Q3 2024 Clarus Corp Earnings Call
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Speaker Change: 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 30th 2024 June yesterday are Clarus Corporation's executive Chairman.
Speaker Change: Lauren tenders CFO, Mike Yates President of Black Diamond equipment, Neil Fiske management director of Claris Adventure segment, Matthew Hayward, and the company's external director of Investor Relations, Matt Berkowitz. 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. Berkowitz.
Matt Berkowitz: As you read the Companys Safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking statements. Please go ahead.
Matt Berkowitz: Thank you before we begin I'd like to remind everyone that during today's call will be making several forward looking statements and are really 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.
Matt Berkowitz: Looking statements are subject to potential risks and uncertainties that could cause the actual results of operations or financial conditions Clarus Corporation to differ materially from those expressed or.
Matt Berkowitz: Implied by the forward looking statements.
Matt Berkowitz: 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.
Speaker Change: I would like to remind everyone. This call will be available for replay starting at seven PM Eastern time Tonight.
Speaker Change: Cast replay will also be available via the link provided in today's press release as well as on the company's website at Clarus Corp Dot com.
Speaker Change: Now I'd like to turn the call over to <unk> Executive Chairman Warren calendars.
Speaker Change: Good afternoon, and thank you for joining classes earnings call to review our results for the third quarter.
Speaker Change: I am joined today by our Chief Financial Officer, Mike Yates as well as Neil Fiske and Matt Heyward.
Speaker Change: We'll discuss our outdoor and adventure segments, respectively.
Speaker Change: 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 claris with strategic plan positioning the company for long term profitable growth.
Speaker Change: 2024 was expected to be a year of simplification for our outdoor segment and one of investment to scale our adventure segment.
Speaker Change: Remained significant work outstanding to execute on our multiple multiyear growth initiatives.
Speaker Change: Yes, we believe the steps we have taken and investments we have made to date will deliver significant long term benefit and Neil and Matt will provide more specific comments about the incremental progress made in each segment during the third quarter.
Speaker Change: 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 Neal will detail in greater depth. Our goal has been to build a smaller more profitable business and today's results are evidenced that the strategies that we have implemented are working.
Speaker Change: While outdoor revenue declined year over year.
Distant with market softness in our expectations adjusted EBITDA was up 25%.
Speaker Change: I'd also like to highlight that the challenging market conditions, we are experiencing represent an opportunity.
Speaker Change: It is our view that consumers tend to favor the highest quality options in this type of retail environment.
Speaker Change: We have seen black diamond grow share in its core categories in recent quarters, and we expect to continue to take share and our most important categories moving forward.
Speaker Change: Turning to our adventure businesses, our objective to scale. This segment to a global footprint has not yet come to fruition.
Speaker Change: Performance was in line with expectations for the first two months of the quarter, but results were ultimately affected by market softness in September.
Speaker Change: North America and Australia.
Speaker Change: We believe we have taken appropriate corrective actions to rightsize, our cost base better adventure without impacting the growth investments we made in the first half of 2024.
Speaker Change: 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.
In international markets.
Overall, while we are in different places on the turnaround curve for each segment. We are encouraged by the steps that have taken and we believe that we have laid the foundation to drive increased profitability.
Speaker Change: Unlock new growth opportunities moving forward.
Speaker Change: 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.
Mike Yates: On today's call I'll provide a brief third quarter update before turning it over to Matt 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.
Mike Yates: Beginning on slide four.
We took additional steps forward during the third quarter that are expected to position <unk> for sustainable long term profitable growth as market conditions.
Mike Yates: Conditions normalize.
Speaker Change: 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 eight styles.
Speaker Change: This can pace compares favorably to the same point last year, when we had approximately $70 million of inventory on hand at outdoor.
Speaker Change: Additionally, we have managed our P fast inventory exposure at outdoor very well and on our way of having this behind us.
Speaker Change: 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.
Speaker Change: Which is intentional and so direct direct result of our simplification strategy as we lean into our best products with our best customers.
Speaker Change: For the full year 2024, we're on track for nearly $30 million less revenues from our C&D products.
Categories due to our simplification process.
Speaker Change: Also due to the market conditions.
Speaker Change: However, this $30 million decrease is offset by $10 million higher revenue from our <unk> styles.
Speaker Change: This is exactly what we were trying to do in order to improve the profitability and outdoors remember our ace styles have higher volumes and most importantly, higher gross margins.
Speaker Change: 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.
Speaker Change: Results in our adventure segment were impacted by a weak market in September.
Speaker Change: Following a broad corporate realignment in recent leadership appointments, we are focused on taking incremental steps in line with our strategic roadmap to quickly identify challenges and solutions to deliver month over month improvement. After the quarter's end in October we structured are we.
Speaker Change: We restructured our cost base across the entire adventure segment with the expectation of an annual run rate savings of $2 $4 million.
Speaker Change: 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.
Speaker Change: 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 our global customer base.
Speaker Change: Moving to the bottom of this 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.
Speaker Change: Our payables position as 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.
Speaker Change: Also entered Q4 with $54 3 million of receivables the vast majority of which are due before the end of the year.
Speaker Change: 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.
Speaker Change: In terms of priorities, we are committed to reinvesting in our existing two segments to seek to drive organic growth.
Speaker Change: We expect to continue to pay a quarterly dividend and.
Speaker Change: And selectively look at small bolt on M&A opportunities that may enhance our adventure business in the U S and new geographies.
Speaker Change: Before I turn the call over to Matt I'll briefly highlight a few key figures on slide five.
Speaker Change: Claris is third quarter revenue of $67 1 million and adjusted EBITDA of $2 4 million was short of our Q3 forecast as a result, we've updated our full outlook, which I will outline later during the call.
Speaker Change: However, I am very pleased with the momentum that we saw at the gross margin level during the third quarter.
Speaker Change: 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.
Speaker Change: Door adjusted for key fast reserve was 37.0% compared to 31, 2% in the third quarter last year, a 580 basis point improvement.
Speaker Change: 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 ace styles I just referred to.
Speaker Change: 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 cost through improved processes and believe we can double.
Speaker Change: It can be a double digit adjusted EBITDA business on an annual basis going forward at outdoor.
Speaker Change: Despite the positive momentum overall unfortunately during the third quarter, our consolidated financial results continued to be affected by near term pressure on the business both of adventure and outdoor.
Speaker Change: But we believe we have the building blocks in place to execute our multiyear strategic plan.
Speaker Change: I'll now pause and turn the call over to Matt Hayward, managing director of <unk> Adventure segment.
Speaker Change: Thanks, Mike I'll begin my remarks on slide six.
Consistent with our stated goals.
Speaker Change: Our objective is to scale our portfolio of adventure brands globally.
Speaker Change: We're 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.
Speaker Change: While I am pleased with our progress our ramp up and acceleration remains a work in progress as we balance near term performance calls with investment in critical foundation to deliver our future.
Speaker Change: We remain confident announced established strategic roadmap that was outlined previously this year and are taking the necessary corrective steps to begin to accelerate in 'twenty five across all channels and product categories.
Speaker Change: Q3 financial results reflect an abrupt slowdown in September and a higher market coupled with a unique set of events that have impacted our business that we believe are short term in nature.
Speaker Change: New vehicle sales in Australia were down nearly 12% overall from the last comparable period.
Speaker Change: Last year versus the growth we saw in the new vehicle market in the first half of this year.
Speaker Change: We managed through a one time supply chain disruptions that resulted in low safety stock levels and key product <unk>.
Speaker Change: Likewise, one of our important OE partners experienced supply chain disruption on the horizon, which caused them to halt production until Q1 of 2025.
Speaker Change: These events impacted our OEM business, the most and dampen the expected wholesale growth in our core refract business. The most.
Speaker Change: For context overall, our sales were down 11, 9% versus the prior comparable quarter and 23.
Speaker Change: Our total wholesale channel was off two 5% largely impacted by key accounts in the ANZ market facing group level inventory challenges unrelated to our product, which we expect to alleviate over the next 12 months and we're working with them in partnership to work through this.
Speaker Change: Furthermore, while the OEM channel accelerated during the first half of 2024, we experienced a onetime holton volume at one customer, which drove a 58% decline in <unk> sales in the quarter as compared to the prior year.
Speaker Change: These circumstances did not impact our accessories category, which was a bright spot in the quarter.
Speaker Change: Led by Max taxes, 16% sales growth over the prior comparable quarter in 2023.
Speaker Change: We also improved our gross margins at Max rates by 850 basis points, which all flow through to overall profitability.
Speaker Change: Revenue growth of <unk> includes new OEM growth is global automaker partners continue to recognize the power of the brand for their customers.
Speaker Change: Looking at our specific geographies and channels, we were pleased with the trends for the first nine months of the aircrafts, Australia and New Zealand supported by net sales gross profit and EBITDA consistent with our internal expectations.
<unk> softness abruptly revealed itself in September.
Speaker Change: Q3 sales in the U S and rest of world reflected a continuation of the slow momentum that characterized the first six 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 challenge, while we integrate additional new.
Speaker Change: <unk> 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 a long time.
Speaker Change: 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. So the startling amounts as we sit up critical programming for 2025.
Speaker Change: In EMEA, we continue to lay the groundwork to expand existing relationships, while adding new customers for 2025.
Speaker Change: We've already added new distributor relationships in the Middle East recently and as recent as the last few months also Additionally in South Africa.
Speaker Change: I would like to spend a few minutes highlighting the operating leverage that we are making within the organization.
Speaker Change: 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.
Speaker Change: Following the extremely successful launch about pioneer six platform globally I'm very proud of the work. The team has put into successfully introducing another new platform developed specifically for the American market and customer our new <unk> platform launched at Sema. This week.
Speaker Change: A new product that further enhances our leadership across the platform category and we are also excited to introduce our new sports range across cross border solutions vital for international markets.
Speaker Change: 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 that product and also for our wholesale partners to get the support they need in their purchasing journey, we still have work to do.
Speaker Change: On this front, but we are tracking to be through this part of the digital transformation in Q1 2025.
Speaker Change: Lastly, we have realigned the elements of our global organization to better support local markets.
Speaker Change: We implemented one time 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.
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.
Ill now turn the call over to Neil Fiske President of Black Diamond.
Neil Fiske: Thanks, Matt.
Neil Fiske: Turning to slide seven I will provide an update on the outdoor segment Q3 results and progress in the year to date.
Neil Fiske: At our Investor Day earlier this year, we laid out a plan for black Diamond that focus on simplifying the business strengthening the core exiting unprofitable categories and styles, improving gross margins right sizing inventory reshaping the organization.
Neil Fiske: Revamping the supply chain and lowering our overall cost structure.
Neil Fiske: We said, we would build a smaller healthier more profitable business and we are delivering on those objectives.
Neil Fiske: Today I am pleased to report that we are executing well against the plan and seeing the results start to take place.
Neil Fiske: Despite a quarter, which was down 19% on the top line our adjusted.
Neil Fiske: EBITDA was up 25% versus prior year.
Neil Fiske: Importantly, as we roll forward all the changes we have implemented the run rate profitability of the business has substantially improved.
Neil Fiske: To the point, where the business is now expected to deliver prospectively.
Neil Fiske: The annual double digit EBITDA margin on the current volume for sales.
Neil Fiske: Gross margins are lifting and we believe they will continue to expand.
Neil Fiske: Our inventories are in better shape, both in the aggregate.
Neil Fiske: And higher.
Neil Fiske: The quality of inventory we have.
Neil Fiske: Against our eight styles, which are the highest margin and highest volume products.
Mike Yates: As Mike mentioned, a styles make up 70% of our inventory at September 32024.
Mike Yates: Service levels and fill rates have improved substantially.
Mike Yates: And much more positive feedback from our retail partners reflects all of the progress we've made.
Mike Yates: 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.
Mike Yates: I am 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 timeframe.
Mike Yates: It's a testament to the passion skill experience and deeply held commitment our employees have to this incredible brand.
Mike Yates: 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.
Mike Yates: But also the simplification moves we've made such as exiting the binding distribution business and a less promotional stance versus prior year. When we were clearing a lot actually.
Mike Yates: Less inventory.
Mike Yates: By region and channel North America wholesale was down 22, 3%.
Mike Yates: North America digital DTC was down four 4%.
Mike Yates: Europe wholesale was down eight 1% Europe DTC was up 11, 9%.
Mike Yates: And our international distributor markets were down 29, 2% and still correcting for me overbought inventory levels as discussed earlier in the year.
Mike Yates: Looking at the quality of our revenue.
Mike Yates: The picture looks much healthier as reflected in improving gross margins.
Mike Yates: Gross margins were up 200 basis points year over year and up 580 points when excluding the <unk> reserve we have taken to ensure we are compliant with new regulations and retailer requirements by 2025.
Mike Yates: Based on the work we've done to simplify the line improved sourcing and create more margin accretive new products. We believe that product margins will continue to lift steadily to 25 and 2026.
Mike Yates: This is a major driver of our more profitable operating model.
Mike Yates: On the cost side operating expenses were down 13, 1% versus the prior year.
Mike Yates: Excluding restructuring expenses from both years costs were down 10, 4%.
Mike Yates: We expect that operational improvements we have implemented will continue to improve our cost ratios and operating leverage in the go forward model.
Mike Yates: As we look ahead to Q4 and 2025 while.
Mike Yates: While we see continued challenges at the consumer and retail level. We believe we are positioning the business not only to absorb these challenges but to expand our EBITDA margins in the process.
Mike Yates: We are maintaining a pragmatic cautious outlook for 2025.
Mike Yates: 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.
Mike Yates: Let me reiterate the key.
Mike Yates: Core of the business is much healthier now and capable of delivering double digit EBITDA margins, even without topline growth.
Mike Yates: That said, we are confident that our growth initiatives and product channels marketing and geographic position.
Mike Yates: <unk> Black Diamond for return to growth as the market stabilizes.
Mike Yates: We are pleased with our progress in strengthening the brand and building a healthier more resilient more profitable business.
Mike Yates: With that I'll turn it over to Mike.
Mike Yates: Thank you Neal.
Mike Yates: Turning to slide eight I'll begin with a summary of our financial performance in the third quarter.
Mike Yates: As a reminder, and as we have noted previously given the sale of the precision sports 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.
Mike Yates: Third quarter sales were $67 1 million compared to $81 3 million in the prior year third quarter.
Mike Yates: 17% decline in total sales was driven by a decrease in outdoors segment of 19% and a decrease in the adventure segment of 12%.
Mike Yates: FX was immaterial in the quarter.
Mike Yates: Moving to consolidated gross margins in the third quarter gross margin was 35.0% compared to 33, 6% in the year ago quarter.
Mike Yates: Proven it was primarily a result of product simplification and SKU rationalization efforts and the outdoor segment that we just highlighted.
Mike Yates: As well as favorable channel mix due to lower OEM sales and higher <unk> revenue at the adventure segment.
Mike Yates: Adjusted gross margin.
Mike Yates: Reflects the peak fast reserve, which was $1 9 million in the third quarter.
Mike Yates: Adjusted consolidated gross margin was 37, 8% compared to 33, 6% and a year ago quarter.
Mike Yates: 420 basis point improvement.
Mike Yates: Adjusted gross margin by segment was as follows outdoor was 37.0% up 580 basis points, and 41% and adventure down 60 basis points compared to last year due to the dilutive impact of the tread outdoor acquisition.
Mike Yates: Q2, selling general and administrative expenses were $27 9 million compared to $28 4 million in the same year ago quarter.
Mike Yates: The decrease was primarily due to lower retail expenses because of our decision to close unprofitable retail stores that outdoor as well as a successful implementation of other expense reduction initiatives to manage costs.
Mike Yates: The outdoor segment.
Mike Yates: This was partially offset by investments that the adventure segment, and global marketing and ecommerce initiatives to accelerate growth as well as the incremental SG&A costs as a result of the tread outdoors acquisition completed in Q4 of 2023.
Adjusted EBITDA in the third quarter was $2 $4 million or an adjusted EBITDA margin of three 6% compared to adjusted EBITDA of three 6 million or an adjusted EBITDA margin of four 5% in the same year ago quarter.
Mike Yates: Our adjusted EBITDA is adjusted for restructuring charges transaction costs and stock compensation expenses as well as movements in the PFS inventory reserve. Additionally.
Mike Yates: Additionally, beginning in the first quarter of the year, we adjusted for legal costs associated with the section 16 be litigation and consumer product Safety Commission known as the CPUC batter. These legal costs were $394000 in the third quarter.
Mike Yates: Third quarter adjusted EBITDA by segment was $250000 and adventure and $4 $4 million at outdoor.
Mike Yates: Adjusted corporate costs was $2 2 million in the third quarter.
Mike Yates: Next let me shift to liquidity.
Mike Yates: At September 32024, cash and cash equivalents were $36 4 million compared to $11 3 million at December 31, 2023.
Mike Yates: Total debt.
Mike Yates: On September 32024 was zero compared to $119 8 million at the end of 2023.
Mike Yates: Our reduced debt and substantially improved cash cash position reflects the closing of the precision sports sale in February of 2024, and termination and repayment in full of our credit agreement.
Mike Yates: 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.
Mike Yates: Free cash flow.
Mike Yates: Defined as net cash provided by operating activities less capital expenditures for the third quarter of 2024 was an outflow of $9 4 million.
Mike Yates: As a reminder, we have NOL carryforwards for U S. Federal income tax purposes of approximately $7 7 million at December 31, 2023.
Mike Yates: The company expects to utilize all of the remaining Nols in their entirety this year.
Mike Yates: 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.
Mike Yates: We continue to proceed in our lawsuit against <unk> trading LLC and Mr. Reshape idea.
Mike Yates: Both that discovery and expert discovery have now been concluded that received a motion for summary judgment from the defendants as well as a motions challenging our expert.
Mike Yates: We don't expect to hear the outcome of these motions until the spring of 2025.
Mike Yates: It goes to trial, we expect the trial to commence towards the end of 2025.
Mike Yates: We also filed a lawsuit against caption management and its related entities and control persons.
Mike Yates: Those defendants filed a motion to dismiss.
Mike Yates: On June 27th we filed our position papers on July 25th and reply papers were filed on August 15th 2024.
Mike Yates: Waiting for the court to pine on the motion to dismiss.
Mike Yates: Moving on to our 2020 for outlook on slide nine.
Mike Yates: We have lowered our topline guidance and.
Mike Yates: 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 3.0% at the midpoint of revenue and adjusted EBITDA guidance.
Mike Yates: We now expect capital expenditures to range between 5 million.
Mike Yates: Two 6 million and adjusted free cash flow to range between negative $6 million to negative $8 million for the full year 2024.
Mike Yates: This includes $7 million of cash outflows related to precision sports prior to disposal.
Mike Yates: Based on our updated forecast fourth quarter sales are expected to be approximately $70 million and adjusted EBITDA is expected to be between 5% and $7 million.
Mike Yates: Okay.
Mike Yates: I want to reiterate that our outlook does not include any expense for ongoing litigation specifically related to section 16, B matters. The CPUC matter of further increases in the PFS related inventory reserves how's.
Mike Yates: However, regarding <unk> SaaS related inventory the team has done a great job dealing with the situation and I don't expect sort of the reserves associated with this inventory going forward. Since Q4 of last year, we have reserved approximately $4 $2 million for pizza hut, which is consistent with how we frame this exposure back during our.
Mike Yates: Year end call in early March of 2024.
Mike Yates: And I don't expect the need for additional reserves related to PFS at this point in time going forward.
Mike Yates: We expect to generate approximately $20 million to $22 million of free cash flow in the fourth quarter.
Mike Yates: Cheat, we would expect to have a cash balance of.
Mike Yates: Above $50 million at the end of the year compared to the $36 4 billion at September 32024.
Mike Yates: Before I move on from discussing our outlook I want to be very clear regarding what is changed we still expect outdoor revenue to be approximately $185 million consistent with what we've been guiding to all year. However, adventures revenue is now expected to be closer to $78 million.
Mike Yates: This totals $263 million of revenue for the full year of 2024, which is our mid point of our top line guide I just presented.
Mike Yates: The $12 million decline in revenue at adventure from our previous guide is due to several factors, including certain wholesale and OEM partners now purchasing in the back half of the year as expected as well as.
Mike Yates: Slower uptake in our recently launched e-commerce initiatives and the impact from the soft market in the USA and the first half of the year that it's down improved in the back half of the year.
Mike Yates: Based on our continued operational progress to date at outdoor and the roadmap in place and adventure to guide us towards the next phase of profitable growth.
Mike Yates: We remain confident that we can deliver significant long term value for <unk> shareholders.
Mike Yates: Outstanding team in place supported by debt free balance sheet to take the next steps in our turnaround and position ourselves for a better 2025.
Speaker Change: At this point operator, we are ready to take questions.
Speaker Change: Thank you to ask a question you May press star one on your telephone and wafer name to be announced towards really a question. Please press star one again, please standby with compile the Q&A roster.
Speaker Change: One moment for our first question.
Speaker Change: Our first question will come from the line of Jim Duffy from Stifel. Your line is.
Jim Duffy: Thank you good afternoon, Hey, Matt I had a question for you on the OEM contribution to the business.
Jim Duffy: Where that stands right now where you see the OEM mix opportunity and then I imagine youre just off of Sema.
Speaker Change: You have any update here.
Color on discussions you had with OEM prospects at Sema. Thank you.
Speaker Change: Hi.
Speaker Change: Thanks, Great question look.
Speaker Change: OEM one of the key things is that as mentioned I think in our last call.
Speaker Change: We have invested.
Speaker Change: Actually we've got a new global head of volume sales.
Speaker Change: It is.
Speaker Change: Now based in the U S. Previously everything is being run out of Australia.
Speaker Change: With this adjustment in the structure, it's really focusing on growth internationally, knowing that the U S. As a prime part of that over the last quarter.
Speaker Change: David Cook in this new role has stepped in and was basically working with the three regional Gms to go through a top 10 analysis of all the I guess the lead or house in each market.
Speaker Change: As you know, there's two opportunities within <unk>.
Speaker Change: OEM market one is dealer programs that we haven't.
Speaker Change: Get into previously and we're now opening up conversations to launch that as soon as Q1 in 2025. These dealer programs 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 for the brand, but on top of that the folks.
Speaker Change: It's really making sure that across EMEA without than you originally laid there and in the U S. We're meeting all of the key partners you mentioned FEMA seamless filled with Macy's across all of the I guess the top five top 10 automakers and also looking at the opportunities.
Speaker Change: With partners in Asia, as well that are coming to life in Australia, especially so it has a lot of.
Speaker Change: Forward looking investment pipeline.
Speaker Change: Pipeline typically are two to three year timeline from start to finish on product specific platforms that we're hoping to offset offset those long term growth with short term daily programs. A lot of work is being done and we're hoping to see that come to life in 2025.
Speaker Change: Thank you and then a question on the Australia, New Zealand marketplace appreciate the.
Speaker Change: Economy, 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.
Speaker Change: Demand.
Speaker Change: New vehicle demand or or aftermarket demand any.
Speaker Change: Any thoughts there would be helpful. Thank you.
Speaker Change: Yes again.
Speaker Change: Almost a tale of two halves as you mentioned, a very very strong <unk>.
Speaker Change: Icewine across Q1, and Q2 with new vehicle.
Speaker Change: Delivery is really.
Speaker Change: Breaking records as of June this year, there was a slowdown in monthly vehicle sales and that's rolled through into our results.
Speaker Change: Moving into kind of Q4 and into Q4, we are in our peak season, we are seeing.
Speaker Change: The commercial 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.
Speaker Change: Al globally, I guess world famous platform <unk> is trading well to the point that we've had to make sure we ramp up.
Speaker Change: Volumes to really take care of that demand I think the other thing to kind of mentioned as New Zealand, Spain, I offset of the Australian business and where they are putting a lot more I guess strategic focus on that individual market, which has different nuances similar I guess to.
Speaker Change: The U S and Canada, New Zealand, there's a lot more of a trade base business and we've recently launched our trade initiatives looking after fleet and service vehicles, and we see an opportunity across both Australia and New Zealand for that in 'twenty five youll see oil side of the fruits of product development.
Speaker Change: <unk>.
Speaker Change: <unk> 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 velocity in years. So all of these initiatives look to kind of counterbalance degrees of softness of either vehicle or partner sales and there is a lot more.
Speaker Change: Our focus on channel segmentation and product segmentation that we also havent previously done with our main market in Australia.
Speaker Change: Not not kind of mincing words previously.
Speaker Change: A company that has also had 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 those specific customers and thats, what we expect to see rolling into Q4 and Q1 next year.
Speaker Change: Thank you for that perspective.
Speaker Change: Last one for me, Mike wheels of Justice grinding slowly hub trading recovery significant in the context of the enterprise value.
Speaker Change: I'm surprised.
Speaker Change: It's taken this long is there any chance of a potential settlement or something like that that could accelerate things.
Speaker Change: Yes.
Speaker Change: Do you want to go ahead and take that warrant.
Speaker Change: Take that one.
Speaker Change: So it's with the judge now Jim and we expect to.
Speaker Change: There is a motion to dismiss in front of him.
Speaker Change: Expect.
Based upon.
Speaker Change: How this judge has responded in prior cases, and so on I mean, there is data around this we expect to hear from him.
Speaker Change: At the end of the first quarter.
Speaker Change: Yes.
Speaker Change: <unk>.
Speaker Change: Dismisses.
Speaker Change: The motion to dismiss then this will go to a jury trial.
Speaker Change: <unk>.
Speaker Change: Typically it's at that point.
Speaker Change: You would have conversations.
Speaker Change: About settlement or not so.
Speaker Change: The timeframe.
Speaker Change: Just to have those conversations would be.
Speaker Change: After that after that.
Speaker Change: Event, but as you pointed out the significant and.
Speaker Change: The happened.
Speaker Change: Today I have not challenged the amount.
Speaker Change: Understood helpful perspective, Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Laurent.
Speaker Change: <unk> from BNP Paribas. Your line is open good afternoon, and thank you very much for taking my question I think Mike you mentioned in your prepared remarks, and I'm waiting for the transcript depopulate.
Speaker Change: The mid point guidance cut for the full year about $20 million I think you mentioned two moving pieces.
Speaker Change: $30 million and offset by the $10 million.
Speaker Change: Can you just maybe clarify that a little bit more and then just.
Speaker Change: Where does the macro come into that equation as we think about the guidance on that no.
Speaker Change: <unk> is not that significant.
Speaker Change: Clarify that yes.
Speaker Change: We lowered our guidance from $2 70 to $2 80 to $2 60 to $2 66, So a net.
Speaker Change: <unk> tried to be very clear on we've talked about $185 million of revenue with.
Speaker Change: Outdoor and $90 million of revenue and adventure, that's the $2 75 kind of at the midpoint of the old guide the only thing that's changing is the $90 million.
Speaker Change: Eventually there is going to 78, so the guidance cut on the top line is $12 million alright.
Speaker Change: That's.
Speaker Change: That's just to be clear.
Speaker Change: And I think we've laid out the reasons for that.
Speaker Change: We had a significant wholesale partner.
Speaker Change: Dealing with their own not our inventory, but other folks inventory challenges.
Speaker Change: 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.
Speaker Change: And the U S business.
Speaker Change: Has was slow from the beginning of the year that Hasnt improved at all here in the back half of the year and finally, our E Com initiative at adventure.
Speaker Change: <unk> been slower to respond to the uptake on the.
Speaker Change: E Com new changes to the E com platform and the investments we've made on the website.
Speaker Change: Uptick to revenue is slower than anticipated. So those are all the reasons why adventures.
Speaker Change: A little slower along with the lower vehicles that Matt mentioned, so that's that's that's that's the change in guidance.
Speaker Change: Okay 31 billion.
Speaker Change: The $30 million decline that I mentioned is when we.
Speaker Change: We're talking about simplification and taking complexity out of our business specifically at outdoor.
Speaker Change: That business is shrinking from $204 million.
Speaker Change: And change last year to $185 million. This year, that's a $20 million declined $30 million of that decline is related to elimination of sales of items, we're calling CS and DS CS and DS.
Speaker Change: Low margin products.
Speaker Change: Our 2020 execution of our low margin product were walking away from them selling less of those et cetera.
Speaker Change: Leaning into is our AI products high volume.
Speaker Change: High margin products.
Speaker Change: I expect us to sell $10 million more of those so the $30 million decline in revenue from our high complex.
Speaker Change: Yes.
Speaker Change: Low volume low margin business has been replaced with $10 million of high margin high volume products that yield higher gross margins. So that's why you're seeing our margins expand.
Speaker Change: As Neil pointed out EBITDA is up 25% this quarter.
Speaker Change: Even though revenue is.
Speaker Change: Down 19% at outdoor.
Speaker Change: And that's <unk>.
Speaker Change: Direct lead result of us being able to execute on our initiatives.
Speaker Change: Simplifying our business selling more of our best products to our best customers does that help.
Speaker Change: 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% to 10% EBITDA margin.
Speaker Change: Any any updated thoughts there is there anything that's changed in that viewpoint.
Speaker Change: Since we're six months into this closer to 2025.
Speaker Change: No that guidance.
Speaker Change: And projections that we talked about.
Speaker Change: I would summarize as follows right that was how we were looking at things in March obviously here as we sit in November.
Speaker Change: The takeaway that everyone's you should hear from our prepared remarks and in my comments in the rest of the teens comments is we are tracking.
Speaker Change: At outdoor I think meals prepared remarks were very clear.
Speaker Change: We're going to hit that $185 million in and we're going to have a strong foundation that we can grow the business off of most importantly profitable growth.
Speaker Change: Double digit EBITDA going forward on a prospective basis adventure is a little behind what 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 this year right. So and for all the reasons I just laid out in some of the prepared remarks you heard.
Speaker Change: We are not were $12 million behind the guide that we that we gave back in March so.
Speaker Change: The 2025 guidance and how we're thinking about 2025, we are going through the budgeting process and putting that altogether now.
Speaker Change: <unk>.
Speaker Change: We'll reserve the right to update that.
Speaker Change: At our next call.
Speaker Change: Once the calendar turns but at this point in time, we are behind at adventure.
Speaker Change: Compared to where we thought in March from a topline and profitability standpoint, but we're tracking where we thought we would be.
Speaker Change: Right on the numbers and outdoor.
Speaker Change: That's very helpful. And then the third quarter gross margins are very nice.
Speaker Change: Tick there I think up 420 bps year over year.
Speaker Change: Can you maybe if you could possibly help us think about how should we think about <unk> gross margins and then to that path to double digit EBITDA margins kind of remind us where we're at.
Speaker Change: Ultimately you want gross margins to go over time.
Speaker Change: Well.
Speaker Change: Sure sure so when I'm looking at fourth quarter gross margins, we haven't give official guidance, but just to.
Speaker Change: I think those at both between 39% and 40% at both at both.
Speaker Change: Both segments as well as what I would expect.
Speaker Change: Okay very helpful. Thank you very much best of luck. Thank you.
Speaker Change: One moment for our next question.
Speaker Change: Our next question comes from the line of Matt Koranda from Roth Capital Partners. Your line is open.
Speaker Change: Hi, This is Joseph on for Matt today.
Speaker Change: Just wanted to look into 2025, a little bit more just hopping onto the gross margin aspect as well as growth in revenues are we expecting.
Speaker Change: 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 in self help in these category if they remain flat and more specifically for the adventure segment.
Speaker Change: Yeah.
Speaker Change: Well I mean again from a 2025 perspective, we're not going to give any guidance today or speak to that right. We're in the process.
Speaker Change: Working through our budgets and our view on 2025.
Speaker Change: From an outdoor perspective.
Speaker Change: Neil went through a litany of things in the prepared remarks that will show up in the transcript us of improvements that the team has made right and they've done a wonderful job dealing with.
Speaker Change: Driving productivity driving simplification working with suppliers.
Speaker Change: Re sourcing products changing processes to take cost out of the business I think the takeaway that everyone should here on the outdoor side is we have right sized the business here in 'twenty four from a cost standpoint, we've improved processes and to improve the mix of our inventory.
Speaker Change: We leaned into our best products that I, just described and the last question right and we're selling more of our styles right.
Speaker Change: That have the higher margins higher.
Speaker Change: Gross margins.
Speaker Change: Higher volumes, where we actually sell more of those products to our best customers.
Speaker Change: That's exactly what we wanted to do but that's the baseline once we've established that in 2005 I think growth comes right.
Speaker Change: On top of that and Thats why we are confident that whether we get a topline growth call. It a market.
Speaker Change: Tailwind from improving market conditions, because to be clear both segments in the outdoor space in general is still in a recession I think we said that and again our prepared remarks.
Speaker Change: Both.
Speaker Change: The adventure in the outdoor space is still in a recession, that's coming off the highs from 2022.
Speaker Change: But we are well positioned to.
Speaker Change: We will profitably and if we get a tailwind with the market that it 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.
Speaker Change: The same could be true we've made several investments.
Speaker Change: Around e-commerce around Matt covered in detail.
Speaker Change: Efforts around <unk>.
Speaker Change: New products in development of new products, both at the <unk> business and at the <unk> business.
Speaker Change: Several of those will launch in 'twenty five right. So we are trying to self help ourselves through new product development, we're trying to drive.
Speaker Change: Enhanced E Commerce business, where obviously, our margins are better alright, right and thats easy to sell accessories through the E Commerce platform and the margins are better because.
Speaker Change: We're also working to make it easier for.
Speaker Change: Consumers to acquire what I'll call rack.
Speaker Change: <unk> baked in through introduction of new fits right.
Speaker Change: We have spent an enormous amount of time and engineering resources to improve and to simplify the debt.
Speaker Change: That the rails in bars that just the.
Speaker Change: <unk>, but the rails in bars, and how those attached to vehicles.
Speaker Change: Targeting fit over four.
Speaker Change: Over 100 E different vehicles, which is a strategic shift from what we were talking about 253 years ago. When we bought this business right. So we're trying to build up the.
Speaker Change: What I'll call the available market for both.
Speaker Change: Platforms and more important for the.
Speaker Change: Cross bars right. So that's something we're excited about in 2025, so I mean, I think as we think about 2025, its all about scaling the adventure business and it's all about.
Speaker Change: Continuing to simplify.
Speaker Change: The black Diamond business.
Speaker Change: All of which both businesses and we will have better operating leverage as the market become tailwind in the markets begin to grow.
Speaker Change: Alright. Thank you for that color will go ahead and take the reservoirs online and thank you for taking our questions.
Speaker Change: Youre welcome.
Speaker Change: Thank you one moment for our next question.
Speaker Change: The next question comes from line of Mark Smith from Lake Street. Your line is open.
Hello, Mark.
Speaker Change: I apologize if this was hit a bit but just looking at the outdoor.
Speaker Change: Segment can you just update us on kind of how the consumer in international markets is doing with all of the work in right sizing the business. If there's still any work for international that needs to be done that's maybe lagging domestic.
Speaker Change: Domestic.
Speaker Change: I'll make one comment and then I'll throw it over to Neil.
Neil Fiske: Our view of the international markets at outdoor is at their 12 to 18 months behind.
Neil Fiske: 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. However.
Neil Fiske: However, we're working through that this year.
Neil Fiske: 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 its slowed down that's my understanding of the market.
Neil Fiske: Internationally in Japan, being one of our biggest international markets.
Neil Fiske: Asia.
Neil Fiske: But.
Speaker Change: 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.
Neil Fiske: I would actually split Europe from.
Neil Fiske: Our international distributor markets because Europe.
Neil Fiske: Isn't it.
Neil Fiske: Largely owned operation, whereas.
Neil Fiske: China, Japan, New Zealand, Australia, et cetera, and go through distributors and we're seeing different dynamics in those two.
Neil Fiske: In Europe, I see Europe sort of tracking maybe just a couple of months behind the U S and its correction, but the pattern looks quite similar.
Neil Fiske: And so I.
Neil Fiske: I think we will see those markets start to behave more similarly, as we go into 2025 and I would expect.
Neil Fiske: Barring some macro economic or geopolitical disruption that that those markets would start to track.
Neil Fiske: And stabilize together.
The international distributor markets.
Neil Fiske: 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.
Neil Fiske: In the system and therefore I think it takes.
Neil Fiske: Another 12 months for <unk>.
Neil Fiske: The international distributor markets to fully correct.
Just one extra step in the process and Thats why I think you see in.
Neil Fiske: <unk> segment this year.
Neil Fiske: As we talked about from the very beginning.
Neil Fiske: We expected this correction to be particularly pronounced this year less so next year I think without giving guidance I think youll start to see.
Neil Fiske: A rebound in international distributor markets next year, but that contraction was particularly concentrated given.
Neil Fiske: Effectively too redundant layers of inventory in those markets.
Neil Fiske: Perfect.
Speaker Change: Second question for me is just.
Speaker Change: Curious if you can speak to maybe your exposure to.
Speaker Change: Potential raise rise in tariffs as we look at stuff coming out of China.
Speaker Change: Maybe hard to quantify but if you could speak to.
Speaker Change: Maybe what your exposure is.
Speaker Change: And how maybe you could come back.
Speaker Change: If that comes to fruition here over the next year or so.
Neil Fiske: Neil you want it you want to cover the outdoor I know we've done a great job Delevering from China, but go ahead and cover that yes, we've had been hard at work at diversifying our sourcing base out of China, We still have a few items there.
Neil Fiske: But relatively small exposure.
Speaker Change: Little bit of our headlamp business.
Speaker Change: Little bit of our smaller footwear business.
Speaker Change: And those also have supply chain transitions, where we can move that business to Vietnam or other countries in the Asia Pacific.
Speaker Change: So I think that China specific tariffs.
Speaker Change: We're relatively well insulated from obviously if.
Speaker Change: Once once we get a sense of the timing and the magnitude of those we can also adjust our purchases to pull those forward.
Speaker Change: On this side with the tariff increase and then use that added buffer time to transition those products.
Speaker Change: Out of out of China.
Speaker Change: We may end up hedging inventory a little bit to bias.
Consistency in her pricing as we diversify the last piece.
Speaker Change: So that's the China piece I would say the thing that is more of a question Mark for us.
Speaker Change: And I am sure everybody at this point is whether there is going to be something more.
Speaker Change: Along the lines of the universal tariff that applies to all product.
Speaker Change: All industries are going to be looking at how to react to that but the Chinese specific piece I think we've contained if we've got a plan for.
Speaker Change: And we can mitigate the impact of <unk>.
Speaker Change: Great. Mike If you don't mind I think from an adventure point of view I'll just add some color kipp.
Speaker Change: Yep go ahead.
Speaker Change: Predominantly.
Speaker Change: Within adventure, Ryan our rack business.
Speaker Change: With Tonight materials element.
Speaker Change: Plastics.
Speaker Change: Over the last two quarters.
With the addition of a new global head of.
Speaker Change: Supply chain and ops, we've kicked off a project to look at our global supply chain, our partners and our footprints and this was an initiative that was central to 2024, but will roll up to 25 and this study has been looking at finding opportunities closer to source close of the market close to the customer.
Speaker Change: In the short term and near term, whereas standing back up existing partnerships on Australia to counter some of the potential headwinds, especially as it relates to China and U S tests and so that's already been done and enacted. Additionally at the same time, we're about five months through the parts.
Speaker Change: Yourself identifying.
Speaker Change: The de risking manufacturing sources, so theres kind of two time lines that we're operating on a 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.
Speaker Change: 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 oil market growth by reducing impact on China. So that's already in motion there is already <unk>.
Speaker Change: Activity and deliveries based on those actions, but it is a key topic within all our category and industry as well.
Speaker Change: Perfect. Thank you.
Speaker Change: Okay.
Speaker Change: Thank you and with that I would now like to turn it back over to Mike <unk> for any closing remarks.
Mike Yates: Great. Thank you Victor.
Mike Yates: Thank you very much.
Mike Yates: Everyone.
For attending the call this afternoon and your questions. We appreciate them.
Mike Yates: More importantly, we appreciate the continued support and interest in Claris, we look forward to updating you on our results again next quarter.
Mike Yates: And.
We'll talk to you all soon thank you very much.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program you may now disconnect everyone have a great day.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: [music].