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Operator
Good afternoon, everyone, and thank you for participating in today's conference call to discuss Claris Corporation's financial results for the first quarter ended March 31st, 2024. Joining us today are Claris Corporation's Executive Chairman, Warren Kanders, CFO Mike Yates, President Black Diamond Equipment, Neil Fisk, Management Director of Claris' Adventure Segment, Matthew Hayward, 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. Matt, please go ahead.
Matt
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 condition of Claire's 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, followed by the SEC. I'd like to remind everyone this call will be available for replay starting at 7 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 clariscorp.com. Now I'd like to turn the call over to Claris' Executive Chairman, Warren Kanders.
Warren Kanders
Good afternoon, and thank you all for joining Claris' earnings call to review our results for the first quarter. I am pleased to be joined today by not only our Chief Financial Officer, Mike Yates, but also Neil Fisk and Matt Hayward, who lead our outdoor and adventure segments. At our investor day this past March, we discussed wanting to deliver a comprehensive segment-level view so that we are excited to have Neil and Matt deliver a comprehensive on board for earnings calls going forward. Last year, we took crucial steps to realign our overall platform and individual brands, and a key component of this strategy was hiring highly experienced and dedicated executives to guide the outdoor and adventure businesses. Since their appointments last year, both have made considerable progress implementing strategic plans to streamline business processes and capitalize on clear long-term growth opportunities. Today, I am confident that we have the right team in place, and we continue to be encouraged by the steps Neil and Matt are taking to advance our rebased businesses and turnaround. At our investor day, we outlined a strategic roadmap highlighting anticipated multi-year growth and margin expansion targets for both segments that we believe Claris can achieve. The first quarter of 2024 represented the initial phase of these plans. While Neil and Matt will provide more specific comments, we are encouraged by the incremental progress demonstrated in the first quarter. In outdoor, we continue to seek to prioritize simplification and right-sizing, which we believe is evidenced by a reduction in total outdoor inventory of 15% versus last year. At Adventure, we saw significant year over year sales growth driven by the launch of compelling new products and expansion in our OEM channel. Based on the results to date, we are pleased to reaffirm our full year guidance, which Mike will detail later in the presentation. There is still much more work to be done, but we believe we have laid the foundation to drive increased profitability and unlock new growth opportunities in 2024 and beyond. With that, thank you. again, for being with us today. And I will turn the call over to Mike.
Mike
Thank you, Warren. Good afternoon, everyone. I want to remind people or let people know who are on the call that we've actually provided slides to accompany our presentation. They're available if you're on the webcast, and they're also available on our website. That's something new, so I wanted to make sure all the participants were aware of the addition that we've made to our call today. On today's call, I'll provide a general Q1 update before turning it over to Matt and Neil to review the segment performance. I'll conclude with a more detailed summary of our Q1 financial results, followed by a Q&A session. Beginning on slide four, we entered the year focused on initiating our strategic plan for CLARIS' next chapter as a pure play, ESG-friendly outdoor business. As we have discussed previously, We completed the sale of our Precision Sports segment in February of 2024, which represented a highly successful outcome for Claris. Today, we have a more streamlined company focused on two consumer segments with broad appeal and attractive long-term tailwinds, outdoor and adventure. In outdoor, our focus is on simplification and solidifying the core. Although the macroeconomic backdrop remained challenging during the first quarter. The stabilization we mentioned during our Q4 and year-end 2023 earnings call was confirmed as our North American wholesale market grew year over year. We believe that the work the sales team put in during the second half of 2023 is paying dividends now as we sought to listen to our cathedral accounts and deliver the right product for them on time. From an operations standpoint, we believe that our inventory reduction and SKU rationalization initiatives are on track. In Adventure, where our core objective is to invest to scale, we saw a continuation of the strong sales growth momentum we established in the back half of 2023. We've made strides both increasing brand awareness through global marketing programs and strengthening our Adventure team to ensure we're best positioned to capitalize on strong market tailwinds. Complementing this progress and following the sale of Precision Sports segment, Claris has a debt-free balance sheet that we believe provides us with significant optionality to allocate capital for the benefit of shareholders. After retiring all of Claris's outstanding debt with the proceeds from the sale, we had over $47 million of cash on hand at the end of the first quarter. Importantly, this provides the flexibility in how we seek to pursue our long-term value creation objectives and growth initiatives. In terms of priorities, we are committed to reinvesting in our existing two segments to drive organic growth. We expect to continue to pay our quarterly dividend and also selectively look at smaller bolt-on M&A opportunities that may enhance our venture business in the United States and new geographies. Overall, our focus is on cash generation through the continued right-sizing of inventory and business expansion with the intent of accumulating cash on our balance sheet as we execute our strategic growth plans. Before I turn the call over to Matt, I'll briefly highlight a couple of key figures on slide five. Claris' first quarter revenue of 69.3 million exceeded our guidance of 64 to 66 million. We also generated adjusted EBITDA of $2 million, which beat our expectations of $1 to $2 million for the quarter. Overall, we are pleased with our execution in Q1 and with the building blocks in place, and we are ready to continue to meet Claris' long-term financial targets. I'll now turn the call over to Matt Hayward, Managing Director of Claris' Adventure segment. Matt?
Matt Hayward
Thanks, Mike, and good morning, everyone from Australia. I'll begin my remarks on slide six. I'm very excited to be part of these calls now to address our adventure segment directly. I'll try to tie back to many of the things we touched on during our investor day in order to track our progress financially and strategically. 2023 marked a recess and stabilization year for the adventure segment, and we are pleased to have kicked off 2024 with significant momentum. The first quarter represented the initial phase of our new three-year strategic plan, and we took important steps launching compelling new products and continuing to expand beyond the home market in Australia. Q1 sales increased 27% year-over-year, supported by two primary drivers. The first, in wholesale, we saw strong key account performance across Australia, New Zealand, and combined with the onboarding of new key accounts in the U.S. market. This has been supported by strong product portfolio introductions across all of our key categories, inclusive of Trace, where we have our category-leading Pioneer 6 platform, our new crossbar system with the RX100 and RX200 introductions, and new accessory ranges with rooftop tents and storage boxes. Second, we continue to experience strong demand in our OEM channel, a vital channel for us that we believe will drive volume while enhancing our brand in new markets and vehicle models. Following the first deliveries to new OEM customers in 2023 for a product launch, demand has continued to remain robust, which has helped accelerate sales growth. At the same time, our first quarter margins were affected by less favorable channel mix, particularly given the outperformance of OEM as it continues to grow. Q1 gross margins in Adventure were 38.4% as compared to 41% last year. We also saw onboarding of new key account programs and locations which do bring in some lower margins in order to be good partners in our dealer base. We continue to take immediate and intermediate steps expected to improve overall profitability and are committed to seeking to drive better SKU productivity, inventory management, and organizational efficiency. Driving performance outside of region A and Z is critical. as is the ramp up of opportunities across both Maxtrax and Tread as we expand brand and category reach across 2024. In terms of market conditions, more generally, positive fundamentals continue to be supported by strong auto sales. VFAX figures, the standard for vehicle deliveries in Australia, showed all-time record first quarter results for the auto sector. with 300,000 sales a year-over-year increase of 13%. Close to the home in the U.S., new vehicle sales are expected to have risen 5.6% year-over-year to 3.8 million units volume in the first quarter of 2024 as per Cox Automotive. Diving into select strategic initiatives, I'd like to highlight some of the key investments we're making in the U.S. markets. During the first quarter, we identified several key positions that we believe will enhance our ability to grow. With our focus on delivering best-in-class product globally, we've recently added a new fit technician and national marketing leader that will sync up with our shared services in Australia to deliver best-in-class content tailored specifically for North America. They will soon be joined by local IT leadership to not only help drive greater DTC transformation, but also to support enhanced integration with our key partners locally. Linked to the above, but called out as a key imperative for the adventure segment, is our strategy to grow our OEM opportunities on a global level outside of ANZ. To this end, we are very excited to be adding a new global head of OEM sales and development in the US based in our Denver office in Q2. In terms of brand investment, we've stepped up investment and support across both trade marketing, in parallel with digital investment. Within trade support, we've been very excited to launch our first truly global brand and product catalog for Reiner Act, delivered in multiple languages for the very first time for partners across Japan, China, Germany, and also adaptations with vehicle specifics for US and Canada. This has been supported with trade show investments across Japan, France, and we will continue across markets in 2024. We'll also be introducing a brand new platform to support the adventure portfolio as a whole across Overland, Expose and SEMA later on in 2024. Developments to showcase our ramped up new product development delivered comprehensive campaigns for our world-famous and industry-leading Pioneer 6 platform. And our new focus on showcasing an adventure lifestyle supported by an amazing array of accessories across all brands in our portfolio, including Maxtrax and Tread in these campaigns. Our focus is clearly aimed at the support of our amazing partners globally, while we're driving greater visibility with investment into digital platforms and media. Lastly, new game-changing product arrived and is on the horizon. As we mentioned during our last earning calls, the new Pioneer 6 platform in Australia marked the first major new product launch in the last 15 months. We've begun to bring to market a portfolio of accessories that complement it. We also bought the market the first Maxtrax board innovation for nearly a decade through the introduction of a light board. We are pleased with the progress, launching four new products in the US, as well as new accessories globally, including rooftop tents during the first quarter. We believe that our adventure segment is well positioned to capitalize on strong industry dynamics and a large and growing addressable market across multiple verticals. We've made significant investment in professionalizing the team, process reengineering, and product commercialization to ensure we continue to gain market share. Moving forward, we are committed to seeking to establish a best-in-class product ecosystem while remaining intensely focused on enhanced product margins as we scale. At the end of the day, when we engage with our wider community and empower them with the opportunity to make space for adventure in whatever shape and activity that entails with our key partners globally across all key markets, We will win together. I'd like to now turn the call over to Neil Fisk, president of Black Diamond. Neil, over to you.
Neil
Thanks, Matt. Turning to slide seven, overall results in the outdoor segment were in line with our expectations for the first quarter of 2024, and we are pleased with the progress we're seeing. At our investor day in March, I said that 2023 was a reset year for the industry and for Black Diamond. and that 2024 would be about simplifying the business to solidify our core, improve profitability, and lay the foundation for long-term sustainable growth. This quarter, we are starting to see the early results from the hard work we put in over the last year. Importantly, our biggest region of North America returned to growth with the wholesale channel growing 10% year over year. This is one of the first areas of focus in our turnaround plan as we completely rebuilt our sales leadership team. As Warren indicated earlier, in addition to the sales results, we're hearing good feedback from our retail partners that our service levels have improved, that we are sharper in our brand positioning and execution, and that we are, for the most part, outperforming the market in our core categories as we seek to expand our product leadership. I'm also pleased with our progress in strengthening our relationships in the specialty channel, which is a top priority for us strategically. We are continuing to rationalize our product lines under that direction of fewer, bigger, better. This quarter, for example, we made the decision to exit our distribution of ski bindings, a category which has low margins, high skew complexity, low term, and high cost to serve. We expect to see further category and skew reduction over the course of the year as we focus on our core sports and build on positions of strength. As we simplified the business, we've streamlined the organization and taken out costs. Operating costs are down 8.3% year over year, and we expect that they will continue to fall as a percentage of sale over the course of 2024. We closed five underperforming stores versus the same period last year. We've also made major strides in both the quality and levels of our inventory. Overall inventory is down 15% versus last year. But equally important, we've moved more of this inventory value into the A styles, which drive 80% of our sales, 59% this year versus 45% last year. And the trend is still improving. Fill rates are up. Markdown exposure is down. We've done a lot of work to bring apparel inventories in line with a 38% reduction versus a year ago. Geographically, the regions are in different stages of recovery. We're pleased to see the turnaround in our largest region of North America. However, the Europe and independent global distributor markets still face tough market conditions. The EU was down 17% in wholesale, which was better than our expectations. The smaller D2C segment in EU was up 33%. EU represents 34% of our revenues in Q1. IGD is a different story altogether. Here we have an added layer of distribution that is still overstocked from the pandemic boom and will likely take all of 2024 to get back in line. For the quarter, IGD was down 44%, and we expect the year to be down 25% to 30% as inventories rebalance across the network. IGD represents 10% of our revenue in Q1. Overall gross margins for outdoor were flat year over year. While we're still clearing through and right-sizing inventory, we believe we're less promotional than the overall market in North America and Europe. We have, however, begun to build a reserve to deal with any PFAS-related inventory that may be more difficult for us to move as a result of new regulations taking effect at the end of this year. By fall of 2025, all of our apparel and packs will be PFAS-free, but there will likely be some residual PFAS inventory to clear in the first half of next year. In summary, we're pleased with our progress and confident in our strategy, knowing there's still much more to do and to demonstrate. I'll now turn the call back over to Mike.
Mike
Thank you, Neil. I'm on slide eight, and I'll begin with a summary of our financial performance in the first quarter. As a reminder, And as we've noted previously, given the sales precision sports segment for approximately $175 million, which was completed and closed on February 29, 2024, during the first quarter, our U.S. GAAP results are comprised of our outdoor and adventure segments, and the results are referred to as continuing operations. First quarter sales were $69.3 million compared to $70.3 million in the prior year first quarter. driven largely by the softness in the European wholesale market and IGD market that Neil just discussed at Outdoor. Partially offset by strong adventure segment sales growth. On a constant currency basis, sales were down a half of 1%. FX was not material in the first quarter. Moving to consolidated gross margin, in the first quarter, gross margin was 35.9% compared to 36.3% in the year-ago quarters. As you heard, the decrease was primarily attributable to promotional pricing at the outdoor segment, the increase in PFAS-related inventory reserves, as well as unfavorable channel mix in the adventure segment. I'd like to highlight that adjusted gross margin of 36.9% in the first quarter improved 60 basis points versus Q1 of last year. Adjusted gross margin is adjusted for the PFAS reserve that Neil just mentioned. We reserved $729,000 in the first quarter for this exposure. Selling general and administrative expenses in the first quarter were $28.2 million compared to $29.4 million in the same year-ago quarter. The decrease was attributable to success reducing costs at outdoor, as well as lower intangible amortization and lower stock compensation expenses. Higher investments in marketing initiatives in the venture segment partially offset the overall decrease. The loss from continuing operations in the first quarter of 2024 was 6.5 million or 17 cents per diluted share compared to a loss from continuing operations of 2 million or 5 cents per diluted share in the year-ago quarter. Loss from continuing operations in the first quarter included $3 million of charges relating to the legal costs and regulatory matter expenses and $700,000 of PFAS inventory reserves. Adjusted loss from continuing operations was $0.1 million or zero cents per diluted share. This compares to adjusted income from continuing operations of $400,000 or one cent per diluted share in the year-ago quarter. Adjusted EBITDA in the first quarter was $2 million, or an adjusted EBITDA margin of 2.9% compared to $1.1 million, or an adjusted EBITDA margin of 1.6% in the same year-ago quarter. Our adjusted EBITDA is adjusted for restructuring charges, transaction costs, stock compensation expense, and this quarter we began adjusting for the PFAS inventory reserve. Additionally, beginning in the first quarter, we adjusted for legal costs associated with the Section 16 litigation and the Consumer Product Safety Commission matter known as the CPC matter. These legal costs were $502,000 in the first quarter. Finally, also included in the separate line on our P&L legal costs and regulatory matters was a $2.5 million estimate of our liability for the matter outstanding with the CPSC which we recorded as a liability in the first quarter. We have adjusted our EBITDA for this estimated liability as well. After consideration of these adjustments, the year-over-year improvement in adjusted EBITDA reflects the early results of our efforts to achieve less complexity and focus on the highest margin, highest return opportunities, particularly at the outdoor segment. First quarter adjusted EBITDA by segment was $2.9 million at outdoor and $1.9 million at adventure. Adjusted corporate cost was $2.8 million in the first quarter. We've provided a reconciliation of these adjusted EBITDA numbers by segment and the corporate cost at the back of the presentation included in today's materials. Next, let me shift to liquidity. At March 31st, 2024, cash equivalents were $47.5 million compared to $11.3 million at December 31, 2023. Total debt at March 31, 2024 was $100,000 compared to $119.8 million at the end of 2023. Our reduced debt and substantially improved cash position reflects the closing on the Precision Sports sale in February and the termination and repayment in full of our credit agreement. During the first quarter, we realized a gain on the sale of Precision Sports of $40.6 million, which was recognized through discontinued operations on our statement of income. Consolidated cash tax expense for the full year is expected to be $2 million, which will allow 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 first quarter was an outflow of $18.3 million compared to positive free cash flow of $1.7 million in the prior year quarter. Free cash flow was significantly lower because of the significant reduction in accounts payable during the first two months of the quarter. As a reminder, we have net operating loss carry-forwards 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 the future years. Before turning to our guidance, I would like to highlight that we continue to proceed in our lawsuit against Half Trading LLC and Mr. Harsh A. Padilla. Both fact discovery and expert discovery have been concluded. The court set the following schedule for the HAP summary judgment motion and challenged to our expert witnesses. Motion papers to be filed by May 9th of 2024, opposition papers by July 9th, 2024, and reply papers by August 9th of 2024. If this matter goes to trial, we would expect the trial to commence in the fourth quarter of 2024 or sometime in 2025. Moving on to our outlook for 2024. I'm on slide 9. We have reaffirmed our guidance and continue to expect sales to range between $270 million and $280 million and adjusted EBITDA from continuing operations of approximately $16 to $18 million or an adjusted EBITDA margin of 6.2% at the midpoint of revenue and adjusted EBITDA. We continue to expect capital expenditures to range between $4 and $5 million and free cash flow to range between $18 and $20 million for the full year 2024. Consistent with our historical seasonal pattern, the second quarter decelerates compared to the first quarter. Therefore, second quarter sales are expected to be between $58 and $62 million and adjusted EBITDA is expected to be between $0 and a half a million dollars. I want to reiterate that our outlook does not include any expense for ongoing litigation specifically relating to the Section 16 matters, the CPSC matter, or further increases in PFAS-related inventory reserves. As we look forward to the remainder of 2024, we are pleased with the incremental progress we are making in both outdoor and adventure segments, and we believe the foundation is in place for profitable growth ahead. While hurdles remain, We are confident in the exceptional team we now have in place and our new positioning as a pure play outdoor company. At this point in the call, operator, we are ready to take questions from the participants.
Operator
Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. One moment. And our first question comes from Lauren Vasilescu of BNP. Your line is open.
Lauren Vasilescu
Good afternoon. Thank you very much for taking my question, as well as thank you for a detailed presentation this afternoon, as well as the investor did a couple weeks ago.
Mike
You're very welcome, Laurent. Good to hear your voice. How are you?
Lauren Vasilescu
Yeah, it was good. It was very detailed, and I appreciate having the team on the call today. I wanted to ask Mike about the guidance for revenues starting off. The midpoint for 2Q would suggest mid-single-digit growth, which is great. But the guidance on the back half would suggest that 2H revenues are down high single digits by my rough math. We can just kind of walk through what's happening there. Is that a level of conservatism, or is there something that we should consider separate from that?
Mike
Well, it's a little bit of both, right? I mean, last year we did about $59 million in Q2, right? So we're kind of right at the midpoint. We're up 62. The back half, if we kind of hit that, that would imply the back half would be about $145 to $150 million of revenue. So call that $75 million a quarter in Q3 and Q4. Last year, I think we did about $83 million in Q3 and $76 million. So it's slightly down. I think it's a little bit of You know, as we right-size the business, we may see a little slower revenue. But I think, you know, I hope there's some conservatism, right? We've set a budget and, you know, the plan is back and loaded, consistent with our business, right? LaRon, you know our Black Diamond outdoor business is really a third and fourth quarter winter business, fall winter business. And same with our adventure business. The big season is in the summer in the southern hemisphere. Unfortunately, or understandably, the summer in the southern hemisphere is Q3 and Q4. So we do expect to see our business return to some profitability and some growth in the back half. But at this point, that's kind of how it's put together. I kind of think of it as flat growth. Hopefully it'll be flat on a year-over-year basis, but that's where the profit will come from in the back half as well.
Lauren Vasilescu
Very helpful. Thank you very much. And then my second question is around the EBITDA margin of 6.2% for the full year. If I remember correctly from 90 days ago, that's largely going to come from gross margins. So I wanted to ask about gross margins. I think they were up 60 bits on an adjusted basis. How much was promotional pricing ahead when in this quarter? And how do we think about the gross margin evolution, particularly in Q2 and then for the balance of the year?
Mike
Gross margin should be a little better in Q2, but not a whole lot. I mean, maybe 37%. It should be right kind of around where we're at, 36.9, 37, 37.2. I mean, it's probably in that range. For promotional pricing, there's still some of that going on for sure. As Neil highlighted in his comments, you know, the market is still requiring promotional pricing, but we don't think we're participating at the same level the market is. But that doesn't mean we're not promotional pricing. To answer your question specifically, I think there's 30 or 40 bits of pressure from promotional pricing, you know, is our best estimate in our margins.
Lauren Vasilescu
Mike, that's super helpful. Last question, if I may. Any comments around inventory levels at your key retail partners on the U.S. side within the outdoor category? I know it's been challenging for a lot of key retailers, but just curious to know what's your sense about their inventories? Are we finally at the destock level and potentially at the restock inflection here?
Mike
Well, I think the short answer is yes. but there are categories where some of our partners, categories of inventory that they're still overstocked. But as we mentioned, we saw a 10% increase in our North American wholesale, which is a good sign that they are restocking, especially in the categories that we're a market leader in. So that's been specifically like Klein. Neil's comments also highlighted though that the channel is over in Asia, which was only 10% of revenue, they're still struggling with too much inventory. But fortunately, that's only 10% of our revenue. Okay, very helpful. Thank you very much. Thanks, Laura.
Operator
Thank you.
Neil
One moment for our next question. And our next question comes from Matt Caranda of Roth MKM.
Operator
Your line is open.
Mike
Hey guys, good afternoon. Just wanted to tag off the prior question for sort of the consolidated outlook and just wanted to understand or make sure you put a finer point on. For the second half with the implied growth rate dropping off, is that largely because we have tougher comps in Adventure or is that because we just still sort of lack an inflection point in demand in outdoor? Maybe if you could just take it segment by segment and just kind of give us the rationale there?
Mike
Yeah, it's a little bit of both. I think I mentioned there's probably some conservatism. I think internally we roll up to a little greater than the $150 million that I've kind of highlighted that the back half would be, but I don't want to commit to that until we get a little further in the year. As I like to say, one quarter doesn't make a year, so let us execute it over the next day and we get some, our next 90 days and we'll get some better visibility in the back half. And, you know, but we are confident in our pre-season orders for the fall winter, you know, at the outdoor space and Adventure, you know, is continuing to, did have some real nice growth in the fourth quarter that will be challenging to comp again. So that's a little bit of that as well. But, you know, we have, you know, We've posted 43% growth last quarter, 27% growth this quarter. So, you know, we're starting to see the, you know, the efforts from the work that the team's put in place. But, you know, like I said, we've got to get a little farther into the year to get confident about the back half.
Mike
Okay, fair enough. And I've got one question for each of the segment leaders. So maybe just outdoor and Neil first. The positive 10% in North America wholesale is definitely an encouraging data point. Just wondering if you could maybe unpack for us the categories that are working, where you're seeing some growth, the types of retailers that are participating in that growth, and then where is there still room for improvement in North America?
Neil
Yeah, thanks, Matt. So the good news is I think the – places that we're seeing the growth are in our core categories where we've really put the focus on building on our positions of strength, where we're number one, two, or three in those categories, things like tracking poles, lighting, a number of our climb categories. And I think that's a combination of marketing programs that we've put in place, importantly, reallocating our inventory dollars to get behind our core categories and our top styles has really led to a big improvement in fill rate year over year and cut down a lot on the friction that we've had in the retail channel with our retail partners over the last couple of years. So I think it's good to see the fill rates coming up. It's good to see the friction going down. I think our retail partners are much happier with our performance in both sell-through and our ability to support that sell-through in customer service. The other thing that I would just say as sort of an addendum to Mike's comments around revenue for the year, bear in mind too that some of the revenue outlook for Black Diamond includes the exit of categories such as ski bindings and other things that we'll be getting out of the course of the year. So bear that in mind as you think about factors that affect year-over-year comparables on the top line. Less stores this year than we had last year, et cetera. Does that answer your question? Okay.
Mike
Yeah, yeah, that's helpful, Neil. I appreciate that. Maybe just turning to Adventure and Matt, I guess you called out operating margins, you know, being a little bit impacted by Nix and the OEM business that you're pursuing and winning. Just curious, I guess, one, why pursue that business if it isn't sort of accretive to margins for the segment, just given the margin goals that you have over the next several years? And then I assume that probably means that, you know, you see a path to improving those. And maybe just if you could highlight... you know, for us, what levers you have to kind of improve margins on the OEM side of the business to get them back up to the kind of that aftermarket sort of, you know, cadence.
Matt Hayward
Look, great question. I'll start by saying, like, historically, our OEM business has been very much focused in our backyard of ANZ. And again, when I kind of outlined the opportunities at the investor session, It really is about the growth opportunities in the U.S. and outside of AMZ. So part of that is establishing a team that's chasing the growth opportunities that exist in the U.S. and going directly with the likes of the Toyotas, the Fords, increasing our partnerships with Polaris, INEOS is taking on the U.S. in 2024. So it's about finding that opportunity. Now, the reason OEM is so important is it does give you access to accelerated aftermarket programs. A good example is we are the global partner from an ANZ point of view for the launch of the new Land Cruiser, which is returning to the US. Now, in Australia, we have access to that, and it's around 4,000 units. The challenge is when you don't have that on a global level, The size and scale is a lot bigger in the U.S. And so the investment with a new global head of OE base in U.S. to actually partner directly with the larger market and one of the driving forces in auto, that's where the growth opportunity lies. And that's the right sizing of the margins as well, just getting that scale. So it does give us access and first in class kind of positioning to have new product hit the market at the same time of the new vehicles because your development timelines can range from two to five to seven years, depending on delays and in auto production, and then it gives us the readiness for aftermarket programs. Outside of that with margin improvement, it really is also about bringing online the size and scale outside of ANZ, but also making sure we're seeing improvements in DTC. So in the second half of this year, we'll be launching new platforms across digital, new websites where we haven't really focused. ANZ has not done direct to consumer, and this is getting done in line with supporting key wholesale. um that blend should see margin improvements as well so it's a number of different levers product mix across the board um adventure accessories have not been a strong part of it so looking at lifetime value and really adding on after the sale of a fit being able to sell a system and accessories and that's where the blended margin will actually improve as well when we can get more products and more basket size per sale so it's a mix of levers And I guess that's one of the good things as we go throughout this year. We're adding a lot more firepower across, I guess, multiple growth opportunities versus relying on a single aftermarket product or a single OEM partner. Matt, does that help kind of give you a high level on that?
Mike
Yeah, that's a great overview. I appreciate that, Matt. I'll take the rest of mine here offline. Appreciate it, guys. Thanks so much.
Operator
Thanks, Matt. Thank you. And our next question comes from Mark Smith of Lake Street. Your line is open.
Mark Smith
Hey, guys. I first just wanted to ask on the PFAS products on kind of where we are, kind of what we got through here, and it's reserved for in this quarter, and kind of how you feel that's coming along.
Mike
Good question, Mark. Now, we're progressing well with that. You know, we're working with all the opportunities to move inventory that we have that has PFAS in it. There's actually some exceptions we're looking into take advantage of for some extreme weather gear that'll give us another year to move that inventory as well. And then there's also regions that they're still acceptable to sell that. But with all that being said, you know, like I think I mentioned in the last call, you know, we said there's three to five million of exposure, you know, and I think that number's Probably very similar still three to four million of exposure, but you know, that's why we've gone ahead and booked a small 25% of that number here in the quarter Perfect and then other question for me just as we think about inventory in general today and primarily within outdoor you know, how do you feel about the
Mark Smith
The improvements are positive, but how do we feel about that total inventory number today? Are we in a good place? How much is left to kind of move? What's a good level where you'd like to be?
Mike
Oh, I'm very pleased. I'd explain it this way. In 23, we wanted to just reduce inventory, right? In 24, we're definitely reducing inventory kind of with a purpose. Last year was reduce inventory, generate cash, pay down debts. This year, it's very tactical and with direction. It's strategic. We're reducing inventory, but we're pivoting, as Neil described, we're adding back some inventory as we categorize inventory A, B, Cs, and Ds, and the inventory we're adding back is a category inventory, which will allow us to meet demand, which will allow us to improve our fill rates, It's all A category inventory stuff that we sell the most of, that we have the highest margin on, that our customers want. So I think overall, I would expect inventory to continue to decrease. At the end of Q2, it'll probably increase a little bit compared to where we are now as we prepare for the fall winter. But by the time we get to the end of the year, I'd expect inventory to be down significantly compared to last year, but more importantly, the mix of our inventory at the end of this year compared to the end of last year will be much healthier. Excellent. Thank you.
Neil
Thank you. And our next question comes from Jim Duffy of CFAW.
Operator
Your line is open.
Neil
Hey, Jim. Hey guys, this is Peter McGoldrick on for Jim. Thanks for taking the question. Sure. Go ahead. Yeah. I wanted to discuss your investment plans as you build your strategies for replatforming outdoor DTC updating systems and otherwise simplifying the business. So how should we be thinking of SG&A dollar growth on a year over year basis as 2024 progresses?
Mike
Good, good, good, good question. So, You know, I think Neil mentioned we are being very cautious on SG&A. In fact, our operating cost is down 8% year over year. So, again, it's all about complexity reduction and choosing the best investments with the highest return, whether that's human capital, which is hiring more people, or investing in CapEx, right, whether that's new systems that we go ahead and install, right, and capitalize onto our book. So that's how we're kind of, that's the filter. We're looking at all investments, again, whether it's operating costs or capital. And Neil and I and Warren are fully aligned on that. So when we think about SG&A, I wouldn't expect it to increase significantly. It's really about an allocation of those dollars that we have available and putting them to the right and the best opportunities.
Neil
Okay, and then as we think about gross margin drivers for the year, the BD Asia office is a meaningful driver long-term. Could you provide some expectations for timing of the BD Asia sourcing and product development office to influence gross margin?
Mike
Yeah, great question, Jim. Peter, I'm sorry. That's an investment we're making this year, and we won't see the full benefit of that until next year.
Neil
Okay, thank you.
Mike
Our supply chain and lead times are extended, so we'll get that benefit in 25.
Operator
Thank you. I'd like to turn it back to Mike Yates for any closing remarks.
Mike
Oh, great, great. Well, hey, I want to thank everyone very much for participating in our call today and your interest in CLARIS. and your continued support. We look forward to updating you at investor conferences over the coming month. I'll be on the road at three or four conferences, and then again in 90 days when we report the second quarter. Again, thank you very much, and we'll talk soon.
Operator
This concludes today's conference call. Thank you for participating, and you may now disconnect.
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