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spk06: Good afternoon, everyone, and thank you for participating in today's conference call to discuss Claris Corporation's financial results for the second quarter ended June 30th, 2023. Joining us today are Claris Corporation's executive chairman, Warren Kanders, COO, Aaron Cuney, and CFO, Mike Gates, and the company's external director of investor relations, Cody Slaw. Following their remarks, we'll open your call for questions. Before we go further, I would like to turn the call over to Mr. Slaw 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.
spk03: Thank you. Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements. and we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding and 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 Claris Corporation to differ materially from those expressed or implied by the forward-looking statements. More information on potential factors that could affect the company's operating and financial results is included from time to time in the company's public reports filed with the SEC. I'd like to remind everyone this call will be available for replay through August 7th of 2024, starting at 7 p.m. Eastern Time tonight. A webcast replay will also be available via the link provided in today's press release, as well as on the company's website at clariscorp.com. Now I'd like to turn the call over to Claris' Executive Chairman, Warren Kanders. Warren?
spk12: Thank you, Cody. Good afternoon, and thank you all for joining Claris' earnings call to review our results for the second quarter of 2023. I am joined by our Chief Operating Officer, Aaron Cooney, and Chief Financial Officer, Mike Yates. I will start by addressing the overall business and corporate strategy. Aaron will provide an update on each of our segments, and Mike will walk through our financial performance for the quarter. Our second quarter results were negatively impacted by the continued challenging macroeconomic environment and related headwinds. We are seeing destocking take place, particularly in North America. The overall promotional environment coupled with retailers tightening their inventory positions. and open to buy dollars weighed on our performance. We took effective countermeasures during the quarter, generating free cash flow of $12.3 million versus $2.3 million during the same period last year. I am pleased that each segment was cash flow positive during the quarter as we right-sized the businesses to match expected demand for the year. Since the beginning of the year, we have undertaken a strategic review of all of our businesses, including our management structure. During last quarter's call, we highlighted the inflection point in our organizational evolution and the strategic shift to seek to decentralize and focus on individual segment performance. As part of this strategy, we have made a number of significant changes to date, which we expect to contribute to long-term value creation. We continue to evaluate all of our businesses and their strategic initiatives to maximize value. We believe that the sum of the parts of our three segments exceeds today's market valuation. We continue to evaluate our corporate structure and inclusive of the changes we have already made, we have a series of initiatives in place that we expect will reduce our normalized corporate overhead by $1.5 million compared to that of 2022. While we are experiencing a challenging retail landscape, the changes we have made through the first half of this year and the further cost outs and savings initiatives we expect to make in the next six months are foundational to our growth strategies. Our management teams continue to seek to simplify their businesses and invest more dollars into commercializing new products and improving sales channel management. We have worked with our retail partners carefully to help drive sell-through while working with our supply chain partners to dynamically manage the flow of inventory in order to seek to reduce inventory levels while ensuring on-time deliveries and higher levels of fulfillment. We are excited by the ongoing work of our three segment leaders. Specifically on outdoor and adventure, we now have two new leaders We're laying the foundation for anticipated future growth and improved profitability. Our focus for the balance of the year will be in ensuring that the starting point for next year is optimized organizationally and clean from a balance sheet perspective. Later on in the year, we will be introducing our segment leadership team and their vision for long-range plans. Despite the headwinds outlined, we continue to see monthly sequential improvement during the quarter. In outdoor, we saw increasing sales each month, driven by a strong push in direct-to-consumer, aiding our inventory work down. While we saw some margin degradation due to off-price and promotional activity, we still increased our outdoor gross margins by 440 basis points to 37.5%. achieving our plan to generate cash and further normalize inventory. I am pleased with the continued performance on our adventure segment. During the second quarter, we saw continued stabilization in the market for our adventure products, resulting in improved gross margins of 370 basis points to 42.4% for the adventure segment. We continue to see normalized sales levels in Australia, which we expect to increase in the seasonally stronger second half as we introduce exciting new products. Adventures U.S. business experienced strong growth month over month during the quarter, improving sales by 63% over the first quarter of 2023. Consistent with how others have reported in the channel, our precision segment experienced sales declines of 27%, while holding EBITDA margins at 26%. We have taken cost outs to match our expected production and sales levels, which we believe will drive higher margins in the second half. Further, we took important strategic steps to seek to stabilize our component supply chain, which we expect will enhance our ability to build programs for our partners going into 2024. To summarize, we believe that we have reached the trough in our outdoor and adventure segments, and the quick actions we have taken to right-size those segments should set us up for more profitable growth in future periods. While Precision's experience has slowed down through market dynamics in the normal summer slump, we believe that hunt season and the looming election cycle into 2024 should catalyze demand. With that, thank you for being with us today. and I will turn the call over to Aaron.
spk01: Thanks, Warren. I would like to dive into specific comments on our segment performance. First, let me address outdoor. Our outdoor segment was impacted by lower consumer demand given the inflationary environment and continued lower open buys as retail partners right-sized their inventory. Additionally, our retail partners are acting conservatively in terms of building back inventory, specifically weeks of inventory on hand, where we are seeing key retailers behave conservatively and shorten up their weeks of supply. We believe this is due to bloated inventory levels industry-wide, specifically private label products which impact overall working capital and open-to-buy dollars. However, as we head into Q3, we are starting to see retail purchasing habits normalize. But we do expect it will take until year-end before the market approaches equilibrium. Somewhat offsetting this weakness was a 28% increase in our direct-to-consumer business, which we believe shows the strength of the Black Diamond brand, despite the broader retail environment. Looking ahead for the year, our top priority in outdoor remains seeking to bring supply and demand into better alignment across our regions and channels, while reducing our outdoor inventory levels by 15% by the end of this year compared to the end of 2022. Also at the top of our priority list is the goal of rebuilding our go-to-market approach in North America, baselining our apparel initiative, and bolstering our digital presence. In our precision segment, we experienced lower sales year over year as retail inventory came in line with historical levels. While Sierra and Barnes were each off approximately 27% over the prior year period, we think it is relevant to take a longer historical view where Barnes was up 5% over 2021 and over 100% during the same period in 2020. While Sierra was down 19% versus 21, it was up 38% over the same period in 2020. The investments we have made in capacity and our continued partnership with OEM customers and retailers yielded meaningful share gains over the last three years. We continue to see a highly promotional environment for commodity ammunition as consumers look for value. We're also seeing open-to-buy dollars tighten as our retail partners remain conservative with weeks of inventory on hand. We are seeing positives, however, as reloading component availability loosens up. which should help our consumers who purchase our green box and black box component bullets for reloading, especially as we head into the hunt season. Military and law enforcement opportunities are also coming into focus. As we head into the second half of the year, our partners continue to expect hunt season to pull through and for highly promotional activity to subside by year end. As Warren mentioned, we are pleased with the progress we've made to shore up shell cases through a strategic supply agreement that covers us over the next two and a half years, which will improve our ability to drive ammunition programs and better serve our retail and distribution partners going into 2024. Finally, our adventure segment. We continue to experience sales improvement each month of the quarter while substantially increasing our gross margin and EBITDA levels. In our brand's home market of Australia, inventory levels have improved with our retail partners, and in North America, we continued to right-size our sales channels and began to experience the early signs of recovery that we expected. For example, we have partnered with several of our strongest retail partners here in North America to support sell-through and increase the velocity of their destocking efforts. With one of our accounts, This has resulted in a year-over-year increase of 60% in Rhino-Rac branded products sold, while the category itself is down high single digits. These efforts are not only expanding Rhino-Rac's market share, but also further reinforcing our strategic relationships, demonstrating our ease of doing business with, accelerating their destocking efforts, and further positioning Rhino-Rac for growth. Just as important, our gross margins and adventure for the quarter ended at 42.2%, which represents the highest margin quarter since mid-2021. We have made strides to right-size direct labor, assembly, and overhead, while reworking input costs and core products. For context, our gross margin for fiscal year 2022 was 35.4%, and our 2023 year-to-date gross margin was 41.6% on sales that were 37% lower than the same period. Our goal for the remainder of the year is to maintain our gross margins while driving inventories down as we introduce next-generation product in Q4 in Australia and globally in 2024. The business has strong fundamentals in place, and we expect that as our growth initiatives take hold, we will see strong operating leverage from the organizational reshaping. While vehicle levels haven't fully rebounded, we are starting to see green shoots with regards to vehicle availability. We expect the supply and demand imbalance with new vehicles to persist through the fourth quarter, but we have important initiatives we believe will accelerate our growth in the back half of the year for adventure. Let me lay them out here. First, we'll focus on transforming our product development and innovation process to seek to drive improvement in speed of market and product differentiation. We have a renewed focus on customer and consumer insights to drive overhauled product hierarchy. A key part of our go-to-market evolution will be how we create and launch products as part of a larger ecosystem of lifestyle demands. Next is customer service. With a renewed focus on our key account partnerships and key account programs, the goal is to be the easiest partner to work with in the industry. Our people will be empowered to take action to drive performance and deliver on the challenge with an understanding that there are different business models for different customers. Next is digital transformation. We are planning to maximize our operational infrastructure to develop our e-commerce platforms to support both B2B and B2C opportunities. We are aiming to build our distribution strategy around the consumer in a way that will continuously strengthen our premium market positioning and drive pricing power. And finally, we will be data-led in our decisions. We are developing a demand and data-driven operating model that plans, buys, and sells inventory closer to demand. Now I'll pass the call to Mike to discuss our Q2 financial results in more detail. Mike?
spk05: Thank you, Aaron, and good afternoon. Jumping right into our performance in the second quarter, sales were $83.7 million compared to $114.9 million in the prior year quarter. On a constant currency basis, total sales were down 26%, while reported sales were down 27%. Second quarter sales in our outdoor segment were down 24% to $40.1 million versus $52.6 million in the second quarter of 2022. If you adjust for the foreign currency exchange headwind, outdoor sales were down 23%. As Aaron mentioned, we are still constrained by lower open to buys from our key North American retail partners due in part to their inventory destocking activities. Partially offsetting this decline was continued strong execution in our direct-to-consumer business at Black Diamond. Precision sports sales were $25.8 million in the second quarter compared to $35.2 million in the second quarter of last year. In the quarter, we experienced broad-based discounting from our competitors and retail partners as the market continued to right-size inventory levels. Our ammunition business has been a significant headwind for the first half of the year on gross margins. However, we remain very optimistic that precision sports in the market will return to solid demand as we move to the second half of the year, supported by the upcoming hunt season. The adventure segment contributed sales of 17.9 million versus 27.1 million in the prior year quarter. And on a constant currency basis, sales were down 31% and reported sales were down 34%. Despite these challenging market conditions, we believe we are starting to see stabilization in the market as sales are up on a sequential basis compared to the first quarter of 2023. And we expect to see sequential improvement in sales in both the third and fourth quarters of 2023. Rhino-Rax U.S. business did well during their peak selling season here domestically. and some of the cost actions we've taken have shown up in improved profitability for our Rhino Rack business in North America. During the first six months of 2023, we moved to a new headquarters and consolidated our three previous warehouses under one roof in Denver for our North American business. During this period, for the first six months of 2023, we incurred over $700,000 of moving costs that should not repeat. Just to be clear, the Rhino Rack facility in Denver serves as an under one roof solution for the entire adventure segment here in North America. Housing our North American headquarters, sales and marketing, warehousing and assembly. In Australia, sales were strong in April and May, but softened in the last few weeks of June as a result of Australian's observation at the end of their fiscal year. Important links have picked back up in July, While the market environment in our venture segment is still challenging, we believe the worst is behind us, and we look forward to reporting a business that produces better than 12% adjusted EBITDA margins going forward. Moving on to consolidated gross margins. In the second quarter, gross margins declined to 36.7% compared to 38% in the year-ago period. We experienced a 140 basis point benefit from favorable variances and write-offs. but this was more than offset by unfavorable FX of 110 basis points and unfavorable product and channel sales mix of 160 basis points. From a segment perspective, gross margin at outdoor was 37.5% in the quarter compared to 33.1% in the prior year quarter, reflecting a 440 basis point improvement. The primary driver here was the elimination of the high freight costs from 2022, not repeating this year. Gross margin at Adventure was 42.2% in the quarter compared to 38.5% in the prior year quarter, reflecting a 370 basis point improvement due to the operational improvements and cost actions taken in the second half of last year taking hold, as well as more favorable FX environments. Gross margin at Precision Sports was 31.7% in the second quarter compared to 44.9% in the prior year quarter, reflecting a 1,320 basis point degradation. This decrease in gross margins at Precision Sports was due to the sale of ammunition at lower margin profile due to the promotional pricing environment that the market is currently demanding. The ammo market has been very tough and has been a drag on gross margins. To put this in context, I want to share the following. During the first half of the year, we used internally produced bullets at Sierra and loaded Sierra ammunition, selling a total of $4.7 million of Sierra ammunition in the first half of 2023. We only realized $236,000 of growth profit on these sales. Had these bullets been sold through Sierra's OEM channel, we would have recognized an additional $550,000 of growth gross profit, which would have increased gross margins at Sierra by nearly 700 basis points during the first half of the year. Once the market stabilizes, we would expect margins to normalize for our ammo products. Until then, we will continue to realize decent margins on our component bullet business. Selling general and administrative expenses in the second quarter decreased to $15.2 million compared to $35.4 million in the year-ago quarter. The decline was driven by expense reduction initiatives in the outdoor, adventure, and precision sports segments, as well as lower sales commissions and lower non-cash stock-based compensation expense for performance awards and corporate. Net loss in the second quarter was $2.1 million, or a $0.06 loss for diluted share, compared to net income of $3.8 million, or $0.09 of EPS in the prior year quarter. Adjusted EBITDA in the second quarter was $7.3 million, or an adjusted EBITDA margin of 8.7%, compared to $17.6 million, or an adjusted EBITDA margin of 15.3% in the same year ago quarter. The decline in adjusted EBITDA was driven by lower sales volumes, unfavorable product and channel mix, and a 1.5 million consolidated foreign currency exchange headwind due to the strength of the US dollar. These impacts were partially offset by the improvements in SG&A during the quarter that I just previously mentioned. Now, let me shift over to liquidity. At June 30th, cash and cash equivalents were 11.3 million compared to 12.1 million at December 31, 2022. As Warren highlighted in his opening comments, free cash flow was outstanding. Free cash flow defined as net cash provided by operating activities less capital expenditures for the second quarter of 2023 was $12.3 million compared to $2.3 million of free cash flow in the same year-ago quarter. We used this free cash flow to pay down nearly $10 million in debt and ended the quarter with total debt of $127.2 million. This put us in a net debt position of 115.9 million, resulting in net debt leverage ratio of 2.7 times on a trailing 12-month adjusted EBITDA basis. We expect to stay within our stated range of two to three times leverage for the remainder of the year. Under our $300 million revolving credit facility, we have approximately $11.4 million outstanding. and further borrowing capacity of approximately $32 million at June 30th while maintaining compliance with the required covenants under our credit agreement. Our inventories ticked up sequentially by $3.2 million to $149 million at June 30th. As discussed in our prior call on May 1st of this year, this increase was expected. As of June 30th, we've taken possession of key inventory specifically at our outdoor business for the prime fall winter selling season. From a tax perspective, we have over 17 million of NOLs remaining, and we expect these NOLs to offset any federal cash taxes due in 2023. Now, let me move on to our 2023 outlook. We now expect sales to land within a range of $385 million to $400 million for the full year 2023, and adjusted EBITDA to be in the range of $42 to $50 million, or an adjusted EBITDA margin of 11.7%, assuming the midpoint of the sales and adjusted EBITDA guidance. We also now expect full-year capital expenditures to range between $6.5 to $7.5 million, And free cash flow is now expected to range between 30 and 35 million for the full year 2023. Finally, for the third quarter of 2023, we expect consolidated sales to be $100 to $105 million, reflecting continued headwinds surrounding the unwinding of inventory at our key North American partners, both at our outdoor and Rhino Rec USA businesses, and the promotional environment within precision sports segments. Let me pause here, hand the call back to the operator. as we're now ready for the Q&A.
spk06: Thank you, sir. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. One moment while we compile the Q&A roster. Our first question comes from the line of Alex Perry with Bank of America. Your line is open.
spk08: Hi, thanks for taking my questions here. I guess just first, what areas of your portfolio are you seeing sort of the heaviest destocking from your retailer partners? Is this mostly BD? And, you know, within BD, are you seeing it sort of across the board with both sporting goods retailers as well as some of your independents? And what is sort of contemplated in the guidance in the second half with regards to that? Thank you.
spk05: I'll go ahead and start with that. So from a guidance standpoint, we noted in our prepared remarks that we expect this tough destocking environment to continue. But through the remainder of the rest of the year, it'll take until the end of the year, we think, for it to clear. But our guidance assumes that it does clear by the end of the year. What it also assumes is that our normal pre-season fall winter orders at Black Diamond that they do flow through as the pre-season orders, right? We've taken possession of that inventory and we do believe that our key retail partners are in a position to take that inventory come September, October, November of this year.
spk01: Hey Mike, this is Aaron. I'll just add a little bit of additional commentary for you, Alex. As highlighted, it is primarily within the outdoor segment, which is really the Black Diamond brand. And if you take a step back and look at our distribution here in North America, you can kind of, from a wholesale perspective, you can slice it up into three different key components. One being that of our national accounts, which represents about 33% of our business, key accounts, another 33%, and then specialty retail. And what we've really been seeing is that especially our national accounts and key accounts, in particular those that also have private label offerings or their own branded product, that is where we're seeing the biggest destocking, the largest amount of destocking taking place. And so really it's focused on about 66% of our North America wholesale distribution partners and just helping them to work through the different inventory levels. The other key piece that's taking place, as highlighted in our prepared remarks, is that A lot of these retail partners have been very conservative in thinking about how they think about weeks of inventory on hand. Just for context, pre-COVID, it was typical that retail partners would carry anywhere from 10 to 12 weeks of inventory on hand. During COVID, it jumped up to 18 to 20 weeks of inventory on hand. And currently, we're sitting at six to seven weeks of inventory on hand. And so what it's naturally doing is shifting a lot of that risk towards the different brands, and it's also forcing us to revisit our demand planning process, which we're in the middle of doing. We're being very focused on, one, managing our inventory levels, but also our supply chains in a very dynamic way. ensuring that we have high levels of fulfillment and just are easy to do business with while also driving towards lower levels of inventory and going after that target that we've outlined before and so um it really is focused on those as they say on those two segments of of our of our north america wholesale channel um and that's where we'll continue to focus on building out our own digital presence but also supporting them with various sell-through initiatives to to hopefully accelerate the destocking activities and get to a more normalized level here in the next, you know, over the next six months.
spk08: That's really helpful. And then my follow-up is just on if we think about the guidance here. I think the 3Q guide implies a sequential acceleration from 2Q, still down year over year, but accelerating. Is that mostly based on what you're seeing from a pre-booking? And then also, I think the 4Q implied guide would imply that it gets even better. What's within the 3Q versus 4Q guide that gives you confidence there? Thanks.
spk01: Yeah, this is Aaron, and again, I'll give you a little bit of commentary, and then Mike can fill in the gaps. But as we look at the back half, especially for that of outdoor, as a reminder, we do operate in two six-month seasons, a spring-summer season and a fall-winter season that are supported by preseason bookings and forward orders by the majority of our key retail partners. What we saw in the first half is that we were realizing about 65% to 70% of those forward orders. Now, historically, we will traditionally realize about 85% to 90% of those forward orders. And then through attrition, we'll offset the attrition rates with replans or ASAP orders that typically come in. And so as we thought about planning for the back half, we are expecting to see improvements in the realization of our forward orders or our bookings. Um, we are not expecting it to get back to historical levels of call it 85 to 90%, but we are expecting it to get back to levels call it 80 to 85%, which is something that we started to see towards the end of June and something that is carried forward through July as well.
spk05: Yeah. So, um, Alex, we, um, so our guide implies 204 million to $219 million of revenue in the back half of the year. Um, From an adventure standpoint, in my comments, I said we expect to see sequential improvement in both Q3 and then again in Q4. So we expect to see sequential improvement at adventure throughout the remainder of the year. Precision of sports, it depends what we end up doing on how ammo pulls through. But as Aaron referred to the Black Diamond business, You know, we do expect that not to get all the way back, but as I mentioned to answer your first question, we do, you know, have a strong order book for our fall and winter goods, and that's the inventory I've mentioned that we've taken possession for. So that should get back into the, you know, $60 million to $65 million range is what we're expecting that to recover to from on a top line at BD.
spk08: Perfect. That's really helpful. Best of luck going forward.
spk05: Yes, thanks.
spk06: One moment for our next question. Our next question comes from Anna Glaston with B. Riley. Your line is open.
spk09: Hey, good afternoon. Thanks for taking my question. First, would it be possible to put in perspective what POS was in Black Diamond for the quarter just to contextualize the difference between the sell-in, sell-through, and understand the impact from the retailer destocking or caution with open-to-buys?
spk01: Yeah, so from a point-of-sale perspective, we continue to get feedback that the core categories within Black Diamond are moving well. They continue to perform quite well at retail, and we're even seeing point-of-sale data support call it high single you know digit growth rates that were taking place the problem is that they're still going through the stalking activity but also still right sizing the various components of their own inventory which nationally impacted their open to buy the one thing that we continue to also see is that their inventory levels specific to that of black diamond are the seller are decreasing at a faster rate than what we're also seeing that a point of selling so that continues to provide us confidence that
spk09: the inventory or the destocking activities are working that it is uh that and that will also feed into more normalized purchasing habits here as we get into q3 and q4 got it thanks and i'm turning to on precision sport um i think in the queue i saw that um international sales actually underperformed domestic which is a bit of a shift from the recent trend. Anything to call out there? Are inventories normalizing internationally after being fairly depleted versus the domestic market?
spk01: A lot of this also comes down to just how we're able to prioritize output and capacity. The team has done a tremendous job of really focusing on these three verticals that we've outlined before, being that of ammunition, our OEM business as well as the component side of things, which is green box for Sierra and black box for Barnes. Because of the demand that we've seen both domestically and internationally, in particular on the component side of things, whether it be for OEM or the green box and black box, it does require us to think about how we manage capacity and just the sequencing of the fulfillment of orders. And so we have a very strong order book as we look into the next six to nine months. And so it really just comes down to how we're able to prioritize and sequence the various fulfillment of those orders. And it naturally causes a shift between domestic and international versus, you know, a wholesale change in terms of demand or just where the inventory levels are.
spk09: Got it. So would it be fair to say internationally you're at a better place with inventory than maybe the last quarter or a couple quarters ago?
spk01: Yeah. Yep. No. So we are, we are able to provide higher levels of fulfillment on the international side. And so the pen of demand isn't as pronounced as it was previously. Right. I mean, there was a lot of demand that we just weren't able to fill over the last two years because a lot of focus was going into building out the ammo initiatives across both of the brands, but also fulfilling that, that, that demand that was quite insatiable. And, but over the last several years, in a months and quarters, we've been very focused on shifting a lot of our production to the international side, just to make sure that we don't lose market share, but also continue to be that great partner that we've been able to prove that we are and support those initiatives that then feed into additional programs and opportunities into the future.
spk09: Got it. Thanks.
spk06: One moment for our next question. Our next question comes from Randy Koenig with Jefferies. Your line is open.
spk02: Yeah, thanks a lot and good evening. I guess, Aaron, can you give us some added perspective on, you talked about this dynamic of moving some of the national accounts where there's more of a move towards private label impacting the destocking and the order book. Maybe give us some vantage point on where, when you have those conversations, Where are we in that kind of finding that equilibrium on that private label penetration that these accounts are kind of focusing on and that's pushing down orders? Where is that? Are we in like the eighth inning of that, the fifth inning? And how does that kind of play out over like let's say the next four to six to eight quarters in your opinion?
spk01: Yeah, so I think because of what took place during the pandemic, it presented a lot of opportunities for some of these retail partners to evaluate that strategy further and to pursue it, right? There's a lot of opportunity to develop one's channels, but also one's brands. But I think what it also highlighted is things started to slow down and the dynamics associated with supply chains, you know, both elongated and then also shortened in a very quick period of time. What I highlighted is that, you know, that's a different ballgame. That's a different business model. than what some are traditionally comfortable with or typical in operating under. And so what it's done is it has opened up the conversation for us to be able to have more holistic discussions around the positioning of our brands, but also the way that we continue to partner with them, whether it be the way that we merchandise product or product offering, but also even doing shop and shops or different types of POP that really help drive awareness, but also traffic to their locations, while also helping to drive sell through as well. And so the discussions have been really focused on just the underlying economics and how we can all partner together. But as a result, it also has created this overhang that they continue to work through from a working capital and just overall liquidity and availability perspective. That's something that started to rear its head in Q2, Q3 of last year and has continued to be a headwind for us over the last four quarters. Now, one thing that we are starting to see is that those pressures are starting to subside. There are still certain categories that are a pretty massive overhang for folks that are They anticipate we'll be in overhang over the next anywhere from a year to two years. Now, of course, enough for us. Those are not categories that we participate in, but it does naturally constrain how they think about open to buys and just the weeks of inventory on hand that they hold. And so as a result for us and the discussion that we've also been having is just how we, as a collective group, manage these dynamics, but also how we support them with making sure that we have inventory availability, but also helping to support them with sell-through while also continuing to build our brand through our own channels and really bolstering up our own business. through our own efforts. And so I think as it specifically relates to our brands, I feel like we're in a good position, but there are gonna be some just natural overhangs that continue to persist through the course of this year. And then I think as we get into 24, it'll be more normalized, recognizing that there will be certain categories that will just continue to be a problem child, but not something that should negatively impact overarching open to buys and also liquidity positions for these retail partners.
spk02: Great. Maybe lastly, can you give us some perspective by division, by segment, on how you're thinking about incremental or go forward promotional posture from here just curious on you know where you're seeing it's going to get less bad uh get maybe perhaps worse just give us a little more granular color there would be very helpful thanks guys
spk01: You bet. So on the outdoor segment, we'll continue to see some promotional levels through the course of the year. We do anticipate that it'll get sequentially better, you know, based off of the inventory levels in the channel and just what we're seeing is people are now transitioning to a different season and starting to annualize a lot of the noise that we've all experienced over the last four quarters. On the adventure side of things, we're also seeing much healthier inventory levels, forcing enough, you know, both in Australia but here domestically, our retail partners don't participate in private labeling, so they came into, you know, the headwinds in a cleaner position. We have supported them in a pretty substantial way in moving that inventory through the system. And as a result, there's a little bit of carryover that will still persist through Q3 and maybe into Q4. But we actually feel that we're in a pretty good position as it relates to just the promotional environment and how we'll participate in that. And I think that commentary is supported by what we saw also with our gross margin improvement, both in the outdoor space, but also in the ventures. You know, despite these overhangs, we are seeing still margin improvement because of the different productivity and efficiency initiatives that we've been able to drive through. The one segment that could continue to see some overarching headwinds is that of precision sports. We are getting feedback from retail partners that they do expect that the hunt season will help recalibrate this. and start to pull through inventory so that the promotional environment doesn't need to be as pronounced as it has been over the last two quarters in particular. But also as we head into the election cycle, that should also help normalize and bring to equilibrium the different dynamics associated with inventory. And so overall, I would say that we should still expect to see a promotional environment for the rest of this year. But I think everyone is very focused on similar to what we are and what we've already communicated as far as just coming into 24 with a very clean balance sheet and just getting a lot of this gyration behind us that we've all been experiencing for the last four or so quarters.
spk02: Super helpful. Thanks, guys.
spk06: One moment for our next question. Our next question comes from Joe Altabella with Raymond James. Your line is open.
spk04: Thanks. Hey, guys. Good afternoon. I guess the first question on the promotional environment obviously got pretty intense here in the second quarter. Maybe help us understand – when that started um you know it sounded like it got worse as the quarter progressed and maybe what you're seeing here in july and august doesn't sound like it's easing up at all yeah so we started to see it you know if so if we break it down by segment um we first started to see in the outdoor space
spk01: an acceleration of the promotional environment towards the tail end of Q1, but really in Q2, and especially in tail end of May and all of June. And even as we headed into the first part of July. And what's driving that is that There was a great deal of effort to try to hold MAP and just to keep everything in check and maintain the health of the ecosystem that we participate in. But also people are very interested in cleaning up their balance sheets and getting a lot of the overhang behind us. And so as a result, as we start to come out of the spring-summer season, that's where you started to really see the promotion environment accelerate and uptick in terms of intensity. which is to be expected just because, you know, once again, we're a year into this and people just want to be done with it, get it behind us and get clean as fast as possible, especially as you head into a new season. On the precision sport side of things, we saw... The promotional environment really focused on the commodity type calibers, especially 9 mil, 223. It started to feed into the 300 blackout type ranges. But as product has become more and more available, that's where we've also seen a stiffer market. point of view or competition when it comes to the promotional environment. And that is something that is really ramped up as we headed into what we call the summer slump. And so call it in May and June, but that is still ongoing. It's something that we expect we'll continue to see at least through August and September as we head into the hunt season. On the adventure side of things, the promotional environment's been ongoing really since February or March as people have come out of as I say, the last, the back half of last year and came into the spring season. It was negatively impacted by the elongated winter, just the wet conditions that were taking place. And so people started to feel a little bit more pressure to get a bit more promotional earlier than what they typically would. The nice thing is those promotions are working. and they are accelerating the destocking activities. And so I would say that it's been layered in, you know, depending on the different segments. And also the progress that we've seen has been slightly different depending on the segment as well. But it is something that we anticipate seeing through the course of the next two quarters. But it really is an effort for everyone to just get their balance sheets clean and get everything, you know, recalibrated and normalized as we head into 24.
spk04: Got it. That's very helpful, Aaron. Thank you. Maybe just a follow-up on that. Is there a way to quantify how much destocking across your three segments is costing you in terms of sales this year? And maybe kind of to follow up on that, how confident are you that we're going to be clean by the end of this year?
spk01: Well, in a simple way of putting it, if you look at how we re-guided the business, I think that re-guide is directly attributable to the destocking activities and what it costs us from a revenue standpoint. You know, we came into the year applying the same approach in terms of how we think about the business, forecast, and plan it. We had a lot of discussions with top-to-tops. We had the bookings in place. It's just that realization of bookings, which is circumvented by the destocking activities, that has really had a negative impact on the first half of the year. And that's where we're optimistic as we head into the back half, but really as we head into 2024. I think as it relates to just where we're at and the confidence level, it keeps on being reinforced by the bookings, but also the conversations that we have with retail partners that everyone is very focused on having this thing cleaned up by the end of the year. Now, there's a lot of variables that come into play there, but I think everyone is very focused on that. Everyone's taking a very disciplined approach, as are we, and the results are demonstrating that with our free cash flow generation that we highlighted or that we reported, but also just the way that we're planning for the business. And, you know, mainly we're taking a little bit on, we're being a bit more conservative even ourselves as we think about our demand plans and just the way we manage inventory levels because we want to get things normalized and rebalanced as fast as possible. Got it.
spk04: Okay. Thank you, guys.
spk06: One moment for our next question. Our next question comes from Mark Smith with Lake Street. Your line is open.
spk10: Hi, guys. I just wanted to revisit the international business just a little bit. It came in a little weaker than we'd expected. Aaron, can you talk a little bit about how much that was maybe supply versus demand, how much you wanted to shift? And this is across all segments. How much you wanted to ship internationally versus just demand-driven and some of the same macro factors slowing some of the international sales?
spk01: So on the international piece, a lot of this is driven by programs that we have in place with key distributors, but also key partners that are underpinned or underwritten by law enforcement and military-type programs. And so when we look at our order book, which Mike can provide additional commentary on, but we have a very strong order book, especially as it relates to that of Sierra, that in essence covers us, you know, for the bulk of the rest of the year as we think about, you know, that business. And so the order book is intact. The order book is there. It's just that there are dynamics associated with one, the licensing side of things, but also just getting the logistics all lined up, but also how we continue to fulfill on domestic demands and programs that we have, you know, desires and obligations to fulfill on as well. And so it really does come down to capacity, especially as we think about the component side of things and how many bolts we can produce on a given day, but also how that all lines up in terms of our ability to ship it out. The demand on the international side continues to be very strong, especially with our bread and butter type calibers, whether it be a 30 cal or a 308 and a 335, et cetera. But, you know, those are programmatic calibers and programmatic orders that we have in place that once again are there, and it's just a matter of can we fill it and when.
spk10: And if we look at outdoor business within international, can you just talk about, you know, puts and takes there? You know, that was actually I think the lowest since before the pandemic. You know, talk about any pressure that you've seen on international business within the outdoor segment.
spk01: Yeah, the outdoor side on the international piece is really driven by Europe. That was a region that had been performing extremely well despite the geopolitical risk and concerns, but also the economic headwinds that the entire globe was facing. And they were really outperforming on a relative basis, but also sequentially for an extended period of time. And in Q2, it just finally caught up to us. The order book stayed pretty stable, but what we really saw is that the ASAP or replenishment side of things just was not there. And part of that was driven that we were able to have a high level of fulfillment as related to pre-season orders. So that really took place in February and March. But as we headed into May and June, which are really driven by ASAP and replenishment rates, the orders just weren't there. And so in discussion with the team, but also with retail accounts in that region, They're just, you know, they're experiencing a lot of what the U.S. started to see four quarters ago and something that they're working through. The nice thing is that a lot of that is just transitory as we transition to the fall-winter season. The bookings are stable, and feedback is that they'll continue to take them. And so for us, it's really just matching up our order book with inventory supply because if we miss the delivery of those orders, open order windows, that could start to bring into question our ability to realize the full potential that we have in front of us based off of the order book. And so it really just comes down to execution and our ease of doing business with our retail partners.
spk10: Okay. And then back to precision for one more question. It sounds like you guys feel better about where kind of you're locked in on components and some contracts there. Can you talk at all about, you know, pricing, you know, margins were squeezed here this quarter. You know, how much of that's really coming from component costs? And as you, you know, sound like feel better, you know, what kind of price increases are you looking at on components going forward?
spk01: So a lot of what we saw from a gross margin perspective was driven by the promotional environment and what Mike highlighted in the prepared remarks associated with the ammo that we moved. This is ammo that we built in anticipation of being able to sell through it over the last four quarters, and it just got to a point where we wanted to be able to move it. The bulk of that was either 9 mil or 223, and that's been a consistent story for us now for the last three quarters. There has been some margin pressure as it relates to input costs, in particular related to that component, shell cases being a primary driver as well as labor. We have been able to plan for that, though, over the last, you know, couple quarters as it relates to the different price increases that we activated, in particular in 2022 that have carried over into 23. And the team's also been very focused on continuous improvement initiatives. They've done a great job in increasing capacity, becoming more efficient, more productive, and finding ways to lower the overall overhead structure of both of the businesses. What we're also focused on is just mix and making sure that we have a good balance of changeovers versus high runners, but also really focusing on the channels and the calibers or the types of product that we're known for, but also naturally come with higher levels of gross margin as well. That is where we have de-emphasized some of our focus on some of the more commodity-based ammunition initiatives, in particular within Sierra, but also really focusing on our OEM and on our component bullet businesses as well.
spk10: Okay. Great. Thank you.
spk06: One moment for our next question. Our next question comes from Jim Duffy with Stifel. Your line is open.
spk11: Oh, thank you. Good afternoon, guys. I've got a couple questions for you. First, Mike, can you give us some help on the inventory mix by category?
spk05: By segment or by raw material, finished goods?
spk11: No, by segment.
spk05: Yeah. Well, we haven't provided that anywhere, so... Um, you know, I mean, we can talk about that in BD inventories, um, about $80 million. Um, precision sports inventory is, um, around $40 million and the remainder is at adventure. So that's about a $30 million. Okay, helpful.
spk11: Thank you. And then with respect to BD, I'm curious to mix the spring summer that you may have to carry over versus fall winter.
spk05: That's the inventory we're moving, right? That's the inventory. We are taking a lot of inventory on for fall winter. We're being aggressive in the promotional environment to move the spring inventory. And that's what everyone is focused on over in the outdoor space. right-size that inventory. That's the whole process that we've been talking about. Maybe I don't understand your question.
spk01: Sorry, maybe Mike, just also to add a little additional commentary. This is Aaron Jim. The way that we've traditionally thought about this from an outdoor perspective is also a function of DM versus in-line type product. And one of the things that we've been able to do throughout this whole process is that we've been able to keep the DM levels pretty tight. We came out of Q2 with something around $4 million to $4.5 million of DM, which is a little bit more elevated than what we've had in the past, but all things considering, not that bad. Now, it's really just a matter of how we continue to reshape the highs and lows. you know, really within the different categories. And that's where the target that we've outlined of bringing inventory levels down 15% really comes into play. But it's just continued to be very thoughtful as we go from season to season. Naturally, we'll have, you know, we'll always be generating some level of discontinued merchandise, but it's how you manage through that process and how you get in front of it as well by doing pre-DM type promotions and just working with retail partners, but also through your own channels and moving that inventory.
spk11: Okay. And Aaron, maybe you answered this question when you were speaking to weeks inventory on hand at retail, and that goes beyond just your brands. But a key question for the achievability of guidance in the back half of the year is your confidence that retailers are going to take those fall winter goods and aren't going to come back and say, you know what, I'm choking on bikes, paddle boards, hiking shoes. I can't take those fall winter shipments. What gives you the confidence that it's you know, some of those other categories aren't going to be problematic to your business.
spk01: The primary driver of that is just where the weeks of inventory on hand for BD is within retail being at that six to seven weeks. You know, if we were at, call it eight to 10 weeks or 10 to 12 would be more, sorry, more realistic as 10 to 12, then there could be, you know, a little bit of exposure there, call it, you know, anywhere from a half month to a month's worth of inventory. But when you're at six to seven weeks, there's just not enough flexibility or agility in the pipeline to be able to take that much lower. And so it really does come down to what's on the, what's, you know, what's on the docket from an order book perspective and how do we support it with sell through? Because at that point in time, you're really just getting into replenishment type activities, which these guys have open to buy dollars for because they just need to have, you know, they need to have the product on the and the shelf space around the pegs.
spk11: Okay, thank you. And then just a line of questioning around decision sports. You demonstrated the economic rationale for owning these businesses, certainly. That said, the message had been that you were a small player in a large market and share gains could support the top line through the market cycles. And the ammo opportunity was kind of a key component of that message. I guess I'm trying to understand You know, is this simply a cyclical business from here forth? What was the miscalculation with respect to ammo? You know, why is the business proving more, you know, exposed to the cycle than you had initially thought?
spk01: Yeah, that is primarily driven by the inability to consistently deliver a full range of ammo product that enables us to have a programmatic business with these different retail partners. In essence, we are going out and reselling the line every month based off of when we get components in place and can actually produce the product. As a result, it really makes it more of an ASAP or an opportunistic type model versus something that is based off of a program, which is really where we need to be, especially in an environment like this, where there's a lot of promotions, there's ample opportunity availability of product. And the feedback that we continue to receive from retail partners is they really like how we're positioned, in particular the Barnes brand. The Barnes brand is definitely best in class. It is well-positioned, it's premium position, and also it has a high level of sell-through. It's just a matter of we've got to be able to be more consistent or easier to do business with by being able to have the availability on a more consistent basis and in a more leveled manner, not in massive ways. And that's why the supply agreement is key and very important for us and why it also gives us confidence that we'll be able to see a better run rate on the business as we head into 24 because we'll be able to start to develop and execute on these programs.
spk11: Okay. That was very helpful. Thank you. You bet.
spk06: One moment for our next question. Our next question comes from Matt Caranda with Roth MKM. Your line is open.
spk07: Hey, guys. Good afternoon. Just a follow-up on the guidance. It sounds like the incremental weakness related to the guidance cut is coming from outdoor and precision sports pretty much entirely, but just wondered if you could maybe help quantify exactly where the cuts are coming from at the midpoint of the guide for both revenue and EBITDA.
spk05: Well, the midpoint is obviously $392.5 million in the $46 million of EBITDA compared to the $420 million and the $60 million, right? I mean, obviously, you've got to take in the first half miss, right? We've missed the first half new. So, obviously, that flows through. The destocking that we've been talking about in the promotional environment, the destocking of BD and EBITDA, North America Adventure, along with the promotional environment of Precision Sports that really, you know, picked up here in the second quarter. And, you know, we see that, you know, taking us through hunt season, right? That's really the, those are the main components of where the, you know, the drop from the 420 guy to 392 at the midpoint, 392 and a half. And in the corresponding EBITDA on that, right? As the Precision Sports business comes down in the promotional environment there, as well as the destocking at BD, which has been quite promotional as well. That's where, you know, that's really the culprit for the drop in the guide.
spk07: Okay. I'll take the rest of those offline. And then on the, specifically as it pertains to the outdoor segment, it just seems like we're going to end up almost flat in the second half this year versus the second half of 2019. But the DTC business, just given some of the stats you guys have thrown out, seems like it's grown quite a bit. So I'm just wondering, how are we thinking about share and wholesale? Are we losing share? Are we intentionally exiting certain customers? Is this where the overall product space is, is kind of flat relative to 2019? I mean, how are you thinking about share at wholesale for Black Diamond in particular?
spk05: I don't think we're losing share at all at the wholesale level. I think it's just a destocking. Aaron mentioned the need for some of our big retail partners to move their own branded private label stuff, right? And our demand that we see through our D2C business is, you know, our D2C business was up 28% in a quarter. So our brand, we still believe is quite strong. We're seeing the negative impacts from the destocking, right? And that's gone on throughout the first half of the year and as we continue to see it here, you know, as we speak. So, you know, as I mentioned in the last call, we needed to see that stop. We needed to see shell casings come available, which we've made great progress, right? But we won't get, you know, full benefit of that till first quarter of next year. And Adventure, we think, is stabilized, right? We think the worst is behind us for that business. So, I think that's how – that's why our focus, frankly, is on right-sizing the balance sheet, right-sizing inventory, and being in a strong position both from an operational and a financial stability to, you know, grow the business in 24. Okay.
spk07: You mentioned inventory, Mike. Maybe just talk about sort of where we're – how the inventory breaks down in terms of the 2Q balance, just between the segments. Are you a little bit heavier in one particular segment or another? It sounds like you're signaling you're going to be more promotional in the outdoor side of things, so probably clearing a little bit more.
spk05: The promotional, that is the environment that we're seeing both across the entire portfolio, frankly. But what we are seeing, as I mentioned to just an earlier question, there's about $80 million of inventory at outdoors. That was expected to spike up, as I said that, you know, I signaled that 90 days ago. We take possession of that inventory as of June 30th, as it leaves South . And we're taking possession of that here in the states now, and we'll get it to our customers here so they can put it on their shelves, hopefully after Labor Day. Precision Sports has about 40, $41 million of inventory between the two businesses. You know, that's a little higher than our target, but our target is, you know, $18 to $20 million to each business. And the venture has about $29 of inventory, you know, with about a third of that here in North America and the remainder over in Australia. So that's, you know, that's the landscape of our inventory positions. From an outdoor, we are looking to reduce that by 15%. That $80 million should be in the high 60s by the end of the year. It's a focus we're laser-focused on. We review it every Wednesday morning with the BD team in that glide path to get to the high 60s for inventory at Black Diamond. You know, right-sizing and focused on the same thing in an adventure. The team's been focused on bringing down inventory, working on product changeover as new products are sunsetting old products and introducing new products and managing that inventory here in the fall, especially in Australia. Aaron mentioned we're introducing new products, new platform six. And then that product will come to the North American market in 2024. So managing that inventory and getting that down is, again, another key focus. So, you know, we see a path to get that $149 million of inventory back to the low 130s, you know, by the end of the year. Okay, that's helpful.
spk07: And then just lastly, just on the balance sheet, what are the other levers we have to reduce leverage? I mean, it seems like we're going to be cash flowing with inventory reduction and even with the lower guide, there should be cash flow in the back half of the year here. Are there any portfolio actions you consider in terms of monetizing any particular segment to pay down debt, kind of free yourself up from some of the leverage that's happening right now?
spk05: We've been, you know, good question. We've been focused on leverage and managing inventory. The obviously You know, we're 2.7 times levered on a net debt basis, as I mentioned in the prepared remarks. We've been focused on that. Obviously, if we can achieve these $15 million improvement in inventory here between now and the end of the year, that'll put us in a position where we can pay off the revolver. The revolver has about $12 million, $11.5 million outstanding right now. We'll pay that off, and then We have a couple of other payments on the term note as well. So there's about $18 million of debt that we could repay between now and the end of the year. The intention is to pay that off as we de-lever the balance sheet. I think we've been planning pretty significantly from a demand planning and syncing up our demand plan and our inventories. That's been a focus over the last a couple of quarters to make sure, which had to happen in order to achieve what I'm trying to do by then, what we're all trying to do by the end of the end of the year. So if we in fact do that, you know, I could see us, you know, the goal is to be just have the term loan outstanding at the end of the year, which is about $110 million of debt. And, you know, you know, a trailing 12 month EBITDA at the midpoint, you know, 40, 46 million dollars of EBITDA. you know, you're still, we're still right in that range, middle of the range, 2.4 times levered. So, I mean, I, I don't think, you know, we're, you know, we're, we're not in a panic position where we need to sell a segment, but in the same breath, I'm sure it's the right price and that's be the boards of, of, you know, responsibilities to assess, you know, any type of, you know, uh, strategic alternative like that. But, you know, right now that's, um, We're just focused on right-side inventory, generating cash, paying down debt, and getting in a good, strong position from a balance sheet perspective to start next year. Okay. Got it.
spk07: So no portfolio actions in the near term, it sounds like.
spk05: Yeah.
spk07: Okay. Thanks, guys. We'll take the rest offline.
spk06: At this time, this concludes our question and answer session. I would now like to turn the call back over to Mr. Keeney for closing remarks.
spk01: Thank you very much, everyone, for joining the call, and we look forward to connecting with you as part of our Q3 earnings call and process.
spk06: Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect your lines. Thank you for your participation.
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