Clarus Corp. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Outdoor: Focused on simplification, strengthening core, improving inventory quality, exiting unprofitable categories, and rightsizing cost structure. Aimed to build a smaller, more profitable business with higher gross margins. Adjusted EBITDA up 25% despite 19% revenue decline.
• Adventure: Working on global portfolio scaling, new product development, website transformation, and organizational realignment. Addressed near-term performance issues through corrective actions and strategic investments. MAXTRAX showed growth and margin improvement.
• Financial Health: Debt-free balance sheet, $36.4 million cash on hand at Q3 2024. Expected cash flow positive in Q4 2024 with cash balance above $50 million by year-end.

Segment Performance

• Outdoor Segment: Revenue declined 19% year-over-year, but adjusted EBITDA was up 25%. A styles make up 70% of inventory. Gross margin (excluding PFAS reserve) was 37.0% in Q3 2024, a 580 basis point improvement from 31.2% in Q3 2023. Full-year 2024 revenue expected to be ~$185 million.
• Adventure Segment: Revenue was impacted by September market softness, OEM issues, and slower e-com uptake. Sales were down 11.9% vs prior year comparable quarter. MAXTRAX had 16% sales growth and 850 basis point gross margin improvement. Full-year 2024 revenue expected to be ~$78 million, down from previous guidance.

Guidance

• Full-year 2024 sales expected to range $260 million to $266 million, adjusted EBITDA $7 million to $9 million.
• Outdoor revenue still expected ~$185 million, Adventure revenue now ~$78 million.
• Q4 2024 sales expected ~$70 million, adjusted EBITDA $5 million to $7 million.
• Expect to be cash flow positive in Q4 with cash balance above $50 million by year-end.

Risks

• Market softness in outdoor and adventure segments.
• Supply chain disruptions affecting OEM and inventory levels.
• Uncertainties related to legal matters (Section 16(b) litigation and CPSC matter).
• Potential impact of tariffs on sourcing from China.

Question and Answer

Q: 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.

A: Thanks. Great question. Look, OEM, one of the key things, as mentioned, I think, in our last call, we have invested. Structurally, we've got a new global head of OEM sales. This role is now based in the U.S. Previously, everything has been run out of Australia. And with this adjustment and structure, it's really focusing on growth internationally, knowing that the U.S. is a prime part of that. Over the last quarter, David Cook, in this new role, has stepped in and is basically working with the 3 regional GMs to go through a top 10 analysis of all the, I guess, the lead autos in each market. As you know, there's 2 opportunities within our OEM market. One is dealer programs that we haven't stepped into previously, and we're now opening up conversations to launch those as soon as Q1 in 2025. These dealer programs are based on accessories that we have in our range and don't need to go through the same product development pipeline that you would for custom and product-specific platforms for the brand. But on top of that, the focus is really making sure that across EMEA with our new regional lead there and in the U.S., we're meeting all of the key partners. You mentioned SEMA. SEMA was filled with meetings across all of the, I guess, the top 5, top 10 automakers and also looking at the opportunities with partners in Asia as well that are coming to light in Australia especially. So it is a lot of, I guess, forward-looking investment. The pipeline is typically are a 2- to 3-year time line from start to finish on product-specific platforms, but we're hoping to offset those long-term growth with short-term dealer programs. But yes, a lot of work has been done, and we're hoping to see that come to life in 2025.

Q: Australia and New Zealand market outlook. Any hope for rate reductions to breathe new life into demand -- new vehicle demand or aftermarket demand?

A: Yeah. Again, it's almost a tale of 2 halves. As you mentioned, a very, very strong H1 across Q1 and Q2 with new vehicle deliveries really breaking records. As of June this year, there was a slowdown in monthly vehicle sales, and that's rolled through into our results. Moving into kind of Q4 and into Q4. We are in our peak season. We are seeing the commercials ramp up. November and December, we are typically in peak trading period for Australia alone. And outside of vehicle sales, we are seeing robustness return. Our globally, I guess, world-famous platform, P6, is trading well to the point that we've had to make sure we ramp up volumes to really take care of that demand. I think the other thing to kind of mention is New Zealand's been an offset of the Australian business, and we're there putting a lot more, I guess, strategic focus on that individual market, which has different nuances similar to, I guess, to the U.S. and Canada. New Zealand is a lot more of a trade-based business, and we've recently launched our trade initiative, looking after fleet and service vehicles. And we see an opportunity across both Australia and New Zealand for that. In '25, you'll see also the fruits of product development, 12 to 16 months' worth of product development start to come through. And these are ranging on new platforms across most of our categories in the business that haven't been fresh for probably about the last 10 years. So all of these initiatives look to kind of counterbalance degrees of softness of either vehicle or partner sales, and there's a lot more focus on channel segmentation and product segmentation that we also haven't previously done with our main market in Australia. Not kind of mincing words. We've previously been a company that's offered kind of everything to everyone, and we're making sure we're really servicing our accounts with a bit more of their specific needs for their specific customers, and that's what we expect to see rolling into Q4 and Q1 next year.

Q: 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?

A: Yeah. No, the -- you want to go ahead and take that, Warren? Warren Kanders: Yeah, I'll take that one. So it's with the judge now, Jim, and we expect to -- there's a motion to dismiss in front of him. We expect, based upon how this judge has responded in prior cases and so on, I mean, there's data around this, we expect to hear from him probably at the end of the first quarter. And if he dismisses -- the motion to dismiss, then this will go to a jury trial. And typically, it's at that point that you would have conversations about settlement or not. So that's the time frame to have those conversations, would be after that event. But as you pointed out, the amount is significant and the HAP and Harsh Padia have not challenged the amount.