Earnings Call Transcript - CLAR Q3 2024

Operator, Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's financial results for the third quarter ended September 30, 2024. Joining us today are Clarus Corporation's Executive Chairman, Warren Kanders; CFO, Mike Yates; President of Black Diamond Equipment, Neil Fiske; Managing Director of Clarus Adventure segment, Mathew Hayward; and the company's external Director of Investor Relations, Matt Berkowitz. Following their remarks, we’ll open the call up for your questions. Before we go further, I would like to turn the call over to Mr. Berkowitz as he reads the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Mat, please go ahead.

Matt Berkowitz, Director of Investor Relations

Thank you. Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we will 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 conditions of Clarus Corporation to differ materially from those expressed or implied by the forward-looking statements. More information on potential factors that could affect the company's operating and financial results is included from time to time in the company's public reports filed with the SEC. I would like to remind everyone this call will be available for replay starting at 7:00 p.m. Eastern Time tonight. A webcast replay will also be available via the link provided in today's press release as well as on the company's website at claruscorp.com. Now I'd like to turn the call over to Clarus' Executive Chairman, Warren Kanders.

Warren Kanders, Executive Chairman

Good afternoon, and thank you for joining Clarus' earnings call to review our results for the third quarter. I'm joined today by our Chief Financial Officer, Mike Yates, as well as Neil Fiske and Mat Hayward, who will discuss our Outdoor and Adventure segments, respectively. While our businesses continue to deal with significant headwinds in the near term, operating against the backdrop of constrained consumers in the outdoor space, our focus in the third quarter was on advancing Clarus' strategic plan to position the company for long-term profitable growth. 2024 was expected to be a year of simplification for our Outdoor segment and one of investment to scale our Adventure segment. There remains significant work outstanding to execute on our multiyear growth initiatives. And we believe the steps we have taken and investments we have made to date will deliver significant long-term benefit, and Neil and Mat will provide more specific comments about the incremental progress made in each segment during the third quarter. At Outdoor, we've been pleased with the team's steady progress, executing initiatives focused on further simplification, strengthening the core and improving the quality and composition of our inventory to focus on the best, most profitable styles. As Neil will detail in greater depth, our goal has been to build a smaller, more profitable business, and today's results are evidence that the strategies we have implemented are working. While Outdoor revenue declined year-over-year, consistent with market softness and our expectations, adjusted EBITDA was up 25%. I'd also like to highlight that the challenging market conditions we are experiencing represent an opportunity as it is our view that consumers tend to favor the highest quality options in this type of retail environment. We have seen Black Diamond grow share in its core categories in recent quarters, and we expect to continue to take share in our most important categories moving forward. Turning to our Adventure businesses. Our objective to scale the segment to a global footprint has not yet come to fruition. Performance was in line with expectations for the first 2 months of the quarter, but results were ultimately affected by market softness in September in both North America and Australia. We believe we have taken appropriate, corrective actions to rightsize our cost base at Adventure without impacting the growth investments we made in the first half of 2024. The team has undergone significant changes this year as we work towards an organizational structure that is expected to allow us to effectively scale our brands in Australia, the U.S. and international markets. Overall, while we are in different places on the turnaround curve for each segment, we are encouraged by the steps Neil and Mat have taken, and we believe that we have laid the foundation to drive increased profitability and unlock new growth opportunities moving forward. With that, thank you for being with us today, and I will turn the call over to Mike.

Mike Yates, CFO

Thank you, Warren, and good afternoon, everyone. On today's call, I will provide a brief update on the third quarter before handing it over to Mat and Neil for a review of segment performance. I will finish with a more detailed summary of our third quarter financial results, followed by a question-and-answer session. We made significant progress in the third quarter that is expected to set Clarus up for sustainable, long-term profitable growth as market conditions stabilize. As mentioned by Warren, our focus at Black Diamond is to simplify and concentrate on our core operations, and we are on track with that strategy. Our inventories are in good condition, and we expect them to approach the low $60 million range by the end of the year, with over 70% consisting of A styles. This is an improvement from last year when we had around $70 million in inventory on hand at Outdoor. Furthermore, we have effectively managed our inventory exposure at Outdoor and are close to resolving this issue. An important aspect to consider about Outdoor is our revenue composition. We anticipate full year revenue to be about $20 million lower in 2024 than in 2023, which is a deliberate outcome of our simplification strategy as we focus on our best products with our best customers. For 2024 as a whole, we're on track for nearly $30 million less in revenues from our C and D products and categories due to simplification and market conditions. However, this $30 million decrease will be offset by an increase of $10 million in revenue from our A styles, which is exactly aligned with our goal of enhancing profitability at Outdoor. Our A styles generate higher volumes and crucially, higher gross margins. Therefore, we aim to establish an Outdoor business with improved gross margins, profitability, and quicker inventory turnover to enhance our working capital. This is the foundation for future business growth. The Adventure segment faced challenges due to a weak market in September. Following a comprehensive corporate realignment and new leadership appointments, we are now focused on incremental improvements based on our strategic roadmap to rapidly identify challenges and solutions for growth. After the quarter ended in October, we restructured our cost base across the Adventure segment, anticipating annual savings of $2.4 million. These actions were executed with care, ensuring they do not affect essential investments needed to scale the business according to our strategic plan. We are confident that the significant investments made in 2024 will yield long-term benefits as we work to create a top-notch product ecosystem for our global customer base. At the bottom of the slide, I want to emphasize a key feature of the new Clarus: our debt-free balance sheet. We concluded the third quarter with over $36 million in cash, which gives us the flexibility to allocate capital for shareholder benefit. Our payables are in good shape going into the fourth quarter, with a balance of $12.7 million compared to $26.4 million at the same time last year. Additionally, we entered Q4 with receivables of $54.3 million, the majority of which are expected to be collected before year-end. With minimal purchases needed to meet our revenue targets for the rest of the year, we are confident that we will generate positive cash flow in Q4. Regarding our priorities, we are committed to reinvesting in our existing segments to drive organic growth. We plan to continue paying our quarterly dividend and will selectively consider small bolt-on M&A opportunities that could enhance our Adventure business in the United States and new markets. Before passing the call to Mat, I want to quickly highlight some key figures. Clarus reported third quarter revenue of $67.1 million and adjusted EBITDA of $2.4 million, which fell short of our Q3 forecast. Consequently, we have updated our outlook, which I'll detail later. However, I am pleased with the gross margin momentum we experienced in the third quarter. We achieved consolidated adjusted gross margins of 37.8%, reflecting a year-over-year improvement of 420 basis points. In our Outdoor segment, the gross margin adjusted for the PFAS reserve stood at 37.0%, up from 31.2% a year ago, marking a 580 basis point gain. This improvement is structural and directly linked to our team’s commitment to our simplification strategy, which focuses on selling more of our highest margin, high-volume products, specifically the A styles. Neil will elaborate on this shortly, but we are transforming the structure at Black Diamond. We are simplifying the business and eliminating complexity, resulting in higher gross margins, while we actively manage costs through improved processes. We believe we have the potential to reach double-digit adjusted EBITDA on an annual basis in Outdoor. Despite the overall positive trends, it is unfortunate that our consolidated financial results faced near-term pressures during the third quarter in both the Adventure and Outdoor segments. Nevertheless, we believe we have established the necessary building blocks to execute our multi-year strategic plan. I will now hand the call over to Mat Hayward, Managing Director of Clarus' Adventure segment.

Mat Hayward, Managing Director, Adventure Segment

Thanks, Mike. I'll begin my remarks on Slide 6. Consistent with our stated goals, our objective is to scale our portfolio of Adventure brands globally. We are making progress operationally to build a new product and sourcing engine that can support healthy growth and deliver newness consistently across our different regions and channels. While I am pleased with our progress, our ramp-up and acceleration remain a work in progress as we balance near-term performance goals with investment in critical foundations to deliver our future. We remain confident in our established strategic roadmap that was outlined previously this year, and are taking the necessary corrective steps to begin to accelerate in '25 across all channels and product categories. Q3 financial results reflect an abrupt slowdown in September in our home market, coupled with a unique set of events that have impacted our business that we believe are short term in nature. New vehicle sales in Australia were down nearly 12% overall from the last comparable period last year versus the growth we saw in the new vehicle market in the first half of this year. We managed through a one-time supply chain disruption that resulted in low safety stock levels in key products. Likewise, one of our important OEM partners experienced supply chain disruption on their own, which caused them to halt production until Q1 of 2025. These events impacted our OEM business the most and dampened the expected wholesale growth in our core roof rack business the most. For context, overall, our sales were down 11.9% versus the prior comparable quarter in '23. Our total wholesale channel was off 2.5%, largely impacted by key accounts in the ANZ, our home market facing group level inventory challenges unrelated to our product, which we expect to alleviate over the next 12 months as we work with them in partnership to resolve this. Furthermore, while the OEM channel accelerated during the first half of 2024, we experienced a one-time halt in volume at one customer, which drove a 58% decline in OEM sales in the quarter compared to the prior year. These circumstances did not impact our accessories category, which was a bright spot in the quarter, led by MAXTRAX' 16% sales growth over the prior comparable quarter in 2023. We also improved our gross margins at MAXTRAX by 850 basis points, which all flowed through to overall profitability. Our revenue growth at MAXTRAX includes new OEM growth as global automotive partners continue to recognize the power of the brand for their customers. Looking at our specific geographies and channels, we were pleased with the trends for the first eight months of the year across Australia and New Zealand, supported by net sales, gross profit and EBITDA consistent with our internal expectations. But market softness abruptly revealed itself in September. Q3 sales in the U.S. and rest of the 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 challenged while we integrate additional new team members and launch our strategic initiatives in line with global initiatives. However, we are excited about the investments we've made this year to accelerate our brands and the brand traction in these key markets for our long term. As it relates to initiatives in the U.S., in addition to announcing the hiring of our new GM, we've also brought in a new Head of Sales who will start in the month as we set up critical programming for 2025. In EMEA, we continue to lay the groundwork to expand existing relationships while adding new customers for 2025. We've already added new distributor relationships in the Middle East recently and as recently as the last two months, also additionally in South Africa. I would like to spend a few minutes highlighting the operational efforts that we are making within the organization. First and foremost, we have developed an entirely new product development and product commercialization process over the last year that will begin showing itself in the coming months. Following the extremely successful launch of our Pioneer 6 platform globally, I'm very proud of the work the team has put to successfully introduce another new platform developed specifically for the American market and customer. Our new Recon platform launched at SEMA this week, a new product that further enhances our leadership across the platform category, and we have also started to introduce our new sports range across crossbar solutions, vital for international markets. Simultaneously with the product changes, we've been rolling out a new website platform and experience focused on presenting more lifestyle category solutions and a better Fit My Vehicle solution, optimizing our website to make it easier for consumers to understand our product and also for our wholesale partners to get the support they need in their purchasing journey. We still have work to do on this front, but we are tracking to be through this part of the digital transformation in Q1 2025. Lastly, we have realigned elements of our global organization to better support local markets. We implemented 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. While these were difficult decisions, we determined that now is the time to take the proactive steps to ensure that we have the appropriate baseline in place to deliver the profitable growth we expect in 2025.

Neil Fiske, President of Black Diamond Equipment

Thanks, Mat. Turning to Slide 7. I will provide an update on the Outdoor segment's Q3 results and progress year-to-date. At our Investor Day earlier this year, we laid out a plan for Black Diamond that focused on simplifying the business, strengthening the core, exiting unprofitable categories and styles, improving gross margins, rightsizing inventory, reshaping the organization, revamping the supply chain and lowering our overall cost structure. We said we would build a smaller, healthier, more profitable business, and we are delivering on those objectives. Today, I am pleased to report that we are executing well against the plan and seeing the results start to take shape. Despite a quarter, which was down 19% on the top line, our adjusted EBITDA was up 25% compared to the prior year. Importantly, as we roll forward all the changes we have implemented, the run rate profitability of the business has substantially improved to the point where the business is now expected to deliver an annual double-digit EBITDA margin on the current volume of sales. Gross margins are lifting, and we believe they will continue to expand. Our inventories are in better shape, both in aggregate and in the quality of inventory we have against our A styles, which are the highest margin and highest volume products. As Mike mentioned, A styles make up 70% of our inventory at September 30, 2024. Service levels and fill rates have improved substantially, and much more positive feedback from our retail partners reflects all the progress we've made. We will enter 2025 with most of the heavy lifting behind us and with a much healthier business from which we can start to grow again. I'm grateful for the hard work of our teams and the ability of the organization to execute on so many fundamental changes in such a compressed time frame. It's a testament to the passion, skill, experience and deeply held commitment our employees have to this incredible brand. As we look at revenues for the quarter, the results reflect the global outdoor market that is still in recession from its peak of 2022 but also the simplification moves we have made, such as exiting the binding distribution business and a less promotional stance compared to the prior year when we were clearing a lot of excess inventory. By region and channel, North America wholesale was down 22.3%. North America digital D2C was down 4.4%. Europe wholesale was down 8.1%. Europe D2C was up 11.9%, and our international distributor markets were down 29.2% and still correcting from the overbought inventory levels as discussed earlier in the year. Looking at the quality of our revenue, the picture looks much healthier as reflected in improving gross margins. Gross margins were up 200 basis points year-over-year and up 580 points when excluding the PFAS reserve we have taken to ensure we are compliant with new regulations and retailer requirements by 2025. Based on the work we have done to simplify the line, improve sourcing and create more margin-accretive new products, we believe that product margins will continue to lift steadily through '25 and 2026. This is a major driver of our more profitable operating model. On the cost side, operating expenses were down 13.1% versus the prior year. Excluding restructuring expenses from both years, costs were down 10.4%. We expect that operational improvements we have implemented will continue to improve our cost ratios and operating leverage in the go-forward model. As we look ahead to Q4 and to 2025, while we see continued challenges at the consumer and retail level, we believe we have positioned the business not only to absorb these challenges but to expand our EBITDA margins in the process. We are maintaining a pragmatic cautious outlook for 2025 knowing that we have the ability to respond to a market rebound based on the quality of our inventory position and a stronger operating platform. Let me reiterate, the core of the business is much healthier now and capable of delivering double-digit EBITDA margins even without top line growth. That said, we are confident that our growth initiatives in product, channels, marketing and geographic position position Black Diamond for a return to growth as the market stabilizes. We are pleased with our progress in strengthening the brand and building a healthier, more resilient, more profitable business.

Mike Yates, CFO

Thank you, Neil. Turning to Slide 8, I'll begin with a summary of our financial performance in the third quarter. As a reminder and as we have noted previously, given the sale of the Precision Sport segment for approximately $175 million, which closed in the first quarter of the year, our U.S. GAAP results are comprised of Outdoor and Adventure segments and results are referred to as continuing operations. Third quarter sales were $67.1 million compared to $81.3 million in the prior year third quarter. The 17% decline in total sales was driven by a decrease in the Outdoor segment of 19% and a decrease in the Adventure segment of 12%. FX was immaterial in the quarter. Moving to consolidated gross margins. In the third quarter, gross margin was 35.0% compared to 33.6% in the year-ago quarter. The improvement was primarily a result of product simplification and SKU rationalization efforts in the Outdoor segment that we just highlighted, as well as favorable channel mix due to lower OEM sales and higher MAXTRAX revenue at the Adventure segment. Adjusted gross margin reflects the PFAS reserve, which was $1.9 million in the third quarter. Adjusted consolidated gross margin was 37.8% compared to 33.6% in the year-ago quarter, a 420 basis point improvement. Adjusted gross margin by segment was as follows: Outdoor was 37%, up 580 basis points; and 40.1% at Adventure, down 60 basis points compared to last year due to the dilutive impact of the TRED Outdoors acquisition. Selling, general and administrative expenses were $27.9 million compared to $28.4 million in the same year-ago quarter. The decrease was primarily due to lower retail expenses because of our decision to close unprofitable retail stores at Outdoor as well as a successful implementation of other expense reduction initiatives to manage costs at the Outdoor segment. This was partially offset by investments at the Adventure segment in global marketing and e-commerce initiatives to accelerate growth, as well as the incremental SG&A cost as a result of the TRED Outdoors acquisition completed in Q4 of 2023. Adjusted EBITDA in the third quarter was $2.4 million or an adjusted EBITDA margin of 3.6% compared to adjusted EBITDA of $3.6 million or an adjusted EBITDA margin of 4.5% in the same year-ago quarter. Our adjusted EBITDA is adjusted for restructuring charges, transaction costs and stock compensation expenses, as well as movements in the PFAS inventory reserve. Additionally, beginning in the first quarter of the year, we adjusted for legal costs associated with the Section 16(b) litigation and Consumer Product Safety Commission, known as the CPSC matter. These legal costs were $394,000 in the third quarter. Third quarter adjusted EBITDA by segment was $250,000 at Adventure and $4.4 million at Outdoor. Adjusted corporate costs were $2.2 million in the third quarter. Next, let me shift to liquidity. At September 30, 2024, cash and cash equivalents were $36.4 million compared to $11.3 million at December 31, 2023. Total debt on September 30, 2024, was zero compared to $119.8 million at the end of 2023. Our reduced debt and substantially improved cash position reflects the closing of the Precision Sports sale in February of 2024 and the termination and repayment in full of our credit agreement. Consolidated cash tax expense for the full year 2024 is expected to be $2 million to $3 million, which will allow us to maintain most of the net cash realized from the sale of Precision Sports. Free cash flow, defined as net cash provided by operating activities less capital expenditures for the third quarter of 2024, was an outflow of $9.4 million. As a reminder, we have NOL carryforwards for U.S. federal income tax purposes of approximately $7.7 million at December 31, 2023. The company expects to utilize all the remaining NOLs in their entirety this year. Before turning to our outlook, I would like to provide an update on the outstanding Section 16(b) securities litigation matters that the company is pursuing. We continue to proceed in our lawsuit against HAP Trading LLC and Mr. Harish A. Padia. Both fact discovery and expert discovery have now been concluded. The court received a motion for summary judgment from the defendants as well as motions challenging our expert. We don't expect to hear the outcome of these motions until the spring of 2025. If this matter goes to trial, we expect the trial to commence towards the end of 2025. We also filed a lawsuit against Caption Management and its related entities and control persons. Those defendants filed a motion to dismiss on June 27. We filed opposition papers on July 25, and reply papers were filed on August 15, 2024. We are waiting for the court to opine on the motion to dismiss. Moving on to our 2024 outlook on Slide 9. We have lowered our top line guidance and expect sales to range between $260 million to $266 million for the full year 2024. Adjusted EBITDA from continuing operations is now expected to be in the range of $7 million to $9 million or an adjusted EBITDA margin of 3% at the midpoint of revenue and adjusted EBITDA guidance. We now expect capital expenditures to range between $5 million to $6 million and adjusted free cash flow to range between a negative $6 million to negative $8 million for the full year 2024. This includes $7 million of cash outflows related to Precision Sports prior to disposal. Based on our updated forecast, fourth quarter sales are expected to be approximately $70 million and adjusted EBITDA is expected to be between $5 million and $7 million. I want to reiterate that our outlook does not include any expense for ongoing litigation specifically related to Section 16(b) matters, the CPSC matter, or further increases in the PFAS-related inventory reserves. However, regarding PFAS-related inventory, the team has done a great job dealing with this situation, and I don't expect further reserves associated with this inventory going forward. Since Q4 of last year, we have reserved approximately $4.2 million for PFAS, which is consistent with how we framed this exposure back during our year-end call in early March of 2024. And I don't expect the need for additional reserves related to PFAS at this point in time going forward. We expect to generate approximately $20 million to $22 million of free cash flow in the fourth quarter. If achieved, we would expect to have a cash balance above $50 million at the end of the year compared to the $36.4 million at September 30, 2024. Before I move on from discussing our outlook, I want to be very clear regarding what has changed. We still expect Outdoor revenue to be approximately $185 million, consistent with what we've been guiding to all year. However, Adventure's revenue is now expected to be closer to $78 million. This totals $263 million of revenue for the full year 2024, which is our midpoint of our top line guide I just presented. The $12 million decline in revenue at Adventure from our previous guide is due to several factors, including certain wholesale and OEM partners now purchasing in the back half of the year as expected, as well as slower uptake in our recently launched e-commerce initiatives and the impact from the soft market in the U.S.A. in the first half of the year that has not improved in the back half of the year. Based on our continued operational progress to date at Outdoor and the roadmap in place at Adventure to guide us towards the next phase of profitable growth, we remain confident that we can deliver significant long-term value for Clarus shareholders. We have an outstanding team in place supported by a debt-free balance sheet to take the next steps in our turnaround and position ourselves for a better 2025. At this point, operator, we are ready to take questions.

Operator, Operator

Our first question will come from Jim Duffy from Stifel. Your line is open.

Jim Duffy, Analyst

Hey, good afternoon. Mat, I had a question for you on the OEM contribution to the business, where that stands right now, where you see the OEM mix opportunity. And then I imagine you're just off of SEMA. If you have any update or color on discussions you had with OEM prospects at SEMA. Thank you.

Mat Hayward, Managing Director, Adventure Segment

Thanks. Great question. Look, OEM, one of the key things, as mentioned, I think, in our last call, we have invested. Structurally, we've got a new global head of OEM sales. This role is now based in the U.S. Previously, everything has been run out of Australia. And with this adjustment and structure, it's really focusing on growth internationally, knowing that the U.S. is a prime part of that. Over the last quarter, David Cook, in this new role, has stepped in and is basically working with the three regional GMs to go through a top 10 analysis of all the, I guess, the lead autos in each market. As you know, there are two opportunities within our OEM market. One is dealer programs that we haven't stepped into previously, and we're now opening up conversations to launch those as soon as Q1 in 2025. These dealer programs are based on accessories that we have in our range and don't need to go through the same product development pipeline that you would for custom and product-specific platforms for the brand. But on top of that, the focus is really making sure that across EMEA with our new regional lead there and in the U.S., we're meeting all of the key partners. You mentioned SEMA. SEMA was filled with meetings across all of the, I guess, the top five, top ten automakers and also looking at the opportunities with partners in Asia as well that are coming to light in Australia especially. So it is a lot of, I guess, forward-looking investment. The pipeline is typically on a 2- to 3-year timeline from start to finish on product-specific platforms, but we're hoping to offset those long-term growth with short-term dealer programs. But yes, a lot of work has been done, and we're hoping to see that come to life in 2025.

Jim Duffy, Analyst

I have a question about the Australia and New Zealand marketplace. I understand that the economy and consumer spending have faced challenges there. Looking ahead to 2025, do you see any possibility for rate reductions that could rejuvenate demand for new vehicles or aftermarket products? Your insights would be appreciated. Thank you.

Mat Hayward, Managing Director, Adventure Segment

Yeah. Again, it's almost a tale of two halves. As you mentioned, a very, very strong H1 across Q1 and Q2 with new vehicle deliveries really breaking records. As of June this year, there was a slowdown in monthly vehicle sales, and that's rolled through into our results. Moving into kind of Q4 and into Q4. We are in our peak season. We are seeing the commercials ramp up. November and December, we are typically in peak trading period for Australia alone. And outside of vehicle sales, we are seeing robustness return. Our globally, I guess, world-famous platform, P6, is trading well to the point that we've had to make sure we ramp up volumes to really take care of that demand. I think the other thing to kind of mention is New Zealand's been an offset of the Australian business, and we're there putting a lot more, I guess, strategic focus on that individual market, which has different nuances similar to, I guess, to the U.S. and Canada. New Zealand is a lot more of a trade-based business, and we've recently launched our trade initiative, looking after fleet and service vehicles. And we see an opportunity across both Australia and New Zealand for that. In '25, you'll see also the fruits of product development, 12 to 16 months' worth of product development start to come through. And these are ranging on new platforms across most of our categories in the business that haven't been fresh for probably about the last 10 years. So all of these initiatives look to kind of counterbalance degrees of softness of either vehicle or partner sales, and there's a lot more focus on channel segmentation and product segmentation that we also haven't previously done with our main market in Australia. Not mincing words, we've previously been a company that's offered kind of everything to everyone, and we're making sure we're really servicing our accounts with a bit more of their specific needs for their specific customers, and that's what we expect to see rolling into Q4 and Q1 next year.

Jim Duffy, Analyst

Thank you for that perspective. Last one for me. Mike, wheels of justice grinding slowly, the HAP Trading recovery significant in the context of the enterprise value, I'm surprised it's taken this long. Is there any chance of a potential settlement or something like that that could accelerate things?

Warren Kanders, Executive Chairman

I'll take that question. It's currently with the judge, and we have a motion to dismiss presented to him. Based on how this judge has previously ruled, we expect to hear back from him by the end of the first quarter. If he dismisses the motion, the case will proceed to a jury trial, which is usually the point where discussions about settlement begin. Therefore, the timeline for those conversations would be after that ruling. As you mentioned, the amount involved is substantial, and neither HAP nor Harsh Padia has disputed it.

Operator, Operator

Next question comes from the line of Laurent Vasilescu from BNP Paribas. Your line is open.

Laurent Vasilescu, Analyst

Good afternoon, thank you for taking my questions. Mike, you mentioned in your prepared remarks that the midpoint for the full-year guidance cut is about $20 million, with two components: $30 million offset by $10 million. Can you clarify that a bit more? Also, how does the macroeconomic environment factor into this guidance?

Mike Yates, CFO

No, the guidance is not that significant, so let me clarify. We lowered our guidance from $270 million to $280 million to $260 million to $266 million. I want to be clear that we discussed $185 million in revenue at Outdoor and $90 million at Adventure, which totals to $275 million at the midpoint of the old guidance. The only change is that the $90 million from Adventure is now $78 million. So the guidance cut on the top line is $12 million. We've explained the reasons for this. One major wholesale partner faced inventory challenges that weren't related to us. An OEM customer had to halt production for the remainder of the year due to a different supply chain issue not linked to us. Additionally, our U.S. business has been slow since the beginning of the year and has not improved in the latter half. Our e-com initiative at Adventure has also been slower in responding to changes and investments we've made to the platform and website, resulting in slower-than-expected revenue growth. These factors, along with the lower vehicle sales Mat mentioned, have contributed to the change in guidance. The $30 million decline refers to our effort to simplify our business and reduce complexity, particularly in Outdoor, which is shrinking from over $204 million last year to $185 million this year, reflecting a $20 million decline. The $30 million decrease is tied to the reduction of sales in what we classify as Cs and Ds, which are low-margin products. We are shifting focus away from these low-margin items in favor of our A products, which are high-volume and high-margin. I expect us to generate an additional $10 million in sales from these better products. Therefore, the $30 million decline in revenue from our complex, low-volume, low-margin business is being offset by $10 million from high-margin products, leading to higher gross margins. This is why our margins are expanding. As Neil highlighted, EBITDA is up 25% this quarter, even though revenue has decreased by 19% at Outdoor, which directly results from our ability to simplify our business and promote our best products to our top customers. Does that help?

Laurent Vasilescu, Analyst

Very helpful. And then maybe a good segue because you provided a detailed Investor Day earlier this year, with a target of $330 million of net sales for 2025 with a 10% EBITDA margin. Any updated thoughts there? Is there anything that's changed in that viewpoint since we're 6 months into this closer to 2025?

Mike Yates, CFO

The guidance and projections we discussed can be summarized as follows. In March, we had a certain outlook, but as we sit here in November, the key takeaway from our remarks is that we are performing well in the Outdoor segment. Neil's remarks made it clear that we are on track to achieve $185 million, and this provides a solid foundation for growth, particularly in terms of profitable growth, with double-digit EBITDA anticipated moving forward. However, Adventure is lagging behind our initial expectations from March. We are currently $12 million short of the guidance we set back then. As we work on our budgeting for 2025, we will have more updates at our next call. At this moment, while Adventure is underperforming compared to our March expectations in terms of revenue and profitability, the Outdoor segment is aligning with our predictions.

Laurent Vasilescu, Analyst

That's very helpful. Regarding the third quarter gross margins, there was a nice increase of 420 basis points year-over-year. Could you help us understand how to approach the fourth quarter gross margins and the path towards achieving double-digit EBITDA margins? Also, please remind us of your long-term gross margin targets.

Mike Yates, CFO

When considering the gross margins for the fourth quarter, we haven't provided official guidance yet, but I would expect them to be between 39% and 40% for both segments.

Operator, Operator

Next question comes from the line of Matt Koranda from ROTH Capital Partners. Your line is open.

Unidentified Analyst, Analyst

Hi. This is Joseph standing in for Matt today. I wanted to discuss 2025 in more detail, specifically regarding gross margin and revenue growth. Are we anticipating that we need market growth in each segment to return to growth? Additionally, could you elaborate on the factors contributing to gross margin expansion? Where do we see that happening? In terms of revenue growth, what strategies can we implement for self-improvement in these categories if they stay flat, particularly in the Adventure segment?

Mike Yates, CFO

From a 2025 perspective, we're not providing any guidance today or discussing that yet. We're currently working through our budgets and our view for 2025. Neil detailed various improvements made by the Outdoor team, and they've done an excellent job enhancing productivity, simplifying processes, collaborating with suppliers, and reducing costs. The key point to take away regarding the Outdoor side is that we have adjusted the business in 2024 from a cost perspective, improved our processes, and optimized our inventory mix. We’re focusing on our top products, which have higher margins and sell more to our best customers. This establishes a solid baseline for growth in 2025. We feel confident that regardless of whether we see top line growth or benefit from improving market conditions, we are well positioned for profitable growth. Both the Adventure and Outdoor segments are still facing a recession after the high points of 2022, but we believe we can grow profitably. If we receive market support, it will naturally assist our top line and lead to operating leverage. In terms of the Adventure segment, we have made significant investments in e-commerce and new product development, which Mat discussed in detail, including efforts at MAXTRAX and Rhino-Rack with several product launches planned for 2025. We are working on enhancing our e-commerce sales, which generally provide better margins, and simplifying consumer access to products like racks through new fitting options. We have dedicated considerable time and resources to improve how racks attach to vehicles, now targeting over 180 different models. This marks a strategic shift from our discussions two to three years ago when we acquired the business. We are excited about expanding the market for both platform products and crossbars. As we look to 2025, our focus is on scaling the Adventure business while continuing to simplify the Black Diamond operations. Both businesses will benefit from improved operating leverage as the market conditions become more favorable.

Unidentified Analyst, Analyst

All right. Thank you for that color. We’ll go ahead and check the rest of ours online and thank you for taking our questions today.

Operator, Operator

Next question from the line of Mark Smith from Lake Street. Your line is open.

Mark Smith, Analyst

Hey, I apologize if this was hit a bit. But just looking at the Outdoor segment, can you just update us on kind of how the consumer in international markets is doing with all of the work in rightsizing the business, if there's still any work for international that needs to be done that's maybe lagging domestic?

Mike Yates, CFO

I'll make one comment and then hand it over to Neil. Our perspective on the international markets in Outdoor is that they are about 12 to 18 months behind the U.S. in terms of outdoor sales. Many of our retail partners are still facing challenges with excess inventory. However, we are addressing this issue this year, and we anticipate improvements next year. It's worth noting that this is the first year in over 20 years that international markets, particularly Japan, have experienced a slowdown. Japan remains one of our largest international markets in Asia. Neil, do you have anything to add?

Neil Fiske, President of Black Diamond Equipment

Thanks, Mike. I think you covered it. Maybe one point of clarity. I would actually split Europe from our international distributor markets because Europe is a largely owned operation, whereas China, Japan, New Zealand, Australia, et cetera, go through distributors. And we're seeing different dynamics in those two. In Europe, I see you're sort of tracking maybe just a couple of months behind the U.S. in its correction, but the pattern looks quite similar. And so I think we'll see those markets start to behave more similarly as we go into 2025. And I would expect, barring some macroeconomic or geopolitical disruption, that those markets would start to track and stabilize together. The international distributor markets are a slightly different dynamic because our distributors buy from us and then their customers buy from them. So you kind of have an extra layer, if you will, of inventory in the system. And therefore, I think it takes another 12 months for the international distributor markets to fully correct. There's just one extra step in the process. And that's why I think you see in our IGD segment this year, as we talked about from the very beginning, we expected this correction to be particularly pronounced this year, less so next year. I think without giving guidance, I think you'll start to see a rebound in international distributor markets next year. But the contraction was particularly concentrated given there are effectively two redundant layers of inventory in those markets.

Mark Smith, Analyst

Perfect. Second question for me is just curious if you can speak to maybe your exposure to potential rise in tariffs as we look at stuff coming out of China. And I know it may be hard to quantify, but if you can speak to maybe what your exposure is and how maybe you could combat that if that comes to fruition here over the next year or so?

Mike Yates, CFO

Neil, you want to cover Outdoor? I know we've done a great job delevering from China, but go ahead and cover that.

Neil Fiske, President of Black Diamond Equipment

We have been actively working on diversifying our sourcing beyond China. While we still source a few items there, our exposure is relatively small, primarily in our headlamp and smaller footwear businesses. Both of these have supply chain transitions that will allow us to move production to Vietnam or other countries in the Asia Pacific. We believe that we are relatively insulated from China-specific tariffs. Once we have a clearer idea of the timing and extent of any potential tariffs, we can adjust our purchasing strategy to acquire products before the tariff increase, giving us extra time to transition those products out of China. This might involve strategically building inventory to ensure consistent pricing as we continue diversifying. The bigger uncertainty for us, which is likely on everyone’s mind, is the potential for a universal tariff that could impact all products. All industries will be considering how to respond to that, but we feel we have managed the China-specific situation and have a plan in place to mitigate its effects.

Mat Hayward, Managing Director, Adventure Segment

Within Adventure, Rhino-Rack, we primarily use aluminum and plastics. In the past two quarters, with the addition of our new global Head of Supply Chain and Ops, we initiated a project to examine our global supply chain, partners, and footprint. This initiative is aimed at 2024 but will extend into 2025. The study focuses on identifying opportunities closer to sources, markets, and customers. In the short term, we are re-establishing existing partnerships in Australia to address potential challenges, particularly concerning tariffs related to China and the U.S. This has already been implemented. Simultaneously, we are about five months into the process of identifying manufacturing sources to mitigate risks. We are operating on two timelines: in the near term, we are ensuring there will be no impact on the delivery of key components for the U.S., EMEA, and Australia; and within 12 to 16 months, which began in Q2, we are exploring new partners and locations to support market growth by minimizing dependency on China. These efforts are currently underway, and we have already begun activities and deliveries as a result. This topic is crucial within our category and the industry as a whole.

Mike Yates, CFO

Great. Thank you, Victor. Thank you very much, everyone, for attending the call this afternoon and your questions. We appreciate them. And more importantly, we appreciate the continued support and interest in Clarus. We look forward to updating you on our results again next quarter, and we'll talk to you all soon. Thank you very much.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.