Clarus Corporation (NASDAQ:CLAR) Q4 2022 Earnings Call Transcript

Clarus Corporation (NASDAQ:CLAR) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Good afternoon, everyone, and thank you for participating in today’s conference call to discuss Clarus Corporation’s financial results for Fourth Quarter and Full Year Ended December 31, 2022. Joining us today are, Clarus Corporation’s President, John Walbrecht; CFO, Mike Yates; and the company’s External Director of Investor Relations, Cody Slach. Following their remarks, we’ll open the call for your questions. Before we go further, I would now like to turn the call over to Mr. Slach as he reads the company’s safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides information — important cautions regarding forward-looking statements. Cody, please go ahead.

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

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

John Walbrecht: Thanks, Cody. It’s good to be with everyone. As I reflect on 2022, there is no doubt it will go down as one of the most challenging years in our company’s history. An uncertain macroeconomic environment, a tough consumer backdrop, extremely volatile foreign currency exchange markets and inefficient supply chains presented rough waters for our brands to navigate. We are proud of our team tenacity and dedication in these uncertain times. So I first want to recognize all the people across all of our brands and their great efforts. As the challenges set in, we acted quickly and pivoted towards the areas of our business that weren’t facing the most severe headwinds. Areas of focus were precision sports as well the markets outside of North American wholesale in our Outdoor segment.

We also prioritized expense reductions, free cash flow generation and debt reduction. On the cash side of this equation, we focused on streamlining inventory and cost reductions. This allowed us to generate over $30 million in free cash flow during the fourth quarter, which we used to pay down $28 million in debt. We ended the quarter at approximately 2 times leverage, which is at the low end of our leverage range and we believe it is a comfortable spot as we enter into 2023. Zooming out on the full year, we have much to be proud of as well. We drove record revenue growth, grew our Precision Sports segment by 21%, deepened our specialty retail presence in our Outdoor segment by increasing sales in this channel by 31% in the second half of the year, grew our apparel by 31% and expanded our direct to consumer business by 26%, all while focusing on decreasing our inventory and paying down debt.

However, we weren’t totally immune to the challenges I just mentioned. Negative impacts associated with foreign currency, inventory destocking at our larger retail accounts in North America during the second half of 2022, a consumers confidence has been tested by rapid inflation and continued inefficiencies with our supply chains were difficult for our brands to fully offset. As a result, on a consolidated basis, our fourth quarter sales were $104 million, down 12% or down 9% on a constant currency basis. Breaking down our Q4 performance at the segment level, as mentioned, Precision Sports continued to market outperform, growing 10%. Our Outdoor segment declined 15% or 11% on a constant currency basis and our Adventure declined 28% or 22% in a constant currency.

Like last quarter, macroeconomic factors outside of our control continued to hamper our profitability. Specifically, unfavorable movements in foreign currency exchange rates had negatively impacted our Q4 adjusted EBITDA by an estimated $3.7 million, while higher freight costs associated with supply chain challenges resulted in incremental $9.9 million in additional costs. Removing these costs, our consolidated adjusted EBITDA margin would have been 14.1%. We believe elevated trade costs are transitory as supply chains continue to stabilize. In fact, we are making progress in the reduction of lead times back to pre-pandemic levels and container costs are decreasing as well. As such, we currently expect a more normalized operating environment as we move towards the back half of 2023.

At this time, I would like to provide additional highlights at the segment level starting with Outdoor. In our Outdoor segment, our focus on Europe and our international global distributor markets, which aren’t experiencing the same magnitude of inventory overhangs that the North American market has allowed us to drive constant currency growth in the fourth quarter of 15% in Europe and 7% in our international global distributors. To provide some context on the level of FX impact we endured in Europe, the strength of the dollar caused a $2.3 million headwind on a constant currency basis in the fourth quarter and nearly $6.6 million for the full year impact. Despite the marketing challenges and significant foreign currency headwinds, our Outdoor segment experienced a 400 basis point gross margin improvement in the fourth quarter due to activities previously outlined around new product introductions, pricing, channel development, sourcing and productivity initiatives.

Without the impact of the foreign currency headwinds that I just mentioned, our Outdoor segment gross margin would have increased 640 basis points to 41.4% margin. Apparel continues to be our fastest growing category with sales up 15% for the quarter and 31% for the year. We experienced outsized demand for the outdoor snow shows led by our Doom Patrol Hybrid and our expanded Recon collections. Our innovative four way stretch fabric and unique feature sets have been strong drivers for our new consumers in this brand. As we continue to refine and integrate our technical components, our fit and are features, we believe this will further increase demand awareness and our overarching growth path. Our direct to consumer business also remains a bright spot with fourth quarter sales up 19% year-over-year and up 38% in Apparel alone.

We’ve been very intentional about driving our direct-to-consumer business, doubling down on our engagement with our core community by opening flagship retail stores and executing a long term investment in e-commerce. Internationally, our Outdoor segment continues to perform well and gain market share. With the lack of microprocessor availability, this has hampered our brand all year and foreign currency exchange headwinds lowered European sales by $2.3 million in the fourth quarter. Demand trends are strong for the brand moving forward. We believe this highlights the strength of our relationship with our vast network of European specialty stores and the desire for the consumer to remain active in the outdoors. Our international global distributor market, specifically Korea, Japan and China, reflected a 90% increase in footwear and a 41% increase in our mountain products in the fourth quarter.

Overall, the retail channel in these two international markets is much healthier than we experienced in the North American market. In fact, inventory destocking trends with our larger key accounts in North America dramatically reduced their open to buys was the major offset to the positive initiatives I just discussed. Based on our continued conversations with our larger key accounts, this not a Black Diamond specific issue, as our products continue to show strong sell through. We believe the issue stems from other discretionary categories not geared towards the activity based consumer. Unlike other retailers we work with globally, there continues to be a challenge for large North American key accounts to ensure a balanced portfolio of inventory.

The demand pull forward experienced in 2020 and 2021 due to the pandemic led to an extreme over indexing of inventory. With the overall demand curve slowing, open to buy’s and delay until this excess inventory is sold through at the retail level. Within our specialty accounts, however, we continued to chase demand with sales in the channel, up 31% in the second half of the year. To meet this demand, we often needed to incur higher than anticipated costs associated with air freighting the product. We estimate that we end the quarter with $3 million in back order demand globally. This number has come down every quarter since the second quarter of 2022, given the strong sell through trends and our team’s ability to service our accounts at higher levels, while chasing the increased demand in headlamps, trekking poles, gloves and apparel.

As we start 2023, we feel confident in our ability to deliver on time 95% plus fulfillment and being easier to do business with than we were in 2022. Looking forward, we are excited about the recent announcement of Neil Fiske as the new President of BD. He will be responsible for accelerating the growth and lifting profitability by capitalizing on the attractive expansion opportunities across various categories, channels and regions. He joins Black Diamond from marquee brands as a leading brand accelerator with a portfolio of 13 brands. As a CEO for almost 20 years, he has an extensive experience in outdoor, active and apparel categories, having led transformational change at marquee brands, including the Dakine and Body Glove, Eddie Bauer, Billabong International, the Gap, and L Brands.

He is an avid outdoorsman and experienced mountaineer and Fiske brings deep experience in building brands, driving innovation and improving operational performance. Please welcome Neil on board. Our focus in our Outdoor business in 2023 will be continuing our commitment to activating and scaling our go to market activities. Through a disciplined approach to new product introductions, identifying continuous improvement activities within our supply chain and operations and increasing the number of touch points with our retail partners and consumers, we believe that we are well positioned for continued market share gains as we seek to elevate the brand awareness and demand for our brand within our targeted markets. We anticipate that the supply chain continue to improve and inventory normalizes and we will accelerate the segment’s growth and profitability.

Moving to Precision Sports. Our niche brand positioning and ability to be nimble with product deliveries resulted in another record quarter. We drove another record quarter with sales growth of 10%. Our ability to continue executing in this segment stems from the diversification we have by brand, by vertical and by geography. Not only do we have two super fan brands in Sierra and Barnes, but both of these brands have strong business relationships across the globe, supporting ammunition, OEM and component businesses. Our 10% sales growth was driven by the prioritization of orders for our OEM partners, both domestically and internationally. Demand for our centerfire rifle hunt product and broader ammunition remains high, limited only by our availability of the brass cases required to load and deliver this product, which continue to create back order through our wholesale channels.

As demand continued to exceed supply for both Sierra and Barnes, we increased capacity in both bullets and loading of ammo, ending the year at our production rate targets of 330 million bullets at Sierra and 110 million at Barnes and an ammo loading capacity of 50 million rounds. As we look to 2023, we anticipate the use of this capacity will mix between OEMs, reloaders and ammo, but it will also mix from the various calibers. But we do expect to focus on larger centerfire rifle calibers and less on pistol and revolver in 2023. The key driver of any variance in this strategy will be our ability to source product components, mainly, as stated previously, the brass cartridges for rifle loads. All things being equal, we will continue to chase growth opportunities in 2023.

This stems from our two super fan brands we own. We believe it is inaccurate to lump our precision brands into the broader ammunition market given our unique product and our brand positioning and our leading specialty market share, premium prices, enthusiast consumers and growing demand by our various channels worldwide. It is our demand across various diverse geographies and channels that allows us to shift quickly when one channel slows or when the supply chain limit other opportunities. I mean, just come out of SHOT Show in mid-January, we are feeling confident about the upcoming product launches. At our Barnes brand, we will be launching the Pioneer line which is product for lever action rifles. We expect the Sierra will follow with a similar product in 2023.

Response we are receiving from the dealers is positive and combined with our relationship with key distributor partners, we believe we will continue to steal market share in 2023. We are also continuing to see opportunities outside of the domestic market primarily in Europe, Australia and South Africa. Now on to Adventure. The challenges we experienced in the third quarter persisted into the fourth quarter, worldwide new vehicle supply continues to lag demand. Like our Black Diamond business, our larger key distributors of our Adventure products were sitting on too much inventory going into the second half of 2022, impacting the sales velocity. To combat these headwinds, we have improved our organizational structure, enhanced our go to market process, professionalized our team via sales force expansion, in store support systems, fulfillment — and our fulfillment center.

We have reallocated expenses to the areas that matter most around new product introduction, distribution and systems. We have also taken over the U.S. and Canadian distribution from MAXTRAX and in Canada for Rhino-Rack, allowing us to further control these brands in these important markets. We are also onboarding additional sales agencies to create more touch points with our retailers. Ultimately, we believe the combination of factors negatively impacting our Adventure segment in the past couple of quarters will be short lived. Our long term growth premise for these brands remains unchanged, strengthened by our overall industry trends that we witnessed at SEMA in November. We continue to see global vehicle trend shift towards more SUVs, CUVs, trucks, and side by side or utility task vehicles, making outdoorism combined with overlanding the global automobile fashion trend which fits perfectly with our products at both Rhino-Rack and MAXTRAX.

Given the relatively young age of these brands within our portfolio, we are still in the process of activating our innovate and accelerate playbook, including meaningful new product introductions and sales channel expansions, both into more specialty as well as outdoor accounts. Activating this playbook forms the basis of our strategy to reaccelerate growth in our Adventure segment and this strategy is as follows. First, we will seek to own the overlanding market globally. Retailer expansion in the mainstream adventureism is just beginning as key retailers launch flagship adventure stores within overlanding as a leading category of focus. We are moving rapidly to build our strategic initiatives as we seek to create an ecosystem of overlanding products, sportsman and weekend warrior consumers.

We expect to be introducing updated bike and ski and kayak racks, luggage boxes, truck bed systems and awnings as well as new accessories, including storage cases, rooftop temps, duffel bags and expanded recovery systems. Second, we expect to improve our market — our speed to market through more focused new product introduction efforts, increasing our sourcing efforts, augmenting our engineering and supply chain teams and leveraging key vendor relationships within the Clarus portfolio. Third, we expect to unlock the U.S. market through an improved direct-to-consumer presence augmenting the support of our direct specialty dealer setups providing more touch points of service and selling through the onboarding of additional sales agencies, improved operation systems, and building out our super fan brand approach to performance marketing and community activation.

And finally, as we improve our U.S. expansion strategy, we expect to develop other attractive markets like Japan, Korea, the Middle East and Europe, which we believe will increase our total addressable markets. We are confident that we are positioning the brands for growing as outdoor adventure through overlanding continues to build momentum globally. As we look ahead to 2023, we believe we have a portfolio of super fan brands that have strong growth profiles with significant market share left to target, even in challenging environments. Climbing, backcountry skiing, trail running, hiking, hunting, competitive shooting and overlanding adventuring are megatrends we do not anticipate changing for the next decade plus. This is one of the most important attributes that we speak for in our super fan brand strategy, so we believe it is the key component to our long term shareholder value creation strategy.

Now, I’ll turn the call over to Mike. Thanks Mike.

Mike Yates: Thank you, John, and good afternoon, everyone. Better jump right into the performance in the fourth quarter. Sales were $104.2 million compared to $118.2 million in the prior year quarter. Sales included revenue contribution of $3.8 million from MAXTRAX, an acquisition completed on December 1, 2021. Reported sales in the fourth quarter were down 12%. Organic sales were down 11% in the fourth quarter, MAXTRAX contributed 2% and foreign exchange was a 3% headwind in the quarter. On a constant currency basis, total sales were down 9% in the quarter. Fourth quarter sales at the Outdoor segment were $55.3 million versus $65.1 million in the fourth quarter of 2021. If you adjust for foreign currency exchange, outdoor sales would have been down 11% as opposed to being down 15% at Outdoor.

As John mentioned, while we’ve done a good job closing the gap on outstanding Black Diamond orders, we are still constrained by lower open to buys from our key North American retail partners due in part to their inventory destocking activities. Partially offsetting this decline was execution in the key pivot areas of direct to consumer European and IGB that John mentioned earlier. Another area of strong execution was apparel, which continues to be our fastest growing category within the outdoor segment. Sales were up 15% at the apparel category level. This is notable as apparel along with footwear and our direct to consumer business represent key strategic growth pillars over the next five years for the corporation. Precision Sports sales increased 10% in the quarter to $30.3 million, strength in the international business continued in the fourth quarter as our Precision Sports team continued to do an excellent job in fulfilling demand, increasing production capacity and navigating a challenging sourcing environment.

One thing to note, during the fourth quarter, we sold 5 million of nine millimeter ammo at lower margins than normal and that reduced — we did this in an attempt to reduce inventory and generate cash as the demand for nine millimeter is expected to remain low compared to the supply during 2023. You’ll see, this reflected in the segment EBITDA in the fourth quarter, but we expect this to be a onetime decrement given the strategy John discussed. Our Adventure segment contributed sales of $18.5 million, reflecting lower consumer demand given the challenging economic environment, loaded industry wide inventory to distributor level and constraints on new vehicle deliveries. Despite these results, our long term positive view of these brands remains intact.

However, during the fourth quarter, due to the reduction in the consolidated market capitalization of the Clarus Corporation and the enterprise value of the corporation, and the lower sales growth and lower EBITDA expectations in the immediate and near term forecast for the Adventure segment, we determined it necessary to write down the value of the trademark and goodwill associated with the Rhino-Rack acquisition. As a result, an impairment charge of $92.3 million was recorded in the quarter. This noncash charge is included in operating expenses and we have excluded it from our adjusted EBITDA in the earnings release published earlier today. Moving on to gross margin. Consolidated gross margin in the fourth quarter declined to 34.6% compared to 36.1% in the year ago period.

As John mentioned, we were able to push through significant improvements in gross margin for our Outdoor segment. Though these improvements were offset by inventory optimization at Precision Sports segment as we cleared out our remaining nine millimeter inventory ammo. In addition, foreign currency had a negative impact of $3.7 million or 220 basis points, while higher freight costs had a negative impact on gross margins of $900,000 or 90 basis points. Excluding both, gross margins in Q4 at a consolidated basis would have been 37.7%. Selling, general and administrative expenses in the fourth quarter were $33.1 million compared to $32.6 million in the same year ago quarter. In both our Outdoor and Precision Sports segments, we were able to push through expense improvements leading to lower SG&A compared to the prior year.

SG&A expenses for the quarter also reflected lower non cash stock based compensation for performance awards at corporate. This disciplined expense management was entirely offset by the inclusion of MAXTRAX and higher rent and selling investments at the Adventure segment. Net loss in the fourth quarter was $81.6 million or $2.20 per diluted share compared to net income of $14 million or $0.36 per diluted share in the prior year quarter. Net loss in the fourth quarter of 2022 included the noncash impairment charge of $92.3 million that I just referenced. Adjusted EBITDA in the fourth quarter was $10.6 million or an adjusted EBITDA margin of 10.2% compared to $20 million or an adjusted EBITDA margin of 16.9% in the same year ago quarter. Lower revenues in the Venture segment, higher freight expenses and adverse changes in foreign currency exchange rates all contributed to the reduction in adjusted EBITDA.

The 10.2% adjusted EBITDA in the fourth quarter would have been 13.3% on a consolidated basis if you remove the impact of FX and would have been $14.1 million or $15.2 million if you remove the FX impact and the higher freight cost at Outdoor and Adventure. EBITDA in Outdoor was 11.7% for the quarter, it was 23% at the Precision Sports segment in the quarter due to the nine millimeter inventory liquidation I just discussed. EBITDA was a loss of $1 million at Adventure in the quarter as we continue to deal with unfavorable FX and freight. We do expect the challenges associated with freight to be behind us in the first half of 2023 as we monetize the inventory that carries these higher freight costs. Now let me shift over to liquidity and asset efficiency.

Inventory levels declined by 5% from where we ended the September quarter to $147.1 million, which was near our end-of-the-year goal. At December 31, 2022, cash and cash equivalents were $12.1 million compared to $19.5 million at December 31, 2021. Free cash flow defined as net cash provided by operating activities less capital expenditures for the fourth quarter of 2022 was $30.3 million compared to $5 million in the same year ago quarter. This is reflective of our conscious efforts to improve working capital during the fourth quarter. Specifically, we were able to reduce receivables by $10 million in the quarter and inventory by $8 million on a sequential basis. We are committed to generating cash in 2023 through our continued focus on optimizing working capital across all three segments.

During the fourth quarter, we paid down $28 million in debt and ended the year with total debt of $139 million. This put us in a net debt position of $127 million with net debt leverage of 2 times on a trailing 12-month adjusted EBITDA basis, which is at the low end of our 2 times to 3 times target. We expect to stay at that low end of that range in the near future. Under our $300 million revolving credit facility, we have approximately $18 million outstanding and further borrowing capacity of approximately $98 million as of December 31, 2022, while maintaining compliance with our required covenants under our credit agreement. From a tax perspective, we were able to utilize $41 million in NOLs in 2022 and expect to use the remaining $18 million in 2023.

That’s right. We only have $18 million left of the NOLs. And over the last 10 years, we have worked to strategically balance the utilization of our NOLs to ensure the optimum path for growth while mitigating tax burdens. And during this time period, we’ve been able to realize $220 million in tax benefits from our NOLs. It’s quite a testament to the organization’s accomplishments and making accretive acquisitions while driving significant cash tax savings for our shareholders. Now I’m going to introduce our 2023 outlook. We expect sales of approximately $420 million and adjusted EBITDA of approximately $60 million, or an adjusted EBITDA margin of 14.3%. We expect full year capital expenditures to range between $7 million and $8 million, and free cash flow is expected to range between $35 million and $40 million for the full year 2023.

Implicit in these expectations is caution and conservatism considering the challenging macro environment, the higher interest rates and the uncertain impact these challenges might have on the consumer as we work through the rest of 2023. As a countermeasure to these unknowns, we are focused on further optimizing our SG&A and driving gross margin enhancing initiatives in order to accelerate the underlying profitability profiles of each of our segments. We also expect to realize further working capital improvements, generating the outlined free cash flow target I just provided. That will result in further deleveraging our business with this incremental free cash flow we’re expecting to generate in 2023. This strategy will not only ensure further value creation in 2023, but will also reestablish the baseline businesses and position us for growth both organically and via M&A in 2024.

Additionally, this outlook assumes foreign currency exchange rates to stay where they are, specifically the euro at EUR1.05 and the Australian dollar at AUD0.67 to the $1. Based on these rates, we estimate that FX is a $2 million headwind for 2023 compared to 2022 on a constant currency basis. For the first quarter of 2023, we expect consolidated sales to be approximately $95 million, reflecting continued headwinds surrounding unwinding of inventory at our key North American wholesale partners. I’ll pause here and hand the call back to the operator as we’re ready for Q&A.

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Q&A Session

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

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

Mike Yates: Alex, I’ll start and John can add any comments. But we specifically have not given segment guidance this year. We’re really proud of the diversification and strength of the entire portfolio across the three very distinctive segments. And each of these segments is really positioned to grow in 2023. We’ve done — we put the effort in to grow these segments and make the investments necessary to grow them. But each are in their different phases of growth. And as you may recall, we — last year, we guided Precision. It was probably an underwhelming guide and outperformed. So we’re really looking to 2023 with the challenging macro environment, the impact to the consumer, the higher interest rates, we want to leave ourselves some optionality of where we pivot to.

Because like I said, all three businesses are — we’ve maybe efforts to grow these businesses. And like I said, they’re positioned to grow, but we’re going to want to keep some optionality available to, as we move through the year and lean into where we’re seeing the best opportunities to grow in light of this difficult environment. So we’re going to be super cautious about our capital and where we invest and how we allocate resources. And — but we’re going to lean into the hot segment and whether that’s geographically the hot channel, et cetera, and we will — as we go through 2023. And that’s why we’ve elected to kind of give a guidance at the consolidated level versus trying to predict how each of these businesses are going to perform here as we go through 2023.

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

Mike Yates: Sure, Al. It’s a great question. Yes. No, the main driver of that $95 million in the first quarter is really because, as John alluded to, the difficulties with our North American retail partners, specifically in our Outdoor business, right? As we said in our prepared remarks, their open-to-buys are limited. We’re seeing demand for our product, but our big customers here in North America are really taming back and rightsizing their inventory levels. And as long as that’s going on, despite the tremendous job at specialty or despite the growth in our international distributors or in Europe or in our new initiatives, right, when North American wholesale is struggling, that’s really the headwind we’re facing here in Q1.

But we think that’s transitory in nature, right? Once they rightsize their inventories we see that picking up. But we’re sitting here almost 2 months into the first quarter. So we know what’s going on here in the first couple of months. So that’s really the background to that. From an earnings perspective, I think gross margins and EBITDA margins are both — should be trending favorable compared to what we just posted here in the fourth quarter because a lot of the initiatives we talked about controlling SG&A, but more importantly, capturing value leakage at the gross margin line, the stabilization of freight, the more favorable FX than we had prior in the back half of 2022. So we’re not giving specifics, but I think we highlighted the significant improvement in gross margins at Outdoor.