Clarus Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 7, 2024

There are 9 speakers on the call.

Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's financial results for the Q4 and full year ended December 31, 2023. Joining us today are Clarus Corporation's Executive Chairman, Warren Kanders CFO, Mike Yates and the company's External Director of Investor Relations, Matt Berkowitz. Following the remarks, we'll open the call 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.

Operator

Matt, please go ahead.

Speaker 1

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 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 is included from time to time in the company's public report filed with the SEC.

Speaker 1

I'd like to remind everyone this call will be available for replay through March 21, 2024, starting at 7 pm Eastern Time tonight. A webcast replay will also be available via the link provided in today's press release as well as on company's website at clariscorp.com. Now I'd like to turn the call over to Clarus' Executive Chairman, Warren Kanders.

Speaker 2

Good afternoon, and thank you for joining Clarus' earnings call to review our results for the Q4 and the full year. I am joined today by our Chief Financial Officer, Mike Yates. I will start the call by addressing the overall business and corporate strategy. Mike will then provide specific comments on the performance of our segments and a more detailed financial review. While consumer demand remained constrained, adversely impacting our 4th quarter results, we have taken crucial steps to realign our overall platform and individual brands to position Clarus for long term profitable growth as a pure play ESG friendly outdoor business.

Speaker 2

Specifically, we completed the sale of our Precision Sports segment, streamlining the company to focus on our Outdoor and Adventure segments. As we have communicated in prior quarters, we are establishing new baselines for our brands. During this transition period, our leadership teams of both Outdoor and Adventure spent much of 2023 identifying areas for structural change, business process improvement and enhanced operational efficiencies. Incremental initiatives in the Q4 included taking sharp action on inventory and product categories that we view as non core going forward, while exiting unprofitable retail decisions from prior years. We entered 2024 with highly capable leadership teams committed to increasing profitability and unlocking new opportunities, while continuing to build the foundation to scale and achieve operating leverage in future years.

Speaker 2

Before discussing those segments in greater depth, let me first address the monetization of our Precision Sports segment. Last week, we completed the $175,000,000 sale, which represents a highly successful outcome for Claris. I'd like to highlight that we invested approximately $132,000,000 in this segment since 2017. And during our ownership period, Precision Sport returned nearly $94,000,000 of cash to Clarus. Inclusive of the gross proceeds from the sale, we generated nearly $270,000,000 during our ownership period.

Speaker 2

Importantly, the proceeds from this sale allowed us to retire all of Claris' outstanding debt. Our balance sheet is now debt free with approximately $43,000,000 of cash on hand that provides flexibility in how we pursue our long term value creation objectives and growth initiatives. From an operating perspective, Clarus is now simplified around 2 traditional outdoor brands without the overhang from the association with ammunition. We believe that our platform offers an attractive entry point into 2 consumer segments with broad appeal and tailwinds, supporting growth as we enter a more normalized post COVID environment. In the near term, our capital allocation strategy will focus on strengthening our existing operating businesses, either through reinvestment in our high margin categories or through bolt on product acquisitions that enhance our brands.

Speaker 2

Turning to our 2 remaining segments, Outdoor and Adventure, we are confident that we have 2 leaders in place fully capable of driving Clarus' turnaround. We believe that we are at different points from the reset of both segments, but each segment is showing signs that the steps taken thus far are positive. These brands are leaders in their respective core categories and we expect that they will rebound as the market stabilizes and reaches a new normal. We continue to believe that we are in the early stages of our action plan and recognize that our strategic initiatives require patience. You'll hear more from both Neil Fisk and Matt Hayward at our upcoming Investor Day, where they will share details on the significant strides we've taken in our strategic review, including rebuilding top level leadership, reengaging with our customer base and restarting the product development pipeline with a focus on delivering enhanced product margins.

Speaker 2

While we are excited to share our longer term vision next week, I would like to take a moment now to discuss Q4 developments. After turning the corner in Q3, Adventure had its best quarter of the year with 43% sales growth and gross margins of 38.1%. This reflected increasing sales in the Australian market and the benefit of the Tread Outdoors acquisition. For context, excluding the acquisition of Tread, our gross margins increased 700 basis points over the prior year period. We are pleased with the intermediate steps management has taken to improve overall profitability.

Speaker 2

Our revenue growth in the quarter was largely driven by the introduction of the new Pioneer 6 platform in Australia and the first deliveries to a new OEM customer for an upcoming product launch. With respect to Pioneer 6, this marks the 1st major new product launch in the last 15 months. The Pioneer range is the hallmark of the Rhino Rack, and we are excited to bring to market the portfolio of accessories that complement it over the next 12 months, along with other new product launches throughout 2024. With respect to Outdoor, sales for the quarter were down 9.4% over the prior year period. However, when zooming into the various selling channels, we began to see signs of stabilization, particularly in North American wholesale, which ticked up 2% over the prior comparable period.

Speaker 2

This was driven by increases at our national accounts, offset by continued challenges in certain key accounts, mainly Big Box Partners and the specialty channel. Our North American e commerce sales were up 3% in the period, offset by lower pro sales. Our European and international businesses were challenged in the quarter, driven by warmer weather trends to open the winter season. At the business unit level, we saw gains across our footwear and mountain products with slowness in ski and apparel. Our core climbing business was up 4% for the period, but it's important to note that we are seeing repurchasing trends in the Q1 of 2024 to fill shelves back to normalized stock levels.

Speaker 2

I am excited about our potential to build long term value in outdoor. Neil has brought on an excellent team that is energized to bring the Black Diamond brand forward. While we believe we have identified the necessary changes, it takes time for those adjustments to manifest themselves in terms of performance. We continue to stress simplification throughout the organization. 1 of the core tenants of prior versions of Black Diamond was a focus on fast innovation and speed to market.

Speaker 2

Neil and team have taken a balanced approach to product, building a plan to reduce SKUs nearly 30% while focusing on fewer, better products. As part of that process, we took a critical view of necessary products and categories and the associated inventory levels. You will see that we have taken an inventory write down of $4,200,000 in the quarter, most of which is associated with these actions. Mike will cover this in greater detail in a moment. In summary, while 2023 was a transition year for Clarus, we are excited to begin 2024 with a solid foundation in place, driven by continued strong momentum in Adventure and operational progress in outdoor.

Speaker 2

After completing the sale of our Precision Sports segment, we are now debt free with over $40,000,000 of cash on our balance sheet and the financial strength and flexibility to create sustainable value for shareholders. Our priorities remain firmly set on the stabilization of sales and margins, additional organizational reshaping and caustic reduction initiatives to drive profitable growth in 2024 and beyond. With that, thank you for being with us today, and I will turn the call over to Mike Nell.

Speaker 3

Thanks, Ward, and good afternoon, everyone. I'll start with our performance in the Q4. But before I dive into our reported results, I'd like to share a summary of our performance inclusive of both continuing and discontinuing operations. As Lauren mentioned, we announced the sale of Precision Sport on December 29, 2023 and completed and closed on the sale of the segment for approximately 175,000,000 dollars on February 29, 2024. Accordingly, under U.

Speaker 3

S. GAAP, the financial statements have been presented on continuing operations and discontinued operations presentation. The financials and results of the Precision Sports segment have been segregated and reported assets and liabilities held for sale on the December 31, 2023 balance sheet, and the income statement has been reported under discontinued operations for all periods presented in today's earnings release and in our Form 10 ks filed earlier today. In the 4th quarter, sales of Precision Support were $18,300,000 which exceeded our expectations compared to the guidance we gave when reporting our Q3 2023 results. Including Precision Sport, total 4th quarter sales were $94,800,000 This compares favorably to the $83,000,000 to $87,000,000 we guided for the Q4.

Speaker 3

For the full year sales, including the contributions of Precision Sports, we delivered sales of approximately $376,000,000 which again reflects outperformance versus our guidance range $364,000,000 to $368,000,000 of revenue. From an adjusted EBITDA perspective, Precision Support generated $26,800,000 for the full year 2023 on sales of nearly 90,000,000 dollars or 29.8 percent EBITDA margin and $4,900,000 of adjusted EBITDA in the 4th quarter or 26.7 percent on the 18 $300,000 of revenue. Beginning today and going forward, our U. S. GAAP results will be comprised of our Outdoor and Adventure segments and results we refer to as continuing operations.

Speaker 3

4th quarter sales from continuing operations were $76,500,000 compared to $73,800,000 in the prior year Q4, driven largely by the strength in our Adventure segment. The strength at Adventure was partially offset by softness in the European region at Outdoor, consistent with the softness we discussed during our last call. On a reported basis, sales were up 3.6%. On a constant currency basis, sales were up 3.8 percent. FX was not material in the Q4 as you can see.

Speaker 3

Our Adventure segment saw its best quarter of the year. Sales increased 43 percent to $26,400,000 or $26,600,000 on a constant currency basis compared to $18,500,000 in the year ago quarter. This increase reflects increased sales in the Australian market and the benefit of the Tread Outdoors acquisition announced during the Q4. Tred contributed approximately $1,700,000 of revenue in the 4th quarter. The Adventure business has started to benefit from various initiatives, including the Tread acquisition, new product development, new customers and a new global leadership team under the direction of Matt Hayward.

Speaker 3

New channels, new products and new customers will be critical as we grow adventure in 2024 And we are excited to introduce Matt Hayward at our Investor Day, as Lauren mentioned, on Monday, March 11, to share our vision for Adventure in more detail. Sales in the outdoor segment was $50,100,000 or 50,000,000 on a constant currency basis compared to $55,300,000 in the year ago quarter. The decline primarily reflected continued challenging market conditions in both North America and the European wholesale market, as well as the unseasonably warm winter weather. Notably, however, we are beginning to see the wholesale market stabilize both in North America and Europe. Our business simplification initiatives are beginning to take hold as we operate in the Q1 of 2024.

Speaker 3

This process and the benefit from our simplification journey will be ongoing throughout 2024. The good news is the North American wholesale market is stabilizing. However, our direct to consumer channels still are very highly promotional as the market continues to work through excess inventory levels. During the Q4, we made some adjustments to our retail strategy, which is part of our D2C business. As Lauren alluded to, we closed 4 retail locations.

Speaker 3

However, we also opened a new outlet location in Seattle, Washington area and are committed to open a flagship retail store in the Seattle area as well. The Seattle metro area has proven to be a highly attractive market based on strong E2Cecommerce sales based on the demographics we review. Moving to consolidated gross margins. In the 4th quarter, gross margin was 28.9% compared to 37.2% in the year ago quarter. The decrease in gross margin was primarily due to a $4,200,000 inventory reserve write off at the outdoor segment during the Q4.

Speaker 3

The bulk of this reserve resulted from our category review and product simplification process that will reduce SKUs from around 14,000 to under 10,000. Another material contributor to the reserve was the recently announced PFAS regulation change. PFAS is an evolving industry issue that we'll be dealing with throughout 2024. PFAS is a chemical used in many products to create the waterproof benefit found in many outdoor goods, including our apparel. Certain states in the USA have banned the sale of products containing PFAS beginning in 2025 and some large retailers would no longer accept or purchase any products of PFAS beginning this summer.

Speaker 3

We are actively managing the end of life of our products containing PFAS during 2024. But depending on our execution and the market reaction to these regulatory changes, we may have further exposure to PFAS inventory during 2024. This exposures both inventory on hand and commitments to buy inventory containing PFAS from our vendors. Other than the PFAS risk, we believe we have right sized and properly valued our inventory at Outdoor based on this Q4 action. Inventory ended the year at Outdoor of $64,800,000 Total inventory for continuing operations was $91,000,000 Gross margin at the Adventure segment improved to 38.1 percent from 31.7% in the year ago quarter.

Speaker 3

This increase was due to cost out initiatives to right size the business earlier in the year as well as lower freight costs. The adjusted gross margin in the 4th quarter was 29 0.0% compared to 37.2% in the year ago quarter related to inventory step up due to the Tread Outdoors acquisition. Selling, general and administrative expenses in the 4th quarter were $30,700,000 compared to $29,900,000 in the same year ago quarter. The increase was attributable to the outdoor segment with higher legal and marketing expenses compared to

Speaker 4

the prior year. Loss

Speaker 3

from continuing operations in the Q4 of 2023 was 7,200,000 dollars or a loss of $0.19 per diluted share compared to a net loss from continuing operations of $83,300,000 or 2.25 dollars per diluted share in the year ago quarter. Net loss in the 4th quarter included $1,500,000 of one off charges related to restructuring and transaction costs as well as the $4,200,000 inventory reserve. The net loss in the Q4 of 2022 included a non cash impairment charge of $92,300,000 in the Inventure segment. Adjusted loss from continuing operations was a net loss of $2,800,000 or $0.07 per diluted share compared to adjusted income from continuing operations of $4,400,000 or $0.11 per diluted share in the year ago quarter. Adjusted EBITDA in the 4th quarter was a negative $3,500,000 or an adjusted EBITDA margin of negative 4.5%.

Speaker 3

This compares to $3,600,000 or an adjusted EBITDA margin of 4.9% in the same year ago quarter. The decline in adjusted EBITDA was primarily driven by continuing challenging market conditions at Outdoor and an increase in the inventory reserves at Outdoor and higher legal and marketing expenses. By segment, adjusted EBITDA was negative $4,600,000 at outdoor primarily due to the inventory reserve of $4,200,000 in the 4th quarter. Adjusted EBITDA at Adventure for the 4th quarter was $3,900,000 or 14.8%. Let me shift now over to liquidity.

Speaker 3

At December 31, 2023, cash and cash equivalents were $11,300,000 compared $12,000,000 at December 31, 2022. Total debt on December 31, 2023 was $119,800,000 compared to $139,000,000 at the end of 2022. After the closing of the sale of Precision Sport last week, our total debt today is 0. The credit agreement was terminated and repaid in full at closing and cash of approximately $43,000,000 is on our balance sheet as of today. We expect to realize a gain on the sale of Precision Sports in the Q1 of 2024.

Speaker 3

The gain will be recognized through discontinued operations. The expected cash tax expense is only expected to be $2,000,000 to $3,000,000 allowing us to maintain most of the net cash realized from the sale of Precision Sport. Free cash flow defined as net cash provided by operating activities less capital expenditures for the Q4 of 2023 was $13,300,000 compared to 30 point $3,000,000 in the prior year quarter. These free cash flow results include both continuing and discontinued operating results. As a reminder, we have NOL carry forwards for U.

Speaker 3

S. Federal income tax purposes of approximately $7,700,000 December 31, 2023. The company expects to utilize all of the remaining NOLs in their entirety in 2024. Clarus utilized $103,000,000 of NOLs during the ownership period of Precision Sports from 2017 to 2023. Let me share a few additional thoughts regarding capital allocation adding to Warren's comments.

Speaker 3

Our near term capital allocation strategy will prioritize organic growth through reinvestment in our existing two businesses. Beyond organic growth, we will pay our quarterly dividend and selectively look at smaller bolt on M and A opportunities to add to our adventure business, just like we did in the Q4 with the purchase of Tread. Otherwise, throughout 2024, we will continue to focus on cash generation through our continued rightsizing of inventory and growth of our businesses with the intent of letting cash grow on our balance sheet as we work on growing and improving the profitability of our existing businesses. Before looking forward to our financial guidance, I would like to highlight that we continue to proceed in our lawsuit against HAP Trading LLC and Mr. Harsh A.

Speaker 3

Padilla. The parties conducted expert debt positions on February 29, March 1 March 6, 2024. At this time, there is no further discovery to be conducted. The parties must submit a joint letter to the court on March 13 stating, among other things, whether or not they plan to file a motion for summary judgment. Counsel for the parties are required to meet in person to discuss settlement within 14 days of the closing of Discovery.

Speaker 3

The parties are required to submit a joint pretrial order within 30 days of the closing of Discovery or if a summary judgment motion has been filed within 30 days of a decision on such motion. Included in our earnings for the year was approximately $1,400,000 of legal and related costs associated with this lawsuit. The company also intends to file similar complaints against Perilux Volatility Advisors, LP and Caption Management LLC. Moving on to our outlook for 2024. We expect 2024 sales to range between $270,000,000 to $280,000,000 and adjusted EBITDA from continuing operations of approximately $16,000,000 to $18,000,000 or an adjusted EBITDA margin of 6.2% at the midpoint of revenue and adjusted EBITDA.

Speaker 3

We expect capital expenditures to range between $4,000,000 $5,000,000 and free cash flow to range between $18,000,000 $20,000,000 for the full year 2024. 1st quarter sales are expected to be between $64,000,000 $66,000,000 and adjusted EBITDA is expected to be between $1,000,000 $2,000,000 Our outlook does not include any expense or ongoing litigation specifically relating to the HAP matter or further increases in PFAS related inventory reserves, but it does reflect the early results of our effort to achieve less complexity, better margins and a streamlined business as we grow our outdoor and adventure segment. As we look forward to 2024, I'd like to reinforce what Warren said about the monetization of Precision Sports segment. During our ownership of Precision Sports, the segment returned nearly $270,000,000 of cash to Clarus. We believe this was a very successful outcome that is emblematic of the value creation potential of our businesses and the teams who lead them.

Speaker 3

We're excited about our new positioning as a per play outdoor business and believe we have a strategy in place today to deliver growth and profitability in 2024 and beyond. At this point, operator, we're ready to take questions.

Operator

Thank Our first question comes from Laurent Vasilescu with BNP Paribas. You may proceed.

Speaker 5

Good afternoon. Thank you very much for taking my question. I wanted to ask about the Investor Day for next week. I don't know if you can share any highlights ahead of the meeting, but should we anticipate 3 to 5 year targets next week?

Speaker 2

Yes, that's a good question. So we'll be going through all of the segments next week and we'll be providing you with 3 year outlooks for our businesses for each one of them.

Speaker 5

Super helpful. And then on the tread business, I don't think you quantified the size of it, whether it was in the announcement or in today's press release. Just so that we can understand the organic revenues, how much did it contribute in the Q4? I think it's de minimis, but more importantly, how do we think about Tread in the context of FY 'twenty four revenues of $270,000,000 to 280,000,000 dollars

Speaker 2

I think you'll hear more about that from Matt Hayward next week. We're not going to break out specifically the various brands, but he'll take you through the automotive as a single segment.

Speaker 5

Okay, fair enough.

Speaker 2

And then And he could speak to and he'll be able to speak to kind of the margin complexion of the various businesses and how it all rolls up.

Speaker 5

Okay, fair enough. And then maybe just on the guidance for the midpoint of EBITDA margin adjusted EBITDA margins of 6.2. I think that's roughly 600 basis point improvement over the last year. Is that driven by gross margin or SG and A efficiencies? And then second part of this multipart question is this, the PFAS, the magnitude of PFAS, I recall, tell me if I'm wrong here, but I thought apparel was like 15% of outdoor.

Speaker 5

So it seems like it's a small business, but if you could clarify just how big the apparel business as we think about this PFAS situation?

Speaker 3

Sure, sure, Laurent. We'll kind of work backwards. You're right, apparel is about 15% of our business. It's historically been about $30,000,000 to $40,000,000 of outdoor. We as I mentioned, the risk here in 2024 is both the inventory we have on hand and commitments we have to purchase inventory.

Speaker 3

It really comes down to our execution of how well we execute here selling and how well the market absorbs what essentially is the waterproof product.

Speaker 2

Yes. Just before I just want to say just before we talk to the first part of your question. So everybody has this PFAS issue right now. The technology for PFAS is a very good technology, but it's not I mean, these are superb products. And in some cases, in many cases, actually the alternative approaches for waterproofing aren't as good.

Speaker 2

So we believe at this point, we believe that we will be able to move our inventory that we have that's key fast related. But given the fact that everybody's got the same in the market or has the same issue, there could be a supply of it. So we are being cautious about it. I mean, it's it would be the numbers aren't large, but it's a minor risk. We do think actually prospectively in a year's time, these products will be desired by consumers just because of how well they perform.

Speaker 2

Mike, do you want to ask it in the first case?

Speaker 3

Yes. And with regards to kind of guidance next year, most all of that improvement that you referenced Laurent is all at the gross profit level, right? It's as you recall during 2023, there was so much promotional pricing in place, margins were hit pretty significantly as a result of the promotional pricing. We see a recovery, both from a price stability in 2024 and from some margin enhancements at the gross profit level that both the outdoor and more importantly the adventure business are focused on.

Speaker 2

Very helpful.

Speaker 5

Thank you very much for taking my questions.

Speaker 4

Sure. Thank you. One moment for questions.

Operator

Our next question comes from Matt Koranda with Roth and Kilometers. You may proceed.

Speaker 6

Hey, guys. I guess a few for me. I wanted to focus on the 2024 outlook that you provided. For the roughly $275,000,000 in revenue, are you willing to just kind of roughly split out the assumptions between Outdoor and Adventure? It just looks like Adventure has been growing nicely even if you strip out Tread, it looks like some really healthy organic growth in the Q4.

Speaker 6

I would assume we can probably maybe not pull forward that rate of growth, but we can probably pull forward some growth, which would suggest that outdoor is declining. So why the decline after kind of a down year in 'twenty three? Are we shedding some unprofitable revenue? That sounded like that was what you're alluding to. So maybe just the split there and just a little bit more around the puts and takes of growth at Outdoor and Adventure?

Speaker 3

Matt, thanks. Good question. You pretty much nailed that though. Yes, I expect, Adventure to grow. We're not going to give specific guidance today by segment.

Speaker 3

You'll see on Monday, we'll talk a little bit more in detail about where we see the business is going. But adventure will grow, it should grow and outdoor will actually shrink, but that's a direct result of some of the simplification and the SKU reduction and leaning into our best products. And it's a journey that we're going through here in 'twenty four to kind of turn the outdoor business around. But that's your view and your assumptions are spot.

Speaker 2

Yes, Matt. Neil will take you through from start to finish what he found, how we're processing that and how the what the future looks like. But one of the things I had him do was really to look at SKU rationalization, and you'll see that in quite a bit of detail. And by virtue of that, we will shrink the revenues somewhat, but margins will improve quite considerably. And I think when he goes through the plan and you look at the EBITDA margin progression over the next couple of years, I think it will all come into focus.

Speaker 2

Okay. That's helpful.

Speaker 6

And then just I guess the bigger, broader question that I know we're going to get here is basically the guidance has revenue down at the midpoint year over year, but EBITDA up pretty healthily. And I guess that implies we're sort of doing away with some unprofitable business and or removing structural costs. I know you mentioned most of the improvements going to come from gross margin, but maybe just help us square all of that. And are there I guess, are there corporate costs that can come out now that Precision is no longer part of the portfolio here?

Speaker 2

Yes. So we'll get into all of that on Monday to provide all of the detail that you're going to need to put together the accurate models. The corporate overheads will be coming down during the course of the year. That's our expectation as we as some of the things that we've had in place are we're able to reset. The other thing that, as you know, we've given some guidance to what our legal expense has been for the 16 trading issue, and we have baked into our guidance for this year the appropriate amount of legal expense to continue to pursue the not just the 16 issue against HAP Trading, but also as Mike said, we will be filing complaints against both Parallax and Caption.

Speaker 2

So that's built into the numbers for now. Obviously, what's not built into the numbers is obviously any interest income that we'll get on our cash balances, which is now earning at a 5% plus rate.

Speaker 6

Okay. That makes sense. And then did I guess the PFAS commentary, can we just nail down, and maybe I missed it, but did you guys quantify the exposure there? Obviously, there's some exposure to inventory, which sounds minimal, but then the more interesting or maybe the thing I'm more interested in understanding is the vendor question. You mentioned maybe there's some commitments for minimum purchases and stuff like that.

Speaker 6

Maybe just any way to think about that?

Speaker 2

I think go ahead, Mike.

Speaker 3

I was going to say we didn't quantify it. It all depends. It could be $3,000,000 to $4,000,000 or $5,000,000 but it depends how we execute, Matt. That's why we're bringing it up, right? How the market absorbs this product.

Speaker 3

But as long as we work through this, as Warren alluded to, it's the waterproof product. It's

Speaker 2

all great. No, all great product. It's all great product. We're just highlighting it because it is a it is conceivably a risk to our numbers. We don't think it's a at this point, we don't think it's a material risk, but we're just highlighting it again because every other company in the world also has a PFAS issue.

Speaker 2

And so depending upon how that all processes through, maybe a little more challenging for us to sell the product. But again, we believe that product people may buy this now because they won't be able to get it in the future and it is better, the waterproofing with PFAS is better than the other technologies that are out there that we'd have to use.

Speaker 3

And Matt, the charge that we took, we did take a charge in the Q4 related to PFAS and that was for commitments to take product that we said, no, we don't want any more of this. So we didn't want to compound our problem. So that's key to understand, I think is what you're trying to get to. The inventory on hand or the inventory being built already is where the exposure is. And as long as we execute and move that inventory through our channels, as Warren said, we don't think it will be material.

Speaker 3

But in the same breath, if for some reason we're not able to move that inventory, we wanted to be upfront with the situation because we do believe we've adjusted our inventory to the appropriate level. But and if we do have an issue in the 2024, we didn't want to ask you asking questions or the street asking questions, but hey, I thought you wrote down your inventory to the right levels at the end of last year. So this is the one thing that's out there that could potentially be a risk. But as we said, we think it's very good inventory, it's very good product that should move. But and we did take a charge in the Q4 for the stuff that we were committed to buy that we haven't been bought yet.

Speaker 3

And that's we put a line in the sand from that perspective. So the risk is just inventory on hand and inventory that's being built that we have to take still.

Speaker 6

Okay. No, that's clear. Just timing on potential risk there. It sounds like you got to sell it into retail by summer roughly?

Speaker 3

I would think so by Q3,

Speaker 7

max. Okay.

Speaker 2

Max, most of it will go through the Q2.

Speaker 6

Okay, great guys. I'll take the rest offline. Thank you.

Speaker 4

Thank you. One moment for questions.

Operator

Our next question comes from Ana Glesion with B. Riley. You may proceed.

Speaker 8

Hello, Ana. Hi. Hey, good afternoon. Thanks for taking my questions. I guess, encouraging to hear that you're starting to see some stabilization at wholesale in North America.

Speaker 8

I guess, would you characterize our inventory levels now as having been mostly appropriately normalized? And to what extent is the 2024 okay. And so I guess when would you expect that to normalize and what's being assumed in the 2024 guide?

Speaker 2

Well, so I'll answer that. It's normalizing. It's normalizing. So we're working on things are getting better, but we don't believe that our retail partners are fully stocked at a normalized level yet.

Speaker 8

Got it. So I guess when would you expect sell in and sell through to become more balanced?

Speaker 3

We're actually seeing the sell in improve on a year over year basis, week over week basis that here in the Q1 compared to Q1 last year. And as Warren just mentioned, I think that's starting to take hold here in the first quarter, first half of the year. And hopefully, that doesn't normalize in

Speaker 2

the back half. Yes, we've you'll hear from Neil and I don't want to steal his thunder about the changes that he's made. But what I can say is that our people are on it now and we are actively pointing out to our retail partners where they're short and we're pushing them to fill out the assortments and their shelf. And that seems to be working. But they are everybody is cautious right now.

Speaker 2

And so I think that's part of it. But our view is that we're looking forward to a great summer and we think that the kind of distillate will accelerate.

Speaker 3

And

Speaker 2

we have the right inventory to achieve those goals. I think you'll hear about that.

Speaker 8

Got it. And turning to some of the commentary around promotionality and DTC specifically, is that a function of mix? I know that skews more toward apparel and footwear than the wholesale exposure? Or is that a function of closing some of those retail locations and just clearing that inventory or something else?

Speaker 3

It's more

Speaker 2

Mike, did we lose you?

Speaker 3

Did you hear my answer? I'm sorry.

Speaker 7

No, no. We lost you, Mike. Can you just I'm

Speaker 3

sorry. I said it's the former Anna. It's the apparel, the promotional pricing in the marketplace for apparel right now all throughout Q3, Q4 was extremely strong and that's really the main driver.

Speaker 8

Got it. Looking forward to Monday. Thanks guys.

Speaker 1

Thanks.

Speaker 4

Thank you. One moment for questions.

Operator

Our next question comes from Mark Smith with Lake Street. You may proceed.

Speaker 2

Hi, guys. First question, Mark.

Speaker 7

Hi, Mark. I just want to confirm. The EBITDA guidance that you guys gave for 24 here, that is stripping out and excluding all of your one time items, including the legal expense expected in some of these lawsuits. Is that correct?

Speaker 3

The EBITDA guidance the $16,000,000 to $18,000,000 full year guidance does not include significant costs associated with the legal costs. That's what I said in my statements in my prepared remarks.

Speaker 7

Okay. And then it sounds like on Monday, you guys will walk through a little bit some of the kind of corporate overhead as well as kind of total SG and A outlook. But does it seem like in the near term here, this kind of $30,000,000 range on total SG and A seems like about the right range here in the near term?

Speaker 3

Yes. So that's a little high, but so just it's a little less than that, but you're in the ballpark.

Speaker 2

Okay.

Speaker 7

And then the last question for me was just, if you can call out, I haven't seen it yet or maybe I missed it, impact from FX and currency here in the quarter and then kind of your outlook, if you will, for 2024?

Speaker 3

Well, the comments I made in the prepared remarks that FX was completely immaterial during the quarter, during the Q4. Our forecast for this year is based on exchange rates here from a few weeks ago. So not significantly different than what kind of the business has been functioning at throughout the 3rd Q4 of this past year.

Speaker 7

Excellent. Thank you.

Operator

Thank you. I would now like to turn the call back over to Mike Yates for any closing remarks.

Speaker 3

Thank you. Thank you for your interest in Clarus and we appreciate everyone's questions and we look forward to spending more time with you next week in New York City for our Investor Day, where both Warren and I are excited to have Matt Hayward speak in-depth about the Venture business and Neil Fisk to spend equal time walking through his plans and vision for the outdoor business. So we thank you for your continued interest in Clarus and look forward to speaking and seeing many of you next week in New York.

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Earnings Conference Call
Clarus Q4 2023
00:00 / 00:00