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, 2020. Joining us today are Clarus Corporation's President, John Walbrecht; Chief Administrative Officer and CFO, Aaron Kuehne; 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 like to turn the call over to Mr. Slach as he reads the company's safe harbor investment first – safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.

Thanks, Corey. Please note that during this call, the company may use words such as appears, anticipates, believes, plans, expects, intends, future and similar expressions, which constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are made based on the company's expectations and beliefs concerning future events impacting the company and, therefore, involve a number of risks and uncertainties. The company cautions you that forward-looking statements are not guarantees, and that actual results could differ materially from those expressed or implied in the forward-looking statements. Potential risks and uncertainties that could cause the actual results of operations or financial condition of the company to differ materially from those expressed or implied by the forward-looking statements used in this call include, but are not limited to; the overall level of the consumer demand on the company's products; general economic conditions and other factors affecting consumer confidence, preferences and behavior; disruption and volatility in the global currency, capital and credit markets; financial strength of the company's customers; the company's ability to implement its business strategy; the ability of the company to execute and integrate acquisitions; the impact that global climate change trends may have on the company and its suppliers and customers; the company's exposure to product liability or product warranty claims and other loss contingencies; disruptions and other impacts to the company's business as a result of the COVID-19 global pandemic and government actions and restrictive measures implemented in response; stability of the company's manufacturing facilities and suppliers as well as consumer demand for our products in light of disease, epidemics and health-related concerns, such as the COVID-19 global pandemic; changes in governmental regulation, legislation or public opinion relating to the manufacture and sale of bullets and ammunition…

Thank you, Cody, and good afternoon, everyone. Despite a challenging consumer environment amidst a global pandemic, the strength of our well-diversified brand portfolio and a multichannel distribution platform was apparent in our second quarter results. We believe that super-fan brands show their long-term strength and core consumer demand even more so in difficult times. When the year ends, we believe we will see the strength of our brands proven through increased market share. Let me step back and address the plan we enacted at the onset of COVID-19 in March of earlier this year. At the onset of the virus, we devised a plan to focus on three things. First, our people, the preservation of brand equity, and then the maximization of liquidity, which together we believe would make us emerge as an ever stronger company. The first pillar of the plan was the safety of our people. We have maintained our work-at-home stance for all office employees with minimal disruption to our operations. For those employees at Sierra and others in distribution, where work has been deemed essentially significant health checks, as well as precautionary measures were implemented to protect their wellbeing and our ongoing. The second pillar was the preservation of brand equity. For Clarus, brand equity amongst the core consumer is our lifeblood. We supported our retailers during the quarter by continuing to ship products to those in need while keeping the integrity of our pricing. This included products to support our partners’ e-commerce businesses or avenues like curbside pickup. Most importantly, we continue to maintain and protect the integrity of our MAP pricing policy with each of our retail partners, thus limiting the amount of off-price promotions of our brand. Complementing our retail partners, we continue to drive strong sales in our direct-to-consumer business, which includes…

Thank you, John and good afternoon everyone. For the second quarter of 2020 total sales were $30 million. By brand, Black Diamond sales were down 47% and Sierra sales were up 7%. The decrease in Black Diamond was solely due to the COVID-19 related retail demand freeze during the quarter. We experienced the trough in year-over-year sales declined in April with sequential improvements in May and June. Currently, we're running at about 10% down from July of last year, which is a big improvement. John touched on the factors that are driving this strong brand equity, a product with less shelf instability or fashion risk, our ability to fulfill orders and a strong e-Commerce business that is tailored to today's consumers needs. The 7% increase in Sierra was due to a 36% increase in our domestic channel due to sustained improvements in the demand environment for bullets. As John covered, our international markets remain soft, decreasing 55% due to the absence of stockpiling buying trends being expressed domestically and the prolonged closure of retail stores. Consolidated gross margin in the second quarter increased 140 basis points to 35.4% compared to 34% in the year ago due to favorable channel and product mix. In addition, compared to last year both foreign currency changes and the new tariffs each had a negative impact on gross margins of 30 basis points, excluding these two impacts gross margin was 36%. Overall, our sales and gross profit in the second quarter were negatively impacted by unfavorable foreign currency changes on a transactional basis by $139,000. With 30% of our global sales being denominated in foreign currencies, we attempt to manage our foreign currency risk on a continuous basis through natural hedges and foreign currency hedge contracts. In our reported sales and gross profit, our hedges…

Thank you. [Operator Instructions] Your first question comes from the line of Randy Konik from Jefferies. Please go ahead.

Good afternoon, guys. Thanks, guys. Can you hear me?

Yes, we can, Randy. Good to hear your voice.

Hey, John. Same here. Same here. I guess, Aaron, I wanted to ask you – maybe elaborate a little bit more on the wholesale trend. You talked about significant sequential improvement from the down near 50 to down, I guess, 10. What are the – maybe give us some perspective on just what are you hearing from the wholesale accounts in terms of any visibility to have their inventory levels, et cetera? Just curious how things are going there to start.

Okay. So similar to how we saw April, May and June being down, so did retailers. And often, it's referred to as the cliff within our own vernacular that the cliff just stopped as people close their doors. During that time, though they may have either continued with an e-comm business or in some cases, like REI and others maybe even move to a curbside pickup, they worked off the current inventories either in their warehouses or in their stores for quite some time. And then just slowly filled in where demand was in excess of what they currently owned. And that's – we saw the positive. And as people move to outdoors, we saw that. And social distancing became outdoor-ism. And as we said in our report, we did better than the 80, 60, 40 in each of those months. Now all the doors – the essentials continue to drive through that. And the essential for accounts that could stay open during that time. And they showed significant either maintaining during that time or even in some cases growth. Now that the other specialty and outdoor accounts have now come back on to full doors, we're seeing that positive momentum more as we enter the third quarter than we saw in the second quarter. And it just happened to be that July 4 and back – everybody hit in summer was at the end of the Q2 window.

That was super helpful. And then I guess, lastly, maybe to transition to Sierra for a second. With the business kind of starting to accelerate for different reasons, where are we on the ability to kind of meet the demand on the ammo side in terms of that part of the business? Give us some perspective there on production and how you can meet what seems to be increasing – accelerating demand for on the ammo.

Yes. So obviously, we initiated last fall with GameChanger and it was specific more premium hunt. Then at SHOT Show, we launched Prairie Enemy. As we came into spring, we launched a new collection called Sports Master, and it was really focused on 9 millimeters and other handgun more of the outdoors consumer, and we've now expanded into additional with Outdoor Master, Guide Master and some other pieces. I would love to tell you, you saw – you heard in the report that our ammo sales through the first half of the year was up more than 300%. That pace has increased and accelerating beyond that. I would love to tell you that we could meet all the demand that the market requires. The reality is, it's not unique to us or anybody right now that if you visit any stores, the shelves in regards to 9 millimeters, .223s, .40 cals, .45, .380s, list goes on, .653 are empty. We are – as Aaron mentioned, we are increasing our capacity, both on bullets, up 30-plus percent and on ammo, and doing our very best to maximize every opportunity on that. But we will tell you that when we do ship it to retail, we have 100% sell through in less than seven days. So the demand in the marketplace is at an all-time high when the market is rushing to try and meet capacity for that demand.

Very helpful. Thanks, guys.

Your next question comes from the line of Jim Duffy from Stifel. Please go ahead, sir.

Thanks. Hello, guys.

Hi, Jim.

Couple of questions for me. Good to hear from you, guys. John, can you share some perspective on what you're seeing from end market demand across your three principal categories for the Black Diamond brand, climb, mountain and ski. Specifically with climb, I'm wondering how much is gym related and what the impact has been there. And then within ski, is there a way to characterize how much of the business is resort-skiing driven? And can you talk about how retailers are planning inventory receipts for the ski season?

Yes. So if you think about the client business, and over the last two years, you've been at a lot of the conferences with us, I think everybody wanted. We wanted and everybody focused on the opportunity potentially of what climbing gyms were doing on behalf of the climb industry. And though climbing gyms were exploding, most climbing brands were, first and foremost, outdoor driven. And they were trying to make the transition to being more climbing gym centric. But the other side of that is that there's only a few items of equipment that really align for the gym climber, that is shoes, maybe harness, a rope, chalk, whatever. Interesting during this time period, again social distancing and all the rules, when the specialty outdoor shutdown, so did gyms, climbing gyms included. But people went more outdoors. And what we even found is those who may have been prior only climbing gym consumers actually in lieu of no climbing started to go outdoors. And so we have actually seen a good run on climbing gear. Would we like to see it grow at the pace it was previously? Yes. Is it there yet? No. In the Q2, it wasn't. But as we get into later in the year, we're seeing that momentum continue to build. And I think the summer just came a little later this year than normal. In back country, back country probably represents 5% of the ski industry maybe in total. And most skiers recognize skiing as resort skiing. At the end of last year, when resorts closed down, there was a spike in a growth in back country skiing. Because resorts have not found a way to kind of announce exactly how they're going to handle social distancing at the lifts, on the mountains, in the lodges, at the restaurants, you name it. There's already been a lot of excitement, expectation around backcountry skiing. And we're seeing that in increased demand early – earlier than normal for snow safety skins, skis, the like. I think as the season comes on, we're going to see that chase. We're anticipating that and building towards that opportunity. I don't anticipate that, that backcountry skiing will become the opposite and become 85%, 90% of skiing, but I do think it will see a strong surge and BD will benefit from that in the second half of the year.

Okay, great. And then as it relates to those shops that maybe cater more towards the resort skiing, how are they planning their business? I recognize you overlap with them, it isn't as much as it is specialty South more back country and orientation. Just curious, like…

Yes. I think that a lot of those shops are quickly trying to chase this trend and look for making that transition from being only front side resort shops to now bringing in more back country ski, skin, snow safety equipment. But I think a lot of it will be instantaneous demand driven when the season starts.

Okay. And then last one to me. I wanted to ask about your digital business. The 25% growth, more modest than we're hearing from some others, we're hearing some report high double digits or even triple-digit growth. Do you have a view as to why your digital wasn't stronger was stores closed? Any perspective you can share there would be helpful.

Yes. So one other things we talked about is one of our pillars. The first was about the employee safety, but number two was brand equity. And I can tell you that was a major focus for us long term in this mix, and I believe you will see the strength of that continue to play out, not only in the rest in the second half of 2020, but well into 2021 and beyond. And that is that at this – during the Q2, a lot of brands went very, very, very aggressive at discounting D2C. And I have no question you could look up your e-mail during that window and see whether it was Nike and Adidas and Under Armour, two other brands in the outdoor space with major discount callouts to buy now. We chose not to support retailers or ourselves to become aggressive and break MAP pricing. And MAP just meant that we were going to promote our brands at normal suggested retail pricing. And maintain growth on that long term, believing that the value of the brand will survive on that. And our belief being that if you go three or four, five, six months, being off-price all the time on your brand that becomes the new valuation of your products in the marketplace in the eyes of the consumer. And when you choose to go back up, it will change very quickly the other ways. We believe that that was critical to us, and we also supported our retailers to be long-term partners, and know that we were not at the chance going to immediately compete against our retailers and use price as the leverage point.

Very good. Thank you, I appreciate the perspective.

Yes.

Your next question comes from the line of Matt Koranda from ROTH Capital. Please go ahead, sir.

Hey, guys. Thanks. Just on Sierra, if I heard it right, it sounded like you guys said capacity utilization up maybe 30% more recently. And it sounds like Europe was a bit of a drag until maybe June, July. But can we infer sort of in the back half, the right sort of framework for the growth rate should be in that kind of 30% range or should we be still factoring in a headwind from Europe in that portion of the business?

I think, obviously, we would like to be optimistic and say that everything we're experiencing in the U.S. is going to translate globally. I can tell you that we've seen positive momentum from the international business. But I don't think that I would say that it has the same momentum that we're seeing in North America. And North America is being driven by a couple of unique drivers right now of what's going on in our social environment. I think we will see improvement internationally. And I think we'll see – continue to see through both 2020 and well into 2021, demand in both the domestic wholesale consumer side as well as the domestic OEM continue to meet where it's at today and maybe some. So we'll see. We hope international is strong, but we're not willing to say that it's going to catch up to where the demand in the North American market is for a lot of reasons.

Sure, totally understood. That makes sense. And mainly what I was – the question I was getting at is we should not necessarily be factoring a huge headwind for that portion of the business going forward, it's not as much of a drag anymore, I guess, relative to what you're in.

No. I mean, I don't – I wouldn't say it's – I don't think it's going to be a huge headwind, but I also don't think it's going to tailwind like the North American market.

Totally fair. Okay. And then I was curious if you can talk a little bit about – go ahead, John.

If it did, we would have a difficult time because as we said our capacity is really primed at this 30% increase. It's not primed to 200% increase.

Right. Understood, okay. And then I was curious if you could talk about maybe the implications for pricing in that business as well, just given that we've been hearing quite a bit of tightness in capacity across the board. But maybe you could speak to the pricing environment, both in kind of the retail channel as well as the OEM channel.

So at this moment, our pricing is fixed, relatively fixed for 2020, and we typically don’t seesaw[ph] all the pricing during the season based on this week more demand, last week less demand, whatever. I think that the market, as it gets tighter, retailers may shift and add additional margin on the products because the demand is more than the supply. We probably will not look at price increases at this moment. But potentially later in the year as we manage what's going on with commodity prices and other things. I will tell you that more important to us, Matt, in all of this, and it's the opening statement I said in our piece, is that super-fan brands first developed the best product in the industry, once understood, it's demanded and then really maximize that emotional connection through both performance as well as storytelling to the consumer. We're seeing that work really well. And where that really transpires is in market share gain. And our answer will be, at the end of this year, and pricing is just one component of that, is that we will see market share gains, and we are careful to not to create negativity on this increasing market share by getting greedy for small percentages of price increases.

Okay. Got it. That’s helpful, John. And just to be clear, when you say market share gains, you're talking more in the ammo category. Is that a fair statement?

Both. Bullets and ammo, right. And that – you have to make this balance between, do I keep getting strong double growth in market share? Or do I try and over-profit on that at the expense of double-digit market share growth? And there's a teeter totter there and managing that well is critical.

Got it. And then, may be last one for me. On the margin front, I guess, if we look at the consolidated gross profit margin for the business, very strong. And it seems to suggest, I guess, that underlying margins at Sierra were probably the driver. But could you guys kind of maybe disentangle BD and Sierra for us? I know we'll get the queue eventually here, but it would be helpful to kind of get your thoughts on that.

So this is Aaron. So at the gross margin level, Black Diamond was pretty much flat with that of the prior year despite some of the headwinds that we've been seeing just with lower levels of throughputs on the supply chain valley leakages of what we call them, taking place during the quarter. Whereas as you pointed out the 140 basis point increase at the consolidated level was really driven by the improvements that we saw within the Sierra.

Okay, perfect. I'll join back in queue guys, thank you.

Your next question comes from the line of Laurent Vasilescu with Exane BNP Paribas. Sir, your line is open.

Thank you. Good afternoon, gentlemen. Thank you for taking my questions. I wanted to follow-up on the July, only down 10%. Aaron, I understand there's no guidance, but high-level, how should we assume, should we assume sequential month-over-month improvement in the third quarter and any high level comments are about the fourth quarter and puts and takes. We've heard some brands talk about sequential improvement in the fourth quarter over the third quarter. I'd love to get your take on that as well.

So as we think about the results that are taking place within Black Diamond in July specifically, and the commentary provided around being down about 10% compared to the prior year, that's consistent with how we're thinking about the rest of the year as well. As mentioned in the commentary provided, we’ve been looking at the Black Diamond business being a kin to what we saw in 2017 and 2018 from a revenue standpoint, now that can obviously change depending on how the retail environment continues to evolve and as well as the consumer behavior. But as of right now, that's how we're looking at the rest of the year. And we do see that there could continue to be some sequential improvements in Q4 primarily driven due to channel mix especially with our direct-to-consumer efforts, but that's not something that we're really factoring in or baking in right now at the moment.

I think the market loves to see optimism right now, but in fairness to this managing through a global pandemic has been everything but consistent.

Very helpful. Thank you. Thank you, John. And thank you Aaron for that. And I think it was mentioned that ammo is up over 300% over seven months. Obviously it's a new initiative. Can you contextualize, just as a percentage of overall sales of Sierra, how much it contributes and where do you think that mix goes over the next few years?

Yes, I think when we initiated it, we were looking at ammo being approximately 2% of our sales in initial planning of 2020. It's probably trending right now at 5% to 6% and growing. We anticipate that it'll continue well into the third and fourth quarter, and it really comes down to capacity and loading on that mix. And it may, in times spike more we think it's a strong initiative for us right now. We continue to keep the gas down on it, as we said as planning and luck came together we developed new ammo initiatives, while at the same time demand increasing and allowed us to be opportunistic to launch these ammo initiatives as well as achieve the market share opportunities we were looking at. And so it accelerated faster than we wanted and we see more of that opportunity and gaining market share that will places well into 2021 and beyond.

Very helpful. And then my last question is on margins Aaron, you had a really strong mix benefit on the gross margin side, should we assume that continues in the back half? And then I think on the last call, it was called out about $9 million of savings on the SG&A line, I am just curious to know how much you saved this quarter and should we still assume $9 million or just because the business may have improved, there is opportunities to reinvest in the business.

Yes. So as it relates to the margin side of things, we do anticipate that we'll continue to see the improvements coming from Sierra, the way that we saw it in Q2, that is a function of the continuous improvement initiatives that we put into place, the efficiencies that we're running within the manufacturing activities as well as the mix in terms of product offerings. And so that is something that we are anticipating to continue to see happen. As it relates to the cost saving side of things, we were able to realize, and when we talked about the $9 million that was compared to what we were anticipating in 2020 and we were able to realize benefits of about $3.5 million compared to what we were expecting in Q2 in terms of savings. And so we continue to be right in line with plan, despite some of the headwinds that we've experienced in terms of increasing our allowance for doubtful accounts, we've been able to find additional savings outside of even that to be able to keep us in track with that $9 million savings that we've outlined in that something that we're still comfortable in achieving.

Great. Thank you very much. And best of luck.

Appreciate it.

[Operator Instructions] Your next question comes from the line of Ryan Meyers from Lake Street Capital Markets. Sir, please go ahead.

Hey guys. Thanks for taking my questions. This is sort of a commentary on the ammunition business. Are you seeing any sort of issues such as sourcing raw materials at this point?

I wouldn't say it's the raw materials. I think it's the component portions of it. And I think this is where the benefit of working with our current OEM partners and loading with them has become a strategic initiative and frankly a blessing. If you're loading with federal and federal is making the primers, then you don't have a shortage on primers and vice versa. For us, I think we're managing well through that. I think that the only miss I would say is just, nobody anticipated the acceleration in those categories at the rate that they accelerated. And I think we – if this was a normal year and we posted 300% plus growth in ammo, everybody would celebrate and go, holy cow, you guys were freaking geniuses, why did you even gamble that big, I don't think anybody expected it to be that and that we would be chasing the second half, every day it's an initiative.

All right. That's helpful. And then just one more from me, can you give an update on your own retail locations and what you guys are seeing there?

Yes. So obviously, when COVID hit we managed that within our own retail and saw our own retail close until early May. It's been positive in May and June and coming back, we have currently four stores at this point. We did closed the Alaska store frankly just because Alaska has been hit so hard in terms of tourism and passes to go mountain climbing and do outdoor activities in that marketplace. We will be opening up a store on Main Street Park Ave and Park City later this month and we'll have probably a couple of more doors this fall. We are being very cognizant about maintaining inventory at the retail level, while prioritizing our wholesale business first and foremost. And wanting to make sure that at the wholesale side, we can have very strong fulfillment, shipping on time and strong fulfillment. But we are very positive about our retail initiative and how it has linked and supported our D2C e-com strategy. And we'll continue that not only in 2020, but 2021 just be very smart and selective of the locations and the numbers each year that we roll out.

Great. Thank you.

You have a follow-up question from Matt Koranda of ROTH Capital. Please go ahead, sir.

Matt?

Hey guys. Thanks for – thank you for taking the call guys. I appreciate it. Just have a quick one for you. On the allowance for doubtful accounts, just wanted to get your take, I mean it looks like collections look fine and DSOs look fine, but just wanted to get a little bit more color on sort of the underlying drivers there, if you could. Thank you.

Yes, it's very specific to certain accounts within the Canadian region that have either announced or either have announced the filing or the intent to file for bankruptcy, it's very isolated to certain accounts within the Canadian region and so for that reason we increased the allowance to accommodate for that, but on a broad-base level the collections continue to be pretty solid. The agents continue to be solid are okay as well and that's also something that we continue to see improve each and every week.

Okay, perfect. Thanks guys. Appreciate it.

Aaron likes to be cautious.

Fair enough. Thank you guys

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

Thanks, Cory. We'd like to thank everyone for listening to today's call and look-forward to speaking with you again when we report our third quarter 2020 results in November. Thanks for joining us.

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