Clarus Corp Q2 FY2025 Earnings Call

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's financial results for the second quarter ended June 30, 2025. Joining us today are Clarus Corporation's Executive Chairman, Warren Kanders; CFO, Mike Yates; President of Black Diamond Equipment, Neil Fiske; and the company's External Director of Investor Relations, Matt Berkowitz. Following their remarks, we will open the call for questions. Before we go further, I would now 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. Matt, please go ahead.

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

Good afternoon, and thank you for joining Clarus' earnings call to review our results for the second quarter of 2025. I am joined today by our Chief Financial Officer, Mike Yates, who will cover our overall performance and our Adventure segment as well as Neil Fiske, who will discuss our Outdoor Segment. During the second quarter, we experienced a mix of positive and negative trends across our individual segments, selling channels, and geographies as we continue to manage through the realities of the current global consumer landscape. Overall, I am pleased with our progress against our operational initiatives as we simplify our organizational structure and streamline our product offering. We generated net sales of $55.2 million, consistent with our quarterly expectations, with a slight increase over the same period last year. Mike and Neil will touch on the figures in more detail, but at a high level, the increase reflected solid performances in both European and North American wholesale at Outdoor and improvement to North American wholesale and direct-to-consumer channels at Adventure. On the other hand, our direct-to-consumer performance and overall site traffic at Outdoor softened as consumers continue to pull back following Liberation Day and we saw continued deterioration of our legacy OEM accounts at Adventure. While the macro environment remains uncertain, particularly with respect to evolving tariff policies and consumer behavior, our focus is controlling what we can to position Clarus for sustainable, profitable growth as market conditions normalize. We continue to reduce complexity at Outdoor as evidenced by our improved financial results year-over-year. Sales, margins, and adjusted EBITDA all increased in Q2 at Outdoor despite choppy consumer sentiment. We delivered on our commitment to raise our going-in product margins while improving the quality of our inventory and revenue. Specifically, the team has done an outstanding job enhancing our inventory composition with less exposure to discounted merchandise and a healthy concentration in our most profitable A styles, which we believe will position Black Diamond to grow its full-price business in the back half of the year. I would also highlight that we completed the sale of our PIEPS snow safety brand and intellectual property rights associated with Avalon Safety Equipment in July for $9.1 million, representing a highly successful outcome after a comprehensive strategic review and competitive process. The divestiture is aligned with Clarus' simplification strategy and further bolsters our balance sheet. Turning to our Adventure segment, I am pleased with our progress since we reported our last quarter amid personnel changes within the team. We've reengaged with each key customer and believe we have a good sense of where our best-in-class brands can win prospectively. We have taken key measures to simplify the cost structure and flatten the organizational reporting in light of slower demand trends. Our global wholesale and direct-to-consumer businesses increased by approximately 8%, partially driven by bike rack sales and was offset by the continued soft demand at certain legacy retailers. Our sales declined over the prior year quarter, due in part to the drop-off in customer-specific OEM sales, which were down by approximately $3.1 million. We have emphasized reducing overhead, eliminating R&D projects on lower-margin categories and supporting a handful of key product launches that we believe will yield results in the second half of 2025. As we look forward, we are focused on unlocking value at each of Outdoor and Adventure. In connection with the development of 3-year plans for our businesses, we have initiated an internal review to ensure we are evaluating all possible opportunities to create value for shareholders. This includes, but is not limited to, further simplification and further cost reductions, incremental to those taken in July, which Mike will outline. Additionally, we believe that the sum of the parts of our 2 segments exceeds today's market valuation, and we are committed to seeking to maximize long-term value. In terms of near-term capital allocation priorities, we are focused on reinvesting in our existing 2 segments to seek to drive organic growth. Supported by a nearly debt-free balance sheet and our current cash position, our goal is to maintain flexibility and discipline in how we deploy capital with an emphasis on the highest return opportunities. Zooming out, the primary question for Clarus and the Outdoor market as a whole continues to be how macro conditions will evolve during the remainder of the year. We have begun implementing countermeasures to mitigate a portion of the impact from tariffs, as you will hear more about shortly, but uncertainty around consumer sentiment and demand in the back half of the year makes it very difficult to confidently forecast. In the face of these challenges, we continue to take decisive actions to strengthen our cash position and improve our profitability while maintaining our competitive position in the market. With that, thank you for being with us today, and I will turn the call over to Neil.

Thanks, Warren. Turning to Slide 6, I will review the Outdoor segment's Q2 performance and our expectations for the remainder of 2025. Overall, we delivered solid results in Q2 that were affected by wavering consumer sentiment in a chaotic macro environment. I'm pleased with our progress, the strengthening of the Black Diamond brand, and the continued transformation of the business. Revenue, gross margin, and adjusted EBITDA were all up as we continue to simplify, move toward a more full-price model, and improve the quality of revenue along with the quality of our brand execution. We have now completed the sale of our PIEPS snow safety brand, as Warren mentioned, which will further simplify and narrow our focus. My remarks for the quarter, therefore, exclude PIEPS. In addition to the divestment of PIEPS, we're dealing with 2 unusual and somewhat unpredictable factors impacting our results: tariffs and currency. I'll address those at the top of my remarks and then turn to the operating results. First, currency: with 33% of our revenue coming from Europe, the euro-dollar exchange rate has a significant impact on our financials. We began the year at EUR 1.035 euro to the dollar and hedged about half of our revenues for the year at $1.08. Few would have predicted the rise to $1.18 following the initial April tariff announcements. That sharp rise in the euro put our hedge position underwater for the quarter and likely for the remainder of the year. For the quarter, the loss on FX contracts was about $447,000 in both reported revenue and EBITDA. For the year, assuming an exchange rate of $1.15, that loss would be $1.4 million. These FX contracts roll off by year-end. On the flip side, we gain from the FX on the translation of our European operating results. For the quarter, FX lifted EU revenues by $1.4 million and EU EBITDA by $64,000. The net of these 2 factors, the negative from FX contracts and the positives of earnings translation, is a hit to earnings of $383,000 for the quarter. The second unusual factor is tariffs. In early May, we initiated our tariff mitigation plan, which included raising prices, negotiating vendor concessions, airfreighting products where necessary, and accelerating our exit out of China. Due to these actions and the lag effects of tariffs running through the supply chain, we did not see a material impact from tariffs in Q2. However, looking ahead for the year, we expect the current tariffs, which include the 10% reciprocal tariffs on most countries, 50% on steel and aluminum, and 55% on China, to have a $3.4 million impact on earnings even after our mitigating measures. And of course, we are all waiting to see how the reciprocal tariff situation plays out. Should these tariffs land above the current 10% level, we expect to see an additional drag on earnings in 2025. Now looking at Black Diamond operating results, Q2 revenue came in at $36.5 million, up 2.1% from the prior year. Excluding the impact of FX contracts, revenue is up 3.9% from the prior year in current dollars and up 2.3% in constant currency. By region and channel, excluding the impact of FX contracts, North American wholesale, our largest market, was up 1.6%. North America digital direct-to-consumer, which represents about 17% of the region's revenue, was down 20.1%. The result reflects our strategy to tighten up discounting in the pro channel, which was down 27.8%, and reducing off-price sales in e-commerce. We also saw an immediate pullback by consumers post Liberation Day and then softness in May and June as we rolled out our new tariff prices ahead of much of the market. Full-price sales for digital D2C were up slightly, while discounted sales were down substantially, a mix shift to full price we expect to build upon in the back half. Europe wholesale was up 4.8% and flat in constant currency. Europe digital D2C was down 10.1% year-over-year and down 14.6% in constant currency. International distributor markets, which represent about 8% of total revenue, were up 81.3%, reflecting a permanent shift in the timing of deliveries as we discussed in our last update. Black Diamond operating gross margin for the quarter came in at 34.9%, up 80 basis points. Excluding the impact of FX contracts, gross margins would have expanded even more, and we expect gross margin to continue to improve relative to last year in the back half even after absorbing the current level of tariffs. The progress we've made in simplifying the business, improving product margins, and cleaning up our inventory gives us some cushion against the tariff impacts versus our position a year ago. Black Diamond operating expenses, excluding restructuring charges, were down 0.8% and down even more in constant currency. Inventories ended the quarter in good shape with much less exposure to discounted merchandise and a healthy concentration in our A Styles. We ended Q2 at $64.2 million, up 4.5% to the prior period due to our pull forwards for the fall season as part of our tariff mitigation plan. As we look to the back half, we expect that our better inventory composition will position us to grow our full-price business as we continue to shrink discounted sales, both in absolute terms and as a percentage of the mix. Adjusted EBITDA for Outdoor was a loss of $213,000. Excluding the adjusted EBITDA loss from PIEPS in the quarter of $516,000, adjusted EBITDA for Black Diamond in Q2 came in at $303,000 versus a small loss in the same period last year. In sum, we've made good progress this quarter. Sales, margin, and adjusted EBITDA were all up in the face of a particularly uncertain consumer and market environment. We simplified the business with the sale of our PIEPS snow safety brand. We continue to improve the quality of our inventory and revenue progressing to a more full-price business. Our apparel initiative accelerated with 11.3% growth in the category and a 21% reduction in sales from discontinued merchandise. We continue to reduce our SG&A costs. We implemented our tariff mitigation plan to offset nearly half of the projected tariff impact in 2025 at current levels. We launched our new e-com site on a more cost-effective and scalable Shopify platform and into a more connected digital ecosystem. And we published our annual impact report outlining our 2030 sustainability goals and our progress towards them. As we look to the second half, the greatest challenge remains uncertainty on tariffs, consumer sentiment, and macroeconomic conditions. That said, I think we're much better positioned than a year ago to deal with all those factors. I'd like to thank our teams around the world who remain focused on building the brand, serving our sports, and winning with our customers. With that, I'll turn it over to Mike.

Thank you, Neil, and good afternoon, everyone. On today's call, I will provide some brief comments on the Inventor segment, followed by a detailed summary of our Q2 financial results and a question-and-answer session. Our second quarter inventory results continue to be affected by near-term pressure on the business. The top-line weakness in the Adventure segment results from significantly decreased demand from a global OEM customer and a challenging wholesale market in Australia for Rhino-Rack. These challenges are partially offset by increased sales in the North American market from RockyMounts, higher direct-to-consumer revenues including our Amazon channel, and stronger sales of our promotional slower-moving inventory. While overall market challenges persist, we see signs of progress under the new leadership of Tripp Wyckoff, who understands the importance of the home market for our Adventure business. Our teams are making strides with new customers in Australia and New Zealand across all product categories beyond legacy accounts. We are excited to announce a significant partnership with a large new retail customer with over 300 locations across Australia and New Zealand, set to start in the third quarter. Additionally, we are working to maximize our global brand awareness by onboarding new OEM and aftermarket customers in several European countries for the third quarter. We have established a new legal entity and will soon open a third-party warehouse in the Netherlands to serve EU and U.K. customers more effectively. MAXTRAX has secured a large contract with the German military, and we received positive feedback regarding our newly launched model board with BMW. We are also pleased to welcome two new distribution partners in China, providing local access for emerging Chinese car brands prevalent outside the U.S. These new global opportunities stem from our previous investments in opening new markets for our Adventure brands. The Americas remain our largest market, and we believe we are only beginning to tap into potential growth in the U.S., Canada, and Latin America. The addition of bike racks from RockyMounts has already introduced us to hundreds of specialty dealers and new key accounts. This year, we have opened 172 new dealers, generating $420,000 in revenue to date, expanded our Latin American sales coverage, added three bicycle channel distributors, and launched a nationwide representative force of independent agents for specialty outdoor channels. Additionally, best-selling MAXTRAX products are now available online at Academy Sports and Pro Shops, and we are making headway at REI, the largest specialty rack seller in the U.S. We have taken control of our brands in the Amazon marketplace where segment-wide revenue recently reached around $200,000 per month. In terms of product development, we have refined our focus on foundational base racks and increased the number of fitments we offer to improve our go-to-market strategy. This year, we added 113 new vehicle fitments, bringing the total to 579 fitments planned for 2025. From an organizational standpoint, our team has experienced significant changes this year to create a structure that supports effective scaling in Australia, the U.S., and international markets while driving profitability during lower demand. We have streamlined operations, reducing headcount within Adventure to achieve annual savings of over $1 million. While we have not yet realized our goal of scaling the Adventure segment globally, we are optimistic about Tripp's initiatives to enhance profitability and reduce complexity. Regarding tariffs, nearly all Adventure products are sourced from Australia and China. Based on our estimated revenue for 2024, over 80% of Adventure’s revenue is outside the United States, meaning tariffs have limited impact overall. However, we have imported more RockyMounts inventory to meet demand, and we anticipate a $0.5 million tariff impact on Adventure in 2025. Let’s now review our consolidated and segment financials. Second quarter sales totaled $55.2 million, down from $56.5 million in the same quarter last year. This 2% decline reflects an 8% decrease in the Adventure segment and a 1% increase in the Outdoor segment. Currency fluctuations had a $0.5 million negative impact, while the acquisition of RockyMounts contributed a $2.1 million positive effect. The consolidated gross margin rate for the second quarter was 35.6%, down from 36.1% in the previous year, primarily due to lower sales volumes and an unfavorable product mix at Adventure related to promotional sales in North America. This was somewhat offset by improved volumes and a better mix in Outdoor. Adjusted gross margin was 36.5%, compared to 37.4% a year ago. Adventure's adjusted gross margin dropped to 37.3% from 40.3% the previous year. Selling, general, and administrative expenses for the second quarter were $26.9 million, a 4% decrease from last year, attributed mainly to reduced marketing, amortization, and employee-related costs. Our adjusted EBITDA for the second quarter was a loss of $2.1 million, with an adjusted EBITDA margin of negative 3.8%. This adjusted EBITDA reflects various costs and reserves. In terms of legal costs associated with ongoing litigation, we incurred $1.8 million in the second quarter and $2.5 million for the first half of the year related to prior legal matters. Our adjusted EBITDA by segment showed $311,000 for Adventure and a negative $214,000 for Outdoor, with adjusted corporate costs at $2.2 million for the quarter. Turning to liquidity, free cash flow for the second quarter was a use of $11.3 million, compared to a use of $744,000 the previous year, mainly due to poor working capital performance in inventory and accounts receivable. Our total debt as of June 30, 2025, stood at $1.9 million, related to our RockyMounts acquisition and due by December 2025, with no other third-party debt. On the same date, cash and cash equivalents were $28.5 million compared to $45.4 million at the end of last year. We purposefully increased our consolidated inventory to $91.5 million to manage tariffs effectively. In early July, we completed the sale of the PIEPS snow safety brand, benefiting from the cash proceeds. Lastly, with the seasonal nature of our cash flow, we typically see the greatest positive cash flow in Q4, and we are confident that our cash balance will continue to grow throughout the year. Regarding tariffs, most of Adventure's products come from China and Australia, while Black Diamond sources from various countries. We now estimate a $3.9 million consolidated headwind from tariffs in 2025, reflecting our mitigation efforts. Turning to our outlook, we have chosen not to provide guidance for Q3 or the full year 2025, maintaining the same position as last quarter, due to ongoing uncertainties around tariffs, consumer sentiment, and macroeconomic conditions. We remain focused on delivering long-term value for our shareholders as we strive to build a smaller, more profitable Outdoor business and enhance the Adventure segment. Despite the current challenges, we believe Clarus is better equipped to handle market headwinds and emerge stronger in the future, supported by a talented team and a robust balance sheet. We remain committed to executing our strategies for sustainable growth. Operator, we are now ready to take questions.

Our first question comes from Anna Glaessgen from B. Riley Securities.

I guess I'd like to start on Adventure. You talked about some actions to rationalize the headcount, but also we're growing fitments and expanding the line. I guess where are we in terms of growing the applicable vehicles that can have the roof rack and what's our line of sight into getting to a more stable platform to grow off?

Anna, this is Mike. That's a great question. We're concentrating on the fundamentals, particularly fit. I've mentioned that we're increasing the number of new fits to 579 vehicles and addressing the top 10 vehicles in both the Australian and U.S. markets. This is a key focus for Tripp, aiming to include more vehicles and the ones that sell best. We're implementing an 80/20 strategy to drive the Adventure mindset. Additionally, we're rationalizing our new product development. In previous quarters, we invested significantly in this area, but we're now trying to control expenditures and concentrate on specific developments that promise the highest returns. We're also putting emphasis on our team. Recently, we made some headcount adjustments, leading to an annual savings of $1 million. We're shifting our focus from a professional management structure suited for a $200 million business to a model that includes player-coaches who can lead and engage in details while fostering an entrepreneurial spirit. We're aiming for a more agile approach, planning as if we were a $50 million to $70 million business, which involves hands-on involvement in the details. These priorities are what Tripp is emphasizing as we work to reset our foundation, and once that's achieved, we'll be ready to grow again.

Got it. And then following up on one of the comments. It was nice to see the domestic sales and collect in Adventure. Can you expand a little bit more on the promotional actions you took in the quarter and the consumer retailer response?

Yes, certainly. If you review the fourth quarter release, you'll find that we eliminated a few million dollars of Adventure inventory at the end of the year. We made an effort to dispose of that inventory, which had accumulated since COVID and wasn't sold, and we wrote it off. However, during that process in December and early January, we discovered a few million dollars of additional inventory and decided to sell it. Although we had a lot of it and were selling it above our cost, it was still quite a volume. I encouraged the team in January to focus on moving that inventory to convert it into cash. They've done an excellent job, managing to sell about half of it in the first six months, particularly in April and May when the selling season started in North America. However, this does impact our margins. While we are recovering our costs, it's not at the normal pricing or full-margin levels.

Got it. And then just one follow-up for me on Outdoor. Just trying to parse the year-over-year commentary on this discontinued merchandise sales. To what extent is that a like-for-like comparison? Or was that impacted by PFAS inventory clearance in the prior year quarter?

It is certainly affected by the PFAS situation. We sold most of our PFAS inventory in the first quarter and have only a small amount remaining. Consequently, our sales in the second quarter were much lower compared to what we achieved in the same quarter last year. However, it’s worth noting that our inventory mix has significantly improved as of June 30. Our discontinued merchandise inventory has decreased substantially compared to a year ago, allowing us to sell less at a discount. This aligns with Neil's comments about moving towards a full-price model, as our aim is to reduce the amount of discounted inventory we sell. Neil, do you have anything to add?

No, I think you captured it well, Mike. So a big chunk clearly was less PFAS this year than in the prior year, but also non-PFAS DM is down year-over-year versus the same period. And also, the depth of our promotions on things like MAP breaks and holiday windows are much shallower than they were a year ago. So really, all 3 of those factors. And I think one of the things we're thinking about is as we go forward in a world of higher tariffs moving towards full price margin as much as we can, it's going to be really important to give us more buffer to offset any or some of the impact of tariffs.

Our next question comes from Matt Koranda from ROTH Capital.

So just trying to get a better sense for the outdoor revenue trend and maybe trends in growth for the rest of the year for outdoor. So I guess if I take it apart for the second quarter, it sounds like the bulk of the growth was probably driven by the international distribution shift, the core direct channels are maybe down high single digits to low double digits year-over-year, just given sort of the lower promotional posture, but you're getting, I guess, lift in full price selling. Maybe could you confirm that, that's sort of the right way to think about what happened in the second quarter and then for the back half of the year as we think about getting back to growth in those scores. How do we think about that and sort of I guess, what's the reaction from your wholesale customers then in terms of your price actions that you've taken recently?

Yes, number since that...

Go ahead, Neil.

Matt, those are great questions. Let me outline the channels and our perspective on the first and second halves of the year. To give you a broader view, our business remains predominantly wholesale-based, with around 80% of our operations in wholesale and distributor markets. Wholesale is in strong condition, having increased for the first half, and we anticipate low single-digit growth in the second half. Specifically, North America, our largest wholesale segment, has seen a solid 1.9% year-over-year growth. Europe remained steady on a constant currency basis. Additionally, the timing shift in the distributor markets from Q3 to Q2 was minimal, approximating $0.5 million, so we are optimistic about returning to organic growth in wholesale. Looking ahead, our order book appears promising compared to a year ago, with a 5% year-over-year increase in Europe and double-digit growth in North America. However, while the order book is encouraging, actual results will depend on market dynamics and consumer behavior. Overall, the wholesale business is performing well, margins are improving, and we are confident about what lies ahead based on our order book. Regarding our price adjustments in the wholesale channel, we aimed for transparency and early communication. We implemented price increases in early May, well before many competitors, which we believe benefited our wholesale partners. Although not all accounts raised their prices immediately, the advance notice allowed them to plan, adjust, and finalize their fall 2025 orders. In contrast, many peers announced their price hikes in July, causing disruption in the wholesale channel as they navigated those changes at the start of the season. Overall, our price increases have been positively received, though we remain cautious about their impact in the current consumer landscape. Now transitioning to D2C, the situation is quite different both strategically and temporally. We have adopted a more aggressive full-price strategy in D2C, implementing new prices early in North America. Consequently, this shift has led to a significant decrease in D2C sales, with a 20% drop in North America and a less drastic decline in Europe. It's challenging to predict the volume loss associated with price hikes and reduced discounting. Since we acted ahead of other retailers, it likely contributed to the decline in our D2C channel. We expect a soft outlook for the D2C channel in the second half, potentially showing a year-over-year decline as we focus on transitioning to a full-price model. Lastly, within D2C, a considerable portion involves our pro channel, where we have tightened discounting, offering fewer discounts to select pros and reducing overall discounting across the program. The dynamics in D2C differ greatly from wholesale. However, with wholesale comprising 80% of our business, we feel confident about the strength of our partnerships with key retailers, growth in major accounts, and our position as we navigate what we anticipate will be a challenging second half.

Okay. I appreciate you unpacking a pretty complicated question there, Neil. Very clear. The other thing I was curious about was just on the PIEPS front, was that included in the first and second quarter results, remind me sort of what was included for this year before the sale? And then what's the full year headwind, I guess, if you were to think about what it contributed in '24, what we're missing out on for '25?

In the 10-Q released today, the results include PIEPS. The assets and liabilities have been removed from the balance sheet and recorded as assets and liabilities held for sale as of June 30. However, the profit and loss statement for this quarter and the first half of the year does include PIEPS. Neil focused only on BD in his comments because that is how he has been managing the business. Official filings and reported numbers include PIEPS. There is no headwind from this sale; it is actually beneficial. I mentioned in my prepared remarks that PIEPS had an EBITDA loss of $600,000 this quarter, so removing it will positively impact our results. We also lost money in 2024.

Yes. Okay. No, I understood. I was just trying to make sure we didn't, I guess, over model revenue in the back half as we kind of compare to last year. Any help on what PIEPS, I guess, contributed from a sales perspective in the second half of '24. That way we can kind of strip that out?

It's a couple of million dollars.

Yes, understood. I wanted to ask about the Adventure segment. We've been experiencing a downturn, particularly in the Australian market with the OEM customer. There's also a retailer you've mentioned several times as a headwind affecting results in the Australian market. Can you remind us when we might start to see improvement from this headwind? I think it started a few quarters ago, but I'm trying to recall if it was in the third quarter of last year or more of a fourth quarter issue. When do we anticipate a turnaround in the Australian market?

I think we've reached a milestone this quarter, marking the anniversary of our OEM sales. Specifically, OEM sales in Q2 of '25 compared to Q2 of '24 were down by $3.1 million. In the third and fourth quarters of last year, OEM sales were under $1 million. Therefore, the impact isn't expected to be as significant. I believe we've essentially reached that milestone as of June 30. Regarding the decline with another large customer, we should see a similar milestone in the latter half of this year. That customer was quite significant in '22 and '23, diminished in '24, and is continuing to reduce in '25.

Yes. Okay. All right. Got it. So that anniversary is probably a third into the fourth quarter, I would assume.

Yes.

Okay. That helps a bit. And then maybe just lastly, just can you talk about sort of cash flow for the remainder of the year. It sounds like the message was working capital source of cash for the back half most likely. So it seems like an opportunity to flush some inventory and build a little cash from working capital, then you get the net proceeds from PIEPS, which I assume there's not too much friction from the total amount that you guys quoted from the press release, but maybe just talk about if there's any gap in terms of the headline number and maybe some net cash proceeds from that. And maybe just lastly, if you could speak to sort of priorities for the rest of the year in terms of cash. It sounds like organic reinvestment was kind of the main message from the prepared remarks, but any consideration given the sort of share buyback, more deployment on that? Just kind of given you guys talked about the sum of the parts being undervalued, maybe just thought process there.

From a cash perspective, cash is a priority for us. I don't expect us to execute a buyback since we aim to protect our cash and reinvest it back into the business in the best possible opportunities. Regarding the sales proceeds from PIEPS, there is some friction totaling about $1.5 million, so the $9.1 million will likely feel more like $7.5 million when it arrives in July, as some of that cash was on their balance sheet and sold as part of the transaction. In terms of working capital usage in the second quarter, it was negative by about $4 million, primarily due to inventory issues. Our inventories exceed $91 million, and we brought in inventory early for both Adventure for RockyMounts and Black Diamond to reduce the impact of tariffs, which means some inventory arrived in June instead of the usual July or August. Moving forward, cash will remain a priority. We will be disciplined regarding foreign exchange and will invest in necessary capital expenditures for business growth, while being cautious with any non-essential investments. Consistent with my earlier comments, we aim to see cash increase in the latter half of the year.

Our next question comes from Mark Smith from Lake Street.

First, Mike, just wondering if you can just clarify and go through quickly the country exposure on tariffs again and kind of your mix?

At Adventure, most of our sourcing is from China, with a small amount from Australia. For Black Diamond, the bulk of our inventory comes from Southeast Asia: 25% from China, 31% from Taiwan, 15% from Vietnam, and 12% from the Philippines, with the remaining portion sourced elsewhere. We have transitioned all manufacturing out of the U.S. starting at the beginning of this year. The team is continuing to focus on reducing our inventory and production reliance on China, but this shift will not occur until 2026.

Okay. And that was my next question, just if there's any other near-term moves in the mitigation plans that we should expect? Or is this just kind of wait and see where things end up for everybody before we see any movement?

I believe that is our strategy. The products we manufacture in China primarily include our electronics and BD headlamps. We are currently waiting for everything to stabilize to determine the best course of action regarding that. Initially, we thought the updates on tariffs related to Vietnam would provide a solution, but after further investigation, we are not as optimistic about that option. Nonetheless, we are still waiting to see how things develop.

Okay. And then the other question I had was just on RockyMounts. Just curious, thoughts here on that performance, how that business has been operating?

We're very pleased with it. With $2.1 million in revenue for the quarter, we believe it's an excellent product. The key now is to gain traction with specialty distributors, particularly bike shops, as we haven't historically partnered with them, but we're working on that. I mentioned this in my prepared remarks. We're optimistic about what this can lead to in the coming years.

Our next question comes from Peter McGoldrick from Stifel.

This is Alex Douglas standing in for Peter. I have a couple of questions. First, regarding gross margin, I noticed it declined by nearly 100 basis points in the second quarter. You mentioned that tariffs didn't significantly impact this period. Should we expect more gross margin challenges in the latter half of the year compared to the first half, or are there factors that might help offset this? I understand that some tariff exposure can be mitigated, but not all of it. I would appreciate your insights on this.

Sure. So if you look at our gross margin, our consolidated gross margin was down. I gave the details by segment. I think the Adventure segment was down 300 basis points on an adjusted basis quarter-over-quarter. Black Diamond was up 30 basis points on an adjusted basis. And I should say Outdoor, the full segment was up 30 basis points, inclusive of the drag from PIEPS. Included in that 30 basis points up is $0.5 million from FX. So it would have been up even more if kind of in the constant currency without the FX headwind that Neil mentioned. Over at Adventure, so tariffs didn't hit yet in Q2 but we did have that headwind from FX. Also, there have been from PIEPS in the published results. Over at adventure, we're down 300 basis points; in that is volume, the volume specifically from the OEM business in Australia and the wholesales business in Australia compounded by some of the lower margin sales that Anna just asked about, the promotional sale activity in North America that occurred. I mentioned that we sold that above cost but not much above cost. So those things all combined brought adjusted margins at Adventure down 300 basis points. So that's the headwind. Going forward, yes, we have the tariff impact in the back half, but we don't have the PIEPS, etc. So gross margin will be challenging compared to our original plan at the beginning of the year and prior to Liberation Day. But all of the work that we had done in advance of tariffs being announced in April, a lot of that good work is going to be offset by the tariffs. But I believe, and I think in Neil's prepared remarks, we still believe margins on a year-over-year basis in the back half for Black Diamond will be up regardless of that.

I have a question about the longer-term margin structure. Pre-COVID, your gross margin was around 35% and the adjusted EBITDA margin was in the high single digits. Once we move past some of these temporary challenges, is that a good way to think about the margin structure in the midterm?

It's reasonable. I think it might be a bit higher than that, but it's reasonable.

Okay. Got it.

I thought we would be closer to the high 39%, but some of the tariff pressures have brought us down to around 36% or 36.5%.

Okay. That's helpful. And then I guess my last question if there's time would just be on inventory. As we're kind of modeling inventory, how should we think about inventory growth through the remainder of the year and specifically like related to sales?

I'll comment on inventory. I noted it was over $91 million at the end of June. I anticipate it will be $10 million lower by year-end. This reduction will contribute to the positive cash flow I mentioned, which aligns with our historical performance, particularly given that our revenue typically strengthens in the latter half of the year. However, we remain cautious about revenue due to consumer sentiment and the macroeconomic environment, which is why we are not providing guidance. Nevertheless, we believe that historical trends regarding revenue distribution still hold, with expectations of a 45% to 55% split between the first and second halves. As you assess your model or analyze the business, these historical figures should continue to be relevant as we move through 2025, with the second half of the year accounting for 55% of the full year revenue for both the Adventure and Outdoor segments.

The question-and-answer session is now closed. I will now turn it over to Mike Yates for closing remarks.

Thank you, everyone. I appreciate your ongoing interest in Clarus and for joining us this afternoon. We look forward to updating you on our results next quarter and engaging with you at the conferences and during any other questions. We value the time we spend together. Take care, and thanks once more. Goodbye.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.