor industry, even as the market settles to a new normal post pandemic. Q1 results reflect the strong international demand for the Black Diamond brand as Europe grew 26% year-over-year and our international distributors grew 35%, exceeding our expectations for the period. Demand trends are strong for the brand, and we believe this highlights the strength of our relationship with our vast network of European specialty stores and the desire for the consumer to remain active in the outdoors. In North America, we are seeing a soft wholesale market continue to settle into a new normal post pandemic as retailers work off the backlog of inventory and consumer spending trends towards the middle of the range between pre-pandemic levels and the sharp demand spike in outdoor categories during the COVID period. For much of the past two years, supply and demand have been out of balance, and we expect that it will take another six months before the market approaches a closer state of equilibrium. Market adjustments notwithstanding, the Black Diamond brand is strong; we see it in our direct-to-consumer business where e-commerce grew 28% during the quarter, and comparable store sales lifted 13%. We see it in the growth of our apparel and lifestyle categories, which grew 50% year-over-year. We see it in global expansion. And we see it in the talent we are attracting to the business as we continue to strengthen our team at all levels in the organization and across key functions. Looking ahead for the year, our top priority remains bringing supply and demand into better alignment across our regions and channels while reducing our Outdoor inventory levels by 15% by the end of this year compared to what the end of 2022. Also at the top of our priority list is rebuilding our sales and go-to-market approach in North America under the leadership of a new VP of Sales for the region. Finally, we must balance our focus on short-term operational performance with strategic investments in areas that will drive long-term growth and market share gains, notably in product innovation, marketing, digital, and international. In our Precision segment, difficulty sourcing shell casings and heavy inventories at both retailers and distributors, in particular with pistol and revolver calibers and the more popular rifle calibers such as 223, masked an otherwise strong order book. Somewhat offsetting this headwind was strength in our OEM vertical due to the programs we have developed with key partners over the years, driven by best-in-class product and the proven ability to be a reliable partner, as well as strong demand in our reloading businesses. Despite the headwinds in retail, our Barnes brand continues to be in high demand when it comes to centerfire rifle cartridges as our all copper solutions continue to demonstrate world-class terminal ballistics required by the super fan hunter. Demand for niche newer, less mainstream cartridges is also still very high, limited only by our availability of the brass cases required to load and deliver this product. The response we are receiving from dealers to new product launches like our Pioneer line of ammo, which is focused on lever guns and revolvers, is positive, and combined with the relationships that we have with our key distribution partners, we believe we will continue to steal market share in 2023. Moving forward, we plan to focus on several initiatives in our Precision segment. First, we are working to shore up component sourcing challenges associated with shell cases. Second, we are working to refresh the Sierra ammunition lines later this year. Third, we will continue to create more dealer and consumer touchpoints for both brands. And finally, we will focus on building and fostering key relationships with Tier 1 retailers, wholesalers, and key accounts. Given the strength of our brands and the diversity of the markets we serve, we feel strongly that 2023 will present various opportunities to build further momentum within our brands. And finally, our Adventure segment. Headwinds around new vehicle supply, lagging demand, and imbalanced inventory levels at our larger key distributors and retail partners persisted in Q1, impacting sales velocity. Irrespective of these headwinds, we remain excited by the global addressable market for overlanding, which we define as the intersection of the automotive enthusiast with the outdoor superfan. This is supported by the most recent issue of SEMA Future Trends, where the light trucks segment, which includes pickups, vans, SUVs, and CUVs, is forecasted to account for close to 80% of all new vehicle sales by 2027, with pickups alone making up nearly 50% of all new vehicles sold. Our commitment to great teams, along with permanent changes to the cost structure, has set the table for an expected sustainable business in the long term. With Matt’s recent hiring, we have now completed the transition from a founder-led to a management-led organization. And we are committed to a renewed emphasis on being customer and consumer-centric and bringing to life a new approach to the unique ecosystem that our Adventure segment can bring to one’s lifestyle. The business has strong fundamentals in place, and we expect to invest in a number of initiatives to support our business partners through 2023 and beyond and to drive best-in-class customer service while managing a more challenging macroeconomic environment. We have already launched a number of unique product solutions, and we’ll be ramping this up throughout 2023. The opportunities outside of Rhino-Rack’s home market are coming to fruition as we step into new markets this year, like Japan, Saudi Arabia, and China. Unfortunately, we still do expect the supply and demand imbalance with new vehicles to persist in 2023, particularly in Australia, but we have important initiatives we believe will accelerate our growth. Let me lay them out here. First, we’ll focus on transforming our product development and innovation processes to drive significant improvement in speed to market and product differentiation. We have a renewed focus on customer and consumer insights to drive an overhauled product hierarchy. A key part of our go-to-market evolution will be how we create and launch products as part of the larger ecosystem of lifestyle demands. Next is customer service. With a renewed focus on our key account partnerships and key account programs, the goal is to be the easiest partner to work with within the industry. Our people will be empowered to take action to drive performance, with an understanding that there are different business models for different customers. Next is digital transformation. We are planning to maximize our operational infrastructure to develop our e-commerce platforms to support both B2B and B2C opportunities. We are aiming to build our distribution strategy around the consumer in a way that will continuously strengthen our premium market positioning and drive pricing power. And finally, we will be data-led in our decisions. We are developing a demand and data-driven operating model that plans, buys, and sells inventory closer to demand. Notwithstanding the difficult macro climate and inventory headwinds, we firmly believe our brands are well positioned to achieve their long-term growth targets: climbing, backcountry skiing, trail running, hiking, competitive shooting, overlanding, and adventuring are megatrends in the outdoor world. And we do not anticipate this changing anytime soon. Now I will pass the call to Mike to discuss our Q1 financial results in more detail. Mike?

Thank you, Aaron, and good afternoon, everyone. Jumping right into our performance in the first quarter. Sales were $97.4 million compared to $113.3 million in the prior year quarter, down 14%. On a constant currency basis, total sales were down 12%. First quarter sales in our Outdoor segment were up 2% to $52.8 million versus $51.5 million in the first quarter of 2022. If you adjust for foreign currency exchange headwinds, Outdoor sales would have been up 5%. As Aaron mentioned, while we’ve done a good job closing the gap on outstanding Black Diamond orders, we are still constrained by lower open-to-buys from our key North American retail partners due in part to their inventory destocking activities. Partially offsetting this decline was continued strong execution in the first quarter in the key markets, where we pivoted in the second half of 2022, the direct-to-consumer market, the European markets, and our IGD markets. Precision Sports sales were $27.1 million in the first quarter compared to $33.1 million in the same quarter last year. We continue to experience challenges sourcing brass casings for ammunition that inhibited our ability to deliver against our order book. Imbalanced inventory levels within the more popular pistol and revolver, as well as rifle cartridges at retail also impacted sales velocity. Irrespective of these headwinds, we still experienced growth in Sierra’s domestic and international green box categories, due to our specific focus to produce bullets to fulfill orders that have been on backorder for over 12 months. Moving to Barnes, we experienced strong demand and sales conversion in our international domestic OEM product due to continued strong worldwide demand for our all copper bullet. The Adventure segment contributed sales of $17.5 million versus $28.6 million in the prior year. Sales were down 39% on a reported basis and 36% after considering the impact of foreign exchange. Sales were down $11.1 million on a quarter-over-quarter basis. The most significant driver of this decrease was from the Rhino-Rack North American market where sales were down $5.7 million. The decline reflects lower consumer demand given the challenging economic environment, higher inventories at the distributor level, and constraints on new vehicle deliveries. As Aaron discussed, despite these results, our long-term positive view of the Rhino-Rack brand in the U.S. remains intact. Moving on to gross margins. Consolidated gross margin in the first quarter declined to 37.0% compared to 39.1% in the year-ago period. Margins did benefit from lower freight costs this quarter by 290 basis points, but this was offset by unfavorable FX of 150 basis points, higher reserves for inventory of 130 basis points, and unfavorable product and channel sales mix of 220 basis points. Selling, general, and administrative expenses in the first quarter decreased 4% to $32.8 million compared to $34.2 million in the same quarter a year ago. The decline was driven by disciplined expense management at the Adventure and Precision Sports segments, as well as lower non-cash stock-based compensation expense for performance awards at corporate. These savings were partially offset by higher investments at Outdoor for employee costs and investments in our direct-to-consumer channel. Net income in the first quarter was $1.6 million or $0.04 per diluted share, compared to net income of $5.3 million or $0.13 per diluted share in the prior year quarter. Adjusted EBITDA in the first quarter was $9.6 million or an adjusted EBITDA margin of 9.9%, compared to $19.7 million or an adjusted EBITDA margin of 17.4% in the same year-ago quarter. The biggest drivers of this decline was a $2.4 million headwind due to the strength in the U.S. dollar and lower volumes at our Precision Sports and Adventure segments. Now I’ll shift to our liquidity and asset efficiency. At March 31, 2023, cash and cash equivalents were $10.3 million compared to $12.1 million at December 31, 2022. Free cash flow, defined as net cash provided by operating activities less capital expenditures for the first quarter of 2023, was $1.7 million, compared to a negative cash flow of $12.7 million of free cash flow in the same quarter a year ago. This is reflective of our conscious effort to reduce inventory, generate free cash flow, and pay down debt. During the quarter, we reduced inventory by $1.3 million. We also paid down $2.2 million in debt and ended the quarter with total debt of $137 million. This put us in a net debt position of $127 million with a net debt leverage of 2.4 times on a trailing 12-month adjusted EBITDA basis, which is at the low end of our range of 2 to 3 times. We expect to stay within this range in the near future. Under our $300 million revolving credit facility, we have approximately $18 million outstanding and further borrowing capacity of approximately $61 million at March 31, 2023, while maintaining compliance with required covenants under our credit agreement. From a tax perspective, we have over $17 million of NOLs remaining, and we expect these NOLs to offset the majority of federal cash taxes due in 2023. Now, moving to the 2023 outlook. We continue to expect sales of approximately $420 million and adjusted EBITDA of approximately $60 million or an adjusted EBITDA margin of 14.3%. We expect full year capital expenditures to range between $7 million and $8 million, and free cash flow is still expected to range between $30 million and $40 million for the full year 2023. For the second quarter of 2023, we expect consolidated sales to be approximately $92 million, reflecting continued headwinds surrounding unwinding of inventory at our key North American partners, both Outdoor and Rhino-Rack USA. I’ll pause here and turn the call back to the operator, and we’re ready for a Q&A.

My first question would be for Warren. Warren, you outlined some clear points regarding your financial priorities for the next few years, focusing on margins, free cash flow, and debt reduction. It would be beneficial to discuss your vision for the significant changes or improvements you anticipate in strategy or strategic direction, especially with new leaders like Neil and Matt in place over the next few years. Your insights on this would be very helpful.

Yes, Randy, thank you for your question. Currently, we have two new leaders in the Black Diamond and Australian businesses. Starting with Neil, he has been in his role for three months now, and we have already made several hires to address gaps in our team. One significant gap was in North American sales, but I'm pleased to report that we now have a strong leader in that area along with additional talent identified. We've made good progress. Neil's background includes being a partner at BCG, and we've reviewed the preliminary version of his long-range plan. We expect to finalize that in the next 45 days, after which we will focus on execution. I'm excited about his approach to the business, which emphasizes growth in areas where we can expand rapidly. We aim to look beyond immediate profitability and have a multi-year perspective on business development. Among the strongest categories we're targeting are apparel, trekking poles, lighting, and packs, which tend to have higher margins than our current product mix. We're very enthusiastic about this. On the Australian side, Matt has been with us for about two months and is developing his long-range plan. We hope to have discussions with him soon and introduce our management team to you later this year with presentations on our strategic outlook for these businesses and the opportunities we see in the short and long term. Regarding the Sierra and Barnes side, we are addressing ongoing issues, particularly with shell casings, and are focused on efficiencies to reduce the number of changeovers that affect our margins. However, we are seeing promising visibility for both businesses today.

Super helpful. And then I guess, lastly, Mike, you reiterated the annual guidance, super helpful there. I just want to understand, are there any nuances to be thinking about whether we should be considering either around gross margin or SG&A, as it relates to anything to be nuanced throughout the second, third, or fourth quarters, that should be considered in thinking about our modeling? Thanks.

Gross margin is expected to remain within the historical range of 37% to 39%. We have guided for $92 million in the second quarter, suggesting a total of around $230 million for the second half of the year, compared to $190 million in the first half. Achieving this will rely heavily on improvements in North American wholesale. Additionally, as mentioned, we are working hard to secure shell cases, which, if obtained in the second half, will positively impact our results. These factors, along with foreign exchange, will also contribute to better performance in the latter half. It's important to factor in these elements when comparing our guidance for the first half to expectations for the second half.

I guess, just first on the quarter. I think sales came in above, but maybe EBITDA margin came in below sort of what you were expecting. I guess, just first, where was the deviation versus when you guided at the end of February, especially on sort of the EBITDA margin? Thanks.

Sure, Alex. It’s Mike. I’ll address that. Yes, we exceeded expectations on the top line by a couple of million compared to consensus and what we communicated just 60 days ago, which is great. On the bottom line, freight provided a significant boost of 290 basis points. The difference lies at the gross margin level, with the top line exceeding expectations and SG&A lower than last year, all contributing to the gross margin improvement. While freight was a 290 basis point benefit, we faced a 200 basis point reduction due to a 150 basis point headwind from foreign exchange. Additionally, we established 130 basis points in reserves for inventory and encountered a 220 basis point challenge from product mix and channels. Clearly, reduced sales in the North American market impact our profitability. Our profitability at BD suffers when we don't achieve volume in the North American segment. In contrast, our European operations, including our IGD and D2C businesses, continue to perform exceptionally well. This is where we noted the gross profit challenges that affected EBITDA.

That's really helpful. My second question is a follow-up to an earlier inquiry. Typically, the first quarter is your highest or second-highest EBITDA quarter, depending on the year. To meet the EBITDA guidance, it seems there needs to be a significant acceleration from this point, particularly in the second half. Can you provide any insight into what kind of EBITDA margin we should expect on that $92 million of sales for the second quarter? Additionally, what gives you confidence in the split between the first and second halves? Is there something you can see today that supports your optimism, like an increase in your fall '23 business development order book compared to last year? Thank you.

Sure, let me address that. There are a couple of points I mentioned in the previous question. It's crucial to note that historically, the BD business and the Clarus business have contributed about 55% of the top line in the second half of the year, and this pattern is expected to continue. Additionally, we have typically achieved around 50% of our EBITDA during the last three to four months of the year, which is also when most of our cash flow is generated. Therefore, along with an increase in wholesale in North America and successful supply agreements for shell cases, if all these factors align, it supports the expectation of a stronger performance in the second half of the year regarding EBITDA.

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

Sure.

Alex, it is important to point out the difference between demand in the marketplace and the destocking or liquidity issues faced by some of our retail partners, particularly in North America. Our ongoing channel checks and discussions with various partners confirm that demand is stable and strong, and we are experiencing sell-through. However, this is not yet reflected in our financial results due to the destocking activity. Many North American retail partners are also limited in their purchasing budgets. We have noted numerous headlines regarding the current situation, and we expect it will take some time—around a month or two—before we see improvements. Additionally, the extended winter season in North America has delayed the usual ramp-up of spring and summer deliveries that typically begin in March, which has not yet occurred to the extent we anticipated. We have implemented several productivity initiatives and are maintaining discipline in our cost management and overall business operations. Despite the challenges posed by destocking, it is crucial to recognize that the underlying fundamentals remain stable, and we need to work through these timing issues.

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

We haven't provided guidance on that, and we won't do so. However, it should improve. I discussed several unusual factors. We accounted for some inventory losses, and we experienced shifts in product mix and channels. Foreign exchange was also a challenge. Overall, I believe it should be better.

I’d like to get a clearer picture of the 2Q revenue decrease. Can you explain why it's down by 20%? Is the Outdoor segment also expected to decline significantly in the quarter? Additionally, was there a shift in timing into 1Q? It would be helpful to understand the details regarding the 2Q top-line.

We generated $115 million in the second quarter last year, so this represents a decline of $23 million. There is some weakness across all three segments, especially when compared to our strong performance last year. In the Adventure business, we recorded $28 million last year in the second quarter, driven by robust demand in Australia and even stronger interest in the North American market. Of the decline we are seeing, approximately $5 million to $6 million is attributed to the North American Rhino-Rack segment. Moving to the Outdoor division, we anticipate that North American retail will remain weak in the first half of this year, which poses a significant challenge compared to last year. Similarly, the Precision Sports segment generated over $35 million in revenue last year. If we achieve a similar revenue figure this quarter in Precision Sports, that would account for another $7 million to $8 million in headwinds. Therefore, it doesn't take much to reach that $20 million decline. However, as I mentioned earlier, we expect conditions in North America to improve in the latter half of the year, along with better access to some of the shell cases and stabilization within the Adventure business. As Aaron noted, we believe the brand is well positioned, but some of our distribution partners need to address their existing inventory levels.

Okay, that's helpful. Following up on Alex’s question regarding the 2Q EBITDA number, you provided guidance for 2Q revenues and 1Q revenues, but the Street missed the 1Q EBITDA. Is there a reason you aren't guiding to 2Q EBITDA to help us avoid missing the estimates?

As we focus on establishing a baseline for our businesses in 2023, we are adopting a conservative approach to guidance. This means we are limiting the guidance at the segment and profitability levels as we assess each of these brands. As mentioned 60 days ago, we will adjust our strategy to capitalize on the best opportunities to enhance EBITDA and sales growth throughout 2023, positioning ourselves to return to a more normal state in 2024.

Okay. Last question. Thank you for that. The final question, Mike, is regarding the guidance for the second half of the year. It seems to be leaning towards the mid-single digits. Can you share any insights on whether it should be balanced, reflecting your current perspective?

No, historically, Q3 has outperformed Q4. Q3 is our significant quarter as we manage inventory. We will be building up inventory in June and July, then shipping it out in July, August, and September. Therefore, Q3 is expected to be somewhat stronger than Q4, based on seasonal and historical trends.

On growth rates, you’re referring to the growth rate, correct?

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

So, just backing up to the broader strategic vision. As you look at the segment leader plans preliminarily, I’m just curious if there’s any early color on how to think about how their segment performance that you set into your 2023 outlook, any notable areas of divergence or convergence? And then just timing this year, in terms of when you think we’ll be able to hear directly from the business unit leaders on sort long-term planning? Is that something that could happen as early as the second quarter, or is that more likely kind of a late back half of event?

I think we’ve discussed the idea of organizing an investor show, likely in New York, where we can introduce the three leaders and have them present their segments and businesses to interested parties for about 30 to 45 minutes, followed by a 15-minute Q&A. We want to set that up, but before they go out, we need to ensure they are comfortable with their business and focused on their long-range plans. Keith has been in his role for nearly three years in the Precision Sports business, while the other two have been in their positions for two and three months, respectively. We aim to arrange this for September at the earliest, but if that doesn't happen, we will definitely complete it in the fourth quarter.

And then just more specifically curious on Outdoor, if you could maybe make some commentary on sell-through trends in Outdoor. And then just health of channel inventory, I mean, obviously, we’re going through a destocking cycle. Any further detail you could provide, either maybe segmentation among customers, mass versus specialty and sort of health of channel inventory. It sounded like you made commentary that said, we’re not going to clean up inventory in that space until probably third quarter at best. So maybe just what that can mean for sort of the growth inflection between third and fourth quarter, or maybe just seasonality in Outdoor for the year?

Yes. So, this is Aaron. I’ll take that one. Specifically to that of the outdoor space or the Outdoor segment, here in North America, in particular, what we’ve seen is that really, at the beginning of July of last year, we started to see the self-correction, and obviously, it’s had a long tail to it. But coming into this year, the indications were highlighting that things were starting to get recalibrated and that we are starting to see a normalization. However, what is overshadowing some of this is that one, the elongation of the winter season, but also just the continued work through of open-to-buys and liquidity within the retail partners’ own balance sheets. What we have seen through the course of Q1 is that we continue to see a lot of progress taking place in terms of the destocking, in terms of what’s going on from the sell-through perspective versus that of what’s happening in terms of their inventory positions. There is a dislocation starting to occur where the sell-through data is much more positive and highlights that the destocking activities are taking hold. But at the same time, because of what we’ve seen in Q1, we want to continue to be conservative in our approach as we work through Q2 and Q3, because what is Clarus is that although the demand is there and that the stocking activities are taking place, what is still a little bit opaque for is exactly how people are positioned internally from an open-to-buy liquidity standpoint and when that’s going to start to impact us specifically as a brand. One of the pieces of commentary that we’ve provided over the last couple of quarters as well that we don’t believe that we are necessarily the driver behind this, but more just the overarching space in general and because of the different dynamics that people are working through, we just got caught in the wash cycle, and therefore, it’s going to require some of this to get cleaned out. And we do believe that there is a timing issue where we’ll start to see an acceleration take place, because, once again, when we do channel check ourselves and have communication with the different retail partners, it’s clear that our product is moving and that there is demand for the brand, it’s just that they’ve got some internal workings that need to be worked through.

Okay, got it. And if I could just sneak one more in on precision. I guess I was a little surprised this was down 18% year-over-year. Just, if you could quantify maybe the component availability constraints, maybe the casings constraint that held you back on revenue, that’d be interesting. And also just curious if you could maybe comment on the pricing environment for the specialty calibers that you typically provide in terms of loaded rounds? What’s the health of pricing look like in this channel inventory in general, across the board?

The decrease in the Precision Sport segment was approximately $6 million, primarily due to challenges in the domestic ammunition market. This decline is influenced by overall market conditions and demand, but the main issue is the availability of shell cases. We are well-positioned in the centerfire rifle hunting market, where there is still strong interest in key cartridges. However, we continue to face difficulties sourcing shell cases. In the marketplace, we are seeing increased price competition in areas like pistol and revolver ammo, as well as in 223 and some 300 Blackout categories, although we are not heavily involved in those segments. In the fourth quarter, we managed to address some inventory issues in that regard. Our focus remains on serving our customers and consumers with essential cartridges in the centerfire rifle hunt category, along with new offerings like the Pioneer line for lever-action and revolver products. These challenges are having a negative impact on our results, and we are actively seeking ways to overcome them, as they are a significant factor contributing to the decrease compared to last year.

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

Unfortunately, compared to last year, we were able to secure a few more shell cases and had some carryover inventory, which alleviated some pressures. Last year was phenomenal for us, and replicating that this year has been difficult due to limited shell case availability. This is something we are actively working on, and we believe we will have a solution in the next couple of months. Simultaneously, we are evaluating our capital allocation and the various growth opportunities, as well as ways to enhance profitability. It’s important to consolidate our individual business units to identify different opportunities. As we progress through the long-range planning process for both the Outdoor and Adventure segments, we will gain clarity on our investment strategies, such as expanding capacities or vertical integration. However, our immediate focus is on addressing the current challenges.

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

And maybe a point of clarification for you, Mike, the inventory reserve, was that contemplated in your Q1 margin guide?

No, it was not.

Okay. And then maybe one last one from a leadership standpoint. Is there a plan to replace John, or will you be effectively assuming his duties, Warren, at least in the near-term?

Yes, there is no intention to replace John. I will be assuming those duties. My focus has been on working closely with Neil and Matt to ensure that we have the long-range plans perfected. I think you’re going to be excited when we share those with you. That’s been my focus, and we’ll just see how it goes. Right now, we have removed some people from the corporate overhead, and as Aaron pointed out, we’re continuing to look at reducing additional costs in the business. We are seeing price discipline in some of the areas with resource requirements, and costs have been going down. We’re really working hard to improve our margins in those ways.

For me a big picture question on the Adventure segment. I’m curious your thoughts as it relates to capital allocation. So you’ve owned the Rhino-Rack business, coming up on two years now, clearly some category challenges in the near-term, you’ve made some leadership changes. But big picture, do you still like this category and see it strategic to the broader portfolio? And then, also curious how you’re feeling about the margin opportunity for that business relative to your initial expectations. And then lastly, interested in perspective on how far along you are in the path of pursuing B2B opportunities for Rhino-Rack and why Rhino-Rack may be uniquely positioned in those B2B market landscapes. Thank you.

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

Yes. You can take it. I know what you’re going to say. You can take it. Yes.

Okay. So Jim, we truly love this area. When considering the Adventure segment, we believe our positioning is at the intersection of the off-road or automotive enthusiast market and the Outdoor space. This unique position allows us to access a much larger addressable market and engage with our activity-based consumers on both ends of the spectrum. As you pointed out, it has been a challenging period for us, but it doesn’t detract from our overall perspective on the business. We have maintained strong interactions with our key retail partners and received positive feedback from consumers who love our product. Our product features a unique design, is OE ready, and we have established some strong regional B2B relationships, particularly in the Asia Pacific region, although they are not yet global. As we move forward, we recognize the macro trends favoring the overlanding and adventure segment. This was evident at the recent SEMA, where Toyota dedicated its entire presentation to the overlanding market, aiming to attract various consumers. Looking at automotive trends, it’s projected that 80% of vehicles in 2027 will cater to the market we’re targeting. Ultimately, we need to continue navigating the current challenges, such as COVID-related shutdowns, severe weather events, and vehicle shortages. Notably in Australia, there are 60,000 vehicles in quarantine, causing consumers to wait for 6 to 18 months for their vehicles, with further delays expected. Meanwhile, we have been strengthening our team, highlighted by the hiring of Matt, which marks a key transition in management. We are also focused on enhancing other fundamental areas within the business to ensure we are prepared for growth and increased profitability. We have seen sequential improvements in our gross margins, which have risen from the high 20s to around 40%, highlighting the effectiveness of our productivity initiatives and value-creation strategies. As we continue to adapt to market dynamics and launch new products while raising brand awareness, we position ourselves well to capitalize on macro trends and maintain a strong reputation in various regions. We are currently focused on managing the complexities of the current environment, but we are optimistic about the future, given the direction of the market and the enhancements we’ve made in processes, systems, and personnel. In response to your final question, becoming a more global B2B partner for guides is also a key initiative for us. We have developed a global partnership focused on the EV market and, through our MAXTRAX brand, established a collaboration with Porsche to emphasize important categories in that space. We are in the early stages of integrating these initiatives but have already achieved some quick wins that make us very excited about the future.

Jim, it’s Mike. I’ll just add that we achieved over 9% EBITDA in the first quarter in Adventure, in contrast to losses of 5% and 3% in the third and fourth quarter of last year. We are seeing the benefits of what’s happening, particularly in gross margin, which has been positive.

Yes. I know you’ve been spending a lot of time in Australia; as I suspected, you answered that you might. Thanks for all that perspective. Just one last question about the differences in trends by region. Starting with North America and the channel inventory dynamics, are the independent partners in a better position than the larger ones? Some of the larger partners we see in the public landscape seem to be managing inventories quite well. I’m curious how that dynamic varies among your key partner segments.

Yes. Specialty guys are faring fairly well. If you recall, specifically for the Outdoor space, specialty was really a strong growth driver for us or performed extremely well in the back half of last year. And those guys continue to be extremely prudent in terms of how they manage their inventory levels. They are a little bit more susceptible to just the ebbs and flows of consumer demand but also weather and the elongation that’s taking place with the great winter that we’ve had. But we anticipate that we’ll continue to see strong performance at the specialty level. And to your point, what you’ve been able to see is more of the public facing larger folks that have been able to manage the different open-to-buys or the inventory levels. But some of the larger accounts that we’ve had that are maybe not as public facing that we continue to work with and navigating through, they’re open-to-buy topics or issues. And that’s where we’ve really seen the negative impact over the last Q1, but really for the last six to nine months.

And then your European business has been really strong despite what’s been a non-existing ski season and touring season. Can you speak to what’s driving the strength in Europe in the IGD business? And I guess, I’m curious what the risk those businesses follow a similar cycle to what we’ve seen in North America where channel inventories overshoot?

Yes. The team has performed exceptionally well as we explore various markets and diversify our channel mix in Europe. We are particularly focused on dark markets, as well as France, Scandinavia, and the UK. Even though we didn't have much of a winter season, we are still seeing growth in key categories we have previously emphasized, such as lights, trekking poles, gloves, packs, and our apparel initiative. We expect that as people return to outdoor activities like climbing and hiking, it will also boost the core business of our climbing products and reinforce the top five product categories we've been concentrating on. These categories are less affected by weather patterns and represent significant growth opportunities as we attract more consumers to our brand.

Now, I’ll turn the call back over to Mr. Kuehne for any closing remarks.

Thank you very much, Victor. I want to thank everyone for attending the call this afternoon and your continued support and the interest in Clarus. We look forward to updating you on our results again in 90 days. Thank you again.

This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.