Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's Financial Results for the Third Quarter ended September 30, 2023. Joining us today are Clarus Corporation's Executive Chairman, Warren Kanders; 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.

Thanks. 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 November 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?

Thank you, Cody. Good afternoon, and thank you all for joining Clarus' earnings call to review our results for the third quarter of 2023. I am joined by our Chief Financial Officer, Mike Yates. I will start the call by addressing the overall business and corporate strategy. Mike will then provide specific comments on the performance of our three segments and a detailed financial review. Given the non-binding indication of interest I previously submitted to acquire the company's Precision Sports segment and our Special Committee's ongoing review, I believe it's prudent for Mike to handle today's Q&A session. Now, jumping to our performance. Our brands largely experienced another challenging quarter given persistent macroeconomic headwinds that have constrained consumer demand and the continued inventory overhang at retail and distributors. This was especially pronounced in our Precision Sports segment where customers stockpiling with markdown inventory earlier this year impacted sales velocity in the third quarter. This was partially offset by a snapback quarter in our Adventure segment, which I will discuss shortly. As an organization, however, we did not stand idle. During the quarter, we made significant strides in the strategic review of our brands developing compelling long-term growth plans, rebuilding our teams, and taking steps to recalibrate each business to operate most efficiently in the post-COVID era. We're undoing some of the choices made by prior management teams, so to a certain extent, we needed to press the reset button in order to pursue rebuilding our reputation as a customer-centric enterprise. I am confident that the teams in place are fully capable of driving the turnaround. Both of our leaders at Outdoor and Adventure have specific past experiences as operators for private equity backed businesses, where they were responsible for structurally correcting and rightsizing iconic global heritage brands in preparation for…

Thanks Warren, and good afternoon, everyone. Jumping right into the performance in the third quarter, total sales were $100.1 million compared to $115.7 million in the prior year quarter. On a reported and constant currency basis, total sales were down 14% and 13%, respectively. By segment, Adventure reported sales increased 9% to $20.2 million in the third quarter, and on a constant currency basis, sales were up 12% compared to $18.6 million in the third quarter Rack's home market of Australia and the stabilization of sales in the North American market. In Australia, new car sale records have been broken for the third month running with the Australian car market posting its best ever September. As such, we experienced sales in Australia surpassing the 20 million Australian dollars level for the quarter, which is a level not seen since the first quarter of 2022. This was driven by strong OEM sales with the introduction of a new vehicle and product line and strong sell into a new box retail partner. The team did a tremendous job engaging with key accounts like these to promote our vision and product horizon was well received. In the US, Adventure revenue surpassed our internal expectations. While demand for overlanding gear remains sluggish, we experience success with select new customers through targeted marketing, promotion and training. We continue to focus on expanding our go-to-market strategy and increasing attention to our e-Commerce channel. Onboarding of large new customers in North American market that will start to ship in the fourth quarter of 2023 has completed with a specific product portfolio being tailored for their large national customer base. But overall, customers domestically in the US have been and continue to control their open to buy dollars and are selective on their replenishment. As an example of…

Thank you, sir. [Operator Instructions] And your first question comes from the line of Anna Glaessgen with B Riley. Your line is now open.

Hi, good afternoon. Thanks for taking my questions.

Hi. Good to hear your voice.

Thanks. I guess first I'd like to dig a little bit into the implied fourth quarter guidance. It seems to imply a sequential deceleration in the trend is that -- would you say that's mostly due to the dynamics you described of -- North America stabilizing, Europe seeming to get a little bit worse. And then any color by segment given that Precision Sports was a little bit of an outlier with the declines in 3Q, should that get better in 4Q? Just any help there would be great.

Yeah, based -- sure. Based on the guidance for the quarter, obviously the midpoint for the third quarter is $88 million, $85 million. That is really being driven by slower Europe, as we mentioned in Outdoor, continued substantial inventory in the market here in North America for Outdoor. And then also the decline at Precision Sports, right? The business does slowdown in December for its annual maintenance, right? We close the factory for a couple weeks at the end of the year. So normally if you look back, you can see lower volumes at Precision Sports. But let me be clear, the business at Precision Sports has slowed, right? The market is weaker. And that's part of the change as well compared to earlier in the year, right? So overall, the decline is a -- the fourth quarter is really about equal between Precision and Outdoor.

Okay, thanks. So…

Compared to our prior guidance, just to be clear.

Okay. But from a year-over-year perspective, should we expect kind of a similar decline as in 3Q in Precision sports?

Yes.

Okay, thanks. And then turning back to some of the commentary and prepared remarks, you alluded to -- or Warren alluded to doing some of the choices made by prior management teams. Can you elaborate on kind of what changes have been made over the past year to set you guys up for 2024 and beyond?

I don't want to get into specific details of what we're unwinding, but that's -- I don't think that's necessary to discuss at this point in time. But both Matt at Adventure and Neil at Outdoor are specifically focused on new products, new channels, new customer opportunities, right, to grow the business, right? And we'll go into a lot more detail of that with both those gentlemen in late January at the Analyst Day that we talked about.

Okay. Thanks, Mike.

Thanks.

One moment for your next question. Your next question comes from the line of Matthew Koranda with ROTH MKM. Your line is now open.

Hello, Matt.

Hey, Mike. So just wanted to drill down on BD and Outdoor. I'm just curious, can you highlight for us why profitability is so challenged there? It sounds like you alluded to D2C growing, so I would assume there'd be a mixed benefit there. Obviously, international wholesale sounds weak, and then obviously I think everybody well understands the North America sort of wholesale challenges with reticence to take inventory. But I would think that a D2C mix would help you from a margin standpoint. Are there particular headwinds that you're facing in terms of margins there? Just help us understand why they're weak, why they're continuing to remain weak in the fourth quarter, and then what the path is to get back to that kind of 10% bogey that you guys have put out there before.

So your assumption is right, that D2C is a positive product mix and helps the profitability. Don't -- and D2C was up 22% in a quarter, but D2C is still a relatively small piece of the overall Black Diamond business. We did a little over nine -- just around $9 million in revenue D2C this quarter, just to put it in perspective. So the weakness is continues around kind of rightsizing inventory. And I think in the prepared remarks, I mentioned that we sold more inventory, more discontinued merchandise inventory, more promotional pricing. So to continue to move inventory and turn that into cash, the pricing is very aggressive in the marketplace. And we did reduce inventory at Black Diamond by over $10 million. And in order to do that, we needed to be very aggressive on pricing, specifically in the wholesale market here in North America.

Okay. And then in the fourth quarter implied guide, it just sounds like you're assuming deterioration in profitability relative to the third quarter, at least on an overall basis. Did your guide build in the assumption that promotions at BD get worse in the fourth quarter? Is that how we should think about the compliance?

No, I don’t think -- I think -- no. I think it stays about the same. Our guide assumes about a 35% gross margin in the fourth quarters, which is not too dissimilar to what we experienced here, 35.5% here in the third quarter.

Okay. But the EBITDA, sort of the implied EBITDA margin in the fourth quarter, does sequentially get worse? So if gross margin isn't the culprit, are we leaning into SG&A? Is there some sort of uptick in spending there, like, help us understand that sequential decline? Because it -- I think it goes down by north of a hundred bps fourth quarter relative to the third.

I think the bigger impact you're going to see is on the gross margins, and the EBITDA at Precision Sports in the fourth quarter.

Okay. So Precision, all right. Can we just -- want to touch on that for just a second and then I'll turn it over to others. But should we just assume that that third quarter run rate in terms of revenue contribution from Precision sustains into the fourth quarter? I'm just trying to get the right way to think about sort of revenue contribution from Precision in the fourth quarter at these kind of lower levels.

It's probably even a little less because of the shutdown I've mentioned in December.

Okay. Got it. So sequentially lower than the third quarter on revs, and then probably in terms of margin, we should assume probably some headwinds to margin as well in the fourth quarter, just given the shutdown.

Yes. Correct. Correct.

Okay. And then any benefit you mentioned, and we picked up in the data, kind of mid-October with the geopolitical disruption and whatnot. There was definitely an uptick in demand for at least a period of time. How much -- to what extent have you built in the benefit of that in the fourth quarter? And how sustainable do you think that is? Because it just -- it feels like maybe it's just a couple weeks of benefit and then that that dies down. But have you guys seen any sort of decline in demand since that uptick in October?

Good question, Matt. There's two things going on. I mentioned both, in October we saw an uptick both from a military and a defense standpoint. I think the defense, home defense -- uptick in that market here in the US with some of the geopolitical things going on across the world that was -- there was an uptick late October related to that. But we don't think that has a lot of legs, that was a couple a week, 10 days worth of uptick that we're -- that we heard from our distributors and retail partners. From a military standpoint, we have seen that uptick, right? But for a certain caliber bullet, right? And we are shifting capacity to that opportunity. And we'd already had capacity designated to that. We're just adding more capacity to the opportunity for the geopolitical challenges over in Europe and the Middle East. So long way to say yes, I think the military has some legs, but the market here at home was a blip.

Okay. All right. Helpful, Mike. Thank you for the detail. And then, one more, if I could just sneak one in. Just on the sale of Precision, I mean, I know you said there's no updates there, but what I'm curious about is just sort of how long is that process supposed to take, I guess, at the outset of the indication from Kanders? The assumption I think at least broadly among investors was that it was probably going to be about a 40, 45 day process. We're kind of outside that window now. What -- is there anything you can highlight as to like why we need more time? Just anything around the mechanics. I know you can't really probably share a lot around the specifics, but the timeline and an update of thinking around that.

Sure. I don't have a specific update on the timing. I will say there's several interested parties in the process and we're going to run the process to its conclusion. And if that extends beyond the 45 days, which -- we probably passed that here last week. We're going to run this process to conclusion to under the guidance of the Special Committee, the Board to make sure that they evaluate all opportunities to create the most shareholder value possible.

Okay. Helpful. I'll leave it there. Thank you.

Okay.

One moment for the next question. And your next question comes from the line of Jim Duffy with Stifel. Your line is now open.

Thank you. Hi, Mike.

Hey, Jim.

Mike, I've got three lines of questioning. I'll keep it direct and quick. First on the Precision Sports business, I'm curious the extent to which the pressure your experiencing on that revenue run rate is reflective of your exposure to certain calibers or your allocation of capital, or excuse me, capacity to certain calibers versus just the general environment. Like is there a tactical approach that could have yielded better results for you?

I don't believe so. I think it's the general market. We -- I mentioned we've built inventory, especially at Barnes and finished goods. That inventory consists of what we've referred to our seven or eight critical center fire rifle hunting ammos, that we would've expected to sell here for the fall hunt season. Like I mentioned that they just -- there's too much inventory at all levels, so none of that's moving at this point. And we elected not to be promotional and discount and give that away because that's a premium solution that we're we opted to hold onto and we'll sell in coming quarters once the markets kind of hit some type of equilibrium.

Understood. And on the Adventure segment, a positive there, particularly enthused about the progress that you've made with gross margins, is that gross margin rate sustainable on a go forward basis? And are there approaches to improving the gross margin in the Adventure segment that can be applied to your other division?

No, I think it's sustainable. There may be blips up and down, but I think in Warren's comment he mentioned P 6, the Pioneer six platform has a 1200 basis point better margin. There's other products we're looking at to take cost out of. So over the coming quarters, I think that definitely is opportunity to continue to maintain or even expand that level of margin at Adventure at the gross margin level.

Okay. And then lastly, I just wanted to ask, looking around the quarter into 2024, 2023 has been a reset year in many respects. What are the objectives for the business in 2024 and how do you think about that in the context of the uncertain environment? I'm just trying to get a view into kind of the philosophy of your strategic planning for the business into 2024.

Right. Without getting into any financial metrics about 2024, because we'll talk about that in the coming weeks. But from a strategic standpoint, it's about getting the right leadership in place, building the teams out, introducing new products across the portfolio, developing new relations with new partners, whether it's distributors or wholesale or retail partners. It's about rightsizing inventory and one of the things we've said is to make sure we're just easy to do business, right? And all those things are the focus of Neil's team at Outdoor, Matt's team at Adventure. And the same with the team at Precision Sports under my leadership.

Very good. Thank you, Mike.

Okay. Thanks Jim.

One moment for the next question. And your next question comes from the line of Mark Smith with Lake Street. Your line is now open.

Hi, guys. First question for me, as we look at the uptick in direct-to-consumer, how much of that maybe was due to promotions and did that hurt kind of the profitability of that business?

Well, like I mentioned earlier, Mark, for the quarter we did just a little under $9 million in our D2C business at Outdoor, e-comm a true D2C business, it was up 1.2 million, margin kind of held up though. There was some promotion, but we did have a sale around Labor Day. But the business held up. Our bigger profit challenges have been moving older inventory, moving discontinued merchandise, right? And we've made good progress on that, and especially as we -- we missed some opportunity because we didn't have the right inventory where the demand existed. And I think we referred to that as a mismatch in inventory compared to demand that -- that's where revenue could have even been better. But on D2C basis, revenue was up and we looked at to that to really kind of look at the health of the brand.

Okay. And then you talked at length about inventory issues continuing throughout the channel, within the Precision segment. Can you talk about within Outdoor and maybe a bit within Adventure, what you're seeing from your retail partners, distributors from inventory? Is there continue to be issues, or did you see it improve at all during Q3?

I mean, there still continues to be issues and there's pockets of some -- pockets of some improvement, but in a whole -- at the whole level, it's still challenging, right? And it's a mixed bag. When we look at some of our key and national accounts, we do get some weekly sell through data. Some are up, low 20%, some are down 20%, week to week. So it's still pretty volatile out there with some of our key accounts.

Okay. And as we look at some continued channel inventory issues, how are you viewing promotional environment here in Q4? I assume this is fully built into your guidance, but do you think that we'll see improvement in inventory throughout the channel in Q4 or is this something that potentially bleeds further into 2024?

Yeah. No, so I told -- in the prepared remarks I mentioned that inventory at Outdoor around $70 million, I think that will be -- that should be in the sixties, come the end of the quarter. We are focused on continuing to right size our inventory, improve the aging, lean into more of what we are calling A products and so we have -- so we can meet the demand, right, for the A products, the stuff that the demand's out there for. And we continue to focus on that. In the fourth quarter, we're targeting to move $3 million or $4 million of older inventory still at Outdoor. So that will have an impact or that will continue to put pressure on margins, but all in the goal, all in the objective to kind reset the business for 2024, specifically from an Outdoor perspective.

Outdoor? Are you seeing some of these same issues in the Adventure segment?

Not so much, no. We're introducing new products. You saw the margins holding up. I mean, I feel good about what we have going on there. Adventures saw the pressure first, right? That -- and Outdoor followed, and now Precision Sports is kind of seeing the pressure from too much inventory in the channel, and Adventures just is the first one to come out of that. And we're starting to -- I don't see it the same. I do see inventory being pressure at Precision, but we feel confident in being able to hold that finished good ammo because it is -- like I mentioned to Jim, it's in our premium center fire rifle calibers. We're not going to be super promotional around moving that inventory just to generate cash. That's not necessary at this point in time.

Okay. Great. Thank you.

[Operator Instructions] Your next question comes from the line of Joe Altobello with Raymond James. Your line is now open.

Good afternoon. This is actually Martin on for Joe. Just a quick question. I saw with the destocking and heightened promotional environment, that's been pretty aggressive as of late, and it sounds like we might expect something similar in 4Q. But just beyond that, how confident are you that this is going to start dissipating, and which segment might have the most pressure just kind of starting into the early part of next year?

Well, this destocking of inventory has been going on for a while. So level of confidence is obviously low, because it has been going on for a while. But like I just mentioned with Mark, I think we're starting to see Adventure turn the corner, Black Diamond stabilize. I'd say the one I'm most worried about is the Precision Sports business as it's just starting to see the excess inventory in the channels here over the last couple of months.

Got it. Thank you. And just looking at the holiday season, do you think it's going to be kind of -- any opportunity for you to move any inventory?

No. Nothing out of the ordinary. Outdoor will have its Black Friday, specials, like it has every year, but nothing out of the ordinary.

Got it. Thank you, Mike.

Sure.

At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Yates for closing remarks. End of Q&A:

Thank you, Bella. I want to thank everyone for attending the call this afternoon and your continued support and interest in Clarus, and we look forward to speaking with you next time we get together. Thanks again for joining. Take care.

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