Clarus Corp Q2 FY2022 Earnings Call

Thanks. Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements and we make these statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to the risks and uncertainties that face Clarus Corp. and the industries in which we operate. More information on potential factors that could affect the company's 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 through August 1, starting at 7:00 p.m. Eastern 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 claruscorp.com. Now, I’d like to turn the call over to Clarus’ President, John Walbrecht. John?

Thank you, Cody and good afternoon, everyone. I want to first thank all of our employees for their tenacity and dedication this year. The challenges that our world has faced certainly did not get any easier in the second quarter. But as promised, our portfolio of superfan brands continued to lead growth in each of their categories. At Clarus, we have intensely developed a strategy to target brands that can create markets through our innovate and accelerate efforts, serving the ever-loyal activity-based consumer who has historically shown resilient buying behavior during economic downturns. Our purpose is to innovate the very best products so our consumers can have their very best days in the mountains. Despite seeing a bumpy road ahead, we are in no way putting our foot on the brake. Instead, we are committed to activating the go-to-market activities within each of our brands. Through a disciplined approach to the new product introductions, continuous improvement activities within our supply chain and operations and increasing the number of touchpoints with retail partners and consumers, we believe we are well positioned for continuing market share gains. Our second quarter results continued to showcase the value of superfan brands and their superfan communities, so let's summarize a few key highlights: One, we experienced demand and growth across all three segments: Outdoor, Precision Sports and Adventure, as the activity-based consumer continued to chase outdoorism as their escape. Future bookings for both fall '22 and spring '23 continue to show strong demand across all categories and all segments. Two, we invested in our world-class teams, incorporating a best-in-class operating model and activating our superfan brands through our innovate and accelerate strategy. A key element of our operating model is ensuring we are over-indexing on growth initiatives, engaging with our consumers, eliminating value leakages and reducing complexity. Although we are in the early days of organizing ourselves around these objectives, we are already seeing the benefits of such efforts, further driving towards our targeted growth and profitability goals. Third, we continue to scale our business, expanding the number of touch points with both our retail partners and end consumers, while enhancing the capabilities and capacity of our operations. Four, investments in our direct-to-consumer businesses, both in e-commerce and retail, are generating strong growth and more importantly, a positive response from our superfans. In fact, EDC posted 30% growth in the second quarter. Fifth, price increases implemented in both the 2021 and 2022 years are sticking, allowing us to achieve improved margins despite value leakages caused by foreign exchange rate fluctuations, increased logistics costs and higher amounts of airfreight utilized due to the supply chain challenges. We are confident in the gross margin enhancing strategies being activated and that such value leakages currently face are transitory in nature. As such, we expect to see improved results in future quarters. Sixth, as we head into the second half of the year, we are focusing on driving continuous improvement initiatives around gross margin-enhancing activities, as well as efficiently scaling our SG&A. Seventh, we have used our balance sheet wisely, focusing on inventory planning and capacity expansions across all our brands. We believe this will pay off in future quarters as current demand continues to transfer into market share gains. And finally, we will continue to exhibit strict discipline with our capital allocations as it relates to organic growth and future M&A opportunities, as well as our newly announced stock repurchase program. Now I will dive into some more detailed comments on these three segments, first, Outdoor. The demand in the Outdoor segment remains strong. Black Diamond proved again its industry-leading momentum, creating more than 2.2 billion impressions and driving growth across all categories, most importantly in apparel, headlamps, trekking poles and core climbing equipment. These categories are entry pathways to the Black Diamond brand, given their approachability to the everyday consumer as well as their large total addressable markets. Throughout the pandemic and through spring 2022, we have been prioritizing product innovations and fulfillment in these key categories and the consumer response has been strong. Overall, for Q2, Outdoor experienced better than 20% growth when adjusted for the FX headwinds. During Q2, we continued to face supply chain and logistics challenges and other delays caused by COVID-19-related shutdowns in Southeast Asia, resulting in roughly $10 million in demand that had already been produced but was stuck in transit. We finally called this back-order demand. Roughly half of this demand was in our key product categories and we expect to convert this into in-line and full-price revenue in future quarters. With strong consumer activity in climbing, back country skiing, trail running and hiking, our global order book for Black Diamond has sustained its momentum. We continue to purchase inventory in line with our demand plans. However, we are handicapping the order book in our 2022 sales guidance because of the supply chain and logistics challenges we continue to face, as well as the headwinds experienced from foreign currency which Mike will discuss further. Second, moving into Precision Sports, our Precision Sports segment delivered another record sales quarter, once again proving the premium positioning and product innovations pave the way for continued market share gains. Demand remained high in the quarter, especially for centerfire bullets. We are proud to have built the enviable position of being able to deliver a premium, unique product demanded by the special forces, law enforcement, reloaders, competitive shooters and hunters. If and when the market slows down, we have a deep pipeline of new product innovations ready to launch to our superfans and OEM partners. As demand continued to exceed supply for both Sierra and Barnes, we continued to increase capacity in both bullets and loading of ammo, driving towards an end-of-year bullet production run rate target of 350 million bullets at Sierra and 120 million at Barnes and an ammo-loading capacity of 50 million rounds. We believe it is inaccurate to lump our Precision Sports brands into the broader ammunition market, given our unique product and brand positioning, our leading specialty market share, our premium prices, enthusiast in consumers and growing demands by our various channels worldwide. Again, what drives our demand across very diverse geographies and channels allows us to shift quickly when one channel slows or in supply chain limits other opportunities. For the rest of 2022 and into 2023, we see our strong demand continuing. Over the past two months, our leadership has had the chance to meet our top 30 Precision Sports accounts and these interactions only confirm our continued long-term demand expectations for both bullets and even more ammo. Looking forward, we will continue to innovate new products, increase our capacity, source the best components and strengthen our on-time deliveries and fulfillment goals to ensure our ease of doing business with our key partners. Finally, the Adventure segment. Within our Adventure segment, it has been a very exciting first half of the year. We are implementing our operating model and expanding our supply chains, strengthening our teams globally and starting to activate our innovate and accelerate strategy for 2023 and beyond. The global auto industry is anticipating strong demand growth for vehicles across Toyota, Jeep, Ford, Dodge and Chevy, as well as Polaris and we believe this will continue to accelerate the overlanding market. Q2 marked the second quarter of Rhino-Rack's introduction into North America and reception remained strong, as pro forma sales were up 31% in North America. MAXTRAX also had strong growth in North America, as we race to increase inventory allocations to meet the demand for our recovery boards. This is notable for two reasons. First, the overlanding market was challenged in the quarter, due to high gas prices and supply chain issues that impacted the delivery of new vehicles. This included key vehicle introductions like the new Ford Ranger and Bronco, the new Toyota Range and the new Jeep Gladiator. As a reminder, new vehicles enhance our ability to drive new product introductions, so we believe our sales would have been even greater in a normal supply environment. And second, driving sales in North America was a key thesis of our M&A strategy for both brands. We believe the North American market is roughly 10x the size for our two brands' home markets of Australia and New Zealand but is also approximately 10 years behind the curve. Our conclusion: huge long-term opportunity is expected. Speaking of Australia and New Zealand, Q2 represents the seasonal slow period in these markets because it's now their winter. We use this time to focus on new product innovation and shifting our inventory to our North American market. Looking to the back half of 2022, we are focused on expanding distribution, building consumer awareness and launching our 2023 products to the global market at the SEMA show this November. In addition, we will be preparing to take over the North American distributor role for our MAXTRAX brand on January 1. This strategic move will allow us to accelerate the brand in our backyard market. Overall, our superfan brand consumers were resilient despite numerous headwinds in the first half of this year. This resiliency is a key attribute to our activity-based consumer. When combined with our ability to drive innovation across our brands and our strong balance sheet, we believe we are poised for another record year in 2022. I’ll now pass it over to Mike to talk about our financial results in more detail. Thanks, Mike.

No, thank you, John and good afternoon, everyone. I'm pleased to be sharing the results of another strong quarter driven by a resilient portfolio of superfan brands. Sales in the second quarter increased 57% to $114.9 million, compared to $73.3 million in the prior-year quarter. The increase was broad based, with solid double-digit growth in our Outdoor and Precision Sports segments and revenue contributions up $22.8 million from Rhino-Rack, an acquisition completed last July and $4.3 million from MAXTRAX, an acquisition completed last December. If we had owned these two brands during the second quarter of 2022, pro forma growth for the entire company would have been 16%. The 57% reported increase in revenue for the second quarter is comprised of the following: Acquisitions contributed 37%; organic revenue grew 22%; and foreign exchange was a 2% headwind. Second quarter sales in the Outdoor segment increased 17% to $52.6 million, versus $44.9 million in Q2 of 2021. If you adjust for foreign exchange, outdoor sales would have been up 20% in the second quarter. As John mentioned, we continue to chase demand in our Black Diamond business but are still constrained by supply chain and logistic challenges that are resulting in inventory showing up late in our U.S. and European markets. We are growing but not as fast as the order bookings and demand would suggest. To address this, we are expediting delivery of goods via airfreight to have the right inventory on time to meet this demand. We will need to continue to do this in the third quarter to accelerate the Outdoor business in the back half of the year. Our apparel business continues to be our fastest-growing category within the Outdoor segment, with sales up 24% in the quarter. This is notable as apparel, along with footwear and our direct-to-consumer business, represent key strategic growth pillars over the next five years. Speaking of direct-to-consumer, we had another strong quarter, with 30% year-over-year growth due to continued momentum in our e-commerce offerings. Precision Sports sales increased 24% to $35.2 million in the second quarter. This was comprised of 44% sales growth at Barnes, driven by strong growth in Black Box and ammo. Sierra was up 9% compared to the prior year due to strong growth in both the domestic and international OEM businesses. Our Precision Sports team continue to do an excellent job working to fulfill strong demand, increased production capacity and navigate a challenging sourcing environment. Our Adventure segment contributed sales of $27.1 million in the second quarter. On a pro forma basis, the Adventure segment was up 5% compared to the second quarter of 2021. Rhino-Rack sales were flat compared to the comparable quarter in the prior year. Slow deliveries of new trucks in Rhino-Rack's market of Australia and New Zealand impacted our ability to drive product sales for those vehicles. Offsetting this headwind was continued momentum in the North American market, as sales were up 31% for Rhino-Rack USA. MAXTRAX sales were up 46% on a pro forma basis due to growth in both the U.S. and Australia. Let me move on to gross margins. Consolidated gross margin in the second quarter declined slightly to 38%, compared to 38.2% in the year-ago period. Improvements in channel and product mix were offset by unfavorable freight costs as well as unfavorable foreign exchange in the Outdoor and Adventure segments. Foreign currency had a negative impact of 80 basis points and airfreight cost us another 130 basis points on our consolidated gross margin rate. Excluding both, gross margin in Q2 would have been 40.1%. Given the environment we are living in, it's worth reiterating our commentary on pricing. So far in 2022, we have increased pricing by approximately 6% across the Clarus portfolio. As John mentioned, pricing is sticking and outpacing our material and wage cost inflation. The variances associated with freight, specifically airfreight, are expected to be a challenge for the remainder of the year. Selling, general and administrative expenses in the second quarter were $35.4 million, compared to $20.7 million in the same year-ago quarter. The increase was primarily due to the inclusion of Rhino-Rack and MAXTRAX which contributed $9.8 million in expenses. Noncash stock-based compensation for stock options and performance awards were $3.6 million, a $1.7 million increase compared to the second quarter of 2021. The remainder of the increase was driven by investments in the Outdoor segment's direct-to-consumer initiatives, along with the higher corporate costs. As we enter the back half of the year, we are being very deliberate with our spending and we are taking the necessary actions to control fixed and discretionary spending across the portfolio. Net income in the first quarter increased 105% to $3.8 million, or $0.09 per diluted share. This compares to $1.8 million, or $0.06 per diluted share, in the year-ago quarter. Adjusted EBITDA in the second quarter increased 51% to a record $17.6 million or an adjusted EBITDA margin of 15.3%, compared to 11.7%, or an adjusted EBITDA margin of 15.9% in the same year-ago quarter. The lower adjusted EBITDA margin reflects the lower gross margin I just discussed, as well as investments we made to grow our Outdoor segment. Now let me shift over to asset efficiency and liquidity. Inventory levels were $153.1 million, roughly flat from Q1 of 2022. As discussed, we are carrying higher inventory than we otherwise would to ensure on-time deliveries and fulfillment, as well as to mitigate supply chain and logistics challenges. As a reminder, our inventory does not go bad but we are still focused on reducing our inventory in the second half of the year. In fact, our goal is to end 2022 in an inventory position that is $10 million lower than where we ended Q2, or approximately $143 million. This is inclusive of carrying approximately $10 million of extra inventory into the first quarter of 2023 to facilitate growth. At June 30, 2022, cash and cash equivalents were $13.9 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 second quarter of 2022 was $2.3 million, compared to $1 million in the same year-ago quarter. This is due to higher net income. At June 30, 2022, total debt was $149.6 million, putting us in a net debt position of $135.7 million. Net debt leverage was 1.8x on a trailing 12-month adjusted EBITDA basis which is below the low end of the 2x to 3x targeted leverage goals that we shared last quarter. Currently, we expect to maintain leverage at the lower end of the target range. Under our new $300 million revolving credit facility, we have $25.5 million outstanding at June 30, 2022. We have further borrowing capacity of nearly $275 million at June 30, 2022. To be clear, we could borrow the full amount and still be in compliance, combined with the required coverage under the credit agreement. So, from a capital perspective, we are in great shape. We are owners and operators that are committed to being shareholder friendly and responsible in how we run the business and manage leverage and most importantly, how we deploy capital. Now let me move on to the 2022 outlook for the remainder of the year. We continue to expect consolidated 2022 sales to grow 25% to $470 million compared to 2021. Please note, this assumption now assumes we will overcome a $7 million foreign exchange headwind to sales in the second half of the year, given the sharp movement in the U.S. dollar versus the euro and the Australian dollar. By segment, we still expect Outdoor sales in 2022 to increase high single digits to approximately $237.5 million. Given the continued outperformance in our Precision Sports segment, we are raising our full-year expectations in this business to now grow 16% to approximately $127.5 million. This was from a previous guide of $112.5 million. We also now expect sales from our Adventure segment to contribute approximately $105 million in 2022 from $120 million previously. This revision is primarily being driven by the slow market conditions for Rhino-Rack due to COVID lockdowns and the historical floods in its home market of Australia in the first half of the year, as well as the delays we've mentioned in the rollout of new vehicles. Specifically, for the third quarter of 2022, we now expect consolidated sales of approximately $118 million. 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 but free cash flow is now expected to range between $30 million to $40 million for the year, primarily due to delays in being able to adjust inventory levels back to historical levels. To close things out, we are very aware of the headwinds that continue to face companies and the consumer today. While the activity-based nature of our superfan brands has thus far insulated us from a sales slowdown, we are being prudent with our P&L. This includes a 6% price increase across the portfolio which is being realized and has more than covered the higher costs we are realizing for wages and material cost inflation. It also includes a series of continuous improvement initiatives around gross margin and further scaling of our SG&A. Within gross margin, we are very focused on capacity and increased efficiency, along with the elimination of value leakages primarily around the cost of freight and extra costs incurred with supply chain delays, the redesign and resourcing of our products, as well as pricing. Within SG&A, we continue to reallocate and reduce complexities that enable us to scale more quickly, eliminating investments in anything we view as non-strategic to our brand and taking targeted actions to reduce certain fixed costs. From a tax perspective, I would like to reiterate our comments about NOL. We have delivered record sales and profitability that has enabled us to deploy over $350 million in capital on acquisitions, starting with the Sierra Bullet acquisition in 2017. Since this time, we have also realized over $109 million of tax benefits associated with our NOL carryforwards. We expect to realize $39.5 million in tax benefits prior to the expiration at the end of 2022. Finally, I would like to address our capital allocation priorities. We are pleased with the long-term 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 previously highlighted, we have further borrowing capacity of nearly $275 million at June 30, 2022. And as we have historically shown, we will continue to seek to utilize our balance sheet which we have strengthened by reducing leverage and increasing liquidity, as the first and foremost way to grow. From a capital allocation strategy, we expect to continue to prioritize organic growth, accretive M&A, our quarterly dividend and the repurchasing of shares, in that order. Specifically related to accretive M&A, we continue to be active in evaluating opportunities. Given the current economic backdrop, we are seeing more opportunities to consider, as well as lower expectations when it comes to price. This is a key underpinning to our value creation strategy and one that we are well positioned to activate. In addition, we are pleased to announce that our board has approved a new $50 million share repurchase program which will be available to the company to acquire shares on an opportunistic basis, whether it be in the open market or Dutch auction tender offer. I will pause here and hand the call back to the operator, as we are now ready for Q&A. Thank you.

Congrats on a strong quarter. Just first, it looks like the Precision Sports segment continues to outperform well ahead of your expectations and you took up the guidance there. Can you maybe just give us a little more color on sort of what is driving that? Also, the EBIT margin there continues to remain very elevated around 35%. Maybe just talk to us a little bit on some of the key profitability drivers there as well.

I think it's first and foremost important to state that, obviously, as excited we are about the superfan brands of Sierra and Barnes, realize that these brands represent 1% or less of the actual addressable market of this. We are the Porsche and the Ferrari of this space. We really focus on premium products and we really focus on the innovation that creates this optionality that allows us to sell all over the globe geographically and also through every channel. So, we can sell to military, law enforcement, reloaders, competitive shooters, hunters, wholesale, retail, OEM, you name it and that optionality has been one of our strengths. The other side and why we continue to see strong EBITDA in this market, is because we have really focused on this acceleration of our capacity, both within bullets which is the mainstay of our business, right and the target run rate at Sierra of 350-plus million bullets by the end of the year at 120 million-plus at Barnes and then continuing to be as scrappy as we can and being opportunistic as we can in acquiring cases so that we can load ammo, remembering that ammo is 5x the valuations of the consumer as bullets. We can sell every bullet we can make and there's really an allocation exercise across the different opportunities, geographies and channels. And our goal really is just to continue to make the very best products in this space, knowing that there is a lot of demand long term for it and realizing that we are really at the tip of the pyramid from both a market share but really also more from the types of bullets we build and the way in which they're positioned in the marketplace.

That’s really helpful. And then, maybe just a broader question. What is your sort of current view on the sort of state of the overall consumer? Are you seeing any signs of slowdown, given some of the inflationary pressure that others have called out? And I guess just a part of that, other apparel retailers in the outdoor space have called out sort of order cancellations from some of the retail partners, given some of these consumer headwinds. Is that anything you guys are seeing on the Black Diamond side?

I would like to focus on two points, starting with the consumer. It's clear that consumers are dealing with higher inflation in their daily expenses, from gas to groceries. Our strategy has always been to target the superfan segment. Each of our brands appeals to the top 10% in their respective industries. Once someone becomes a fan of our brand, they define themselves by it. For instance, if you're a climber, you identify with our brand, or if you’re an overlander, you choose our products. These activities are essential to these enthusiastic consumers. Despite the challenges they face, they will prioritize spending on their passions and adjust their budgets in other areas to maintain these activities. Yes, they may feel some financial strain, but we believe that even if they face job losses, they will likely continue participating in their hobbies since these provide an escape for them. Regarding the market state, we acknowledge there might be a potential slowdown. However, our approach differs because we position our products as gear rather than just apparel. Apparel constitutes a small portion of our business, around 15%, while it may average 85% for other brands. Our consumers select our apparel because it is essential for their activities; for example, you need a ski coat or gloves for skiing. This necessity typically grants us more stability compared to the broader market. Our focus on premium, activity-oriented products—which are designed to be lighter, faster, and stronger—provides us some insulation against market fluctuations. So far, we haven't experienced significant impacts, and since apparel only represents 15% of our business, our equipment segment further supports this insulation.

Perfect. Best of luck going forward.

First, I’d like to touch on the Adventure segment. In light of the headwind from new vehicle availability, could you provide some perspective on the extent to which sales historically have been to new vehicles? And is it fair to assume the supply headwind has less of an impact in North America, as the market is less mature than Australia? Or is the vehicle availability significantly worse in the domestic market.

Great questions, Anna. I think typically, new vehicles are a driving point for overlanding. From a percentage, I would say it's probably at least 10% to 15% a year in that space. Specifically, I think the potential left on the table was more in 2022 because of the real focus on overlanding. And specifically, we saw it with companies like Ford and the launch of the Bronco and the new Ranger, the explosion and lack of ability to get F-150s. We've seen it with the whole new Toyota Range which has gotten an amazing response and even that with Polaris and side-by-sides. I think in the U.S., again, because of the scale and this is super important in this, where we are the leading brand, have very established retail relationships in Australia, are the brand of reference and have 50-plus market share in that market, we get impacted a lot quicker because the rising tide, we are the rising tide. In the North American market, where we are 10 years behind, you know, 10% of the opportunity today accomplished and we're less than 1% of the market share, that's where we really drive towards accelerating on this and building the retail partnerships, building the communication and touchpoints with the consumer and really driving towards what we think is this ever-expanding demand in the overland market. So, we're again, by size, able to pick up more growth in the North American market versus what we traditionally already own and maintain in Australia and New Zealand.

Great. And earlier in the commentary, you touched on the importance of investing in approachable categories, such as apparel or trekking poles which are oftentimes entry points to the brand. Obviously, over COVID, we’ve seen an influx of new entrants across outdoor recreation. Can you speak to the extent to which maybe these newer consumers to the brand or outdoor recreation have – you’ve seen conversion towards higher-level products within the lineup?

Yes. I think what we've seen coming out of COVID is the explosion of outdoorism and we've seen it with the tailwinds. Now that gyms are open, we've seen a growth of the gym climber again come back. Last winter, we saw an explosion of new entrants into backcountry skiing and you need only go to a trailhead today to see the explosion of consumers in both trail running and hiking. I think what we see is that those entry categories are the categories that we continue to chase and not be able to keep up in, whether that's trekking poles and headlamps, whether that's entry lifestyle apparel, shorts that help them, things like that. This is past those entries and I think to be honest with you, probably as much as we chased that, I don't think we understood, again, how big that opportunity is. And as you know, we've talked about always focusing on the top 10% of the industry with our brand. And so, if you get an influx of new consumers, you can quickly see a demand that's a lot higher than you anticipated, given that you were only targeting the top 10%. And that's a little bit of what we experienced and that's the reference for the back order that we continue to chase, both through the first half and frankly, I think we will continue to chase it despite the increase in growth well into 2023.

I just wanted to see if we could attack the broader demand question from maybe a different angle. If you guys could maybe speak to inventory levels and your comfort with inventory levels at your retail customers kind of across the portfolio. And then, just anything on the POS data that you see that you could call out in terms of where demand may have lightened in the recent months versus where you’re still tracking at a similar pace to sort of throughout Q1 and Q2. I’ll start there and then I got a follow-up.

Okay. I think this reflects our superfan brands well. We monitor point-of-sale data weekly and maintain close relationships with all our accounts across different brands. We observe that superfan brands like Black Diamond, Sierra, Barnes, Rhino, MAXTRAX, and others tend to lead in the market. They are often at the forefront of category average growth and sell-through rates. However, retail open-to-buys might be affected by consumer sentiment, which could impact our allocations. The key issue is how quickly we can manage and allocate our inventories to match the sell-through rates. Logistics have created a backlog, making it challenging to move products fast enough to align with sell-through at some retail locations. Overall, the market has experienced a slowdown in lifestyle apparel, and there has been a decline in certain camping categories that surged during the COVID period. Thankfully, since our products are activity-driven and specific to end-use, we've managed to sustain our performance. Our focus is on optimizing open-to-buy allocations regularly on a seasonal, weekly, and monthly basis.

Great. Very helpful, John. And then, I wanted to follow up on the Rhino-Rack and the Adventure segment guide. So, it sounds like the majority of the cut to the guide for the full year is related to Australia and New Zealand and the inability of end users to sort of get the right off-road vehicles, including Toyota and some of the other new launches that have come out recently. But just wanted to be clear, is there anything coming out of the guide for the full year related to sort of the ramp-up in North America, or is it all effectively Australia and New Zealand?

No, Matt, it's actually all New Zealand and Australia. We're still tracking, like we were up 40-some percent in the first quarter here in North America and again 31% here in North America. We still are tracking above our markets and plans for North America. It's all related to the whole market in Australia for Rhino-Rack.

Great. And then, anything within your supply chain in Rhino-Rack to call out? It sounds, again, like an external problem, not internal with you guys but anything supply chain-related on Rhino-Rack that we can highlight that might inhibit growth, beyond the OEMs just getting vehicles in the customer hands?

It's not about supply itself; it's more related to the vehicle supply chain. The introduction of the Ford Ranger in Australia is significant for us. So it's fundamentally about the vehicles rather than the supply chain from an Adventure perspective. In this sector, the Ford Ranger and one other vehicle are the top two, both having been newly introduced this year. Until these vehicles are available to consumers, there will be a wait for people to purchase the racks.

Just wanted to go back first to Precision Sports for a second. Obviously, very strong first half, raising guidance. But if I look at your guidance, it still implies a pretty significant slowdown and sequential decline in the second half. Is that all related to the supply of shell casings and you’re taking sort of a wait-and-see approach there? Is any of that demand related.

No, Joe, it's Mike. It's the same situation as 90 days ago. It's all about the supply chain, particularly the ability to convert a bullet into an ammo load, which represents a significant revenue multiple. So, while the $68 million run rate times two is still much higher than the $127 million we updated our guidance to, it ultimately hinges on our ability to source those shell casings, as we have discussed in the past, rather than just selling the bullet.

I think the way we look at the demand for the rest of the year is that it’s really become a realization that it’s how much we can deliver and win to fulfill that demand, despite whatever the order book is at this point. And we’ve really chosen to focus on how fast do we either airfreight or logistics management, or using our balance sheet to ensure we have inventory in the second half and then realizing, as we’ve even said in here, we anticipate strong demand into 2023. And at some point, we’re going to have to start building the inventory and maintaining the inventory in order to deliver on time to meet that fulfillment. And that’s where Mike referenced to, we may not be able to transfer as much of that back in new cash as we would like to see just in order to keep up with the demand at this point.

Yes. And let me just add, demand's been super strong. I mentioned the Outdoor segment demand. Sales would have been up 20% ex-FX. They're up 17% on a reported basis. So, the demand has not been the issue. It's just being able to have the right inventory at the right time and be able to meet that demand, right? So, we're very comfortable, very happy with the demand and it's broad-based demand, as I've shared with the team. It's across all of our different channels across the Black Diamond business.

John, I think you mentioned in your prepared remarks that spring bookings, you’re initially pleased with those initial reads. Maybe can you give us a little bit more context around that? Is that maybe by product category or just maybe some guardrails around that in terms of like how we think about growth? And then, I think, Mike, you mentioned for 3Q a revenue number of $118 million which I think is just a little bit shy of where consensus is. I don’t know if there’s a way you can maybe – the fact that there was no comment around EBITDA, are you comfortable where EBITDA consensus is for 3Q? Any context around gross margins for 3Q would be very helpful as well.

From a gross margin perspective, we are still seeing the 38% we discussed for the second quarter. Gross margins could have been higher, factoring in $2 million to $3 million in headwinds from foreign exchange and airfreight costs, which affected us by about 80 basis points and 130 basis points respectively due to expedited freight costs. Adjusting for these factors, we're looking at gross margins of over 40%. To clarify, we anticipate these challenges to persist; airfreight costs are expected to continue as we work to meet demand, and while foreign exchange rates have slightly improved since the end of the quarter, they remain a significant challenge, presenting a $7 million headwind for the latter half of the year based on current rates. On the sales front, we are expecting $118 million. As previously mentioned, we aim for numbers we are confident we can achieve. Demand in Precision Sports remains robust along with strong interest in the Outdoor and Black Diamond sectors. We have reaffirmed our full-year EBITDA guidance of $78 million and while we did not provide a specific EBITDA target for the third quarter, we believe achieving a similar level is reasonable. In summary, I want to emphasize that our gross margins could have been even higher excluding the impact of foreign exchange and freight inefficiencies, which we consider temporary for the remainder of the year. We are pleased with our progress in scaling gross margins and improving overall performance.

Great. And then, John, I don’t know if you have any comments about this spring and just a high-level commentary.

Yes, we continue to see strong demand for spring '23. Obviously, spring '23 is highly driven by two big categories, climbing which we continue to push hard into climb and we're seeing strong growth across both protective equipment as well as helmets, harnesses, you name it. And then, we're going to be chasing lights and trekking poles for quite some time. The new introductions of the products have been extremely well received in both those categories. And because of the new introduction into outdoors, I think we underestimated how much demand we would see and obviously, have had issues from a supply chain to keep up or accelerate that as much as the market would love us to, specifically in trekking poles, headlamps, some of these cases and including some of the sportswear categories within apparel.

Sure. Let me address the free cash flow question first. Our guidance for free cash flow has been adjusted to $30 million to $40 million, down from $50 million to $60 million. This $20 million decrease is mainly due to inventory issues. We initially aimed to restore inventory levels to what they were at the beginning of the year but expect to fall slightly short, with a target of $143 million instead of $129 million, resulting in an excess of about $14 million in inventory. This increase is mostly due to Black Diamond, alongside significant growth in our Precision Sports business this year. Additionally, as we plan for 2023, we're considering the necessary inventory levels needed in this uncertain environment to avoid being caught off guard. Therefore, we plan to carry about $10 million more inventory entering the year. This totals a $24 million challenge, which accounts for the $20 million decrease in free cash flow. Ultimately, this situation is entirely related to working capital and our preparations for both the current environment and anticipated growth in 2023.

On the pricing side, obviously, we looked at pricing on a seasonal basis. We had price increases on a seasonal basis for spring '23 and due to the headwinds we were having both with freight but also supply chain, we pulled those prices early and launched them with July 1 and that was part of the stickiness of the program that we've seen. And those price increases now will carry through spring '23. And when we launch our next subsequent season, fall '23, we will again look at prices across the board by SKU, by category, by geography and ensure that we are maintaining both our premium nature in the marketplace but also our ability to cover the costs relative to airfreight logistics, other things, input costs across the board.

Hello. We’ve seen oil come down a bit and there’s certain commodities that have also rolled over and started to come down. Can you comment on what you’re seeing in terms of your commodity input costs and whether you’re starting to kind of project that some things are going to start moderating here in the future?

Yes, copper costs, which are essential for the Precision Sports manufacturing process, have begun to decrease over the past month and are now below $4 per pound. I would consider this neutral as we move into the remainder of the year since we had budgeted for that level. Looking ahead, this is likely to be a neutral factor. Additionally, as we implement some price adjustments, they will help offset the higher costs compared to a year earlier when copper prices were slightly lower.

Okay. And then, I guess on the pricing, I’m a little bit confused about the 6%. I mean, certainly, that’s very good. But quite frankly, I have some consumer product companies that are experiencing or putting through double-digit price increases. So, can you talk to like kind of the magnitude? And if you say you’re not having too much trouble, is there a possibility of even greater magnitude price increases here?

Well, what we said is we're realizing that level of price and it's sticking. That was a blended rate. I mean, you're right, we have taken price up a little higher in certain categories and in certain segments. But that's what's sticking and relative to our cost, we're very comfortable with that. The other thing that John alluded to, though, is we are looking at price increases here in the back half of the year for spring ‘23, right? And so, others may have taken price up, we may take price up again here as we get further into the year.

I think another difference is that we analyze this on a seasonal basis. Not all of these businesses follow the same seasonal pricing pattern, and sometimes it requires multiple adjustments. For our brands, we have two opportunities each season to make introductions and changes, including Rhino-Rack, which differs from others. However, our intention is not to overcharge; rather, we aim to cover our costs and preserve the premium quality of our business.

Guys, you’ve raised the outlook for Precision Sports. Are there specific product lines or customers that are driving that more confident view for that segment? And then, what’s the availability of materials to actually deliver to that? Is there’s still outstanding risk to sourcing components? Or do you feel like you have the components to deliver to that guidance for Precision Sports?

I think across the board, we've seen strong demand. I think, again, two pieces I would say. One, obviously, both from a bullets and an ammo, we can sell everything we can make at this point, specifically because of the uniqueness of the precision or the hunting side of the centerfire rifle. I think the other side for us is that despite what we see in the mainstream market, we are such a small player as a percentage of market share and the addressable market is literally 20x our scale, that we think there's a lot of opportunity for us to keep playing on this and gaining opportunities. And it's really about delivering cases and ammo. So, could we sell more ammo? Yes. Can we sell every bullet we make? Yes. I don't necessarily know but in one account, frankly, we went out and visited the top 30 accounts and in all cases, if we could deliver more, they would buy more.

I think it's really just another example of, John, in his prepared remarks, referred to the optionality that this business provides itself through different channels, different geographies that it can sell through. And obviously, the international OEM business has been strong this year as you think about some of the needs from a military standpoint, etcetera, that the precision accuracy of a Sierra bullet will be called for. So, that's an opportunity, again, that we've been able to take advantage of here this year in 2022.

The demand has honestly been more than we can get, whether it's .338s or precision .30 cals, given what's taking place in the theaters around the globe. The other side is that we have great partners internationally and we finally had focused on supplying to that, where the last year, the availability just wasn't there and the demand in the U.S. was so far in excess of what we could ship.

So, in the second quarter, we spent $2 million on airfreight. So, as in my prepared remarks, I think that number is probably going to be about a similar level here in Q3 and Q4. So, that’s going to bring a little pressure on the gross margin compared to that over 40% rate that I said it would have been without it.

John, if you look back at the rack market being 10 years behind Australia in North America today, how should we think about the closing of that gap? Does it look pretty linear, or are there certain points where you see adoption jump forward as you kind of go back and compare the two markets?

As we looked at 2022 and the rollout of this, Aaron and Greg and the team at first ensured that we had the supply chain, the right structure, the operating model to then accelerate that and we feel comfortable with that moving into the second half of this year. Obviously, we scaled up and took advantage of the opportunity of a little softer market in Australia to move that inventory. Subsequent to that, we think there's a lot of new product introductions that will start to roll out over the next two or three years in the North American market, specifically around North American vehicle. That's specifically a side-by-side but also the whole pickup truck market is obviously dominant in this market. You know, rule of 72, we just keep putting out 35% average H1 growth and you'll double every short period of time. And we think that's happening. You know and so, in time, I think this will start to close up. I think the biggest limiter in 2022 to the growth for the whole industry and I invite you out to the SEMA show to see the excitement of it in November but the biggest limiter is lots and lots of new vehicle introductions by the Big 5 carmakers in this space, that being Jeep, Toyota, Ford, Chevy, Dodge but all those vehicles have been slow to introductions in the market due to chips or other availability. And so, I think you're going to see what would have been an even bigger acceleration in 2022 translate into 2023.

As we said in the past, with the right deal, we would exceed our target with a very deliberate and disciplined plan to pay down any debt that we took us above that 3x leverage, right? In the short term, I think I think we'll stay towards the lower end of the range. But as I mentioned, we are actively looking at M&A. But as I've also mentioned, we'll do the right deal at the right price. We don't have to do any deals, so we're very focused on returns on invested capital when it comes to M&A. And the most important driver sometimes on ROIC is what that denominator is, how much you pay for something. So, we're going to be patient and disciplined and when the right time comes and the right deal comes, we'll go ahead and, whether it's big or small, whether it's a bigger deal or a tack-on deal, a tuck-in deal, we'll follow that discipline.

Just a couple of quick questions on some smaller pieces of the business. First, within Precision, can you discuss maybe how much of the growth may be coming from added capacity at Barnes?

Yes. I think obviously, we continue to look at capacity. I would say probably 10% to 15% came from adding capacity. The other side is chasing ammo, right and the ability to load ammo. And we've increased the capacity of loading ammo but it still is based off of how much of the components we could get in order to over accelerate that in the space.

Okay. And then, the second question for me is, as we look at the Adventure segment, can you give us any idea on the size or maybe the growth in the domestic market that's coming from ORV or as we think about kind of the Polaris business versus a traditional truck and Jeep market?

It's really challenging to identify that right now due to manufacturers' difficulties in delivering vehicles consistently on time, whether it's Polaris or the major auto markets. Our main focus at the moment is on fitness, both comparing existing vehicles and assessing new fitments as they are introduced. When the new Ranger or Gladiator comes to market, we will be evaluating how we fit within those markets. I believe there has been a shift of about three to six months in the marketplace, largely because of vehicle delays. Thank you, Tawanda. We’d like to thank everyone for listening to today’s call and we look forward to speaking to you again when we report our third quarter 2022 results later in the year. Thanks, again, guys. All the best.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.