Clarus Corp Q1 FY2022 Earnings Call

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's Financial Results for the First Quarter ended March 31, 2022. Joining us today are Clarus Corporation's President, John Walbrecht; Executive Vice President and COO, Aaron Kuehne; CFO, Mike Yates; and the company's External Director of Investor Relations, Cody Slach. Following their remarks, we'll open the call for your questions. Before we go further, I would like to turn the call over to Mr. Slach 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. Cody, please go ahead.

Thank you. Before we begin, I would like to remind everyone that during today's call, we will be making several forward-looking statements, which we make under the safe harbor provisions of the Private Securities Litigation Reform Act. These statements reflect our best estimates and assumptions based on the information available to us today. They are subject to risks and uncertainties affecting Clarus Corp. and the industries in which we operate. More details about potential risks that could impact the company's financial results can be found in our public reports filed with the Securities and Exchange Commission. I also want to mention that this call will be available for replay through May 23rd, starting at 8:00 p.m. Eastern tonight. A webcast replay will be accessible via the link provided in today's press release and on the company's website at claruscorp.com. Now, I would like to turn the call over to Clarus' President, John Walbrecht. John?

Thank you, Cody, and good afternoon, everyone. The first quarter of 2022 is successfully in the books, despite the many challenges people across the world are experiencing, proving once again that activity-based brands in the outdoors are continuing to experience strong momentum. And that Super Fan brands drive those market trends, especially in tough times. Let me summarize. Our Precision Sport segment continues to execute at a high level, growing sales by 41%. And in our Adventure segment, we are pleased to report early success in our Innovate and Accelerate strategy, especially in North America. In fact, Rhino-Rack's net sales in North America during the first quarter increased 42%, an early proof point of the substantial white space that we believe exists for our Adventure brands in this market. As we continue to experience a strong order book with Black Diamond, supply chain and logistics challenges impacted our ability to convert all Outdoor segment demand into revenue. We are incredibly proud of our entire team of colleagues, who continue to drive these strong results, especially given so much uncertainty in the marketplace. We continue to be nimble and decisive at the individual brand levels, which is critical in achieving the level of performance, proof again that great teams build great brands. Now let me address our performance by business segment. Starting with our Outdoor segment, sales were roughly flat in the first quarter despite strong consumer demand. Due to the continued supply chain and logistics challenges and other delays caused by COVID-19 related shutdowns in Southeast Asia, we were unable to fulfill roughly $10 million in demand with product during the first quarter that had already been produced, but stuck in transit. Given the high concentration of core equipment that Black Diamond sells, we expect to convert this in-transit inventory into in-line or full-price revenue in future quarters. Our global order book for Black Diamond has continued to sustain momentum. Consistent with what we stated earlier this year, we are purchasing inventories in line with our demand plans of $270 million to support these higher levels of bookings. However, we are handicapping this order book in our 2022 sales guidance as a result of the supply chain and logistics challenges we continue to face. As we stand today, along with a very strong fall '22 order book, we have confidence that the Black Diamond brand's top line revenues should accelerate going forward. Most of the logistics challenges impacted our equipment sales as our apparel business was up 53% year-over-year, driven by growth in men's and women's outerwear and women's sportswear. Most importantly, apparel remains our fastest-growing category, confirming that the Black Diamond positioning of apparel as equipment continues to resonate well with our core consumers. We experienced a strong reacceleration in our direct-to-consumer growth with sales up 38% in the quarter. This was overseen by our new Vice President of E-Commerce, Bryson White, who joined our team in December of 2021. He has already been successful in activating our digital-first strategy, focusing on performance marketing and balancing that approach across search, top of funnel, paid social, and email retargeting. We also did a better job of fulfillment, while still balancing our desire to serve and grow our wholesale retail partners. As we look to the rest of the year, we expect continued momentum from our direct-to-consumer business within Outdoor. Moving to Precision Sport. Q1's 41% growth was an exceptional quarter, where several factors worked in our favor. We outperformed on our ability to increase capacity and satisfied an increase in growing OEM demand, while continuing to be scrappy in our ability to deliver ammo across both Sierra and Barnes. While shell cases continue to be our number one challenge from a sourcing standpoint, we've done an excellent job sourcing copper and lead, using our balance sheet to secure these materials in advance of rising costs and accelerated demand. For 2022, we continue to drive towards an end of year bullet production run rate target of 350 million bullets at Sierra and 120 million bullets at Barnes, resulting in the doubling of both businesses and substantially improved margins since acquiring them in 2017 and 2020, respectively. Through both Sierra and Barnes, we have complementary brands that provide strong runway for long-term growth. Sierra is focused on precision, and we will continue to maximize growth through proactive innovations and the expansion of our ammunition collections. Barnes is focused on terminal impact as the hunting brand of reference that has been selling ammo for 30 years, servicing the large addressable market that has been built over decades. Our brands are gaining market share across all leading categories and bookings remained strong across our portfolio. Although we are tenacious and disciplined in our approach, this doesn't mean that we are immune to the various external supply chain challenges that are currently being experienced as we work towards building increased capacity and product availability to support our longer-term targets of $200 million annually for Precision Sports. Through new product introductions, increased capacity, expanding our distribution globally, and maintaining our focus on building the best bullets in the world, we are confident in our long-term vision for this segment. In our Adventure segment, our Innovate and Accelerate strategy began to take shape in the first quarter. We are excited about the growing momentum of overlanding. However, as many witnessed, Australia was impacted by extraordinary floods, affecting the Australian continent and continued impacts of COVID-19 lockdowns early in the first quarter. This negatively impacted our short-term demand in Australia. More positively, Q1 marked the first full quarter of Rhino-Rack introduction into the North American market. Reception was strong as sales increased 42% on a pro forma basis. Initially, we are focused on meeting the growing demand of our top 10 key automotive aftermarket retailers and preparing for accelerated opportunities through both the automotive aftermarket and outdoor channels. MAXTRAX, which we acquired in December of 2021, saw an acceleration in the first quarter as we increased the inventory allocations to catch up to the growing demand of our recovery boards within the overlanding space. In summary, we believe our portfolio of Super Fan brands has us well positioned to continue our market momentum. Our activity-based brands have demonstrated strong resistance to recent economic headwinds, while outdoorism continues to fuel demand for the outdoor activities that we serve. As a result, we believe that we are well positioned for another record-setting year in 2022. I'll now pass it over to Mike to talk about our financial results in more detail. Thanks, Mike.

Thank you, John, and good afternoon everyone. I'll go into some additional detail relating to our financial performance for the first quarter, then address our outlook for the second quarter and full-year 2022 and conclude with a few comments around taxes and our capital allocation priorities. Sales in the first quarter increased 50% to $113.3 million compared to $75.3 million in the prior year quarter. The increase is primarily driven by $9.6 million of sales growth in the Precision Sport segment, along with revenue contribution of $24.5 million from Rhino-Rack, an acquisition completed on July 1, 2021, and $4.2 million from MAXTRAX, an acquisition completed on December 1, 2021. If we had owned these brands during the first quarter of 2021, pro forma growth in Q1 2022 for the entire company would have been 6%. First quarter sales in the Outdoor segment were $51.5 million, roughly flat versus the $51.8 million in Q1 of 2021. If you adjust for foreign exchange, Outdoor sales would have been up 2% in Q1 2022. As John mentioned, supply chain and logistics issues caused growth in Q1 to be challenging in the Outdoor segment. Specifically, we experienced longer lead times, translating into a higher value of inventory in transit during the quarter, impacting specifically our hard good sales, specifically around poles and lights at Black Diamond. However, our apparel business continues to be a fastest-growing category within our Outdoor segment, with sales up 53% in the quarter. This is important as apparel along with footwear and direct-to-consumer are key strategic growth drivers over the next five years. Our direct-to-consumer business grew nearly 38% in the quarter as we are starting to see our e-commerce business gain traction. Precision Sport sales increased 41% to $33.1 million in the first quarter, with Sierra up 14% compared to the prior year. The increase is largely the result of continued high demand for ammo and significant growth in our OEM business during the first quarter. Specifically, ammo was up 145% year-over-year and our OEM business was up over 55%. Barnes sales were up 88% year-over-year, including 69% growth in black box and 196% growth in ammo. Our teams at Sierra and Barnes did a great job this quarter, increasing capacity, fulfilling strong OEM demand and continuing to be scrappy in our ammo business. Sales in our Adventure segment were $28.7 million. As John mentioned, the integration of Rhino-Rack in North America is going according to plan and we are seeing it in the results. Total Rhino-Rack sales for the first quarter were down 12% year-over-year on a pro forma basis due to the challenging market environment in Australia caused by the COVID-19 shutdowns and catastrophic flooding in key regions throughout Australia. We expect the Rhino-Rack business to get back to growth for the remainder of 2022. Total MAXTRAX sales for the first quarter were up 5% year-over-year on a pro forma basis. Switching over to margins. Consolidated gross margins in the first quarter increased 320 basis points to 39.1% compared to 35.9% in the year-ago period and it was up 290 basis points to 39.3%, when adding in the $0.3 million of fair value inventory step-up charge associated with the MAXTRAX acquisition. Improvements in channel and product mix, along with operational efficiencies drove the bulk of this margin performance that more than offset the $400,000 of incremental air freight expenses that we incurred in our Outdoor segment during the first quarter. It is important to reiterate some of the commentary from our last call related to pricing. We will continue to be thoughtful and disciplined in our approach to pricing. During 2022, we have been able to increase pricing by approximately 6% across the Clarus portfolio. A strong characteristic of a Super Fan brand is the ability to raise prices each year while still growing market share, and we believe we are doing both. Moving further down the income statement. Selling, general and administrative expenses in the first quarter were $34.2 million compared to $20.9 million in the same year-ago quarter. The increase was primarily due to the inclusion of Rhino-Rack and MAXTRAX, which contributed $9.4 million in expenses. Non-cash stock-based compensation for performance awards was $3.4 million, a $1.8 million increase compared to the first quarter of 2021. The remainder of the increase was driven by investments in our go-to-market and fulfillment activities in support of growing sales. Net income in the first quarter was $5.3 million, or $0.13 per diluted share, compared to $5.7 million, or $0.17 per diluted share in the year-ago quarter. Adjusted EBITDA in the first quarter increased 85% to a record $19.7 million, or an adjusted EBITDA margin of 17.4%. This compares to $10.6 million, or an adjusted margin of 14.1% in the same year-ago quarter. The strong adjusted EBITDA results were driven by our Precision Sport segment and the higher margins those products carry. Now, I'll shift to liquidity and asset efficiency. Inventory levels were at $152.7 million, up 18% from where we ended 2021. The dollar increase reflects proactive buying across all of our segments given the demand curve. In addition, we experienced longer lead times during the quarter, translating into higher than normal inventory levels. We expect these supply chain challenges to subside in the back half of 2022, as we are now currently starting to see lead times improve, which we expect to also translate into lower levels of inventory at year end. As of March 31, 2022, cash and cash equivalents were $16.5 million compared to $19.5 million at December 31, 2021. Free cash flow, defined as net cash provided by operating activities less capital expenditures, for the first quarter of 2022, was a negative $12.7 million compared to a negative $3.9 million in the same year. The decrease is primarily due to our investments in inventory previously noted. As of March 31, 2022, total debt was $151.9 million, putting us in a net debt position of $135.5 million. Net debt leverage was 1.9x on a trailing 12-month adjusted EBITDA basis, which is right at the low end of the 2x to 3x targeted leverage goals that we shared last quarter. In connection with future M&A, we may expect that we may extend our leverage a bit higher. But when we do, we will always seek to have a clear plan of how to bring it back within this targeted range over the course of a 12-month period. We are owners and operators that are committed to being shareholder-friendly and responsible in how we run the business and manage leverage. On April 18, we took an additional step to strengthen our ability to pursue other activity-based Super Fan brands by upsizing our credit agreement to $425 million. The new credit agreement is very similar to our prior agreement. But working with our expanded banking partners, we were able to expand our bank group to seven banks and increased our revolving facility from $100 million to $300 million. We continue to have a term loan in the amount of $125 million, bringing the total facility to $425 million compared to our prior credit agreement of $225 million. We look forward to prudently using this additional capital to seek to invest both organically and inorganically to create shareholder value. Let me move on to our outlook for 2022. We expect consolidated 2022 sales to grow 25% to $470 million compared to 2021. By segment, we expect sales for the Outdoor segment in 2022 to increase high-single digits to approximately $237.5 million and sales for our Precision Sport segment is expected to grow low single-digits to approximately $112.5 million. We also expect sales from our Adventure segment to contribute approximately $120 million in 2022. Specifically for the second quarter of 2022, we expect consolidated sales of approximately $110 million. More importantly, we expect the growth in the second quarter to be broad-based, with all three segments expected to deliver sales growth. On a consolidated basis, we continue to expect adjusted EBITDA in 2022 to grow approximately 27% to $78 million. In addition, we still expect full-year capital expenditures of approximately $9 million, and free cash flow is still expected to range between $50 million and $60 million for the full-year 2022. From a tax perspective, I'd like to address our NOLs. We have delivered record sales and profitability that has enabled us to deploy over $350 million of capital on acquisitions, starting with Sierra Bullets in 2017. Since this time, we've also realized over $109 million of tax benefits associated with our NOL carryforwards. In 2022, we expect to realize $39.5 million in tax benefits prior to their expiration at the end of 2022. This is quite a testament to our organization's accomplishments in making accretive acquisitions while driving significant cash tax savings in value creation for our shareholders. Finally, I'd like to address our capital allocation priorities. We are very pleased with the direction of our business, which we believe inherently provides us with additional growth opportunities for us to evaluate both organically and through M&A. As we've historically shown, we will continue to seek to utilize our balance sheet as the first and foremost way to growth. We have a business with increasing levels of EBITDA and strong recurring free cash flow. We are owner-operators that are committed to being shareholder-friendly and responsible in how we run the business, including the amount of leverage we take on. We also maintain a $30 million share repurchase program, which still has approximately $10.8 million available. Over the years, we have purchased nearly 3.5 million shares of our outstanding common stock at a cost of approximately $19.2 million at an average price of $5.42 per share. From a capital allocation strategy, we expect to continue to prioritize organic growth, M&A, and our quarterly dividend over share repurchase, but we will continue to seek to accumulate shares on an opportunistic basis. I'll pause here and hand the call back to the operator as we are now ready for Q&A.

Our first question will come from Randy Konik with Jefferies.

I guess, Aaron is there, right?

Yes.

I would like to hear your thoughts on the supply chain cost trends moving forward. Are costs continuing to rise, or are they starting to stabilize? I’m also interested in your insights on lead times, which you mentioned affected our ability to meet demand in the quarter. Are those lead times starting to level off, or are they still increasing?

Yes, absolutely. On the cost side, things are beginning to stabilize, although I wouldn't say they're fully normalized yet. As Mike mentioned, we've managed to navigate these changes in a disciplined manner, both in terms of handling cost inputs with our vendor partners and managing general pricing strategies. Fortunately, the cost inputs are starting to stabilize, leading to a flatter trend line. We're actively collaborating with our vendor partners, as well as our R&D teams and supply chains, to implement cost-cutting measures and redesign initiatives. The advantage of our Innovate and Accelerate playbook is that introducing new products allows us to reset market prices for those items. Regarding the delays in the Outdoor business during Q1, we built up inventory to counteract the longer lead times caused by logistical challenges. We felt optimistic towards the end of last year, but around mid-February, we noticed that lead times for transporting products from Southeast Asia to the US and Europe extended by approximately 30 days, creating a gap in Q1. However, we began to see improvements in April as things started to stabilize and return to the typical lead times from Q3 and Q4 of last year. The positive news is that inventory is now flowing back into warehouses. As Mike noted, we had significant inventory on the water, which is now arriving at our facilities. Looking ahead to Q2, we anticipate that all business units will resume growth. While we’re not completely out of the woods yet, we are witnessing stabilization and are returning to a more natural rhythm that should allow us to grow the businesses again.

Super helpful. And then I guess my last question is, you talked about or Mike brought up the nice growth within the Outdoor segment of apparel. Just wanted to get some perspective again, maybe from John or Mike's perspective, where do you think apparel can kind of get to from a penetration of total perspective? And then just how you're thinking about channel mix in terms of DTC versus wholesale, again, within the Outdoor segment? Just curious on how you're thinking long-term where that kind of channel distribution penetration goes?

Yes. So, obviously, we really focused on this apparel-as-equipment concept and we've seen that really focused on three initiatives of growth within apparel that are happening, both when we reported last quarter, but also this quarter and moving forward, that being snow, performance rainwear, stretch rainwear, and rock bottoms. And then obviously, from there, we fill in what is the rest of sportswear. And those three categories are growing significantly. We think that now opens up new expansion of opportunities within existing doors, as well as new door opportunities as we head into both the bookings that we saw in fall '22 new door expansion, but then as we now launch into spring '23, which is happening here momentarily. To your second question, what gives us the great confidence in apparel at this time is that, obviously, we have the Super Fan equipment, apparel-as-equipment strategy that really focuses, first and foremost, on ensuring we're building the right product for the core. And the measurement of that is do we have a higher penetration and success through D2C and through our own expanded retail flagships. And the answer on both of those is yes. And there, we currently see a global apparel business that's about 15% of our sales globally, but we see apparel represent anywhere between 40% to 60% monthly in our D2C and in our flagship retail stores. And that just gives us the great confidence that we're aligning correctly with this core Super Fan consumer, while at the same time expanding that success into our wholesale distribution. Long term, I think we'd like to see it somewhere around 30% of our sales direct-to-consumer. Obviously, apparel has a wide footprint. Men's and women's, eventually in the kids, you name it. So it gives you a lot of opportunity in that. And our big growth in the next few years is to get the level of success that we see in D2C and retail in our biggest key accounts and then our specialty retailers globally.

And our next question will come from Laurent Vasilescu with BNP Paribas.

Mike, I think you mentioned for 2Q and I appreciate this, that we should think about 2Q revenues at $110 million, which I think you mentioned maybe some balanced growth across the segment. If that's the case, then Precision Sport would be up in 2Q year-over-year. Should we assume that, that segment should be down double-digits in the back half if that's the case? Just curious to know what's the driver on that?

No, you understood that right, that the $110 million, and we do expect our Precision Sports business to show growth in the second quarter as well. But as we've been saying consistently here, it's not a question of demand even across Precision Sports. It always comes back to the question around capacity, which the team has done an amazing job, continuing to add capacity. But also when we talk about being scrappy, it's around making sure we can source, specifically from an ammo standpoint, the shell casing, right? We've talked a little bit about the challenges sourcing that. So, we don't have a full view on the back half yet for Precision Sports. We're taking it one quarter at a time. We've been conservative with our view on that business here. 65 days ago when we released first year-end and gave the guidance for the full year for 2022, and we're going to continue to be prudent with our view on how that business performs throughout the year, but it has gotten off to a great start, as you're noticing. And we do expect it to grow in the second quarter as well as we sit here in May in our understanding, but we're going to be prudent as we look through the remainder of the year.

That's great to hear, Mike. And then my second question is really kind of a two-part question here. But can you parse out the drivers of the first quarter gross margin? Most companies or guys are reporting gross margins down. So just like to get to understand what's the drivers? How do we think about gross margins as they evolve over the course of the year? And then back in 2020, I think it was called out on one of the earnings calls that BD had about 1/4 of its supply chain coming from China. Just curious to know where that stands today and if you're seeing any disruptions from the lockdowns in China.

I'll address the first question regarding margins and leave the supply chain inquiry for Aaron. We initially projected a 39% margin for the entire year during our first quarter call in March, and we achieved that this quarter. However, it's somewhat mixed. Much of the margin improvement came from the Precision Sports business. The Black Diamond and Outdoor segment remained flat, putting pressure on margins there. We anticipate that, as Aaron mentioned in his response to the first question, the Black Diamond business will improve over the year, and margins will align with the anticipated growth in that segment as the supply chain issues begin to ease in the second quarter and more significantly in the latter half of the year. Thus, the margin reaching 39% is due to a combination of these factors.

Lauren, regarding our exposure to China, we are maintaining our current position. This situation underscores the ongoing efforts of our team to collaborate with supply chain partners and navigate various market challenges, such as shutdowns and logistic delays. It further confirms our strategy of investing in inventory to reduce risk by holding slightly more inventory than usual. This approach aims to ensure we deliver high service levels to both our retail partners and end consumers in our direct-to-consumer channels, enhancing delivery and on-time fulfillment.

And our next question will come from the line of Matt Koranda with ROTH Capital.

So, you guys mentioned in the prepared remarks, I think, if I heard correctly, on average, about 6% contribution from pricing increases in the quarter. So, I was just curious if you could maybe discuss the segments where you've had the ability to push price a bit more. My assumption, I guess, would be you guys have the ability to take a bit more price more recently in Sierra, Barnes, maybe a little bit less so in BD, just given some of the supply chain challenges. But are we correct in our thinking there? And then maybe just how to characterize price within Rhino-Rack and MAXTRAX? And then where is there still opportunity for the rest of this year for additional action on price?

I will start and then John and Aaron can add their insights. As we mentioned in our previous call, we implemented a price increase late last year across our entire portfolio. On average, these prices have risen about 6%. We are capturing this price increase throughout the business. However, we are also facing higher costs. We had anticipated that costs would increase by around 500 basis points, which we expected would result in approximately a 100 basis points improvement in margin, and we are seeing that happen. We have successfully realized the price increases and will continue to do so across the portfolio. We will reassess this throughout the year based on the input costs we encounter. Currently, copper prices are around $4.35 per pound, and we are observing similar increases in aluminum. We will remain cautious and ready to adjust as needed later in the year with further price changes.

The only other thing I would add to that is, obviously, each business has its own cyclical nature. In the case of Sierra and Barnes, we typically, unless absolutely necessary, do price increases once a year. However, in the BD world, each season, both through NPI and new products, we get to raise prices on new introductions, innovations to the market. And then we revisit pricing every single season, both relative to the input cost, but also relative to the competition and how we position ourselves in the marketplace. And so it's an always ongoing topic. And as we look to spring '23, we revisit that again. But we think of pricing as a way to both, how we position our brand, but also how we maintain our margins and our overall perspective on the market.

Great. Very helpful, guys. And then just when we think about the supply chain challenges subsiding at BD later this year, maybe just put a finer point on this for us. It sounds like it's mostly just a function of improvement in inbound ocean freight and sort of the timing there. But is there also some assumed improvement on the product sourcing side? Could you just break it down a bit more for us in terms of what's driving the improvement in the back half of the year?

Certainly, Matt. Our commentary is more about stabilization rather than improvement. This distinction is important as it reflects our supply chain strategy and how we manage our balance sheet. We expect some supply chain challenges to ease, particularly regarding inventory availability. However, we still face issues, especially with microprocessors needed for our lighting and avalanche transceiver beacon products. Our team is actively addressing these challenges daily. Thanks to our business planning and strong relationships with supply chain partners, we receive prioritization and are well-positioned to achieve favorable outcomes. Consequently, we'll continue to be focused and disciplined in how we allocate our capital towards inventory during this time to enhance fulfillment and ensure timely deliveries.

If I could just sneak one follow-up on the inventory side. Is there a way for you guys to quantify how much inventory is still on the water that's embedded within the inventory balance at the end of 1Q? Just curious if it's expanded year-over-year, how that's trended since 4Q? Maybe just any trends you can mention on that front would be super helpful.

Yes. We always have a certain level of inventory on the water naturally. But when we look at the inventory levels that existed at the end of the quarter, I'd say that we're sitting on $20 million of extra inventory that is just working through the system and that we purposely brought on in order to mitigate some of the supply chain or logistic challenges or delays that we're experiencing. It is important to highlight, though, that we're very sensitive to, one, the generation of free cash flow and the way that we manage the overall health of our balance sheet, particularly that of inventory, but also the way that we manage our line plans. And as a result, we continue to be very confident that the inventory that we have on the books will translate into full price in-line revenues over the next quarter or two.

Our next question will come from Mark Smith with Lake Street Capital.

I want to look at Precision just a little deeper here. Can you talk any more about the mix of ammo versus bullet and kind of how each of those segments trended during the quarter?

Yes. So if you look at the way we reported it here, we're seeing significant triple-digit increases in our ammo. We're seeing 50-plus percent growth in our OEM businesses. Obviously, as you well know, we're not doubling and tripling our production. So, we make choices between what we call reloading bullets, green box or black box to that of OEM and ammo. And as we've often said, we prioritize ammo OEM and in green box in the allocations. Obviously, ammo is a function, as mentioned through this, ammo is also a function of chasing brass and cartridges. And so when we're scrappy and able to pull it off, we see better than accelerated opportunity. And if and when we can't pull off the brass, then obviously, we reallocate towards the OEM and the green box or black box depending on the brand, mix of bullets.

Okay. In that business, as we examine international performance, you achieved your best quarter ever in that segment. Was this due to Europe recovering, or did you have the capacity to ship to international markets? What was the primary driver behind this?

That's OEM business that our team over to Precision Sports Group was able to execute on. I think you're probably seeing a number up from like a $1.7 million to over $5 million. So, there's over $3.5 million of growth and it's all in the OEM side of space.

And Mark, just to reiterate there, though, it's not that we see the slowdown in the domestic market. What it was is that these orders have been outstanding for an extended period of time. And we just felt it was necessary or appropriate to allocate some of our capacity to those customers. Pre-2020, we had a very balanced approach in terms of how we were dealing with the domestic versus international side of things, and the international piece will continue to be an area of focus and also an opportunity for growth, especially now that we have the Barnes business within the portfolio, especially when you think about being able to provide an all copper offering. And so it's something that we felt was getting to the point where it was of strategic importance to be able to allocate and service that market, which once again was underserved over the last 12 to 18 months.

Perfect. And then, I think the last one for me just as we look at the Adventure segment. Domestically, can you just talk about the growth there? Was that a function of more distribution or better sales within existing distribution or a solid combination of both those factors?

Yes. As we mentioned, we hold approximately 50% market share in Australia, while in the US we have under 2%. Last fall, we initiated a pre-season program that we previously discussed. In the first quarter, we concentrated on the top five to seven key accounts in the automotive aftermarket sector. We took advantage of the situation in Australia to reallocate inventory to North America in order to speed up our growth there. However, we could only focus on those top five to seven accounts and weren't able to maximize our reach across all of North America in the automotive aftermarket. Long term, we also aim to enhance our Outdoor segment. If the Australian market had been performing at its pre-COVID levels and not impacted by significant floods, it would have been harder to allocate inventory to pursue those markets, potentially slowing down our overall growth. Nevertheless, we were able to boost the North American market opportunity, reinforcing our belief that the potential in North America lies somewhere between 2% and 50%.

And our next question will come from Jim Duffy with Stifel.

Mike, John, Aaron, Cody, hope you guys are doing well. I wanted to start with some follow-ups just on the inventory questions. Maybe you can help us with a little visibility within the inventory balances. What's the current posture on raw materials? I recall you were front-loading some raw materials. If you continue to do so, is there any way to consider that as it relates to what we're seeing in the inventory number at quarter end?

Yes, that's part of the $20 million, and I wouldn't describe it as excess inventory, but rather higher than normal or optimal inventory levels. We have close to $5 million of raw materials that fall into that category. It's crucial for us to ensure that our capacity is optimized, not only in how the plants operate but also in managing the flow of inventory effectively. This has been a key element we were missing at the start of the year, particularly in having the raw materials and components needed to enhance our operations and increase our capacity more efficiently. We have made progress in securing these components, although we are not yet at our desired level. By being resourceful and taking advantage of opportunities, we have managed to secure more components than before, which gives us confidence about the rest of the year, especially regarding our ability to distribute ammunition and further develop initiatives for both the Barnes and Sierra businesses.

Got it. And you guys have given us some interesting perspective with the backlog for the Black Diamond business versus the revenue guidance. Can you talk about the current backlog for Precision Sports? I'm curious, how does that compare the revenue assumptions that you're looking at for the second quarter? And if I'm understanding things, it sounds like the principal bottlenecks with respect to supply are within the ammunition offering.

Yes. So as we look out, obviously, we think of this business in three perspectives, that of the reloading components, what we either call green box or black box depending on the brand Sierra here vs. Barnes. And then there's obviously the OEM businesses, which is a bigger proponent of that is in Sierra. And obviously, again, recognizing that Sierra is on track to a run rate of 330 million bullets, whereas Barnes is on a run rate towards the end of the year of 110 million to 120 million, right? So a big OEM component. And then ammo. At Barnes, we can load our own ammo. At Sierra, we don't load our own ammo. We're not vertical, and so we use partners. Order books for OEMs are strong and growing. Order books for green box or black box are strong and growing. And obviously, we see opportunities in our prioritized ammo, but ammo in the case of Sierra is not 100% driven by us, both in terms of loading capacity at other facilities, as well as chasing brass cases to this. And at Barnes, there's more demand, specifically around centerfire going into fall '22, and that driver of the limiter right there again is brass. And fortunately or unfortunately, it's the same problem across the whole industry. So strong order books. We'll continue to be scrappy as we say, and chase the opportunity there. If and when we over-index, as we did in the first quarter, then you see the results. We see a strong order book for the second quarter, as well as our ability to chase that. And as Mike referenced, we would love to keep that momentum through the third and fourth quarter, but we can't see that far out in the crystal ball and know exactly when we can receive cases and opportunities to fulfill that.

Understood. I'm going to take things a different direction here. John, I was surprised you didn't call out footwear for Black Diamond. Can you give us an update on the footwear, the pipeline for future seasons? Is that still aligned with what you had shared with us in prior years? Or did COVID shift that around some?

No. We're still very optimistic about the footwear business. We've seen significant growth in the outdoor lifestyle segment, particularly in the technical approach we refer to as hike. We're continuing to pursue the climbing footwear market, and with the opening of climbing gyms, we're starting to see that segment turn around, especially with a new shoe launching in spring 2023. We believe there are still major opportunities in trail running. We're keeping our notes for the quarter concise and haven't included every single category. One of the surprises linked to footwear is that with climbing gyms reopening, there's been a strong demand for climbing equipment and footwear, which we didn't experience in the past couple of years due to COVID lockdowns.

Our next question will come from Joe Altobello with Raymond James.

This is Martin Mitela calling in for Joe Altobello. You mentioned earlier that your DTC channel went up about 38% for the quarter. How much is that in revenue, and what are your expectations for the full year for that channel?

Yes. We don't drop in specifically on the revenue aspect of breaking down the businesses. I will tell you that we have said that our goal is to continue to accelerate our D2C business. As we started, prior to 2022, our estimates were our D2C business is approximately 15% of our sales and that our long-term vision is that it should be probably more around 30%, given the acceleration of categories like footwear, apparel, in the mix. Clearly, it's outpacing our wholesale. And really, that's a function of mix as well. And that's why you actually see this interesting split between our apparel sales being up 53%, and our D2C being up 37% and our wholesale, i.e., highly equipment-driven, still chasing inventory to catch up. So that kind of gives you a sense of where those two categories are going. We believe that we'll be able to maintain that growth with D2C, both through our e-com and then also the expansion of retail. We recently opened Bend and Jackson Hole stores. And our goal is that over the next three years, we trend that to, like I said, at least 20%, if not approaching 30% of our percentage of business overall.

And our next question will come from Linda Bolton-Weiser with Davidson.

Yes. I was just curious how your businesses are expected to perform in like kind of a consumer recessionary environment. It strikes me that some of these outdoor activities could be discretionary and consumers might have to cut back on some of their activities if they were being a little bit pinched. And also in a recession, would there be like a different mix of demand for bullets versus ammo?

One of the key characteristics of the Super Fan brand is that it is activity-based. This is important because these consumers do not change their approach or lifestyle based on economic conditions. Instead, they remain very loyal and focused on their activities. Historically, particularly with Black Diamond, we have seen that during recessionary environments, it has been able to grow significantly. We believe this is due to what the brand represents to core enthusiasts and the activity-based concept. As we consider the various conditions in the current marketplace and how that might affect our business, we are very confident and optimistic about our direction and our ability to achieve our overall objectives. The end consumers we serve and the nature of the activities are very resilient and durable, consistently proving this over time.

I think, Linda, the best way to think of that is, if I lose my job, I may not go to Chipotle or the movie, but I'm not going to run any less. In fact, I may run twice a day just to deal with the anxiety, right? And therefore, I'll actually do more of the sport. To your question of bullets and ammo, frankly, because those that use our activity products, as Aaron said, are really engaged in shooting sports, whether it's hunting or target, this market doesn't really have a different impact versus a recession or not a recession, i.e., reloaders still reload bullets. Those that hunt and buy ammo still shoot ammo. And then on the OEM world, whether it's law enforcement or military, that doesn't slow down because of the economic trends.

Okay. Also, can you just talk about what you're kind of seeing in the M&A environment? I mean, are you kind of seeing pricing kind of moderating more? Are you seeing more opportunities? Or are you kind of holding back just because of the uncertainties in the macro environment?

No. We've always been transparent about our M&A strategy. We focus on Super Fan brands that perform well in both good and challenging times, often better during tough times. Our interest is primarily in the outdoor sector, and we currently have a robust pipeline of companies under consideration. There are clear opportunities in the Outdoor segment, and we are also witnessing strong demand and growth in the overlanding segment. Regarding pricing, we anticipate that business valuations may decrease as the market has begun to decline. Some of the brands we're evaluating may not reach completion in their processes, and we expect to see changes in the market. Importantly, we aim to ensure that every acquisition adds value to our business and aligns with our segments of Outdoor, Precision Sports, and Adventure. Each time we announce an M&A deal, we want everyone to think it is perfectly aligned with our strategy. This alignment is crucial for us. As operators and owners, we are committed to long-term success, making every acquisition significant to our operations.

And our last question will come from Ryan Sundby with William Blair.

Congrats on a nice quarter in a tough environment here. This one might be more geared towards Aaron. I think a little over a year ago, you started to transition away from a distributor model in Europe. Clearly, a lot has happened since then. So, I'm wondering if you could update us on how that transition progressed and if that's helped maybe improve visibility or flexibility during this time of the product uncertainty?

Without a doubt, Ryan, that's a great question. The transition is going very well. The European team has fully adopted the approach to serve core markets within the EU, especially focusing on the UK, France, and the Scandinavian markets. Despite the ongoing challenges from the Russian-Ukrainian conflict, we continue to see significant growth opportunities and momentum, both in bookings and ASAP replenishment orders. It's clear that the team has effectively connected with key retail partners and provided them with strong support. Additionally, we have made our strategy clear to our retail partners, which is backed up by results that exceed industry standards in terms of on-time and complete deliveries. Recently, we received positive feedback regarding our management through Brexit, with BD being recognized as one of the top brands for our communication and support for retail partners in the UK. This reinforces the importance of this region for us, especially for the Black Diamond brand, and it aligns with our model as we look to expand global distribution across our various brands.

And that was a significant move in the UK because it's one of the top outdoor markets, obviously, in Europe, #2, but also globally as a trendsetter in an area where we really saw opportunity.

Yes. Good to hear demand is going out well and transition is going well. I just wanted to follow up on a couple of other questions that were asked. With apparel growth up over 50% this quarter, I mean, what is it about that, that you've been able to get your hands on products easier for that over the hard goods? And then with Rhino-Rack, just given the lockdowns and the flooding there, I just want to make sure I understood, were you able to maybe lean or shift product into North America a little quicker than you thought to help offset that pressure? Just wanted to follow up there as well.

Yes. The apparel segment has been a significant focus for us, as we have intentionally prioritized this initiative at an organizational level. The delays we experienced regarding inventory in the hard goods category were primarily due to specific items like lighting and trekking poles. We faced logistics delays, which were exacerbated by pressure on aluminum supplies. These issues resulted in a backlog that we struggled to address, as logistics delays extended from 90 days to 120 days, creating substantial gaps in the hard goods segment at Black Diamond during the first quarter. However, our supply chain and inventory flow are now back on track, and we will expedite inventory for those high-demand product categories since they are among our top sellers. Not meeting this demand has directly affected our business growth. Regarding Rhino-Rack, we anticipated this would be a great opportunity, particularly because Rhino-Rack has a strong presence in Australia. We recognized North America as a key area for growth during our due diligence and integration efforts. Last fall, we began preparing to ensure we had the right inventory in North America at the right time. The challenges of flooding and COVID shutdowns also provided us some reprieve, allowing us to better focus on the North American market. Our ability to deliver on time and maintain high fulfillment levels is critical to our success. In response to a question about expanding distribution, we have not expanded; we have continued to support our top accounts. Now, with Rhino-Rack positioned effectively in North America, we are confident we can expand distribution as the necessary inventory is readily available in our warehouse.

First find the ceiling for the business you have today before you look for another bucket to fill.

Thank you. At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Walbrecht for closing remarks.

Thank you, everyone, for your support today and listening in. We super appreciate it. And we look forward to speaking to you again when we report on our second quarter 2022 results. Thanks, everyone, and be safe.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.