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Operator
Good afternoon, everyone, and thank you for participating in today's conference call to discuss Claris Corporation financial results for the second quarter ended June 30th, 2022. Joining us today are Claris Corporation President John Walbrecht and CFO Mike Yates and the company's external director of investor relations, Cody Swall. 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. Slaw as he reads the company safe harbor statements within the meaning of the Private Security Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.
John Walbrecht
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 Claris 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 1st, starting at 7 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 clariscorp.com. Now I'd like to turn the call over to Claris' president, John Walbrecht. John?
John Walbrecht
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 continue to lead growth in each of their categories. At Claris, we have intentionally 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 continued market share gains. Our second quarter results continue 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 touchpoints with both our retail partners and end consumers while enhancing the capabilities and capacity of our operations. Fourth, 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 sickening, allowing us to achieve improved margins despite value leakages caused by foreign exchange rate fluctuations, increased logistics costs, and higher amounts of air freight utilized due to the supply chain challenges. We are confident in the gross margin enhancing strategies being activated and that such value leakages currently faced 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 blank 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 It had already been produced but was stuck in transit. We finally call this backorder demand. Roughly half of this demand was in our key product categories, and we expect to convert this into inline and full-price revenue in future quarters. With strong consumer activity in climbing, backcountry 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 handicapped in 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 that premium positioning and product innovations paved 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 continues to exceed supply for both Sierra and Barnes, we continue 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 accurate 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, enthusiasts in consumers, and growing demands by our various channels worldwide. Again, it is our demand across very diverse geographies and channels that allows us to shift quickly when one channel slows or when supply chain limit 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 nature with our key partners. Finally, the adventure segment. Within our adventure segment, it has been a very exciting first half of the year. We're 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 raced 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 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 10 times 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 1st. 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 opposed 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.
Cody
Thank you, John. 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's quarter. The increase was broad-based with solid double-digit growth in our outdoor and precision sports segments and revenue contributions of $22.8 million from RhinoRack, 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 air freight 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 represents 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 continued to do an excellent job working to fulfill strong demand, increase 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 flagged compared to the comparable quarter in the prior year. Slow deliveries of new trucks in Rhino Rack's whole market of Australian 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-Rax USA. Max-track 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 venture segments. Foreign currency had a negative impact of 80 basis points, and air freight 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 CLARIS portfolio. As John mentioned, pricing is sticking and outpacing our material and wage cost inflation. The variances associated with freight, specifically air freight, 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-Rac and Max-Rac, which contributed $9.8 million in expenses. Non-cash stock-based compensation for stock options and performance awards was $3.6 million, a $1.7 million increase compared to the second quarter of 2021. The remainder of the increase is driven by investments in the outdoor segment, 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're 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 for diluted shares. 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 logistic 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 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 1.8 times on a trailing 12-month adjusted EBITDA basis, which is below the low end of the two to three times targeted leverage goals that were 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 30th, 2022. We have further borrowing capacity of nearly $275 million at June 30th, 2022. To be clear, we could borrow the full amount and still be in compliance with the required cover 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 US 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 lockdown 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 to $40 million for the full year of 2022, 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 brand 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 product, 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 on capital and acquisitions, starting with the Sierra Bullock acquisition in 2017. Since this time, we've also realized over $109 million of tax benefits associated with our NOL care reports. 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 30th, 2022. 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 dividends, 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 through a Dutch auction tender offer. I will pause here and hand the call back to the operator as we are now ready for Q&A.
Operator
Thank you. As a reminder to ask the question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A roster. That's star one one to ask the question. Our first question comes from the line of Alex Perry with Bank of America. Your line is open.
Alex Perry
Hi, thanks for taking my questions and congrats on a strong quarter. Just first, it looks like the precision scored 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, you know, very elevated around 35%. Maybe just talk to us a little bit on some of the key profitability drivers there as well. Thank you.
John Walbrecht
Okay. Thank you. I appreciate the question. I think it's first and foremost important to state that obviously as excited as we are about the superfan brands of Sierra and Barn, 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. And that creates this optionality that allows us to sell all over the globe geographically, but also 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 can see this 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 the era of 350-plus million bullets by the end of the year and 120 million-plus at barn, and then continuing to be as scrappy as we can, as being opportunistic as we can in acquiring cases so that we can load ammo, remembering that ammo is 5X the valuation to the consumer as bullets. We can sell every bullet we can make. And it's really an allocation exercise across the different opportunities, geographies, and channels. And our goal really is just to continue to make the very, very best product 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 the market share, but really also more from the types of bullets we build and the way in which they're positioned in the marketplace.
Alex Perry
That's really helpful. And then maybe just a broader question. What is your sort of current view on this sort of state of the overall consumer? Are you seeing any signs of, you know, slowdown given some of the inflationary pressure that others have called out? And I guess just a part of that, you know, other apparel retailers in the outdoor space have called out sort of order cancellations from some of their retail partners given some of these consumer headwinds. Is that Anything you guys are seeing on the Black Diamond side?
John Walbrecht
I think twofold that I would speak to. The first about the consumer. Obviously, we can't, you know, we all notice that the consumer is facing higher inflationary pressures in their day-to-day activities, whether it's gas, groceries, you name it. I think where and why we have always focused on the superfan brand is because, We speak to, you know, with each of our brands, the premium nature, we speak to the top 10% of each of the industries we play in, right? By the time you graduate to our brand, you're a diehard that defines your ethos by our brand. I am a climber. I am busy, right? I'm an overlander. I have rhino rats. Because these activities are so critical to the importance and nature of these super fan enthusiasts, Despite the headwind, they will make choices, right? And they're feeling it. They will just make choices away from other things to protect these activity-based ethos that make them who they are. And, you know, will they feel the pain? Yes. Will it be less so than others? Potentially. And that's always our belief on superfan brands that, you know, these consumers, despite they may lose their job, they're probably going to spend more time doing these activities than less. and these you know these are their escapes i think beyond that what you talk about is yes is there going to be potential for slow down in the market um i think again the difference is that what we build is apparel as equipment until our product which apparel represents 15 of our business rather than 85 let's say of other brands um our consumer chooses this apparel because they need it in order to perform the activity that they're doing right you need a ski coat in order to ski you need gloves in order to ski right and so in that we typically see a little more insulation than the market as a whole and again the premium nature the activity-based consumer and our view that What we build is lighter, faster, stronger, and more geared to this important activity day, gives us a little bit more insulation in the marketplace. And so we haven't seen that. But again, today, only 15% of our business is apparel. And so we're, again, a little insulated by the equipment side of the business.
Ford Ranger
Perfect. Best of luck going forward.
Gyms
Thank you. Please stand by for our next question. Our next question comes from the line of Anna Glazgen with Jefferies.
Operator
Your line is open.
Dana
Hi, good afternoon. Thanks for taking my question. First, I'd like to touch on the inventory 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's less mature in Australia? Or is the vehicle availability significantly worse than the domestic market?
John Walbrecht
Great question, Dana. I think typically new vehicles are a driving point for overlanding from a percentage. I would say it's probably at least you know, 10 to 15% a year in that space. Specifically, I think the potential left on the table is 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, you know, 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 Side. I think in the U.S., again, because of the scale, and this is super important in this, you know, where we are the leading brand, have very established retail relationships in Australia, are the brand of reference and have, you know, 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, 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 partnership, building the communication and touch points with the consumer, and really driving towards what we think is this ever-expanding, demanding 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.
Dana
Great. Thanks. And earlier in the commentary you touched on, you know, the importance of investing in approachable categories such as apparel or tracking poles, which are oftentimes entry points to the brands. Obviously, you know, 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 toward, you know, higher level products within the lineup?
John Walbrecht
Yeah, I think what we've seen coming out of COVID is this explosion of outdoorism. And we've seen it with the tailwind, you know, now that, that, uh, Gyms are open. We've seen a growth of the gym climber again come back. You know, 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, you know, in both trail running and hiking. I think anecdotally 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, you know, trekking poles and headlamps, whether that entry lifestyle apparel shorts, the Alpenglow, things like that, distance packs, those entries. And I think, to be honest, we were probably, as much as we've shaped that, I don't think we understood, again, how big that opportunity is. And as you know, we've talked about, you know, always focusing on the top 10% of the industry with our brands. 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 to the back order that we continue to chase both through the first half. And frankly, I think we will continue to chase this despite the increase in growth well into 2023.
Gyms
Great. Thanks. Thanks so much.
Operator
Thank you. Please stand by for our next question. Our next question comes from the line of Matt Coranda with Wasp Capital. Your line is open.
Matt Coranda
Hey, guys. Good afternoon. I just wanted to see if we could attack the broader demand question or maybe a different angle. see 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 in 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've got to follow up.
John Walbrecht
Okay. What I would say to you, and I think this is indicative of superfan brands, obviously we track POS data on a weekly basis. We stay very close to our accounts across all the different brands. What we find is that superfan brands, specifically whether it's Black Diamond, Sierra, Barnes, Rhino, you name it, Maxtrax, are typically the pullers in the space. um which means that they are whatever the category average growth is and or sell through we typically are at the front of that if not leaving that um in this mix now you know i think what you find is open to buy that retail may be inhibited by consumer sentiment um and that potentially could have an impact on our ability to get more allocated to our brand but The real driver is how fast we can maintain, move, allocate our inventories to align with those sell-throughs at the time that we're having them. And this is where logistics has created the backlog, right? We can't move the product fast enough to keep up with sell-through at some of these retailers. I think in total sentiment, clearly the market has seen a slowdown in lifestyle apparel across the market. And I think that's been a well-known piece. I think the market has seen a little bit of a slowdown in certain camping categories that has seen a massive surge in outdoorism during the COVID window. I think, again, in our nature, because our products are so activity-based and specific to end-use pieces, that I think we've continued to maintain on that. And it's really about trying to maximize open-to-buy allocation on a seasonal, weekly, monthly basis.
Matt Coranda
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 offered 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?
Cody
No, it's actually all New Zealand and Australia. We're still tracking, like, we lost 40-some percent in the first quarter here in North America, and again, 31% here in North America.
Ford Ranger
We still are tracking above our budgets and plans for North America. It's all related to the whole market.
Matt Coranda
Great. And then anything within your supply chain in Rhino-Rac to call out? It sounds, again, like an external problem, not internal with you guys. But anything supply chain related on Rhino-Rac that we can highlight that might inhibit growth beyond the OEMs, just getting vehicles into customer hands?
Cody
It's not supply. It's more about the supply chain of the vehicles, right? It's the Ford range or VN or It's all about the vehicles, not the supply chain from an adventure standpoint.
John Walbrecht
You know, in this space, the Hilux and the Ford Ranger are the top two vehicles, and both have new introductions this year.
Ford Ranger
And until those vehicles hit the market, people wait to buy the vehicles, and they wait to buy the racks. Got it. Super clear. Thank you, guys.
Gyms
Thank you.
Operator
Please stand by for our next question. Our next question comes from the line of Joseph Altobello with Raymond James. Your line is open.
Joseph Altobello
Thanks. Hey, guys. Good afternoon. Just wanted to go back first to Precision Sports for a second. Obviously, you know, 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 there? related?
Cody
No, Joe. Hey, it's Mike. It's the same story as 90 days ago. It's all about supply chain, the difference between, like we talked when we were on the road about being able to convert a bullet into an ammo load, right? And there's a multiple of revenues. Of course, the $68 million run rate times two is still much higher than the 127 we took the guide up to, but It is all about being able to source those shell casings like we talked about in the past versus just selling the mullet.
Joseph Altobello
Okay. That's helpful. And then maybe on outdoor, obviously supply chain and logistics, still a challenge at Black Diamond. But did you see any improvement at all in the quarter? And is the order book still $270 million? It sounds like you're obviously still haircutting. I was curious if that number has changed at all.
John Walbrecht
I think the way we look at the demand for the rest of the year is that, you know, it's really become a realization that it's how much we can deliver and when to fulfill that demand, despite whatever the order book is at this point. And we really, you know, chosen to focus on how fast are we, their air freight 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, You know, we anticipate strong demand into 2023. And at some point, you know, we're going to have to start building the inventory, maintaining the inventory in order to deliver on time and meet that fulfillment. And that's, you know, where Mike referenced to, you know, we may not be able to transfer as much of that back into cash as we would like to see just in order to keep up with the demand at this point.
Cody
Yeah. Let me just add, demand is super strong. I mentioned the outdoor segment demand. You know, sales would have been up 20% FX. They're up 17% on a, you know, reported basis. So the demand has not been the issue. It's just being able to, you know, have the right inventory at the right time, you know, and be able to meet that demand, right? So we're very, you know, comfortable, very happy with the demand. And it's broad-based demand, as I've shared with the team. It's across, you know, all of our different channels across the Black Diamond business. Okay. Thanks, guys.
Operator
Thank you. Please stand by for our next question. Our next question comes from the line of Laurent Vasily with BNP Paribas. Your line is open.
spk13
Good afternoon, gentlemen. Thank you very much for taking my question. John, I think you mentioned in your prepared remarks that spring bookings are 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 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, maybe the fact that there was no comment around EBITDA. Are you comfortable where EBITDA is? consensus is for 3Q. Any context around gross margins for 3Q would be very helpful as well. Thank you.
Cody
So from a gross margin standpoint, I think we're still seeing that 38% that we just talked about here in the second quarter. Again, as I mentioned during the call, gross margins would have been even higher. We had a $2 to $3 million of headwinds from foreign exchange and air freighting costs. And this is a tune of 80 basis points and 130 basis points from freight expedited freight costs. So, you know, if you adjust for all that, you've been almost north of 40% gross margins. Now to be clear, both those things we expect to continue kind of, you know, I mentioned that we expect the air freight costs to kind of continue in order to deal with making sure we can meet the demand. Foreign exchange has improved slightly since the end of the quarter, but it's still quite the headwind. As I mentioned, it's a $7 million headwind here in the back half of the year based on the rates over the weekend. From a sales standpoint, the $118 million, as we've talked about, we try to pick a number that we're comfortable with and make sure that we can deliver on that. As we've mentioned, demand across precision sports continues to be strong. demand across the outdoor and the black diamond business remains strong. We've just talked a little bit about what's going on in the adventure side. And we did reconfirm the full year guide of $78 million of EBITDA. We did not give a specific EBITDA guide for the third quarter, but that same level of achievement is reasonable, I think, to expect in the third quarter. Like I said, like I started with my comments, I think it would be even higher at some of the FX and some of the freight inefficiencies that we're dealing with. But those are, those, you know, we're viewing those as, you know, transitory, you know, this year for the remainder of the year probably. But, you know, we're very happy with the way we're scaling gross margins and driving improvements to gross margins.
spk13
Great. And then, John, I don't know if you have any comments about the spring. Just a high-level commentary.
John Walbrecht
Yeah, we continue to see strong demand for spring 23. Obviously, spring 23 is highly driven by two big categories, that of Klein, which we continue to push hard into Klein. And we're seeing strong growth across both protective equipment as well as helmets, harnesses, the name. And then, to be honest, 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 outdoorism, you know, I think we underestimated how much demand we would see. And obviously, it had issues from a supply chain to keep up or, you know, accelerate that as much as the market would love us to, specifically in trekking poles, headlamps, some of these cases, and including, you know, some of the sportswear categories within apparel.
spk13
Very helpful. And then, Mike, just as a follow-up question, I think you maintained your EBITDA target of $78 million, maintained the CapEx spend range. You gave us some prepared remarks around inventory expectations for the year. Can you just maybe help us walk us through the lowered free cash flow guide for the year? And then, John, as a follow-up on pricing, it's great to hear about the pricing. that's sticking at 6%? Maybe can you give us a little bit more context between between VD and other parts of the business if there's any variance between that 6% pricing?
Cody
Sure. Let me answer the free cash flow question first here. You know, yes, free cash flow, our guide is down, you know, down to that 30 to 40 from the 50 to 60. So that $20 million drop in the guide is really entirely around inventory, right? we targeted initially to get inventory back to kind of at the beginning of the year level. We're going to come up about, you know, a little short of that when I say the $143 million compared to the $129 million. So that's about $14 million of higher inventory. And that's just necessary primarily across Black Diamond, but also across the precision sports business as that business has grown significantly this year. And then we've also, you know, as we're starting to think about plans for 2023 and the necessary inventory levels that we're going to need in kind of this uncertain environment that we continue to find ourselves in, and we don't want to be caught flat-footed as we enter 2023. We're also planning to carry about $10 million more extra inventory going into the year. So that's a $24 million headwind right there, and that kind of makes up the gap in the $20 million drop in the So it's entirely around working capital and planning for, you know, the current environment along with planning for growth in 23.
John Walbrecht
On the pricing side, you know, obviously we look at pricing on DD 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 thickiness of the program that we've seen. And those price increases now will carry through 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 cost relative to air freight logistics, other things, you know, input costs across the board.
spk13
Very helpful. Thank you very much for all the call. Best of luck.
Operator
Thank you. Please stand by for our next question.
Gyms
Our next question comes from the line of Linda Bolton-Weiser with DA Davidson.
Operator
Your line is open.
Linda
Hello. You know, we've seen oil come down a bit, and there's certain commodities that have also kind of 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?
Cody
So hi, Linda. Mike, great question. So yeah, copper costs obviously are where copper is a critical element for the precision sports manufacturing process. Yeah, those prices have started to come down here just in the last, frankly, in the last month, right? And in fact, under $4 a pound for copper. You know, that should be a... I call that neutral going into the remainder of the year, right? We budgeted around that level. So, you know, I think if you look forward, that's probably more of a neutral thing, right? And as we push some price through, you know, it's offset the higher cost relative to, you know, if you compare on a year-over-year basis back in 21, copper was a little less.
Linda
Okay. And then, you know, I guess on the pricing, I'm a little bit about the 6%. I mean, certainly that's very good. But, you know, 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 with, Is there a possibility of even greater magnitude price increases here?
Cody
Well, what we said is we're realizing that level of price and it's sticking. You know, 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 in 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, you know, others may be taking price up. We may take price up again here as we get farther into the year.
John Walbrecht
I think the other difference, Linda, is that we get to look at this on a seasonal basis. Not every one of these businesses has the exact same season cadence on pricing, and sometimes it's not a one and done. You know, in the case of BD, we have two seasons that we can constantly make those introductions and changes on the same with Rhino Rack, you know, as opposed to others. But I think the other side is we just, you know, our goal isn't to gouge on this.
Ford Ranger
It's really to just ensure that we cover our costs and continue to maintain the premium nature of our business.
Linda
Okay. Sounds good. Thank you very much.
Operator
Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Jim Duffy with Stifel. Your line is open.
Jim Duffy
Thank you. Good afternoon. As you've raised the outlook for precision sports, are there specific product lines or customers that are driving a more confident view for that segment? And then what's the availability of materials to actually deliver to that? Is there still outstanding risk to sourcing components, or do you feel like you have the components to deliver to that guidance for precision sports? Thanks.
John Walbrecht
Jim, I apologize. I missed the first part of your question. If you don't mind asking it again.
Jim Duffy
Sure. You've raised the outlook in precision sports. Are there specific product lines or customers driving the more confident outlook?
John Walbrecht
You know, I think across the board, we stream strong demand. um you know i think again two pieces i would say one obviously you know both from a bulletin and ammo we can sell everything we can make at this point um specifically because of the uniqueness and pers and you know of the precision or the hunting side of the centerfire rifle um i think the other side for us is that you know despite what we see in the mainstream market you know we we are such a small player as a percentage of market share, and the addressable market is literally 20 times our scale. But 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 if it's one account. Frankly, We've went out and visited the top 30 accounts. And in all cases, if we could deliver more, they would buy more.
Jim Duffy
Okay. So clearly the demand, sir, how about the availability of materials, the casings, the primer, so forth? Do you have that in hand to deliver to the guidance? Or should we as investors be thinking about that as something you're still working on across the year?
Cody
You know, Jim, as we've talked about in the past, we have access to the primers. We're still being scrappy and sourcing shell casings in order to convert, you know, a bullet into an ammo sale, right? And that's the difference in kind of, as I mentioned earlier, in the difference in kind of like doubling, you know, the first half revenue and saying that, you know, why isn't the full year guide double that, right? So that's still a challenge. But we're pretty comfortable with that. As John just alluded to, we think we can sell all or nearly every bullet we make. The question always comes back to is how many of those bullets will we sell as loaded ammo, right? And we do have a lot of the shell casings, but we don't have them all to answer your question specifically.
John Walbrecht
And we don't have all against what the potential demand is versus what's in our plan.
Cody
And hence the reason to be a little conservative on the guide.
Jim Duffy
Understood. Should you get better availability, though, perhaps even opportunity for upside just given the demand backdrop?
John Walbrecht
100%. We just would have to meet expectations, not miss them.
Jim Duffy
And then sticking on precision sports, a big step up in the international. I recognized small numbers last year, but in the first half of the year, you've seen a much nicer international contribution. Anything specific to speak to with respect to that?
Cody
I think it's really just another example of John and his prepared remarks refer 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, et cetera, the precision, accuracy of a Sierra,
John Walbrecht
bullet would be called for so that that's an opportunity again that we've been able to take advantage of here this year in 2022. despite the demand is honestly getting more than we can get whether it's 338s or precision 30 cows given what's taking place in the theaters around the globe the other side is that you know we have great partners internationally and we finally had you know focused on supplying to that where you know the last 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.
Jim Duffy
Understood. Okay. And then, Mike, I don't know if you're prepared for this, but perhaps some visibility on the amount of air freight you're expecting in the back half of the year, just to help us model out the margins some?
Cody
So, in the second quarter, we spent $2 million on air freight. You know, 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, you know, over 40% rate that I said it would have been without it.
Jim Duffy
Understood. Thank you, guys. Thank you.
Operator
Thank you. As a reminder, ladies and gentlemen, that's star 1-1 to ask the question. Please stand by for our next question. Our next question comes from the line of Ryan Sundby with Wim Blair. Your line is open.
Ryan Sundby
Hey, good afternoon, guys. Thanks for the questions. John, if you look back at the RAC market being 10 years behind Australia and North America, 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?
John Walbrecht
You know, as we look to 2022 and the rollout of this, you know, Aaron and Greg and the team that first, you know, 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, you know, we scaled up and took advantage of the opportunity of a little softer market in Australia to move that inventory. Subsequent to that, you know, 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 vehicles, not only that specifically of side-by-side, but also the whole pickup truck market, which obviously is dominant in this market. rule of 72, you just keep putting out 35% average H1 growth and you'll double every short period of time. We think that's happening. In time, I think this will start to close up. I think the biggest limiter in 2022 to the growth of the whole industry, and I invite you out to the seamless show to see the excitement of it in November, but the biggest limiter is lots and lots of new vehicle introductions by the big five car makers in this space that mean the jeep toyota ford chevy dodge but all those vehicles have been slowed 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. okay
Ryan Sundby
So then, Mike, in the script, it sounded like you were maybe more comfortable saying the lower end of the two to three times target leverage range. But it also sounded like maybe deal flow and prices were getting better. So I guess, should we take that to mean you're looking at smaller CACON type deals at the moment? Or are you willing to go higher on leverage if the right deal warrants it?
Cody
As we've said in the past, with the right deal, we would exceed our target with a very a deliberate and disciplined plan to pay down any debt that took us above that three times leverage. In the short term, 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 deal. So we're very focused on returns on investment capital when it comes to M&A. The most important driver sometimes on ROIC is, you know, 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, you know, we'll follow that discipline.
Ryan Sundby
All right. Great. Just wanted to see if there's any change there. Thanks.
Operator
Thank you. Please stand by for our next question. Our next question comes from the line of Mark Smith with Lake Street. Your line is open.
Mark Smith
Hey, guys. Just a couple quick questions on some smaller pieces of the business. First, within precision, can you discuss maybe how much of the growth maybe came from added capacity at Barnes?
John Walbrecht
Sorry, Mark, I missed the front end of your question. Can you repeat it one more time for me?
Mark Smith
Yeah, no, just how much of the precision growth came from added capacity at Barnes?
John Walbrecht
Yeah, I think, you know, 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. We've increased the capacity of loading ammo, but it still is based off of how much of the components we can get in order to over-accelerate that in the space.
Mark Smith
Okay. And then the second question for me is 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 or as we think about kind of the Polaris business versus, you know, traditional truck and Jeep market?
John Walbrecht
Wow. To be honest with you, I think it's really tough to trace that right now because of the inability of all these manufacturers to consistently deliver vehicles on time, whether it's Polaris or, you know, the big five auto markets in this. I think for us right now, you know, the real thing we focus on is fitment, both against existing vehicles and then when the introduction happens, new fitment, you know, when the new range that comes to market or the new high-lux and tracing how we fit against those markets. You know, and I think we just, I think, honestly assume a shift probably a three to six months in the marketplace just due to the delay of vehicles.
Cody
Mark, we're really focused on the vehicle aftermarket channel here in North America. We don't have great sell-through of where our partners there are selling and what types of vehicles they're selling our product onto. That's a tough question for us today.
Mark Smith
Well, that's fair. Great. Thank you, guys.
Operator
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.
John Walbrecht
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.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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