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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 second quarter ended June 30, 2024. Joining us today are Claris Corporation's Executive Chairman, Warren Kanders, CFO Mike Yates, President of 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 questions. Please note this call is being recorded. Before we go further, I would like to turn the call over to Mr. Berkowitz as he reads the Company 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 I 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 in the financial condition of Claris Corporation to differ materially from those expressed or implied by the forward-looking statements. More information on potential factors that could affect the company's operating and financial results is included from time to time in the company's public reports filed with the SEC. I'd like to remind everyone this call will be available for replay starting at 7 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
Thank you, Matt. Good afternoon, and thank you for joining CLARIS's earnings call to review our results for the second quarter. I am joined today by our Chief Financial Officer, Mike Yates, as well as Neil Fisk and Matt Hayward, who will discuss our outdoor and adventure segments, respectively. Before I turn the call over, I'd like to highlight the incremental progress we have made thus far in 2024, executing CLARIS's strategic initiatives to seek to create long-term value. While overall macroeconomic conditions have remained challenging with consumer demand broadly constrained, we are confident that we have laid the foundation for expected sustainable growth moving forward. It is worth reiterating that we remain in the early stages of our multi-year strategic plan, but believe the investments we have made to date will deliver significant long-term benefit. While Neil and Matt will provide more specific comments, we continue to take positive steps forward in each segment during the quarter. At Outdoor, in the face of strong market headwinds, the team continued to execute initiatives focused on simplification and right-sizing of the inventory. Importantly, inventory levels were down 17 percent year-over-year And we've improved the quality and composition of the inventory to focus on our A styles across categories, which Neil will discuss in greater detail. From an operational standpoint, we identified several opportunities that may drive efficiencies in the business. And we've been pleased with our progress, both reducing operating costs and solidifying the core. In the adventure segment, while Q2 results reflected market softness, particularly in the United States, we continue to see positive trends during the first half of the year within the broader segment, primarily in Australia. As we have detailed previously, we believe there are significant growth opportunities outside of the home market, and we continue to invest proactively to capitalize on the strong long-term industry dynamics and large and growing addressable market across our verticals. Matt will discuss the team's broader corporate realignment and recent appointments, which we believe will bring a focus to the U.S. and international markets and strengthen our global OEM initiatives. We believe we now have the right team and strategic roadmap in place to build out a best-in-class product ecosystem while maintaining a commitment to enhance product margins as we scale. As we look towards the future, we recognize there is still much more work to be done, but are pleased with the incremental improvements we have seen across the business and believe that the previously stated long-term profitability objectives are achievable. With that, thank you for being with us today, and I will turn the call over to Mike.
Mike
Thank you, Warren, and good afternoon, everyone. On today's call, I'll provide a brief Q2 update before turning it over to Matt and Neil to review segment performance. I will then conclude with a more detailed summary of our Q2 financial results and then open it up for a Q&A session. Beginning on slide four, we continue to advance our strategic plan in the second quarter with CLARIS positioned for long-term growth as a pure play, ESG-friendly outdoor business. As a reminder, This was our first full quarter following the divestiture of the precision sports segment in Q1. As Warren mentioned, in the second quarter, we advanced our strategic initiatives to reposition the organizational structure, drive balance sheet improvement, and de-emphasize categories and revenue streams that do not enhance our goal to find our foundation and drive profitable growth. In the outdoor segment, our simplification initiatives remain on track as we continue to focus on our core categories and build on positions of strength. We previously indicated that we believed we were seeing stabilization in the North American market, and we can confirm that today. In the first half of the year, against a difficult backdrop where many of our peers have seen sales decline, our North American wholesale business was up 1% over the prior year period, which is encouraging as we have been simplifying and rationalizing our scope of products. We view this as evidence that our strategy of leaning into our best categories with our best customers is working. Operationally, we have continued to streamline our development process, leaning on excellent vendor partners to deliver better products and tighter timelines, which is the engine for higher margin growth. Over at the adventure segment, revenue increased year over year for the fourth consecutive quarter. Although overall sales growth and profitability were affected by weakness in the U.S. and rest of world markets, especially in the USA, consistent with our invest to scale objective, we continue to take steps to strengthen our adventure team and seek to expand beyond the home market of Australia and New Zealand. Matt will detail our progress in these areas in a moment. Moving to the bottom of the slide, I would like to reiterate that a key component of the new CLARIS is our significant financial strength and flexibility to strategically allocate capital for the benefit of shareholders. We ended the second quarter with no debt and over $46 million of cash on the balance sheet. Through our capital allocation strategy, our priority is to reinvest in our existing two segments to seek to drive organic growth. We expect to continue to pay our quarterly dividends and also selectively look at smaller bolt-on M&A opportunities that may enhance our adventure business in the United States. Before I turn the call over to Matt, I'll briefly highlight a few key figures on slide five. CLARIS' second quarter revenue of 56.5 million was short of our guidance of 58 to 62 million. However, our first half 2024 revenue of 125.8 million remains consistent with our expectation for 125 million of revenue in the first half of the year. Taking this into account, we are reaffirming our top line guidance for the year of $270 to $280 million of revenue. In the second quarter, we generated an adjusted EBITDA loss of $1.9 million. This compares to our guidance of zero to half a million dollars of adjusted EBITDA. Our revised EBITDA guidance is primarily driven by our myths in the first half of the year from the adventure segments U.S., and rest of world operations. While we are confident in the new team we have in place, we view the probability of clawing back the negative EBITDA from Q2 as low. As a result, we've revised our full-year adjusted EBITDA outlook. I'll provide additional details on our updated 2024 guidance later on the call. Overall, our second quarter financial results reflect near-term pressure on the business but we believe we have the building blocks in place to continue to execute our multi-year strategic plan. I'll now turn the call over to Matt Hayward, Managing Director of Clarissa's Adventure segment. Matt?
Matt Hayward
Thanks, Mike. I'll begin my remarks on slide number six. Following the reset and stabilization of our business, we continue to take steps in the second quarter consistent with our primary objective of investing to scale and finding integrated efficiency across our portfolio of businesses. In our core Australian New Zealand markets, results were solid and execution remains on track. Sales growth and margin expansion were once again driven by strong demand by OEM customers and specific key accounts. This was partially offset by softness in certain retail accounts as we've seen customers managing Australian fiscal year-end inventory levels tighter than in prior years. Overall, We're pleased with the results in the first half of the year across our AMZ business, supported by net sales, gross profit, and EBITDA consistent with our expectations. It is also worth highlighting our progress driving down inventory levels below our targets in these regions. Zooming in on specific channels, while we saw outperformance in wholesale and OEM in the first half of the year, sales in the U.S. and rest of the world lagged behind. As a result, second quarter margins in particular were adversely impacted with the channel mix skewed more towards OEM product rather than higher margin foreign distribution revenue. Simply put, the U.S. market has not delivered to plan and that weakness hampered our results. While we underperformed in terms of second quarter net sales, gross profit and EBITDA, we believe our key investments made in the first half of the year should pay expected dividends moving forward. Most importantly, in July of this year, we hired a new leader in the business who has the full support of our Global Shed Services team. Trip Wyckoff will be responsible for managing and growing each of the adventure brands in the Americas, including the US, Canada, and Latin America, and has a wealth of knowledge, operating discipline, and expertise in taking brands of our size to the next level. He has previously worked for Tool in the US, where he grew the brand significantly in their peak periods and was primarily responsible for bringing to market global initiatives, building one-on-one customer relationships, and integrating key acquisitions. This addition to the team represents a critical progress as we invest to scale and work to capitalize on clear long-term growth opportunities outside of our home market with a clear focus on growing our U.S. business. Turning to Amir... We've also taken important corrective action to address the lack of sales leadership with the appointment that Warren alluded to earlier, that of Daniel Brunch, who has joined our team as head of EMEA sales. In his role, he will build the adventure segment's current accounts in Europe while focusing on initiatives that are expected to expand customer relationships across the broader region, including the Middle East and Africa. Additionally, building on the success of our growing ANZ regions, we've made the decision to promote Chris Radford to the head of APAC, where he will oversee the whole region to better execute our global distribution strategy, supported by a robust ANZ infrastructure. We now have three clearly defined regions, each with proper management structures, incentivized to drive profitable growth, supported by our shared services and our HQ in Sydney. We believe these steps will go a long way towards improving overall profitability, as we allocate resources to drive performance outside of our home market. Taking a step back into our Q2 results and context, adventures, limited sales, and EBITDA growth were largely attributed to our underperformance in the U.S. and softness in international markets. There were some margin mix matters where we saw outperformance in our growing OEM channel that offset traditionally higher rest of world distribution product sales. We are confident in our view that this is the baseline from which improvements in revenue and gross margins, SG&A and EBITDA, will be driven during the second half. We have enacted significant operational change in the first half of the year, bringing on and upskilling 15 team members across our three key regions. While several of these positions were sourced internally, we engaged a network of great recruiting partners to help in all of our endeavors. We've also engaged an outside firm to work through our global sourcing and supply chain initiatives that we believe could deliver meaningful margin improvement across 25 and beyond. I'd like to now turn the call over to Neil Fisk, president of Black Diamond. Neil.
Neil
Thanks, Matt. Turning to slide seven, overall results in the outdoor segment were in line with our expectations for the quarter, and we are pleased with our progress in the face of some strong market headwinds. Actions in Q2 represented our key themes for 2024, simplifying the business to solidify our core, improving profitability, and laying the foundation for long-term sustainable growth. Overall revenues met our expectation for the quarter in the context of a market that is still adjusting to the post-pandemic demand levels. In North America, wholesale revenues were down 4.7% on a comparable basis, with significantly less promotional activity and one fewer MAP pricing breaks this year. For the first half of the year, as you've heard, North American wholesale grew 1% year over year. We've rebuilt the sales team in North America and are very pleased with the results that we are seeing. North America Digital B2C was down 15.7 for the quarter due in large part to less promotional activity and not repeating our huge June clearance event from last year. The digital channel represented 20.5% of the region's revenue compared to 22.2% last year, while retail stores accounted for 4.4% of the total down from 5.8% last year. In the European wholesale market, we saw a sequential improvement over the first quarter with a 5% decline versus a 17% drop in Q1. Again, in line with our expectations. We see further improvement ahead in H2 with an outlook that is flat to up slightly in the wholesale. That said, many accounts in Europe have bought conservatively for the fall-winter season and are counting on fill-in orders if the weather is normal to favor them. EU digital direct-to-consumer grew 7.4%, and we expect some modest acceleration in the second half, although that channel is still a relatively low 7.6% of the region's revenue. Our international distributor markets also posted a sequential improvement from Q1, with revenues down 7.8% versus the 44.1% drop in Q1. However, we believe 2024 will continue to be an inventory reset year for most of our distributive markets, consistent with the commentary we provided in Q1. Our regions are at varying stages of recovery but signals point to them all heading in the right direction. In total, our revenue for Q2 was down 10%. Excluding reserves to deal with potential PFAS inventory, Q2 gross margins were down 180 basis points to prior year, primarily due to channel and product mix. For the first half of the year, margins were flat year over year. Operating costs excluding restructuring charges, were down 9.3% year-over-year on a comparable basis. We continue to drive efficiencies in the business and reshape the organization to be leaner and more agile. We expect to see additional cost savings materialize in H2 and continue to grow into 2025. Inventory ended the quarter down 17.1% at $66.4 million compared to the prior year of 80.1 million. Our simplification work continues to improve the quality and composition of the inventory. The percentage of inventory in our volume-driving A-Styles, for example, increased to 68% up from 59% last quarter and 45% a year ago. Meanwhile, fill rates on our wholesale orders improved to over 95%, reflecting stronger inventory management and improvement in our sales and operation planning processes. Importantly, apparel inventory ended the quarter down 19.8% year-over-year at 17.8 million. Finally, as we continue to rationalize our product lines and simplify the business, we are undertaking a strategic review of our Peeps snow safety brand. The goal of this review is to assess whether the value of this business can best be unlocked by Black Diamond or another owner. In summary, I'll reiterate the message from last quarter. We are pleased with our progress and confident in our strategy, knowing that there is much more to do and to demonstrate. I'll now turn the call back over to Mike.
Mike
Thank you. Thank you, Neil. Turning to slide eight, I'll begin with a summary of our financial performance in the second quarter. As a reminder, and as we have noted previously, given the sales precision sports segment for approximately $175 million, which was closed in the first quarter of this year, our U.S. GAAP results are comprised of outdoor and the adventure segment, and the results are referred to as continuing operations. Second quarter sales were 56.5 million compared to 57.9 million in the prior year second quarter. 3% decline in total sales was driven by a decrease in the outdoor segment of 10% that Neil just mentioned. This is partially offset by venture segment sales growth of 14%. Overall, FX was immaterial in this quarter. Moving to the consolidated gross margins, in the second quarter, gross margin was 36.1% compared to 39% in the year-ago quarter. The decrease was primarily attributable to an increase in the PFAS-related inventory reserves, unfavorable product mix in outdoor, and higher inventory and sales return reserve expenses for the adventure segment. Adjusted gross margin, adjusted for the the PFAS reserve that Neil mentioned, which was $716,000 in the quarter. Adjusted gross margin adjusting for the PFAS reserve of 37.4% compared to 39% in the year-ago quarter. Q2 selling and general and administrative expenses were $28.1 million compared to $26.9 million in the same year-ago quarter. The increase was primarily due to additional investments in marketing initiatives at Adventure, as well as higher employee-related expenses across the company, including higher bonus expense and the 15 new employees added to the Adventure segment to help scale the business. These investments were partially offset by expense reduction initiatives at the outdoor segment to manage costs, as well as lower intangible amortization. Adjusted EBITDA loss in the second quarter was $1.9 million, or an adjusted EBITDA margin of negative 3.4%, compared to an adjusted EBITDA of $1.0 million, or an adjusted EBITDA margin of 1.7% in the same year-ago quarter. Our adjusted EBITDA is adjusted for restructuring charges, transaction costs, contingent consideration benefits, and stock compensation expense. as well as PFAS inventory reserves. Additionally, beginning in the first quarter of the year, we adjusted for legal costs associated with the Section 16B litigation and the Consumer Product Safety Commission, known as the CPSC matter. These legal costs were $399,000 in the second quarter. Second quarter adjusted EBITDA by segment was $1.2 million at Adventure, and a loss of $400,000 at outdoor. Adjusted corporate cost was $2.7 million in the second quarter. Next, let me shift to liquidity. At June 30, 2024, cash and cash equivalents were $46.2 million compared to $11.3 million at December 31, 2023. Total debt at june 30 2024 was zero compared to 119.8 million at the end of 2023. our reduced debt and substantial improved cash 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 expenses for the full year is expected to be three to four million dollars which will allow us to maintain most of the net cash realized from the precision sports sale. Free cash flow, defined as net cash provided by operating activities less capital expenditures for the second quarter of 2024, was an outflow of $700,000. We expect to generate approximately $25 million of free cash flow in the second half of 2024. If achieved, our cash balance would be north of $70 million compared to the $46.2 million at June 30, 2024. As a reminder, we have NOLs carried forward for U.S. federal income tax purposes of approximately $7.7 million at the end of December of 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. Padilla. Both fact discovery and expert discovery have now been concluded. The court set the following schedule for Hap's summary judgment motion. and challenge to our expert witness. Motion papers were served on May 9th of 2024, opposition papers were served on July 9th of 2024, and reply papers are due by August 9th of 2024. If this matter goes to trial, we would expect the trial to commence sometime in 2025. We also have filed a lawsuit against caption management and its related entities and control persons. Those defendants filed a motion to dismiss on June 27th. We filed opposition papers on July 25th and reply papers are due by August 15th. Moving on to our 2024 outlook on slide nine. we have reaffirmed our top-line guidance and continue to expect sales to range between $270 and $280 million for the full year 2024. Adjusted EBITDA from continuing operations is now expected to be approximately $11 million to $14 million, or an adjusted EBITDA margin of 4.5% at the midpoint of revenue and adjusted EBITDA. We now expect capital expenditures to range between $6 and $7 million in adjusted free cash flow to a range between $7 to $9 million for the full year 2024, excluding $2 million of cash outflow related to precision sports prior to the disposal. Consistent with our historical seasonal pattern, the second half accelerates compared to the first half. Therefore, third quarter sales are expected to be between $70 and $75 million, and adjusted EBITDA is expected to be between $3 and $4 million. I want to reiterate that our outlook does not include any expense or ongoing litigation specifically relating to Section 16B matters. The CPSC matters are further increases to the PFAS-related inventory reserves. 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 and venture sales to be $90 million for the full year 2024. This is consistent with the guidance we have been sharing since our investor day back in early March in New York City. We also continue to expect the outdoor business to generate $14.5 million of adjusted EBITDA, representing a nearly 8% margin. The change today compared to our prior guidance is that we now expect the venture segment to only generate a 10% EBITDA margin compared to the 15% margin we shared earlier in the year. This is a $4.5 million impact on the adjusted EBITDA and is the bridge between our new guidance at the midpoint of $12.5 million and our prior guidance at the midpoint of $17 million for adjusted EBITDA. The obvious question is why the decrease from 15% to 10%. And the answer is we believe we have a tremendous strategic plan to take an iconic market-leading Australian New Zealand Rookrock brand and turn it into a global brand. And in order to do that, we need to make investments to scale the business. We are continuing to make these investments here in 2024 despite challenging market conditions. These investments, as Matt outlined, including new team members in critical leadership positions, marketing investments, technology investments, and supply chain investments, to name just a few. Finally, as Neil discussed, we are reviewing strategic alternatives for the Peep Snow Safety brand with the intention of soliciting interest from potential acquirers. This strategic initiative is aligned with a prioritization of simplifying the business and rationalizing our product categories. The company's board of directors has not set a timetable to complete this review and evaluation of strategic options, nor have they made a decision relating to the strategic options at this time. There can be no assurance that the review process will result in any transaction that will be consummated. The company and the company's board of directors do not intend to comment further about this strategic review unless and until they deem further disclosure is appropriate. As we look towards the future, we are confident that Claris is well-positioned to drive sustainable, profitable growth supported by outstanding leadership and a debt-free balance sheet. We remain in the early stages of our multi-year strategic plan but believe the investments we have made to scale our adventure business and simplifying the outdoor business and product categories are expected to deliver significant long-term benefits to declare shareholders as market conditions normalize. At this point, operator, you're ready to take questions.
Operator
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. The first question comes from Matt Caranda from Ross Capital. Please go ahead.
Matt Caranda
Hey, guys. Good afternoon. I guess I just wanted to dig in a little bit more. Hey, Mike. Sure. So just Wanted to dig in a little bit more on the EBITDA guide and the 4.5 million change that you mentioned. So I guess just the follow-on question to your explanation is just why the change that we're seeing now? I guess wouldn't you have contemplated a scale-up investment in the business prior to sort of the long-term planning you did in preparation for the investor day in March and And I guess, could you break down the $4.5 million a little bit more in detail? I know you mentioned there were some buckets in there, like new team members, marketing, supply chain. Any further detail you can provide around sort of where we're making the investments and why we expect those to bear fruit?
Mike
Well, sure. No, great question. So, obviously, it's investments and the decline in Q2s. You know, I think in Matt's commentary, and we've already acknowledged that Q2 way underperformed here in the U.S., right? So we've probably underperformed by our budget from a budget perspective by $2 million to $3 million of what we thought the profitability would be coming out of the U.S. business here in the second quarter. All right, so that's not going to, like we said in our prepared remarks, we're not going to be able to make that up, right? The season in the U.S. is, you know, is in the Q2 period, right? That's the biggest period we would expect to do business in the U.S., so quite disappointed by that. On the flip side, we are committed to our plan. We think we have a great brand, a great product, and we think the market, you know, is right for us to take advantage of this. That's why we've gone ahead and we've hired Trip Wyckoff to lead the Americans, whether that's Canada, North America, all throughout North America. And his background, he did this once 12 years earlier in his career for Thule. He's a proven leader. He knows the folks at the distributor level. He's already spoke with them all as part of his diligence to take the job. So we're excited about what he can do to come in and help get the Brino Rack brand that is a market leader, that is showing the strength in Australia and New Zealand and the OEM space and grow that here in North America. So quantifying the investments, a lot of it is people. We've hired 15 more people across the businesses to help scale the business because not only Does Matt want to grow the business here in North America? We're also trying to grow what we'll refer to as the rest of the world. The rest of the world, there's the Americas, there's the whole market of Australia and New Zealand, and now we've included the Asian markets in there as well. But the rest of the world being Europe, right, and some of the OEMs that are based over in Europe too. So we hired Daniel to tackle that, another proven person who knows how to grow businesses, Australian businesses in Germany and the rest of Europe. So it is people. It's technology. We're spending money on a new website, new tech stack to help our D2C, especially with our Maxtrax products. That's underperformed this year. It's what we would have expected that to have done here in the U.S. We're spending money on supply chain, projects to investigate opportunities to simplify our supply chain, take costs out of our supply chain, which would then help on the margin and profitability going forward. Marketing, technology, supply chain, people, regional growth. I mean, we have a blueprint. We need to execute on it. And in order to execute on it, we need to spend some more money. To answer your question, you know, have we thought about it? Frankly, yes, we thought about it. We had these costs built into our plan for 2024. The decision we've made here in the second quarter was – We are going to continue and commit to spending these dollars and making these investments despite the top line being challenged. Our internal budget was higher, much higher than what we achieved at Adventure here through the first half of the year, especially in the second quarter. We're making a conscious decision to spend even though these dollars would have been covered by margin dollars had we had higher revenues that we thought we were tracking towards up through the end of April, frankly. May and June were extremely tough.
Matt Caranda
Okay, got it. So it sounds like maybe things eroded a little bit toward the latter portion of the quarter on the top line, at the very least. Yes, indeed. Okay, all right, got it. And then one other, I guess, more outlook-oriented question, which is just, I guess if I, if I triangulate between the full year guide and what you put out for the third quarter, it does imply like a, a pretty good improvement and even on margin heading into the fourth quarter and just kind of wondering where we get the confidence to, to say that we're going to be able to jump up to what looks like a low double digit, even on margin in the fourth quarter. Um, You know, where specifically can we highlight some costs that maybe we're pulling out or some improvement fundamentally in one of the segments where we can get there?
Mike
Yeah, no, no. So, right, so at the midpoint, the Q3 revenue is 72.5, which implies the fourth quarter is 77.5, right? So that, you know, that's for the fourth quarter of revenue. The difference of what you're highlighting is I'm only guiding 3 to 4 million of I'm called three and a half at the midpoint of profitability for third quarter, but to get to the 12 and a half, I need, I need 9 million of profitability in the fourth quarter. So your question's spot on. Um, and that, so you're, that is exactly how we're looking at it. Um, interestingly enough, right? The fourth quarter this year is setting up to be our strongest quarter. Um, and, and, and that's how, how the numbers are coming together. Um, specifically over at the Adventure business and at the Black Diamond business. Neil, Matt, either one of you want to comment on why your confidence level for the fourth quarter on the top line?
Matt Hayward
Yeah, look, it's Matt here from Adventure. Look, Q4 is, you know, our H2 is typically our strongest. One of the benefits, you know, we have had softness in Q2 as you called out. We haven't performed in the U.S., The benefit going into the back half is ANZ, it's our peak season. We are introducing a range of new products across the three different brands, Q4 being the dominant one. Added to that, some cost-out projects that are more based on long-term efficiency and our product mix. We're also looking to see some of the fruit of our global supply chain project kind of kick in as well. So there's a number of things linked into, I guess, the timing and the phasing of it, but the dominant factor is H2 being the strongest season as we go into our peak summer seasons in ANZ. And at that point of time as well, we've also factored in, you know, the ability for Trip kind of heading into his fourth and fifth month in the job and his relationships in the market being able to stabilize our U.S. projections. So that's why we have confidence in H2 from an adventure point of view.
Neil
And, Matt, I can add on from the outdoor perspective. So fourth quarter is naturally our biggest quarter just in terms of demand and seasonal build, and we get a tremendous amount of operating leverage in the fourth quarter, so the flow-through on that revenue is extremely high. Secondly, we've taken an incremental amount of cost out of the operating model at Black Diamond that I think will – ensure that we hit our profitability goals for Q4, specifically about $700,000 in the quarter alone from incremental cost initiatives that we've put in place. And frankly, this will continue to build into 2025. And thirdly, I would say we look forward to a business still that is mostly wholesale-based, and we look at the order book as the first indicator of what we'll be able to do in any given quarter. And we feel good about the order book matching our expectations. There is quite a bit still, maybe 20% of the business that will be at once, either call orders or ASAP orders. And I think that's where the fluctuation could be. depending on how early winter turns on and what the early seasonal demand is for winter product. But it's a confined amount of revenue for us. So I think those are the three factors for Black Diamond that give us confidence in the profit outlook for the Q4 and for the second half. I also think we're in a better inventory position overall. And so for those call orders and ASAP orders that do come in, our fill rates are considerably better this year than last year. It should allow us to react to any upsides of any given product line category or overall market trends.
Matt Caranda
Okay. Appreciate all the detail on the segments, guys. Maybe just one more and then I'll turn it over, but just wanted to understand the latest from you guys and your perspective on PFAS exposure. I guess we had another inventory reserve this quarter. That sort of doubles what we've done thus far, I guess. How much more exposure do we have left? Do we think we've kind of reserved for all of the exposure that we have? When does this fully get cleaned up and how should we think about it?
Mike
So, Matt, I'll take that. You know, I think when we first brought this up here two calls ago, I mentioned I thought there was a $3 to $5 million risk. I think the team's done an excellent job working through PFAS inventory, right? We do have, you know, we've booked a million and a half of the reserves, and we have that on the books still. We are continuing to focus on that and work through PFAS inventory. The criteria continues to change, and there's some exceptions we're able to take advantage of. But our goal and our objective is to get rid of all this inventory by the end of the year. I think we have about $9 million of inventory left as of June 30th that we need to work through. And I know we've sold a good chunk of that here. Well, not a good chunk of it. We've sold a lot of... PFAS packs here in the month of July, frankly. So we're continuing to work through it. I think, you know, I'll stick with my guidance from six months ago. I think we have a $3 million to $4 million exposure. So I could see us booking another $750,000 each quarter, but I don't think it's much more than that with the objective of being through this and having most of this issue behind us by the end of the year.
Neil
Mike, if I could just add to that from a qualitative standpoint in terms of execution, we've established a glide path for getting out of our PFAS inventory. We look at it every week, and at the halfway point here, we're actually a little bit ahead of our glide path schedule. So feeling like we got on this problem early and we moved through, quite a bit of product last year, early this year, and while we've got some more work to go, we feel like we're on it. We're a little bit ahead of pace, and should we continue on this pace, we'll end the year relatively clean and in that range of reserves that Mike talked about and be set up for margin expansion in 2025 as a result of the work we've done this year.
Matt Caranda
All right. Appreciate all the responses, guys. I'll leave it over. Thanks, Ben.
Operator
The next question comes from Anna Glaston from B. Riley. Please go ahead. Hi. Good afternoon.
Anna Glaston
Thank you for taking my question.
Mike
Sure. Hello, Anna.
Anna Glaston
First, I'd like to touch on the state of the retail landscape and outdoor. In the past, you've given some perspective on, you know, the different sub-segments that you break down your retailers and, you know, mass versus the national accounts. Could you give an update on how those performed in the quarter?
Warren Kanders
Do you want me to take that?
Neil
Yeah, sure.
Warren Kanders
Yeah, Dale, you take it.
Neil
Sure. So, I would say as a headline, we see the market continuing to stabilize inventories coming more back in line with demand. But having said that, I don't think we're through it yet. We've still got another good six months, I think, before retailers are at the inventory levels they want and with the right composition of inventory that they're after. And so that's a little bit of a drag still, a little bit of a headwind on the market overall. I would say when we look at specialty, the specialty segment overall is kind of holding its own to down low single digits, better than prior year, showing sequential improvement. Our retailers are still cautious about what the outlook is and making sure not to get over-inventored and over-bought again. So they're being quite tight on the push strings and forward orders. I think as I look at the specialty business, the core of it seems pretty good to me and in pretty good shape. There are at the margin some of the weaker specialty players that have struggled for a little bit. I think we might see a little bit of shakeout of small accounts in the market with the kind of multi-year pressure that's been in the market. But overall, we see specialty coming back and becoming healthy. And that remains a super important part for the industry and for our strategy as well. It's very much the top of our distribution pyramid. With regard to the big national accounts, notably REI, MEC, a little bit of the same story. They're both kind of digging out of the ditch from last year. Still some softness there, but we're seeing sequential improvement. We're seeing inventories get back in line and in better balance. We think we're outperforming the industry and the categories with those accounts and picking up share. It's hard to get the data, but from what we hear from our buyers, Black Diamond continues to be a brand by virtue of its equity and leadership positions and core categories that those big retailers count on. And when things get a little rocky, One of the good things about being a market leader is you tend to get a little bit more of the open to buy because you're more of a sure bet. And I think we're seeing, as a brand, we're seeing some of that pick up. So I would say across the big accounts, the national accounts, as well as specialty, we're seeing stabilization of the market with more to come. And it's certainly, I wouldn't say there are any tailwinds out there, still a little bit of headwinds, but much less than what we saw last year. And I think that going into 2025, the industry will be healthier and those accounts will all be in a better place. So cautiously optimistic, I would say, in terms of the recovery of our retail account base. Does that answer your question, Anna?
Anna Glaston
Yeah, that was super helpful. I guess... It seems like retailers are still cautious, still working down probably some pockets of excesses, but you're not seeing kind of like the wild wings and order flow or sort of last-minute cancellations that were an issue probably more last year. Is that fair?
Neil
Much less, and there's still some, but I think it's abating at a steady pace.
Anna Glaston
Got it. And it seems to be that there's less of a delta between the specialty and mass or national accounts than in the past. Is that fair?
Neil
Probably less of a delta and maybe specialties respond a little bit more quickly and has come through this more quickly than some of the big accounts. And so maybe they're a little bit ahead just in the recovery curve. But I think the delta is relatively small.
Anna Glaston
Okay, great.
Operator
Thanks so much. That's it for me. The next question comes from Jim Duffy from Stiefel. Please go ahead.
Jim Duffy
Hi, this is Peter on for Jim. Thanks for taking our questions. Mike, a question for you. The constrained consumer was recognized as a source of pressure for both the outdoor and adventure segments. Is this incremental to the prior outlook? And what are you baking into the second half outlook? I'm just curious if there's consumer macro influence to the second half outlook?
Mike
No, our commentary about that is, hey, overall, the consumer and, you know, retail is being called out as being challenged and the consumer is getting tighter and tighter. And I don't think that's debatable, right? We've seen that, especially in the outdoor, when we look at our peer groups and other folks who've presented and disclosed their earnings. Is it specifically baked into our outlook in some fashion? Not entirely. It's not. The numbers we're presenting here for the rest of the year are based on what we see our order book, what we have line of sight to here in the third quarter, and what we know we have line of sight for fall, winter, spring, season that will ship late in the third quarter and into the fourth quarter. So I don't think there's a, you know, we didn't discount any numbers because we think the consumer's tight based on what we're seeing specific to our business.
Jim Duffy
Okay, thank you for that. Then switching, Mike, again, specific to your commentary on the venture business in the U.S. market, and a potential for a bolt-on acquisition. Can you talk about where you want to add to the business if there are any categories, channels, or capabilities you're looking to add to bolster the existing business? And then a follow-up to that would be, now that you've reached a net cash position, how are you thinking about sensitivity to the leverage profile?
Mike
Well, first from an M&A standpoint, Mike.
Warren Kanders
Mike, do you want me to take that?
Mike
Sure, go ahead, Warren.
Warren Kanders
Yeah, thanks. So I think the acquisitions that currently we're looking at in that space are modest and would fit really part of what we view as our product portfolio that we need to truly be successful in this market. And so, you know, I think, you know, our cash balances, you know, as Mike talked about, we expect to be, you know, upwards of $70 million by the end of the year. And, you know, any acquisition would be modest. So we would have quite a bit of cash still on our balance sheet, just to give you an order of magnitude.
Mike
Not very big.
Operator
As a reminder, if you have a question, please press star one. The next question comes from Mark Smith from Lake Street Capital. Please go ahead.
Mark Smith
Hi, guys. Similar question here, just as we think about consumer trends domestically. Can you just speak to kind of what you're seeing in Europe or other markets kind of around the consumer, any signs of improvement and kind of how they're holding up today?
Mike
Well, I can start, but I'll let Neil and Matt, you know, add to it. I would say the North American consumers probably holding up a little better. We're seeing that, you know, in our North American business at Outdoor. The D2C customer, right, you know, they're probably looking for a promotion, right? The market's a lot of promotional activity still. on websites for outdoor product. The European customer, from my perspective, and talking with the team in the market conditions over in Europe, we've discussed internally that we think the European market's about six months behind, at a minimum six months behind the US market. So we started seeing stabilization of the North American market here at the beginning of the year. So we're hopeful we see stabilization with the European consumer here in the back half or at some point in the back half of 24 for the outdoor consumer over in Europe. You know, Matt, any comments on the consumer over in Australia that you'd like to add? Yes.
Matt Hayward
Thanks, Mike. Look, I think the best way of answering this is outside of ANZ. Look, we've got a very robust brand in our home market. That's one of the luxuries we do have, and that strength sees us through a lot of ups and downs. One of the key indicators of performance, obviously, is auto sales, and it's been incredibly robust and continues to grow across our home market. As we look into Europe, the benefit we've got there is it's greenfields. We've had one primary partner there in Germany. And basically, you know, the whole point of hiring Daniel is to go beyond that home distributor who's based in Germany and look at the opportunities across all of our three brands, Reinerach, Maxtrax and Tread. And we are seeing those opportunities. And with Daniel's contacts, we're already looking into being able to go into Scandinavia. into other parts of France and Southern Europe. We've signed a new distributor called Dream Team in France to look after more markets there. So the confidence we have is that we haven't really started and made, you know, there hasn't been too much focus in Europe, and those opportunities are rolling in. From an APAC point of view, we do have standing relationships with partners in China and Japan, and we just need to have more focus on that, and that's with the restructure with Chris Radford now taking on APAC, And there is a lot of inquiry and interest. Looking at the US for us, again, we missed Q2 based on that was internally inflicted, not consumer-based. There is a massive opportunity as we stand up new products. We're going into more of an ecosystem, as Warren mentioned earlier. That is not just our system, but more fits for more vehicles, more accessories. and more of an activity-based marketing opportunity to go after people's lifestyles. And again, our key accounts are demanding a strong third player in the market to take on some of the incumbents. So we are pretty excited about the H2 opportunities with our new product and our new partners there. And we're not seeing too many headwinds. It's more our ability to execute on our plan in H2 and beyond.
Mark Smith
And that leads into my next question.
Neil
Sorry, Mike. Go ahead, Neil. To your point, because you hit on something very important, which is I think consumers are out there still buying, but they're buying more promotional items. And as we've come through a period of a year or more of supply exceeding or demand, supply exceeding demand, in a very promotional market as players at all levels have tried to get their inventories in line. The reality is we've trained as an industry the consumer to be more price-sensitive, deal-oriented. And I think we'll see a little bit of that still this year with people clearing through PFAS inventories. There are a lot of bargains out there for consumers right now. And so we just have to be a little bit mindful that there will be across the industry. I think continued margin pressure this year should get much better next year as we get through the last bit of key fast inventory overhang. But it is a, it is a price sensitive consumer. They're a little bit fatigued. They're, they're still buying, but they're looking for the deal.
Mark Smith
Okay. And I think the last question for me, just maybe if Matt wants to take it or somebody else, just as we think about kind of a squeezed North American or U.S. consumer, maybe hitting some stumbles out of the gates here on trying to roll out and improve the business or grow the business in the U.S. for adventure. You know, is this something that's going to get pushed in really much more of a 2025 story rather than the second half of this year, especially as we think about kind of the seasonality and when maybe consumers are buying these products?
Mike
Yeah, great question. Sorry, Mike. Go ahead. The answer to that. The short answer, I believe, is yes.
Matt Hayward
So go ahead. Yeah, go ahead. Short answer is yes, and we've baked that in, again, giving Tripp time to get his feet under the desk. But the reality is we've launched some new products in the U.S. in April. So we put in our flagship product globally, the Pioneer 6 tray. This is world-class. It's got over 90 accessories that comes with it. We launched it in April. We weren't able to realize that with changes of management, and we exited the old trend. partner, you know, early in Q2 when we bought in Trip in July. So we've got that sitting there waiting. We've got stock on hand. We've got an incredible marketing campaign ready to go. Same thing with our new accessories that we launched, luggage boxes and tents that help kind of complete that adventure opportunity. Standing up our new website that launches in September. We're about four months behind standing that up. So yes, we are seeing this more of an acceleration into 25. but we'll bake that into our number, and we do want to make sure that we deliver on the rest of the year in the U.S., and we have brought that, you know, I guess that projection down, but we do have expectations that we can realize some of that in H2. Great.
Mark Smith
Thank you.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Mike Yates for closing remarks.
Mike
Thank you. Thank you very much. I want to thank everyone for attending the call this afternoon and your continued support and interest in CLARIS. We look forward to updating you on our results again next quarter. I appreciate your time. Take care.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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