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Operator: Good afternoon, everyone, and thank you for participating in today’s conference call to discuss Clarus Corporation’s Financial Results for the Second Quarter ended June 30, 2023. Joining us today are Clarus Corporation’s Executive Chairman, Warren Kanders; COO, Aaron Kuehne; and CFO, Mike Yates; and the company’s External Director of Investor Relations, Cody Slach. Following their remarks, we’ll open your call for questions. Before we go further, I would like to turn the call over to Mr. Slach as he reads the company’s Safe Harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.

Cody Slach: Thank you. Before we begin, I’d like to remind everyone that during today’s call, we will be making several forward-looking statements, and we make these statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to potential risks and uncertainties that could cause the actual results of operations or financial condition of Clarus Corporation to differ materially from those expressed or implied by the forward-looking statements. More information on potential factors that could affect the company’s operating and financial results is included from time to time in the company’s public reports filed with the SEC.

I’d like to remind everyone this call will be available for replay through August 7, 2024, starting at 7:00 p.m. Eastern Time tonight. A webcast replay will also be available via the link provided in today’s press release as well as on the company’s website at claruscorp.com. Now I’d like to turn the call over to Clarus’ Executive Chairman, Warren Kanders. Warren?

Warren Kanders: Thank you, Cody. Good afternoon, and thank you all for joining Clarus’ earnings call to review our results for the second quarter of 2023. I am joined by our Chief Operating Officer, Aaron Kuehne; and Chief Financial Officer, Mike Yates. I will start by addressing the overall business and corporate strategy. Aaron will provide an update on each of our segments, and Mike will walk through our financial performance for the quarter. Our second quarter results were negatively impacted by the continued challenging macroeconomic environment and related headwinds. We were seeing destocking take place, particularly in North America. The overall promotional environment, coupled with retailers tightening their inventory positions and open-to-buy dollars weighed on our performance.

We took effective countermeasures during the quarter, generating free cash flow of $12.3 million versus $2.3 million during the same period last year. I am pleased that each segment was cash flow positive during the quarter as we right-sized the businesses to match expected demand for the year. Since the beginning of the year, we have undertaken a strategic review of all of our businesses, including our management structure. During last quarter’s call, we highlighted the inflection point in our organizational evolution and the strategic shift to seek to decentralize and focus on individual segment performance. As part of this strategy, we have made a number of significant changes to date, which we expect to contribute to long-term value creation.

We continue to evaluate all of our businesses and their strategic initiatives to maximize value. We believe that the sum of the parts of our three segments exceeds today’s market valuation. We continue to evaluate our corporate structure. And inclusive of the changes we have already made, we have a series of initiatives in place that we expect will reduce our normalized corporate overhead by $1.5 million compared to that of 2022. While we are experiencing a challenging retail landscape, the changes we have made through the first half of this year and the further cost-outs and savings initiatives we expect to make in the next 6 months are foundational to our growth strategies. Our management teams continue to seek to simplify their businesses and invest more dollars into commercializing new products and improving sales channel management.

We have worked with our retail partners carefully to help drive sell-through, while working with our supply chain partners to dynamically manage the flow of inventory in order to seek to reduce inventory levels, while ensuring on-time deliveries and higher levels of fulfillment. We are excited by the ongoing work of our three segment leaders. Specifically, on Outdoor and Adventure, we now have two new leaders who are laying the foundation for anticipated future growth and improve profitability. Our focus for the balance of the year will be on ensuring that the starting point for next year is optimized organizationally and clean from a balance sheet perspective. Later on in the year, we will be introducing our segment leadership team and their vision for long-range plans.

Despite the headwinds outlined, we continued to see monthly sequential improvement during the quarter. In Outdoor, we saw increasing sales each month, driven by a strong push in direct-to-consumer, aiding our inventory work down. While we saw some margin degradation due to off-price and promotional activity, we still increased our outdoor gross margin by 440 basis points to 37.5%, achieving our plan to generate cash and further normalize inventory. I am pleased with the continued performance on our Adventure segment. During the second quarter, we saw continued stabilization in the market for our adventure products, resulting in improved gross margins of 370 basis points to 42.4% for the Adventure segment. We continue to see normalized levels — sales levels in Australia, which we expect to increase in the seasonally-stronger second half as we introduce exciting new products.

Adventure’s U.S. business experienced strong growth month-over-month during the quarter, improving sales by 63% over the first quarter of 2023. Consistent with how others have reported in the channel, our Precision segment experienced sales declines of 27% while holding EBITDA margins at 26%. We have taken cost out to match our expected production and sales levels, which we believe will drive higher margin in the second half. Further, we took important strategic steps to seek to stabilize our component supply chain, which we expect will enhance our ability to build programs for our partners going into 2024. To summarize, we believe that we have reached the trough in our Outdoor and Adventure segments, and the quick actions we have taken to right-size those segments should set us up for more profitable growth in future periods.

While Precision has experienced a slowdown from market dynamics and the normal summer slump, we believe that hunt season and the looming election cycle into 2024 should catalyze demand. With that, thank you for being with us today, and I will turn the call over to Aaron.

Aaron Kuehne: Thanks, Warren. I would like to dive into specific comments on our segment performance. First, let me address Outdoor. Our Outdoor segment was impacted by lower consumer demand, given the inflationary environment and continued lower open-to-buys as retail partners right-size their inventory. Additionally, our retail partners are acting conservatively in terms of building back inventory, specifically weeks of inventory on hand, where we are seeing key retailers behave conservatively and shorten up their weeks of supply. We believe this is due to bloated inventory levels industry-wide, specifically private label products, which impact overall working capital and open-to-buy dollars. However, as we head into Q3, we are starting to see retail purchasing habits normalize, but we do expect it will take until year-end before the market approaches equilibrium.

Somewhat offsetting this weakness was a 28% increase in our direct-to-consumer business, which we believe shows the strength of the Black Diamond brand despite the broader retail environment. Looking ahead for the year, our top priority in Outdoor remains seeking to bring supply and demand into better alignment across our regions and channels, while reducing our outdoor inventory levels by 15% by the end of this year compared to the end of 2022. Also at the top of our priority list is the goal of rebuilding our go-to-market approach in North America, baselining our apparel initiative and bolstering our digital presence. In our Precision segment, we experienced lower sales year-over-year as retail inventory came in line with historical levels.

While Sierra and Barnes were each off approximately 27% over the prior year period, we think it is relevant to take a longer historical view where Barnes was up 5% over 2021 and over 100% during the same period in 2020. While Sierra was down 19% versus 2021, it was up 38% over the same period in 2020. The investments we have made in capacity and our continued partnership with OEM customers and retailers yielded meaningful share gains over the last three years. We continue to see a highly promotional environment for commodity ammunition as consumers look for value. We’re also seeing open-to-buy dollars tighten as our retail partners remain conservative with weeks of inventory on hand. We are seeing positives, however, as reloaded component availability loosens up, which should help our consumers who purchase our green box and black box component bullets for reloading, especially as we head into the hunt season.

Military and law enforcement opportunities are also coming into focus. As we head into the second half of the year, our partners continue to expect hunt season to pull through for highly promotional activity to subside by year-end. As Warren mentioned, we are pleased with the progress we’ve made in short shell cases through a strategic supply agreement that covers us over the next 2.5 years, which will improve our ability to drive ammunition programs and better serve our retail and distribution partners going into 2024. Finally, our Adventure segment. We continued to experience sales improvement each month of the quarter, while substantially increasing our gross margin and EBITDA levels. In our brands’ home market of Australia, inventory levels have improved with our retail partners.

And in North America, we continue to right-size our sales channels and began to experience the early signs of recovery that we expected. For example, we have partnered with several of our strongest retail partners here in North America to support sell-through and increase the velocity of their destocking efforts. With one of our accounts, this has resulted in a year-over-year increase of 60% in Rhino-Rack branded products sold, while the category itself is down high single-digits. These efforts are not only expanding Rhino-Rack’s market share but also further reinforcing our strategic relationships, demonstrating our ease of doing business with, accelerating their destocking efforts and further positioning Rhino-Rack for growth. Just as important, our gross margins in Adventure for the quarter ended up at 42.2%, which represents the highest margin quarter since mid-2021.

We have made strides to right-size direct labor, assembly and overhead, while reworking input costs in core products. For context, our gross margin for fiscal year 2022 was 35.4%, and our 2023 year-to-date gross margin was 41.6% on sales that were 37% lower than the same period. Our goal for the remainder of the year is to maintain our gross margins while driving inventories down, as we introduce next-generation products in Q4 in Australia and globally in 2024. The business has strong fundamentals in place, and we expect that as our growth initiatives take hold, we will see strong operating leverage from the organizational reshaping. While vehicle levels haven’t fully rebounded, we are starting to see green shoots with regards to vehicle availability.

We expect the supply and demand imbalance with new vehicles to persist through the fourth quarter, but we have important initiatives that we believe will accelerate our growth in the back half of the year for adventure. Let me lay them out here. First, we will focus on transforming our product development and innovation process to seek to drive improvement in speed to market and product differentiation. We have a renewed focus on customer and consumer insights to drive overhauled product hierarchy. A key part of our go-to-market evolution will be how we create and launch products as part of a larger ecosystem of lifestyle demands. Next is customer service, with a renewed focus on our key account partnerships and key account programs, the goal to be the easiest partner to work with in the industry.

Our people will be empowered to take action to drive performance and deliver on the challenge with an understanding that there are different business models for different customers. Next is digital transformation. We are planning to maximize our operational infrastructure to develop our e-commerce platforms to support both B2B and B2C opportunities. We are aiming to build our distribution strategy around the consumer in a way that will continuously strengthen our premium market positioning and drive the pricing power. And finally, we will be data-led in our decisions. We are developing a demand and data-driven operating model that plans, buys and sells inventory closer to demand. Now, I’ll pass the call to Mike to discuss our Q2 financial results in more detail.

Mike?

Michael Yates: Thank you, Aaron, and good afternoon. Jumping right into our performance in the second quarter. Sales were $83.7 million compared to $114.9 million in the prior year quarter. On a constant currency basis, total sales were down 26%, while reported sales were down 27%. Second quarter sales in our Outdoor segment were down 24% to $40.1 million versus $52.6 million in the second quarter of 2022. If you adjust for the foreign currency exchange headwind, Outdoor sales [indiscernible] 23%. As Aaron mentioned, we are still constrained by lower open-to-buys from our key North American retail partners, due in part to their inventory destocking activities. Partially offsetting this decline was continued strong execution in our direct-to-consumer business at Black Diamond.

Precision Sports sales were $25.8 million in the second quarter compared to $35.2 million in the second quarter of last year. In the quarter, we experienced broad-based discounting from our competitors and retail partners as the market continued to right-size inventory levels. Our ammunition business has been a significant headwind for the first half of the year on gross margin. However, we remain very optimistic that Precision Sports and the market will return to solid demand as we move to the second half of the year, supported by the upcoming hunt season. The Adventure segment contributed sales of $17.9 million versus $27.1 million in the prior year quarter. And on a constant currency basis, sales were down 31% and reported sales were down 34%.

Despite these challenging market conditions, we believe we are starting to see stabilization in the market as sales were up on a sequential basis compared to the first quarter of 2023, and we expect to see sequential improvement in sales in both the third and fourth quarters of 2023. Rhino-Rack ‘s U.S. business did well during their peak selling season here domestically, and some of the cost actions we’ve taken have shown up in improved profitability for our Rhino-Rack business in North America. During the first six months of 2023, we moved to a new headquarters and consolidated our three previous warehouses under one roof in Denver for our North American business. During this period, for the first six months of 2023, we incurred over $700,000 of moving costs that should not repeat.

Just to be clear, the Rhino-Rack facility in Denver serves as an under-one-roof solution for the entire Adventure segment here in North America, housing our North American headquarters, sales and marketing, warehousing and assembly. In Australia, sales were strong in April and May, but softened in the last few weeks of June as a result of Australians’ observation of the end of their fiscal year. Importantly [Technical Difficulty] picked back up in July. While the market environment in our Adventure segment is still challenging, we believe the worst is behind us, and we look forward to reporting a business that produces better than 12% adjusted EBITDA margins going forward. Moving on to consolidated gross margins. In the second quarter, gross margins declined to 36.7% compared to 38% in the year ago period.

We experienced a 140 basis point benefit from favorable variances in write-offs, but this was more than offset by unfavorable FX of 110 basis points and unfavorable product and channel sales mix of 160 basis points. From a segment perspective, gross margin at Outdoor was 37.5% in the quarter compared to 33.1% in the prior year quarter, reflecting a 440 basis point improvement. The primary driver here was the elimination of the high freight cost from 2022, not repeating this year. Gross margin at Adventure was 42.2% in the quarter compared to 38.5% in the prior year quarter, reflecting a 370 basis point improvement due to the operational improvement and cost actions taken in the second half of last year taking hold, as well as more favorable FX environment.

Gross margin at Precision Sports was 31.7% in the second quarter compared to 44.9% in the prior year quarter, reflecting a 1,320 basis point degradation. This decrease in gross margins at Precision Sports was due to the sale of ammunition at lower margin profile due to the promotional pricing environment that the market is currently demanding. The ammo market has been very tough and has been a drag on gross margin. To put this in context, I want to share the following. During the first half of the year, we used internally produced bullets at Sierra and loaded Sierra ammunitions, selling a total of $4.7 million of Sierra ammunition in the first half of 2023. We only realized $236,000 of gross profit on these sales. Have these bullets been sold through Sierra’s OEM channel, we would have recognized an additional $550,000 of gross profit, which would have increased gross margins at Sierra by nearly 700 basis points during the first half of the year.

Once the market stabilizes, we would expect margins to normalize for our ammo product. Until then, we will continue to realize decent margins on our component bullet business. Selling, general and administrative expenses in the second quarter decreased [Technical Difficulty] compared to $35.4 million in the year ago quarter. The decline was driven by expense reduction initiatives in the Outdoor, Adventure and Precision Sports segment, as well as lower sales commissions and lower noncash stock-based compensation expense for performance awards in corporate. Net loss in the second quarter was $2.1 million or a $0.06 loss per diluted share, compared to net income of $3.8 million or $0.09 of EPS in the prior year quarter. Adjusted EBITDA in the second quarter was $7.3 million or an adjusted EBITDA margin of 8.7% compared to $17.6 million or an adjusted EBITDA margin of 15.3% in the same year ago quarter.

The decline in adjusted EBITDA was driven by lower sales volumes, unfavorable product and channel mix and a $1.5 million consolidated foreign currency exchange headwind due to the strength of the U.S. dollar. These impacts were partially offset by the improvements in SG&A during the quarter that I just previously mentioned. Now, let me shift over to liquidity. At June 30, cash and cash equivalents were $11.3 million compared to $12.1 million at December 31, 2022. As Warren highlighted in his opening comments, free cash flow was outstanding. Free cash flow, defined as net cash provided by operating activities plus capital expenditures for the second quarter of 2023 was $12.3 million compared to $2.3 million of free cash flow in the same year ago quarter.

We used this free cash flow to pay down nearly $10 million of debt and ended the quarter with total debt of $127.2 million. This put us in a net debt position of $115.9 million, resulting in a net debt leverage ratio of 2.7 times on a trailing 12-month adjusted EBITDA basis. We expect to stay within our stated range of 2 times to 3 times leverage for the remainder of the year. Under our $300 million revolving credit facility, we have approximately $11.4 million outstanding and further borrowing capacity of approximately $32 million at June 30, while maintaining compliance with the required covenants under our credit agreement. Our inventories ticked up sequentially by $3.2 million to $149 million at June 30. As discussed in our prior call on May 1 of this year, this increase was expected.

As of June 30, we’ve taken possession of key inventory, specifically at our Outdoor business for the prime fall/winter selling season. From a tax perspective, we have over $17 million of NOLs remaining, and we expect these NOLs to offset any federal cash taxes due in 2023. Now, let me move on to our 2023 outlook. We now expect sales to land within the range of $385 million to $400 million for the full year 2023 and adjusted EBITDA to be in the range of $42 million to $50 million, or an adjusted EBITDA margin of 11.7%, assuming the midpoint of the sales and adjusted EBITDA guidance. We also now expect full year capital expenditures to range between $6.5 million to $7.5 million, and free cash flow is now expected to range between $30 million and $35 million for the full year 2023.

Finally, for the third quarter of 2023, we expect consolidated sales to be $100 million to $105 million, reflecting continued headwinds surrounding the unwinding of inventory at our key North American partners, both at our Outdoor and Rhino-Rack USA businesses, and the promotional environment within Precision Sports segment. Let me pause here, hand the call back to the operator as we are now ready for the Q&A.

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Operator: Thank you, sir. At this time we will conduct the question-and-answer session. Our first question comes from the line of Alex Perry with Bank of America.

Alexander Perry: 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 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.

Michael Yates: 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 will take until the end of the year, we think, to clear. But our guidance assumes that it does clear through the — by the end of the year. What it also assumes is that our normal preseason fall/winter orders at Black Diamond, if they do flow through as the preseason 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.

Aaron Kuehne: Hi, Mike. This is Aaron. I’ll also 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, it 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 brand of products, that is where we’re seeing the biggest destocking — the largest amount of destock you 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 weeks to 12 weeks of inventory on hand. During COVID, it jumped up to 18 weeks to 20 weeks of inventory on hand. And currently, we’re sitting at six weeks to seven weeks of inventory on hand. And so what it’s actually 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 it really is focused on those — as I say, on those two segments of our North America wholesale channel, 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 totally accelerate the destocking activities and get to a more normalized level here in the next — over the next six months.

Alexander Perry: That’s really helpful. And then my follow-up is just on — if we think about the guidance here, so I think the 3Q guide implies a sequential acceleration from 2Q, still down year-over-year by accelerating. Is that mostly based on what you’re seeing from a pre-booking? And then also, I think the 4Q sort of implied guide — would imply that it gets even better. What sort of within the sort of 3Q versus 4Q guide that sort of gives you confidence there? Thanks.

Aaron Kuehne: Yes. This is Aaron 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 re-plans or ASAP orders that typically come in. So as we thought about planning for the back half, we are expecting to see improvements in the realization of our forward orders for our bookings.

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’s carried forward through July as well.

Michael Yates: Yes. So Alex, we — our guide implies $204 million to $219 million of revenue in the back half of the year. 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. On Precision Sports, it depends what we end up doing on how ammo pulls through. But as Aaron referred to, the Black Diamond business, we do expect that not to get all the way back, but as I mentioned in the answer to your first question, we do had a strong order book for our fall and winter goods, and that’s the inventory I mentioned that we’ve taken possession for. So that should get back into the $60 million to $65 million range is what we’re expecting that to recover to from — on the top line at BD.

Alexander Perry: Perfect. That’s really helpful. Best of luck going forward.

Michael Yates: Thanks.

Operator: One moment for our next question. Our next question comes from Anna Glaessgen with B. Riley. Your line is open.

Anna Glaessgen: Hi. 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 impacts from the retailer destocking or caution with open-to-buys?

Aaron Kuehne: Yes. 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 you’re even seeing point-of-sale data support, call it, high single-digit growth rates that were taking place. The problem is that there’s still going to be stocking activity, but also still right-sizing the various components of their own inventory, which naturally impacted their open-to-busy. And the one thing that we continue to also see is that their inventory levels specific to that of Black Diamond are decreasing at a faster rate than what we’re also seeing that at point of sale. So that continues to provide us confidence that the inventory or the destocking activities are working, but it is — and that will also feed into more normalized purchasing habits here as we get into Q3 and Q4.

Anna Glaessgen: Got it. Thanks. And then turning to Precision Sports, I think in the Q, I saw that 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?

Aaron Kuehne: A lot of this also comes down to just how we’re able to prioritize the 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 months 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 actually causes a shift between domestic and international versus a wholesale change in terms of demand or just where the inventory levels are.

Anna Glaessgen: 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 of quarters ago?

Aaron Kuehne: Yes. So we are able to provide higher levels of fulfillment on the international side. And so the pent-up demand isn’t as pronounced as it was previously, right? 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 demand that was quite insatiable. But over the last several 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 to additional programs and opportunities into the future.

Anna Glaessgen: Got it. Thanks.

Operator: One moment for our next question. Our next question comes from Randy Konik with Jefferies. Your line is open.

Randal Konik: Yes. Thanks a lot and good evening. I guess, Aaron, can you give us some added perspective on — can you talk about the dynamic of moving to 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 or fifth inning? And how does that kind of play out over like, let’s say, the next four quarters to six quarters to eight quarters in your opinion?

Aaron Kuehne: Yes. So I think because of what took place during the pandemic 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 that things started to slow down and the dynamics associated with supply chains both elongated and then also shortened in a very quick period of time. What I highlighted is that that’s a different ball game. 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, our product offering, but also even doing shop-in-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 they anticipate will be an overhang over the next — anywhere from a year to two years. [indiscernible] 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, 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 going to be some just natural overhangs that continue to persist through the course of this year. And then I think as we get into 2024, it will 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.

Randal Konik: Great. Maybe lastly, can you give us some perspective by division, by segment on how we should — how you’re thinking about incremental — or go-forward promotional posture from here? Just curious on where you’re seeing it going to get less bad, get maybe perhaps worse. Just give us a little more granular color there would be very helpful.

Aaron Kuehne: 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 will get sequentially better 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 was enough both in Australia and here domestically. Our retail partners don’t participate in private label, and so they came into the headwinds and 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 Adventure. 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 2024 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.

Randal Konik: Super helpful. Thanks guys.

Operator: One moment for our next question. Our next question comes from Joe Altobello with Raymond James. Your line is open.

Joseph Altobello: Thanks. Hey, guys. Good afternoon. I guess, first question on the promotional environment. Obviously, you got pretty intense during the second quarter. Maybe help us understand when that started — it sounds 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.

Aaron Kuehne: Yes. So we started to see it — so if we break it down by segment, we first started to see in the Outdoor space 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 back 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 we started to really see the promotional environment accelerated an uptick in terms of intensity, which is to be expected just because 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 Sports side of things, we saw the promotional environment really focused on the commodity type calibers, especially nine mill, 223 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 point of view or competition when it comes to the promotional environment, and that is something that has really ramped up as we headed into what we call the summer swamp, 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 has been ongoing really since February or March, as people have come out of, as I say, in 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. 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, 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 the balance sheets clean and get everything recalibrated and normalized as we head into 2024.

Joseph Altobello: Got it. And that’s very helpful, Aaron. Thank you. And maybe just a follow-up on that. Is there a way to quantify how much destocking across the 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?

Aaron Kuehne: 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’s cost us from a revenue standpoint. We came into the year applying the same approach in terms of how we think about the business, work as a planet. We did a lot of — we had a lot of discussions with top to tops. We have 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 why 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 being 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 is 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 mainly, we’re taking it 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.

Joseph Altobello: Got it. Okay. Thank you, guys.

Operator: One moment for our next question. Our next question comes from Mark Smith with Lake Street. Your line is open. Q – Mark Smith Hi, guys. I just wanted to revisit the international business just a little bit as that came in a little weaker than we had expected. Aaron, can you talk a little bit about how much of that was maybe supply versus demand? How much you want a shift — and this is across all segments. How much you want to ship internationally versus just demand-driven and some of the same macro factors slowing some of the international sales?

Aaron Kuehne: 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 for the bulk of the rest of the year as we think about 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 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 bullets we can produce on a given day, but also how that all ends 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 308 and the 335, et cetera. But 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.

Mark Smith: And if we look at outdoor business within international, can you just talk about puts and takes there that was, perhaps, I think the lowest since before the pandemic? Talk about any pressures that you’re seeing on international business within the Outdoor segment.

Aaron Kuehne: Yes. The outdoor side on the international piece is really driven by Europe. That was the region that has been performing extremely well despite the geopolitical risk and concerns but also the economic headwinds that the entire globe is facing. And they were really outperforming on a relative basis but also sequentially for an extended period of time. And in Q2, it’s 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 preseason orders, so that really took place in February and March. But as we headed into May and June, which are really driven by ASP 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 — 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 open order windows, that could start to bring you the 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.

Mark Smith: Okay. And then back to Precision for one more question. Just 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 pricing? Margins were squeezed here this quarter. How much of that’s really coming from component costs? And as you sound like feel better, what kind of price increases are you looking at on components going forward?

Aaron Kuehne: 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 the 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 nine 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 of components, shell cases being a primary driver, as well as labor. We have been able to plan for that, though, over the last couple of quarters as it relates to the different price increases that we activated, in particular in 2022, that have carried over into 2023.

And the team has also been very focused on continuous improvement initiatives. They have 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 the 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 products that we’re known for but also actually come with higher levels of gross margin as well. And so that is where we have deemphasized 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.

Mark Smith: Okay. Great. Thank you.

Operator: One moment for our next question. Our next question comes from Jim Duffy with Stifel. Your line is open.

James Duffy: Thank you. Good afternoon, guys. I’ve got a couple of questions for you. First, Mike, can you give us some help on the inventory mix by category?

Michael Yates: By segment or by raw material, finished goods?

James Duffy: No, by segment.

Michael Yates: Yes. Well, we haven’t provided that anywhere. So, we can talk about that in BD, inventory is about $80 million. Precision Sports inventory is around $40 million. And the remainder is at Adventure, so that’s about $30 million.

James Duffy: Okay. Helpful. Thank you. And then with respect to BD, I’m curious the mix of spring/summer that you may have to carryover versus fall/winter.

Michael Yates: That’s the inventory we’re moving, right? We are taking a lot of inventory on for fall/winter. We’re being aggressive in the promotional environment and move the spring inventory, and that’s what everyone is focused on over in the Outdoor space is to right-size that inventory. That’s the whole process that we’ve been talking about. So maybe I don’t understand your question.

Aaron Kuehne: 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 over the — 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 really within the different categories, and that’s where the targets that we’ve outlined of bringing inventory levels down 15% really comes into play, but it just continue to be very thoughtful as we go from season to season.

And actually, we’ll have — we’ll always be generating some level of discontinued merchandise, but it’s how you manage through that process of how you get in front of it as well by doing pre-DM type promotions and just working with retail partners, but also for your own channels and moving that inventory.

James Duffy: Okay. And Aaron, maybe you answered this question when you were speaking to lease 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 choose. I can’t take those fall/winter shipments. What gives you the confidence that it’s — some of those other categories aren’t going to be problematic to your business?

Aaron Kuehne: The primary driver of that is just where the weeks of inventory on hand for BD is within retail being at that six weeks to seven weeks. If we were at, call it, eight weeks to 10 weeks or 10 weeks to 12 weeks would be more — sorry, more realistic is 10 weeks, 12 weeks. Then there could be a little bit of exposure there, call it, anywhere from the half month to a month’s worth of inventory. But when you’re at six weeks 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 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 replenish-type activities, which these guys have open-to-buy dollars for because they just need to happen. We need to have the product in the shelf space around the pegs.

James Duffy: Okay. Thank you. And then just a broader question around Precision Sports. You’ve 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, is this simply a cyclical business from here forth? What was the miscalculation with respect to ammo? Why is the business proving more exposed to the cycle than you had initially thought?

Aaron Kuehne: Yes. That is primarily driven by the inability to consistently deliver a whole range of ammo product that enables us to have a programmatic business with these different retail partners. In essence, we are going out and resetting 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 and 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 positioned, and also has a high level of sell trough. This is a matter where you got to be able to be more consistent or easier to do business with by being able to have these — availability on a more consistent basis, 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 2024 because we’ll be able to start to develop and execute on this program.

James Duffy: Okay. That was very helpful. Thank you.

Aaron Kuehne: You bet.

Operator: One moment for our next question. Our next question comes from Matt Koranda with Roth MKM. Your line is open.

Matthew Koranda: Hi, guys. Good afternoon. Just a follow-up on the guidance. It sounds like the incremental weakness related to the guidance kind of coming from Outdoor and Precision Sports pretty much entirely. But I 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.

Michael Yates: Well, the midpoint is obviously $392.5 million and the $46 million of EBITDA compared to the $420 million and the $60 million, right? Obviously, you got to take in the first half miss, right? We’ve missed the first half [Technical Difficulty]. So obviously, that flows through. The destocking that we’ve been talking about and the promotional environment, the destock in BD and North America Adventure, along with the promotional environment in Precision Sports, that really picked up here in the second quarter, and we see that taking us through hunt season, right? That’s really the — those are the main components of where the drop from the $420 million guide to $392 million at the midpoint — $392.5 million and the corresponding EBITDA on that, right?

As the Precision Sports business comes down and the promotional environment there, as well as the destocking at BD, which has been quite promotional as well, that’s where — that’s really the culprit for the drop in the guide.

Matthew Koranda: 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 D2C business, just given some of the stats you guys have thrown out, it seems like it’s grown quite a bit. So I’m just wondering how are we thinking about share in wholesale, are we losing share? Are we intentionally exiting certain customers? Is this where the overall product space is just kind of flat relative to 2019? How are you thinking about share at wholesale for Black Diamond in particular?

Michael Yates: I don’t think we’re losing share at all at the wholesale level. I think it’s just the 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 for — through our D2C business — our D2C business was up 28% in the 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 as we speak. So as I’ve 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 full benefit of that until first quarter of next year.

In Adventure, we think, it’s 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 be in a strong position, both from an operational and a financial stability to grow the business in 2024.

Matthew Koranda: Okay. 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.

Michael Yates: 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, but there’s about $80 million of inventory at Outdoor that was expected to spike up. As I said that — I signaled that 90 days ago, we take possession of that inventory as of June 30 is at least [indiscernible] and we’re taking possession back here in the States now, and we’ll get it to our customers here, so they can put it on their shelf, hopefully, after Labor Day. Precision Sports has about $40 million, $41 million of inventory between the two businesses. That’s a little higher than our target, but our target is $18 million to $20 million in each business [Technical Difficulty] of inventory with about a third of that here in North America and the remainder over in Australia.

So that’s the landscape of our inventory position. 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 with the — we review it every Wednesday morning with the BD team and the glide path to get to the high-60s for inventory at Black Diamond. And then we’re right-sizing and focused on the same thing at Adventure. The team has been focused on bringing down inventory, working on product changeover as new products or sunsetting old products, introducing new products and managing that inventory here in the fall, especially in Australia. Aaron mentioned, we’re introducing new product, new platform [indiscernible] 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 we see a path to get that $149 million of inventory back to the low-130s by the end of the year.

Matthew Koranda: Okay. That’s helpful. 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’d 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?

Michael Yates: We’ve been — good question. We’ve been focused on leverage and managing inventory. Obviously, we’re 2.7 times levered on our — 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 will 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 delever the balance sheet.

I think we’ve been planning pretty significantly from a demand planning and syncing up our demand plans and our inventories. That’s been a focus over the last couple of quarters to make — which had to happen in order to achieve what I’m trying to do by — what we’re all trying to do by the end of the year. So if we, in fact, do that, I could see us — 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 on a trailing 12 month EBITDA at the midpoint, $46 million of EBITDA, you’re still — we’re still right in that range — middle of the range, 2.4 times levered. So, I don’t think we’re not in a panic position where we need to sell a segment. But in the same breath, I’m sure if the right price — and that’s the Board’s responsibilities to assess any type of strategic alternatives like that.

But right now, that’s — we’re just focused on right-sizing inventory, generating cash and paying down debt and getting in a good strong, better position from a balance sheet perspective to start next year.

Matthew Koranda: Okay. Got it. Enough portfolio actions in the near term it sounds like.

Michael Yates: Yes.

Matthew Koranda: Okay. Thanks guys. I’ll take the rest offline.

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

Aaron Kuehne: Thank you very much, everyone, for joining the call. We look forward to connecting with you as part of our Q3 earnings call in process.

Operator: Ladies and gentlemen, this does conclude today’s teleconference. You may now disconnect your lines. Thank you for your participation.