Clarus Corporation (CLAR), a leading company in the outdoor and adventure segments, held its earnings call to discuss the results for the third quarter ending September 30, 2024. Despite a challenging market environment, the company reported strategic initiatives aimed at long-term profitable growth and a focus on high-margin products.
While Q3 revenue fell short of expectations at $67.1 million, a significant improvement in gross margins was noted. The Adventure segment saw a slowdown, but the MAXTRAX brand outperformed with 16% sales growth. The company also reported a strong cash position with over $36 million and zero debt, setting the stage for potential cash flow positivity in Q4.
Key Takeaways
- Clarus Corporation's Q3 revenue was $67.1 million, below forecasts, but gross margins improved significantly.
- The Outdoor segment's revenue declined, but adjusted EBITDA increased by 25% year-over-year.
- The Adventure segment experienced a sales decline of 11.9%, with challenges in market softness and supply chain disruptions.
- The MAXTRAX brand achieved 16% sales growth despite market challenges.
- Clarus ended Q3 with a strong cash position of over $36 million and zero debt, ready for cash flow positivity in Q4.
- The company is committed to reinvesting in its segments, maintaining dividends, and exploring small M&A opportunities to boost the Adventure business.
Company Outlook
- Clarus Corporation has lowered its full-year sales guidance to $260 million to $266 million, with adjusted EBITDA anticipated between $7 million and $9 million.
- The company aims for net sales of $330 million and a 10% EBITDA margin by 2025.
- Despite current challenges, Clarus expects improvements in Q4 and Q1 of the following year.
Bearish Highlights
- Sales slowed down in Q3 both in the U.S. and globally, with the OEM channel experiencing a significant 58% decline.
- The Adventure segment's revenue outlook was lowered to $78 million, down from previous estimates.
- International markets are recovering slower, with improvements projected in 2025.
Bullish Highlights
- The company's strategic shift to focus on high-margin products is expected to yield gross margins between 39% and 40% in Q4.
- Positive sales trends were seen in Australia and New Zealand earlier in the year.
- Clarus is diversifying sourcing away from China to mitigate potential tariff impacts.
Misses
- The company's Q3 sales of $67.1 million were down from $81.3 million a year ago.
- Adjusted EBITDA for Q3 was $2.4 million, a decrease from $3.6 million in the previous year.
Q&A Highlights
- Mike Yates clarified the updated revenue guidance, with a reduction primarily due to a decrease in the Adventure segment's projected revenue.
- Warren Kanders indicated a legal motion is pending, with a decision expected by the end of Q1 next year.
- The company is focusing on expanding the market for vehicle offerings, with 180 platforms and crossbars aimed for 2025.
Clarus Corporation's executive team remains focused on strategic growth and profitability despite a challenging market. With a strong cash position and zero debt, the company is well-prepared to navigate the current environment and invest in future growth opportunities. The company's commitment to maintaining dividends and exploring M&A opportunities further demonstrates its confidence in the long-term potential of both the Outdoor and Adventure segments. Investors and stakeholders can look forward to updates on the company's progress in the coming quarters.
InvestingPro Insights
Clarus Corporation's recent earnings call and financial performance can be further illuminated by data from InvestingPro. Despite the challenges highlighted in the Q3 results, there are some positive indicators for the company's financial health and future prospects.
According to InvestingPro data, Clarus holds more cash than debt on its balance sheet, which aligns with the company's reported strong cash position of over $36 million and zero debt. This financial stability is crucial as Clarus navigates through the current market challenges and positions itself for future growth.
InvestingPro Tips reveal that net income is expected to grow this year, and analysts predict the company will be profitable this year. These projections offer a glimmer of optimism amidst the recent revenue declines and lowered guidance. The company's focus on high-margin products and strategic initiatives may be contributing factors to these positive forecasts.
However, it's important to note that the stock has taken a significant hit over the last six months, with InvestingPro data showing a 6-month price total return of -34.49%. This decline reflects the market's reaction to the company's recent performance and lowered outlook.
For investors seeking a more comprehensive analysis, InvestingPro offers 6 additional tips that could provide deeper insights into Clarus Corporation's financial situation and market position.
The company's Price to Book ratio of 0.55 as of the last twelve months ending Q3 2024 suggests that the stock may be undervalued relative to its book value. This could be of interest to value investors, especially considering the company's strong cash position and zero debt.
While the current challenges are evident, the InvestingPro data and tips provide a more nuanced view of Clarus Corporation's financial health and potential, offering valuable context to the information presented in the earnings call.
Full transcript - Clarus Corp (CLAR) Q3 2024:
Operator: 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, 2024. Joining us today are Clarus Corporation's Executive Chairman, Warren Kanders; CFO, Mike Yates; President of Black Diamond (NASDAQ:CLAR) Equipment, Neil Fiske; Management Director of Clarus Adventure segment, Mathew Hayward; and the company's external Director of Investor Relations, Matt Berkowitz. Following their remarks, we’ll open the call up for your questions. Before we go further, I would like to turn the call over to Mr. Berkowitz 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. Mat, please go ahead.
Matt Berkowitz: 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 will be making 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 conditions 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 would like to remind everyone this call will be available for replay 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 Kanders: Good afternoon, and thank you for joining Clarus' earnings call to review our results for the third quarter. I'm joined today by our Chief Financial Officer, Mike Yates, as well as Neil Fiske and Mat Hayward, who will discuss our Outdoor and Adventure segments, respectively. While our businesses continue to deal with significant headwinds in the near term, operating against the backdrop of constrained consumers in the outdoor space, our focus in the third quarter was on advancing Clarus' strategic plan to position the company for long-term profitable growth. 2024 was expected to be a year of simplification for our Outdoor segment and one of investment to scale our Adventure segment. There remains significant work outstanding to execute on our multiyear growth initiatives. And we believe the steps we have taken and investments we have made to date will deliver significant long-term benefit, and Neil and Mat will provide more specific comments about the incremental progress made in each segment during the third quarter. At Outdoor, we've been pleased with the team's steady progress, executing initiatives focused on further simplification, strengthening the core and improving the quality and composition of our inventory to focus on the best, most profitable styles. As Neil will detail in greater depth, our goal has been to build a smaller, more profitable business, and today's results are evidence that the strategies that we have implemented are working. While Outdoor revenue declined year-over-year, consistent with market softness and our expectations, adjusted EBITDA was up 25%. I'd also like to highlight that the challenging market conditions we are experiencing represent an opportunity as it is our view that consumers tend to favor the highest quality options in this type of retail environment. We have seen Black Diamond grow share in its core categories in recent quarters, and we expect to continue to take share in our most important categories moving forward. Turning to our Adventure businesses. Our objective to scale the segment to a global footprint has not yet come to fruition. Performance was in line with expectations for the first 2 months of the quarter, but results were ultimately affected by market softness in September in both North America and Australia. We believe we have taken appropriate, corrective actions to rightsize our cost base at Adventure without impacting the growth investments we made in the first half of 2024. The team has undergone significant changes this year as we work towards an organizational structure that is expected to allow us to effectively scale our brands in Australia, the U.S. and international markets. Overall, while we are in different places on the turnaround curve for each segment, we are encouraged by the steps Neil and Mat have taken, and we believe that we have laid the foundation to drive increased profitability and unlock new growth opportunities moving forward. With that, thank you for being with us today, and I will turn the call over to Mike.
Mike Yates: Thank you, Warren, and good afternoon, everyone. On today's call, I'll provide a brief third quarter update before turning it over to Mat and Neil to review the segment performance. I will conclude with a more detailed summary of our third quarter financial results, followed by question-and-answer session. Beginning on Slide 4. We took additional steps forward during the third quarter that are expected to position Clarus for sustainable, long-term profitable growth as market conditions normalize. As you just heard from Warren, our objective at Black Diamond is to simplify and focus on the core, and that remains on track. Inventories are in decent shape and are trending towards the low $60 million range at the end of the year, with over 70% of that balance comprised of A styles. This compares favorably to the same point last year when we had approximately $70 million of inventory on hand at Outdoor. Additionally, we have managed our inventory exposure at Outdoor very well and on our way of having this behind us. One other critical element to understand Outdoor is the composition of revenues. We are expecting full year revenue to be approximately $20 million less in 2024 compared to 2023, which is intentional and it's a direct result of our simplification strategy as we lean into our best products with our best customers. For the full year 2024, we're on track for nearly $30 million less revenues from our C and D products and categories due to the simplification process. It's also due to the market conditions. However, this $30 million decrease is offset by $10 million higher revenue from our A styles. This is exactly what we were trying to do in order to improve the profitability at Outdoors. Remember, our A styles have higher volumes and most importantly, higher gross margins. So we are seeking to build an Outdoor business with higher gross margins, higher profitability and inventory that will turn more and help improve our working capital. This is the foundation from which we will grow the business in the future. Results in our Adventure segment were impacted by a weak market in September. Following a broad corporate realignment and recent leadership appointments, we are focused on taking incremental steps in line with our strategic road map to quickly identify challenges and solutions to deliver month-over-month improvement. After the quarter's end in October, we structured our -- we restructured our cost base across the entire Adventure segment with the expectation of an annual run rate saving of $2.4 million. These actions were carried out carefully and deliberately, and we believe they will not have an impact on the critical investments necessary to scale the business for our strategic road map. We remain confident that the significant investments we have made in 2024 will deliver long-term benefits, specifically as we look to build out a best-in-class product ecosystem for global customer base. Moving to the bottom of the slide. I would like to reiterate that a key attribute to the new Clarus is our debt-free balance sheet. We ended the third quarter with over $36 million of cash on hand, which provides optionality to allocate capital for the benefit of shareholders. Our payables position is clean going into the fourth quarter as we entered with a balance of $12.7 million versus $26.4 million at the same time last year. We also entered Q4 with $54.3 million of receivables, the vast majority of which are due before the end of the year. With limited purchases required to hit our revenue goals for the rest of the year, this fact pattern gives us confidence that we will be cash flow positive in Q4. In terms of priorities, we are committed to reinvesting in our existing 2 segments to seek to drive organic growth. We expect to continue to pay our quarterly dividend and selectively look at small bolt-on M&A opportunities that may enhance our Adventure business in the U.S. and new geographies. Before I turn the call over to Mat, I'll briefly highlight a few key figures on Slide 5. Clarus' third quarter revenue of $67.1 million and adjusted EBITDA of $2.4 million were short of our Q3 forecast. As a result, we've updated our full outlook, which I will outline later during the call. However, I am very pleased with the momentum that we saw at the gross margin level during the third quarter. During the third quarter, consolidated adjusted gross margins of 37.8% or a year-over-year improvement of 420 basis points was realized. At a segment level gross margin, Outdoor adjusted for the PFAS reserve was 37.0% compared to 31.2% in the third quarter last year, a 580 basis point improvement. This improvement is structural and a direct result of the team embracing the simplification strategy to sell more of our highest margin, high-volume products, those A styles I've just referred to. Neil will spend more time on this in a few minutes, but we are changing the bones of BD. We are simplifying and taking complexity out of the business, resulting in higher gross margins, and we are actively managing costs through improved processes and believe we can double -- can be a double-digit adjusted EBITDA business on an annual basis going forward at Outdoor. Despite the positive momentum overall, unfortunately, during the third quarter, our consolidated financial results continue to be affected by near-term pressure on the business, both at Adventure and Outdoor. But we believe we have the building blocks in place to execute our multiyear strategic plan. I'll now pause and turn the call over to Mat Hayward, Managing Director of Clarus' Adventure segment.
Mat Hayward: Thanks, Mike. I'll begin my remarks on Slide 6. Consistent with our stated goals, our objective is to scale our portfolio of Adventure brands globally. We are making progress operationally to build a new product and sourcing engine that can support healthy growth and deliver newness consistently across our different regions and channels. While I am pleased with our progress, our ramp-up and acceleration remains a work in progress as we balance near-term performance goals with investment in critical foundations to deliver our future. We remain confident in our established strategic road map that was outlined previously this year, and are taking the necessary corrective steps to begin to accelerate in '25 across all channels and product categories. Q3 financial results reflect an abrupt slowdown in September in our home market, coupled with a unique set of events that have impacted our business that we believe are short term in nature. New vehicle sales in Australia were down nearly 12% overall from the last comparable period last year versus the growth we saw in the new vehicle market in the first half of this year. We managed through a onetime supply chain disruption that resulted in low safety stock levels in key products. Likewise, one of our important OEM partners experienced supply chain disruption on their own, which caused them to halt production until Q1 of 2025. These events impacted our OEM business the most and dampened the expected wholesale growth in our core roof rack business the most. For context, overall, our sales were down 11.9% versus the prior comparable quarter in '23. Our total wholesale channel was off 2.5%, largely impacted by key accounts in the ANZ, our home market facing group level inventory challenges unrelated to our product, which we expect to alleviate over the next 12 months, and we are working with them in partnership to work through this. Furthermore, while the OEM channel accelerated during the first half of 2024, we experienced a onetime halt in volume at 1 customer, which drove a 58% decline in OEM sales in the quarter as compared to the prior year. These circumstances did not impact our accessories category, which was a bright spot in the quarter, led by MAXTRAX' 16% sales growth over the prior comparable quarter in 2023. We also improved our gross margins at MAXTRAX by 850 basis points, which all flowed through to overall profitability. Our revenue growth at MAXTRAX includes new OEM growth as global automotive partners continue to recognize the power of the brand for their customers. Looking at our specific geographies and channels, we were pleased with the trends for the first 8 months of the year across Australia and New Zealand, supported by net sales, gross profit and EBITDA consistent with our internal expectations. But market softness abruptly revealed itself in September. Q3 sales in the U.S. and rest of world reflected a continuation of the slow momentum that characterized the first 6 months of the year for us. As previously announced, we have newly established leadership in both of these channels and markets that came through partway through this quarter. We expect these regions to be challenged while we integrate additional new team members and launch our strategic initiatives in line with global initiatives. However, we are excited about the investments we've made this year to accelerate our brands and the brand traction in these key markets for our long term. As it relates to initiatives in the U.S., in addition to announcing the hiring of our new GM, we've also brought in a new Head of Sales who will start in the month as we set up critical programming for 2025. In EMEA, we continue to lay the groundwork to expand existing relationships while adding new customers for 2025. We've already added new distributor relationships in the Middle East recently and as recent as the last 2 months, also additionally in South Africa. I would like to spend a few minutes highlighting the operational efforts that we are making within the organization. First and foremost, we have developed an entirely new product development and product commercialization process over the last year that will begin showing itself in the coming months. Following the extremely successful launch of our Pioneer 6 platform globally, I'm very proud with the work the team has put into successfully introducing another new platform developed specifically for the American market and customer. Our new Recon platform launched at SEMA this week, a new product that further enhances our leadership across the platform category, and we have also started to introduce our new sports range across crossbar solutions, vital for international markets. Simultaneous with the product changes, we've been rolling out a new website platform and experience focused on presenting more lifestyle category solutions and a better Fit My Vehicle solution, optimizing our website to make it easier for consumers to understand our product and also for our wholesale partners to get the support they need in their purchasing journey. We still have work to do on this front, but we are tracking to be through this part of the digital transformation in Q1 2025. Lastly, we have realigned elements of our global organization to better support local markets. We implemented onetime structural changes to streamline the business and eliminate redundancies. As mentioned in March this year, evolution across our brands to operate as one Adventure segment versus the sum of parts is crucial as we look to grow globally. While these were difficult decisions, we determined that now is the time to take the proactive steps to ensure that we have the appropriate baseline in place to deliver the profitable growth we expect in 2025. I'd like to now turn the call over to Neil Fiske, President of Black Diamond.
Neil Fiske: Thanks, Mat. Turning to Slide 7. I will provide an update on the Outdoor segment's Q3 results and progress in the year-to-date. At our Investor Day earlier this year, we laid out a plan for Black Diamond that focused on simplifying the business, strengthening the core, exiting unprofitable categories and styles, improving gross margins, rightsizing inventory, reshaping the organization, revamping the supply chain and lowering our overall cost structure. We said we would build a smaller, healthier, more profitable business, and we are delivering on those objectives. Today, I am pleased to report that we are executing well against the plan and seeing the results start to take place. Despite a quarter, which was down 19% on the top line, our adjusted EBITDA was up 25% versus prior year. Importantly, as we roll forward all the changes we have implemented, the run rate profitability of the business has substantially improved to the point where the business is now expected to deliver prospectively an annual double-digit EBITDA margin on the current volume of sales. Gross margins are lifting, and we believe they will continue to expand. Our inventories are in better shape, both in the aggregate and higher -- and the quality of inventory we have against our A styles, which are the highest margin and highest volume products. As Mike mentioned, A styles make up 70% of our inventory at September 30, 2024. Service levels and fill rates have improved substantially and much more positive feedback from our retail partners reflects all the progress we've made. We will enter 2025 with most of the heavy lifting behind us and with a much healthier business from which we can start to grow again. I'm grateful for the hard work of our teams and the ability of the organization to execute on so many fundamental changes in such a compressed time frame. It's a testament to the passion, skill, experience and deeply held commitment our employees have to this incredible brand. As we look at revenues for the quarter, the results reflect the global outdoor market that is still in recession from its peak of 2022 but also the simplification moves we have made, such as exiting the binding distribution business and a less promotional stance versus prior year when we are clearing a lot of excess inventory. By region and channel, North America wholesale was down 22.3%. North America digital D2C was down 4.4%. Europe wholesale was down 8.1%. Europe D2C was up 11.9%, and our international distributor markets were down 29.2% and still correcting from the overbought inventory levels as discussed earlier in the year. Looking at the quality of our revenue, the picture looks much healthier as reflected in improving gross margins. Gross margins were up 200 basis points year-over-year and up 580 points when excluding the PFAS reserve we have taken to ensure we are compliant with new regulations and retailer requirements by 2025. Based on the work we have done to simplify the line, improve sourcing and create more margin-accretive new products, we believe that product margins will continue to lift steadily through '25 and 2026. This is a major driver of our more profitable operating model. On the cost side, operating expenses were down 13.1% versus the prior year. Excluding restructuring expenses from both years, costs were down 10.4%. We expect that operational improvements we have implemented will continue to improve our cost ratios and operating leverage in the go-forward model. As we look ahead to Q4 and to 2025, while we see continued challenges at the consumer and retail level, we believe we have positioned the business not only to absorb these challenges but to expand our EBITDA margins in the process. We are maintaining a pragmatic cautious outlook for 2025 knowing that we have the ability to respond to a market rebound based on the quality of our inventory position and a stronger operating platform. Let me reiterate, the core of the business is much healthier now and capable of delivering double-digit EBITDA margins even without top line growth. That said, we are confident that our growth initiatives in product, channels, marketing and geographic position, position Black Diamond for a return to growth as the market stabilizes. We are pleased with our progress in strengthening the brand and building a healthier, more resilient, more profitable business. With that, I'll turn it over to Mike.
Mike Yates: Thank you, Neil. Turning to Slide 8, I'll begin with a summary of our financial performance in the third quarter. As a reminder and as we have noted previously, given the sale of the Precision Sport segment for approximately $175 million, which closed in the first quarter of the year, our U.S. GAAP results are comprised of Outdoor and Adventure segments and results are referred to as continuing operations. Third quarter sales were $67.1 million compared to $81.3 million in the prior year third quarter. The 17% decline in total sales was driven by a decrease in Outdoor segment of 19% and a decrease in the Adventure segment of 12%. FX was immaterial in the quarter. Moving to consolidated gross margins. In the third quarter, gross margin was 35.0% compared to 33.6% in the year ago quarter. The improvement was primarily a result of product simplification and SKU rationalization efforts in the Outdoor segment that we just highlighted as well as favorable channel mix due to lower OEM sales and higher MAXTRAX revenue at the Adventure segment. Adjusted gross margin reflects the PFAS reserve, which was 1.9 million in the third quarter. Adjusted consolidated gross margin was 37.8% compared to 33.6% in the year ago quarter, a 420 basis point improvement. Adjusted gross margin by segment was as follows: Outdoor was 37%, up 580 basis points; and 40.1% at Adventure, down 60 basis points compared to last year due to the dilutive impact of the TRED Outdoors acquisition. Q2 selling, general and administrative expenses were $27.9 million compared to $28.4 million in the same year ago quarter. The decrease was primarily due to lower retail expenses because of our decision to close unprofitable retail stores at Outdoor as well as a successful implementation of other expense reduction initiatives to manage cost at the Outdoor segment. This was partially offset by investments at the Adventure segment in global marketing and e-commerce initiatives to accelerate growth as well as the incremental SG&A cost as a result of the TRED Outdoors acquisition completed in Q4 of 2023. Adjusted EBITDA in the third quarter was $2.4 million or an adjusted EBITDA margin of 3.6% compared to adjusted EBITDA of $3.6 million or an adjusted EBITDA margin of 4.5% in the same year ago quarter. Our adjusted EBITDA is adjusted for restructuring charges, transaction costs and stock compensation expenses as well as movements in the PFAS inventory reserve. Additionally, beginning in the first quarter of the year, we adjusted for legal costs associated with the Section 16(b) litigation and Consumer Product Safety Commission, known as the CPSC matter. These legal costs were $394,000 in the third quarter. Third quarter adjusted EBITDA by segment was $250,000 at Adventure and $4.4 million at Outdoor. Adjusted corporate cost was $2.2 million in the third quarter. Next (LON:NXT), let me shift to liquidity. At September 30, 2024, cash and cash equivalents were $36.4 million compared to $11.3 million at December 31, 2023. Total (EPA:TTEF) debt on September 30, 2024, was zero compared to $119.8 million at the end of 2023. Our reduced debt and substantially improved cash position reflects the closing of the Precision Sports sale in February of 2024 and the termination and repayment in full of our credit agreement. Consolidated cash tax expense for the full year 2024 is expected to be $2 million to $3 million, which will allow us to maintain most of the net cash realized from the sale of Precision Sports. Free cash flow, defined as net cash provided by operating activities less capital expenditures for the third quarter of 2024 was an outflow of $9.4 million. As a reminder, we have NOL carryforwards for U.S. federal income tax purposes of approximately $7.7 million at December 31, 2023. The company expects to utilize all the remaining NOLs in their entirety this year. Before turning to our outlook, I would like to provide an update on the outstanding Section 16(b) securities litigation matters that the company is pursuing. We continue to proceed in our lawsuit against HAP Trading LLC and Mr. Harish A. Padia. Both fact discovery and expert discovery have now been concluded. The court received a motion for summary judgment from the defendants as well as motions challenging our expert. We don't expect to hear the outcome of these motions until the spring of 2025. If this matter goes to trial, we expect the trial to commence towards the end of 2025. We also filed a lawsuit against Caption Management and its related entities and control persons. Those defendants filed a motion to dismiss on June 27. We filed opposition papers on July 25, and reply papers were filed on August 15, 2024. We are waiting for the court to opine on the motion to dismiss. Moving on to our 2024 outlook on Slide 9. We have lowered our top line guidance and expect sales to range between $260 million to $266 million for the full year 2024. Adjusted EBITDA from continuing operations is now expected to be in the range of $7 million to $9 million or an adjusted EBITDA margin of 3% at the midpoint of revenue and adjusted EBITDA guidance. We now expect capital expenditures to range between $5 million to $6 million and adjusted free cash flow to range between a negative $6 million to negative $8 million for the full year 2024. This includes $7 million of cash outflows related to Precision Sports prior to disposal. Based on our updated forecast, fourth quarter sales are expected to be approximately $70 million and adjusted EBITDA is expected to be between $5 million and $7 million. I want to reiterate that our outlook does not include any expense for ongoing litigation specifically related to Section 16(b) matters, the CPSC matter of further increases in the PFAS-related inventory reserves. However, regarding PFAS-related inventory, the team has done a great job dealing with this situation, and I don't expect further reserves associated with this inventory going forward. Since Q4 of last year, we have reserved approximately $4.2 million for PFAS, which is consistent with how we framed this exposure back during our year-end call in early March of 2024. And I don't expect the need for additional reserves related to PFAS at this point in time going forward. We expect to generate approximately $20 million to $22 million of free cash flow in the fourth quarter. If achieved, we would expect to have a cash balance above $50 million at the end of the year compared to the $36.4 million at September 30, 2024. Before I move on from discussing our outlook, I want to be very clear regarding what has changed. We still expect Outdoor revenue to be approximately $185 million, consistent with what we've been guiding to all year. However, Adventure's revenue is now expected to be closer to $78 million. This totals $263 million of revenue for the full year 2024, which is our midpoint of our top line guide I just presented. The $12 million decline in revenue at Adventure from our previous guide is due to the several factors, including certain wholesale and OEM partners now purchasing in the back half of the year as expected as well as slower uptake in our recently launched e-com initiatives and the impact from the soft market in the U.S.A. in the first half of the year that has not improved in the back half of the year. Based on our continued operational progress to date at Outdoor and the road map in place at Adventure to guide us towards the next phase of profitable growth, we remain confident that we can deliver significant long-term value for Clarus shareholders. We have an outstanding team in place supported by a debt-free balance sheet to take the next steps in our turnaround and position ourselves for a better 2025. At this point, operator, we are ready to take questions.
Operator: [Operator Instructions] Our first question. Our first question will come from the line of Jim Duffy from Stifel. Your line is open.
Jim Duffy: Hey, good afternoon. Mat, I had a question for you on the OEM contribution to the business, where that stands right now, where you see the OEM mix opportunity. And then I imagine you're just off of SEMA. If you have any update or color on discussions you had with OEM prospects at SEMA. Thank you.
Mat Hayward: Thanks. Great question. Look, OEM, one of the key things, as mentioned, I think, in our last call, we have invested. Structurally, we've got a new global head of OEM sales. This role is now based in the U.S. Previously, everything has been run out of Australia. And with this adjustment and structure, it's really focusing on growth internationally, knowing that the U.S. is a prime part of that. Over the last quarter, David Cook, in this new role, has stepped in and is basically working with the 3 regional GMs to go through a top 10 analysis of all the, I guess, the lead autos in each market. As you know, there's 2 opportunities within our OEM market. One is dealer programs that we haven't stepped into previously, and we're now opening up conversations to launch those as soon as Q1 in 2025. These dealer programs are based on accessories that we have in our range and don't need to go through the same product development pipeline that you would for custom and product-specific platforms for the brand. But on top of that, the focus is really making sure that across EMEA with our new regional lead there and in the U.S., we're meeting all of the key partners. You mentioned SEMA. SEMA was filled with meetings across all of the, I guess, the top 5, top 10 automakers and also looking at the opportunities with partners in Asia as well that are coming to light in Australia especially. So it is a lot of, I guess, forward-looking investment. The pipeline is typically are a 2- to 3-year time line from start to finish on product-specific platforms, but we're hoping to offset those long-term growth with short-term dealer programs. But yes, a lot of work has been done, and we're hoping to see that come to life in 2025.
Jim Duffy: And then a question on the Australia and New Zealand marketplace. Appreciate the economy has -- and consumer spending has been challenged there. Just thoughts on a go-forward basis, looking into 2025. Any hope for rate reductions to breathe new life into demand -- new vehicle demand or aftermarket demand? Any thoughts there would be helpful. Thank you.
Mat Hayward: Yeah. Again, it's almost a tale of 2 halves. As you mentioned, a very, very strong H1 across Q1 and Q2 with new vehicle deliveries really breaking records. As of June this year, there was a slowdown in monthly vehicle sales, and that's rolled through into our results. Moving into kind of Q4 and into Q4. We are in our peak season. We are seeing the commercials ramp up. November and December, we are typically in peak trading period for Australia alone. And outside of vehicle sales, we are seeing robustness return. Our globally, I guess, world-famous platform, P6, is trading well to the point that we've had to make sure we ramp up volumes to really take care of that demand. I think the other thing to kind of mention is New Zealand's been an offset of the Australian business, and we're there putting a lot more, I guess, strategic focus on that individual market, which has different nuances similar to, I guess, to the U.S. and Canada. New Zealand is a lot more of a trade-based business, and we've recently launched our trade initiative, looking after fleet and service vehicles. And we see an opportunity across both Australia and New Zealand for that. In '25, you'll see also the fruits of product development, 12 to 16 months' worth of product development start to come through. And these are ranging on new platforms across most of our categories in the business that haven't been fresh for probably about the last 10 years. So all of these initiatives look to kind of counterbalance degrees of softness of either vehicle or partner sales, and there's a lot more focus on channel segmentation and product segmentation that we also haven't previously done with our main market in Australia. Not kind of mincing words. We've previously been a company that's offered kind of everything to everyone, and we're making sure we're really servicing our accounts with a bit more of their specific needs for their specific customers, and that's what we expect to see rolling into Q4 and Q1 next year.
Jim Duffy: Thank you for that perspective. Last one for me. Mike, wheels of justice grinding slowly, the HAP Trading recovery significant in the context of the enterprise value, I'm surprised it's taken this long. Is there any chance of a potential settlement or something like that, that could accelerate things?
Mike Yates: Yeah. No, the -- you want to go ahead and take that, Warren?
Warren Kanders: Yeah, I'll take that one. So it's with the judge now, Jim, and we expect to -- there's a motion to dismiss in front of him. We expect, based upon how this judge has responded in prior cases and so on, I mean, there's data around this, we expect to hear from him probably at the end of the first quarter. And if he dismisses -- the motion to dismiss, then this will go to a jury trial. And typically, it's at that point that you would have conversations about settlement or not. So that's the time frame to have those conversations, would be after that event. But as you pointed out, the amount is significant and the HAP and Harsh Padia have not challenged the amount.
Jim Duffy: Understood. Helpful perspective. Thank you.
Operator: Next question comes from the line of Laurent Vasilescu from BNP Paribas (OTC:BNPQY). Your line is open.
Laurent Vasilescu: Good afternoon, thank you for taking my questions. I think, Mike, you mentioned in your prepared remarks, and I'm waiting for the transcript to populate, but the midpoint -- the guidance cut for the full year about $20 million, I think you mentioned 2 moving pieces, $30 million and then offset by the $10 million. Can you just maybe clarify that a little bit more? And then just where does the macro come into that equation as we think about the guidance on that?
Mike Yates: No, that's -- the guidance is not that significant. So let me clarify that. We lowered our guidance from $270 million to $280 million to $260 million to $266 million. So in that, what I was trying to be very clear on, we've talked about $185 million of revenue at Outdoor and $90 million of revenue at Adventure. That's the $275 million kind of at the midpoint of the old guide. The only thing that's changing is the $90 million from Adventures going to $78 million. So the guidance cut on the top line is $12 million, right? That's just to be clear, right? And I think we've laid out the reasons for that. We had a significant wholesale partner dealing with their own -- not our inventory but other folks' inventory challenges. We had an OEM customer who significantly had to halt production for the remainder of the year due to a different supply chain challenge not related to us, right? And the U.S. business has -- was slow from the beginning of the year. That hasn't improved at all here in the back half of the year. And finally, our e-com initiative at Adventure has been slower to respond to the uptake on the e-com -- new changes to the e-com platform and the investments we've made on the website. This uptick of revenue is slower than anticipated. So those are all the reasons why Adventure's a little slower along with the lower vehicles that Mat mentioned. So that's the change in guidance. The $30 million decline that I mentioned is when we're talking about simplification and taking complexity out of our business, specifically at Outdoor and that business is shrinking from $204 million and change last year to $185 million this year, that's a $20 million decline. $30 million of that decline is related to elimination of sales of items we're calling Cs and Ds. Cs and Ds are low-margin products that -- it's our 80-20 execution of our low-margin product. We're walking away from them, selling less of those, et cetera. What we're leaning into is our A products, high-volume, high-margin products, and I expect us to sell $10 million more of those. So the $30 million decline in revenue from our high-complex, low-volume, low-margin business is being replaced with $10 million of high-margin, high-volume product that yields higher gross margins. So that's why you're seeing our margins expand. As Neil pointed out, EBITDA is up 25% this quarter, even though revenue is down 19% at Outdoor. And that's directly result of us being able to execute on our initiatives of simplifying our business, selling more of our best products to our best customers. Does that help?
Laurent Vasilescu: Very helpful. And then maybe a good segue because you provided a detailed Investor Day earlier this year, with a target of $330 million of net sales for 2025 with a 10% EBITDA margin. Any updated thoughts there? Is there anything that's changed in that viewpoint since we're 6 months into this closer to 2025?
Mike Yates: Yeah. No, that guidance and projections that we talked about, I think I would summarize it as follows, right? That was how we were looking at things in March. Obviously, here as we sit in November, I think the takeaway that everyone should hear from our prepared remarks and in my comments and the rest of the team's comments is we are tracking at Outdoor. I think Neil's prepared remarks are very clear. We're going to hit that $185 million, and we're going to have a strong foundation that we can grow the business off of and most importantly, profitable growth, right, double-digit EBITDA going forward on a prospective basis. Adventure is a little behind what we -- where we hoped it would be and what we thought it would be when we gave those projections back in March in New York, in the first week of March of this year. right? And for all the reasons I just laid out in some of the prepared remarks, you heard, we are not -- we're $12 million behind the guide that we gave back in March. So the 2025 guidance and how we're thinking about 2025, we're going through the budgeting process and putting that all together now, and we'll reserve the right to update that at our next call here once the calendar turns. But at this point in time, we are behind at Adventure compared to where we thought in March from a top line and profitability standpoint, but we're tracking where we thought we would be right on the numbers at Outdoor.
Laurent Vasilescu: That's very helpful. And then on the third quarter gross margins, just a very nice uptick there. I think up 420 bps year-over-year. Can you maybe -- if you could possibly help us think about how should we think about 4Q gross margins and then to that path to double-digit EBITDA margins, kind of remind us where ultimately you want gross margins to go over time.
Mike Yates: Well, sure, sure. So when I'm looking at fourth quarter gross margins, we haven't given official guidance, but just to -- I think those -- at both -- between 39% and 40% at both segments is what I would expect.
Laurent Vasilescu: Okay, very helpful. Thank you very much. Best of luck.
Operator: Next question come from the line of Matt Koranda from ROTH Capital Partners (WA:CPAP). Your line is open.
Unidentified Analyst: Hi. This is Joseph on for Matt today. Just wanted to look into 2025 a little bit more, just hopping on to the gross margin aspect as well as growth in revenues. Are we expecting -- do we need market growth in each segment in order to get back to growth? And can you provide any colors on levers for gross margin expansion exactly? Like where do we see that? And in terms of revenue growth, what can you do for self-help in these categories if they remain flat and more specifically for the Adventure segment?
Mike Yates: Well, I mean, from a -- again, from a 2025 perspective, we're not going to give any guidance today or speak to that, right? We're in the process of working through our budgets in our view on 2025. From an Outdoor perspective, Neil went through a litany of things in the prepared remarks that will show up in the transcript of improvements that the team has made, right? And they've done a wonderful job dealing with driving productivity, driving the simplification, working with suppliers, resourcing products, changing processes to take cost out of the business. I think the takeaway that everyone should hear on the Outdoor side is we have rightsized the business here in '24 from a cost standpoint. We've improved processes. We've improved the mix of our inventory. We've leaned into our best products that I just described in the last question, right? And we're selling more of our A styles, right, that have the higher margins, higher gross margins and higher volumes, where we actually sell more of those products to our best customers. That's exactly what we want to do. That's the baseline. Once we've established that in '25, I think growth comes, right, on top of that. And that's why we're confident that whether we get a top line growth or, I'll call it, a market tailwind from improving market conditions -- because to be clear, both segments, in the Outdoor space in general, still in a recession. I think we said that again in our prepared remarks, both the Adventure and the Outdoor space is still in a recession coming off the highs from 2022. But we're well positioned to grow profitably. And if we get a tailwind with the market, that will only fuel the top line and then the operating leverage that follows when the top line expands. So we feel very good about that. From an Adventure standpoint, the same could be true. We've made several investments around e-commerce, around -- Mat covered in detail the efforts around new products, in development of new products, both at the MAXTRAX business and at the Rhino-Rack business. Several of those will launch in '25, right? So we are trying to self-help ourselves through new product development. We're trying to drive enhanced e-commerce business, where obviously, our margins are better, right, and that's easy to sell accessories through the e-commerce platform and the margins are better because we -- but we're also working to make it easier for consumers to acquire, what I'll call, racks, right, and through introduction of new fits, right? We have spent an enormous amount of time and engineering resources to improve and to simplify the fit that the rails and bars, not just the platform racks but the rails and bars and how those attach to vehicles, and we're targeting fit over for -- over 180 different vehicles, which is a strategic shift from what we were talking about two and half, three years ago when we bought this business, right? So we're trying to build up the, what I'll call, the available market for both the platforms and more importantly, for the crossbars, right? So that's something we're excited about in 2025. So I mean I think as we think about 2025, it's all about scaling the Adventure business, and it's all about continuing to simplify the Black Diamond business, all of which -- both businesses and we'll have better operating leverage as the market become tailwinds and the markets begin to grow.
Unidentified Analyst: All right. Thank you for that color. We’ll go ahead and check the rest of ours online and thank you for taking our questions today.
Operator: Next question from the line of Mark Smith from Lake Street. Your line is open.
Mark Smith: Hey, I apologize if this was hit a bit. But just looking at the Outdoor segment, can you just update us on kind of how the consumer in international markets is doing with all of the work in rightsizing the business, if there's still any work for international that needs to be done that's maybe lagging domestic?
Mike Yates: I'll make one comment, and then I'll throw it over to Neil. Our view of the international markets at Outdoor is that they're 12 to 18 months behind kind of where we've seen the U.S. from an Outdoor standpoint, meaning many of our customers' retail partners are still struggling with too much of the wrong inventory, right? However, we're working through that this year. And I think we would expect that to improve next year. But I do -- the market, I think, is the first year in over 20 years internationally, like in Japan, that it's slowed down. That's my understanding of the market and internationally, and Japan being one of our biggest international markets in Asia. But I'll see what -- Neil, what would you add to that?
Neil Fiske: Thanks, Mike. I think you covered it. Maybe one point of clarity. I would actually split Europe from our international distributor markets because Europe is a largely owned operation, whereas China, Japan, New Zealand, Australia, et cetera, go through distributors. And we're seeing different dynamics in those 2. In Europe, I see you're sort of tracking maybe just a couple of months behind the U.S. in its correction, but the pattern looks quite similar. And so I think we'll see those markets start to behave more similarly as we go into 2025. And I would expect, barring some macroeconomic or geopolitical disruption, that those markets would start to track and stabilize together. The international distributor markets are slightly different dynamic because our distributors buy from us and then their customers buy from them. So you kind of have an extra layer, if you will, of inventory in the system. And therefore, I think it takes another 12 months for the international distributor markets to fully correct. There's just one extra step in the process. And that's why I think you see in our IGD segment this year, as we talked about from the very beginning, we expected this correction to be particularly pronounced this year, less so next year. I think without giving guidance, I think you'll start to see a rebound in international distributor markets next year. But the contraction was particularly concentrated given there are effectively 2 redundant layers of inventory in those markets.
Mark Smith: Perfect. Second question for me is just curious if you can speak to maybe your exposure to potential rise in tariffs as we look at stuff coming out of China. And I know it may be hard to quantify, but if you can speak to maybe what your exposure is and how maybe you could combat that if that comes to fruition here over the next year or so?
Mike Yates: Neil, you want to cover Outdoor? I know we've done a great job delevering from China, but go ahead and cover that.
Neil Fiske: Yes. We've had -- been hard at work at diversifying our sourcing base out of China. We still have a few items there but relatively small exposure, a little bit of our headlamp business and a little bit of our smaller footwear business. And those also have supply chain transitions where we can move that business to Vietnam or other countries in the Asia Pacific. So I think that China-specific tariffs were relatively well insulated from -- obviously if -- once we get a sense of the timing and the magnitude of those, we can also adjust our purchases to pull those forward on this side of the tariff increase and then use that added buffer time to transition those products out of China. So we may end up hedging inventory a little bit to buy us consistency in our pricing as we diversify the last piece. So that's the China piece. I would say the thing that is more of a question mark for us, and I'm sure everybody at this point, is whether there's going to be something more along the lines of universal tariff that applies to all products. And I think all industries are going to be looking at how to react to that. But the China-specific piece, I think we've contained, we've got a plan for and we can mitigate the impact of.
Mat Hayward: Mike, if you don't mind, I think from an Adventure point of view, I'll just add some color.
Mike Yates: Yes, go ahead.
Mat Hayward: Predominantly within Adventure, Rhino-Rack, there's -- we -- there's 2 main materials, aluminum and plastics. Over the last 2 quarters and with the addition of our new global Head of Supply Chain and Ops, we've kicked off a project to look at our global supply chain, our partners and our footprint. And this was an initiative that was central to 2024 but will roll into '25. And this study has been looking at finding opportunities closer to source, closer to market, closer to customer. In the short term and near term, we're standing back up existing partnerships in Australia to counter some of the potential headwinds, especially as it relates to China and U.S. tariffs. And so that's already been done and enacted. Additionally, at the same time, we're about 5 months through the process of identifying the derisking manufacturing sources. So there's kind of 2 time lines that we're operating on, in near term where we stand up and we make sure there's no potential impact to delivery of key components for U.S., EMEA and Australia; and then within a 12 to 16 months, which kicked off in Q2, as mentioned, we're looking at new partners and new locations to then fuel all market growth by reducing impact on China. So that's already in motion, and there is already activities and deliveries based on those actions. But it is a key topic within our category in the industry as well.
Operator: And with that, I would now like to turn it back over to Mike Yates for any closing remarks.
Mike Yates: Great. Thank you, Victor. Thank you very much, everyone, for attending the call this afternoon and your questions. We appreciate them. And more importantly, we appreciate the continued support and interest in Clarus. We look forward to updating you on our results again next quarter, and we'll talk to you all soon. Thank you very much.
Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
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