Q2 2022 Clarus Corp Earnings Call
Good afternoon, everyone and thank you for participating in today's conference call to discuss Clarus Corporation's financial results for the second quarter ended June 30th 2022.
Joining us today are Clarus Corporation's President John Wall brick and C. F O, Mike Yates and the company's external director of Investor Relations Cody Slaw.
Following their remarks, well open the call for your questions before we go further I would like to turn the call over to Mr floor as he reads the company's safe Harbor statements within the meaning of the private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking statements Cody. Please go ahead.
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. In 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.
To remind everyone. This call will be available for replay through August 1st starting at seven 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 Clarus Corp. Dot Com now I would like to turn the call over to Claris as President John Wall Bret John .
Thank you Cody and good afternoon, everyone.
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.
As promised our portfolio of Super fan brands continued to lead growth in each of their categories.
At Clarus, we are 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 the economic downturn.
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.
Angelus improvement activities within our supply chain and operations and increasing the number of touch points 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 they're Super fan communities.
So let's summarize a few key highlights.
One we experienced demand and growth across all three segments outdoor precision sports and adventure.
The activity based consumer continue to chase outdoors as their escape.
Future bookings for both fall 'twenty, two and spring 'twenty three continued 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 Super fan 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 consumers, while enhancing the capabilities and capacity of our operations.
For 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 Super fans in fact, AUC 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 increase.
Increased logistics costs and higher amounts of airfreight utilized due to the supply chain challenges.
We are confident in the gross margin enhancing strategies be it activate it.
And that such value Leakages currently face are transitory in nature as such we expect to see improved results in future quarters.
Yes, 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.
Kevin we have used our blended 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 allocation 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 remained strong black Diamond proved again, its industry, leading momentum, creating more than $2 2 billion impressions and driving growth across all categories. Most importantly, and apparel headlamps trekking poles and core common equipment.
These categories are entry pathways to the black Diamond brand given their approach ability to the everyday consumer as.
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 experience 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 had already been produce but we are stuck in transit.
We finally called this backorder demand roughly half of this demand within our key product categories and we expect to convert this into in line in full price revenue in future quarters.
With strong consumer activity and climbing back country skiing trail running and heightened 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.
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 pave the way for continued market share gains.
Demand remained high in the quarter, especially for center fire 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 re loaders competitive shooters and hunters.
If and when the market slows down we have a deep pipeline of new product innovations rage of launch to our Super fans and OEM partners.
As demand continues to exceed supply for both Sierra and bars, we continue to increase capacity in both boards and loading of ammo driving towards an end of year bulk production run rate target of 350 million bullets at Sierra.
$120 million at Barnes, and then ammo loading capacity of $50 million rounds.
We believe.
It is an 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.
Yes in consumers and growing demands by our various channels worldwide.
Again, it is our demand across a very diverse geographies and channels.
Owes us to shift quickly when one channel slows or in supply chain limit other opportunities.
For the rest of 2022 and into 2023.
We see our strong demand continuing.
Over the past few 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.
<unk> strengthened 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 debt indenture segment. It has been a very exciting first half of the year.
We are implementing our operating model and expanding our supply chains.
<unk>, 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 G boards.
And <unk> as well as Polaris and we believe this will continue to accelerate the overwhelming market.
Q2 marked the second quarter of radar racks introduction into North America.
And reception remains strong as pro forma sales were up 31% in North America.
<unk> 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 overland the market was challenged in the quarter due to high gas prices and supply chain issues that impact 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 than our 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 there is also approximately 10 years behind the curve.
Our conclusion huge long term opportunity as expected.
Speaking of Australia, and New Zealand Q2 represented 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 match stretch brand on January one.
This strategic move will allow us to accelerate the brand in our backyard markets.
Overall, our superfan brand consumers will 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 posed poised for another record year in 2022.
Now I'll pass it over to Mike to talk about our financial results in more detail. Thanks, Mike.
Thank you John and good afternoon, everyone I'm.
I am pleased to be sharing the results of another strong quarter, driven by our resilient portfolio 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 arent precision sports segments and revenue contributions up $22 8 million from Rhino rat.
And an acquisition completed last July and $4 3 million from Max track and 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%.
<unk>, 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.
Yes.
As John mentioned, we continue to chase demand in our black Diamond business, but are still constrained by supply chain and logistics challenges that are resulting in inventory showing up late in our U S and European markets.
We're growing but not as fast as the order bookings and demand would suggest to.
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 represents a key strategic growth pillars over the next five years.
In a direct to consumer we had another strong quarter with 30% year over year growth due to continued momentum.
In our e-commerce offerings.
Precision sport 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 in ammo.
Sierra was up 9% compared to the prior year due to strong growth in both the domestic and international OEM businesses are.
Our precision sports team continued 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 second quarter.
On a pro forma basis, the adventure segment was up 5% compared to the second quarter of 2021 Ryan.
<unk> sales were flat compared to the comparable quarter in the prior year.
Slow deliveries of new trucks, and Rhino racks hope market of Australia, and New Zealand impacted our ability to drive product sales for those vehicles.
Offsetting this headwind with continued momentum in the North American market sales were up 31% of Rhino <unk> USA.
<unk> 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 a year ago period.
Improvements in channel and product mix were offset by unfavorable freight costs as well as unfavorable foreign exchange and the outdoor adventure 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 41%.
Given the environment, we are living in its worth reiterating our commentary on pricing. So far in 2022, we have increased pricing by approximately 6% across the portfolio.
As John mentioned pricing is sticking and outpacing our material and wage cost inflation.
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 was $35 4 million compared to $27 million in the same year ago quarter.
The increase was primarily due to the inclusion of Brian Iraq, and Max tracks, which contributed $9 8 million of expenses.
Noncash 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 was driven by investments in the outdoor segment direct to consumer initiatives, along with a 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 to 105% to $3 8 million or nine cents per diluted share. This compares to $1 8 million or six cents 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 EBIT margin up 15, 3% compared to 11, 7% on 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 the investments we've made to grow our outdoor segment.
Now, let me shift over to asset asset efficiency and liquidity.
Inventory levels were $153 1 million roughly flat from Q1 of 2022.
As discussed we are carrying higher inventories 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.
Fact, our goal is to end 2022, and an inventory position that is $10 million lower than where we ended Q2 or approximately $143 million.
This is inclusive inclusive of chairman approximately $10 million of extra inventory into the first quarter of 2023 to facilitate growth.
At June 32022, 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.
At June 32022, total debt was $149 6 million, putting us in a net debt position of $135 7 million.
Net debt leverage was one eight times on a trailing 12 months adjusted EBITDA basis.
Which is below the low end of the two to three times 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 32022.
We have further borrowing capacity of nearly $275 million at June 32022 to.
To be clear.
Could borrow the full amount and still being compliant combined with the required covenant 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 2020 to 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 lift from our 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.
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 year for the full year 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 based companies in the <unk>.
Sumer today.
While activity based nature of our Super fan brands has thus far insulated us a sales slowdown we are being prudent with our P&L.
This includes a 6% price increase across the portfolio.
Which has been 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 up our SG&A.
Within gross margin, we are very focused on capacity and increased efficiency.
Along with the elimination of value.
Linkages, 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 reduced complexity.
Enable us to scale more quickly eliminating investments in anything we view as not 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 Nols.
We have delivered record sales and profitability that has enabled us to deploy over $350 million in capital on acquisitions, starting with the Sierra bullets acquisition in 2017. Since this time, we have also realized over $109 million of tax benefits associated with our NOL carry forwards we expect to.
Realized $39 5 million in tax benefit prior to the exploration 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 <unk>.
Further borrowing capacity of nearly 275 million at June 32022, as we have historically historically shown we will continue to seek to utilize our balance sheet, which we have strengthened by reducing leverage and increase in liquidity as the first and foremost weighted growth from a capital allocation.
<unk>, 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 through a Dutch auction tender offer.
I will pause here and the call back to the operator as we are now ready for Q&A.
Okay.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
Please standby, while we compile the Q&A roster.
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.
Hi, Thanks for taking my questions and congrats on a strong quarter.
Just just first it looks like the precision sport sorry, Greg 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.
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. Thank you.
Okay. Thank you.
The question.
I think it's first and foremost important. This date that obviously are excited we are about the superfan brands of Sierra and barn realized that these.
These brands represent 1% or less of the actual addressable market of risk.
The Porsche and the Ferrari of this space.
We really focus on premium products and really focus on the innovation and.
That creates.
This optionality that allows us to sell.
All over the Globe geographically will also every channel that we can sell to military law enforcement re loaders comparative sugar, it's hunters wholesale retail Oems you named Matt.
Optionality has been one of our strength the other side and why we continue with strong EBITDA. In this market is because we are really focused on this acceleration of our capacity both within both the mainstay of our business right in the target run rate at Sierra.
$350 million, both by the end of the year at $120 million plus the barn, and then continuing to be a scrap dealer fleet plan.
As being opportunistic as we can in acquiring cases, so that we can load ammo remembering that ammo is buybacks the valuations of the consumer as board.
We can sell every bolt, we can make and it's really an allocation exercise across the different opportunities in geographies and channels.
And our goal really is 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 a market share, but really also more from the types of bullets, we build and the way in which they are 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 their retail partners given some of these consumer headwinds is that anything you guys are seeing on the black Diamond side.
I think too Paul that I would speak to the first about the consumer obviously guest.
All noticed that there that the consumer is facing.
Inflationary pressures in their day to day activities, whether it's gas groceries you name it.
I think were and why we have always focused on a superfan brand is because.
We speak to with each of our brands the premium nature.
The top 10% of each of the industries, we play it right by the time you graduate to our brand Euro diehard the defined ethos.
By our brands I am a climber BD alright, im in overland right Ryan.
Because of these activities are so critical to the importance of nature of these super fan enthusiasm.
Despite the headwinds they will make choices right and they're feeling that they were just made choices away from other things to protect that.
Activity based ethos that make them, who they are and.
Will they feel their pain, yes, we'll will it be less so than others potentially and that's always our belief on superfan brands.
These consumers.
Might they may lose their job they are probably going to spend more time with you on these activities then less and these.
These are their escape.
I think beyond that what we talk about this yes is there going to be potential for a slowdown in the market.
I think again the difference is that what we built is apparel as equipment and so our product, which apparel represents 15% of our business rather than 85%, let's say of other brands.
Our consumer chooses this apparel because they need it in order to perform the activity that they're doing right you need us to go in order to skew unique gloves in order to SKU right.
And so in that we took.
Typically see a little more installation bid in the market as a whole.
And again, the premium nature of the activity based consumer and our view that what we build is lighter faster stronger more geared to this activity important activities day Gibbs.
It gives us a little bit more installation in the marketplace and so we haven't seen that but again today, we're only 15% of our business is apparel and so we're again, a little insulated to that buy the equipment side of the business.
Perfect Best of luck going forward.
Okay.
Thank you.
Please standby for our next question.
Our next question comes from the line of Anna <unk> with Jefferies. Your line is open.
Dan.
Hi, good afternoon, Thanks for taking my question.
First of all by quality pulp on the adventure segment in light of the headwind from new vehicle availability could you provide some perspective on the extent to which historically have been.
New vehicles and is it fair to assume the supply headwind has less of an impact in North America. The market is less mature in Australia or is the vehicle availability is significantly worse than the domestic market.
Great question Dan.
I think typically new vehicles are a driving point where overland.
From a percentage I would say it's probably.
10% to 15% a year in that space.
Specifically I think the potential left on the tape worth more in 2022 because of the real focus on overlapping and specifically we saw with with companies like Ford and the launch of the Bronco and the new Ranger, the explosion and lack of ability to get.
100, <unk>, 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 well.
We are the leading brand have very established retail relationships in Australia, or the brand of restaurants and have.
50, plus market share in that market.
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.
Tim.
10%.
The opportunity today accomplished in less than 1% of the market share, that's where we really drive towards accelerating on this end.
Building the retail partnerships in the communication and touch points with the consumer and really driving towards what we think is this ever expanding demand in 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. Thanks, and earlier in the commentary you touched on the <unk>.
Horton of investing and approachable categories, such as apparel or trekking Poles, which are oftentimes entry points to the brand obviously.
Of our Covid, we've seen an influx of new entrants across outdoor recreation, Ken can you speak to the extent to which maybe these newer consumers to the brand our outdoor recreation have 15 comparison toward higher level products within the lineup.
Yes, I think what we've seen coming out of Covid is the explosion of outdoors.
With the tailwind.
Now that that.
Gyms are opened we have seen a growth of the gym climber again come back.
Last quarter, we saw an explosion of new entrants into back to school.
And we only go through a trailhead today.
The explosion of consumers.
In both trail running and heightened.
I think anecdotally, what we see is with the injury categories are the categories that we continue to change and not be able to keep up in whether that.
Trekking poles, and Headlamps, whether that interim lifestyle apparel shorts, the alpenglow do things like that.
This is Pat.
Those industries and I think.
We will probably as much as we've changed that.
Understood again, how big that opportunity is.
As you know we've talked about we're 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.
A lot higher than you anticipated given that you were only targeting the top 10% and thats a little bit of what we experienced in that's the reference to the bat order that we continue to chase both through the first half and Brent I think we will continue to chase that despite the increase in growth well into 2023.
Great. Thanks, so much.
Thank you.
Please standby for our next question.
Our next question comes from the line of Matt Koranda with Roth Capital. Your line is open.
Hey, guys good afternoon.
I just wanted to see if we can attack.
Water demand question or maybe a different angle typically 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.
You could call out in terms of where demand may have widened in the recent months versus where you are still tracking.
At a similar pace to sort of.
So throughout Q1 and Q2 I'll start there.
Okay.
<unk>.
What I would say to you and I think this is indicative of a super fan brand. 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 Super fan brands, specifically, whether it's black Diamond Sierra Barnes Rhino.
Our metrics are typically the pillars in this space.
Which means that they are whatever the category average growth is <unk> sell through we typically are at the front of that if not lead that.
In this mix now.
<unk>.
What you find is open to buys at retail maybe inhibited by consumer sentiment.
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.
And this is where logistics.
<unk> has created the backlog if we can't move the product fast enough to keep up with sell through at some of the retailer.
I think in total sentiment clearly the market has seen a slowdown in <unk>.
Lifestyle apparel across the market.
And I think that that's been a well known piece I think the market has seen a little bit of a slowdown in <unk>.
Certain camping categories.
<unk> seen a massive surge in outdoors.
The COVID-19 window.
I think again in our in that nature, because our products are not.
So activity based and specific two in use.
Pieces, but 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.
Great very helpful. John and then.
Wanted to follow up on the right Iraq in 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 there.
But right offered vehicles, including Toyota.
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 does it all effectively Australia and New Zealand.
No.
It's actually all New Zealand.
Australia spill tracking like we were up 42% in first quarter in North America, it's been 31% here in North America.
We still are tracking above our budget and plan for North America.
Related to that the whole market.
Australia right away.
Great and then anything within your supply chain and Rhino rack to call out again like an external problem not internal with you guys.
But anything supply chain related.
Iraq.
Maybe we can highlight.
That might inhibit growth beyond the.
I was just getting vehicles and the customer has.
It's not supply.
More about the supply chain of the vehicles.
Or a range of BMW.
Failure.
That's a good product for us.
So it's all about the vehicles that the supply chain.
Interesting.
You know in this space the highlights and the Ford Ranger the top few vehicles and both have new introductions this year and until their vehicles hit the market people waiting to buy vehicles.
And we provide rex.
Got it Super clear Thank you guys.
Thank you.
Please standby for our next question.
Our next question comes from the line of Joseph <unk> with Raymond James Your line is open.
Thanks, Hey, guys good afternoon.
Just wanted to go back first to precision sport 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've taken sort of a wait and see approach. There is I mean is there any of that demand related.
No Joe Hey, Mike.
Same story as 90 days ago.
It's all about supply chain is difference between like we've talked when we were on the road about being able to convert a bullet into an annual load right and there is a multiple of revenue so now.
Of course, the $68 million run rate thanks to its still much higher than the 127, we took the guide up to but it is all about being able to.
Source of shell casings like we've talked about in the past versus just selling them the bullet.
Okay. That's helpful.
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.
Is the order book still $270 million it sounds like Youre still.
Obviously, you're still hair cutting I was curious if that number has changed at all.
I think the way we look at the demand for the rest of the year is that.
Really become 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.
Chosen to focus on how fast you either air freight or logistics management or using our balance sheet to ensure we have inventory in the second half and then realizing as we even said in here.
We anticipate strong demand into 2023 and at some point, we're going to have to start building the inventory maintaining the inventory in order to deliver on time to meet that fulfillment and that's where Mike referenced two 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, yes.
Just to add to demand the Super strong I mentioned, the outdoor segment demand.
Where it would have been up 20%.
Ex FX, we were up 17 on a reported basis. So the demand has not been the issue.
Being able to have the right inventory at the right time.
Are you able to meet that demand right. So so we're very.
Comfortable very happy with the demand is broad based demand.
<unk> shared with the team that's across all of our different channels across the black Diamond business.
Okay. Thanks, guys.
Thank you please standby for our next question.
Our next question comes from the line of Laurent with Silly with BNP Paribas. Your line is open.
Good afternoon gentlemen, thank you very much for taking my question. John I think you mentioned in your prepared remarks that the spring bookings are initially pleased with the with those initial reads maybe can you give us a little bit more context around that is that.
With by maybe by product category or just maybe some guardrails around that.
In terms of like how do we think about growth and then I think Mike you mentioned.
For for three Q, a revenue number of $118 million, which I think it's just a little bit shy of where consensus is I don't know if theres a way you can maybe fact that there was no comment around EBITDA are you comfortable where EBITDA consensus is for <unk>.
The context around gross margins for <unk> would be very helpful. As well. Thank you.
Okay.
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 had mentioned during the call gross margins would have been even higher we had a $2 million to $3 million of heads.
Headwinds from foreign exchange and air Freighting costs.
You too.
80 basis points, and 130 basis points from.
Great.
Expedited freight costs.
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.
Mentioned that we expect the airfreight cost dependent 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 to $7 million headwind here in the back half of the year based on the rates over the weekend. So.
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 but 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 just talk a little bit about what's going on in the investor side. So we and we did reconfirm the full year guide of $78 million EBITDA, we did not give a specific.
EBITDA guide for the third quarter, but.
At the same level of achievement as 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 other freight.
<unk> that we're dealing with but those are those were viewing those.
Transitory.
This year for the remainder of the year, probably but.
We're very happy with the way, we're scaling on gross margins and driving improvements to gross margin.
Great and then John I don't know if you have any comments about the spring.
Yes high level commentary, yes, we.
You see strong demand for spring 'twenty, three obviously spring 'twenty three is highly driven by two big categories that decline, which we continue that.
Pushed hard in decline and we're seeing strong growth across both protective equipment as well as helmets harnesses the name and then we're.
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 the new introduction in the outdoors.
I think we underestimated how much demand, we would see and obviously you've 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.
Very helpful and then Mike just as a follow up question I think.
You maintained your EBITDA target of $7 million to $8 million maintain the Capex spend range you gave us some prepared remarks around inventory expectations for the year.
But can you just maybe help us walk us through the the lowered our free cash flow guide for the year and then.
And then John as a follow up on pricing Thats, great to hear about the pricing.
Sticking at 6%, maybe can you give us a little bit more context between.
BD in the other parts of the business, if there's any variance between that 6%.
Pricing.
Sure Let me, let me answer the free cash flow question first here.
Free cash flow our guidance down.
Down to that 30 to 40 from the 15 to 16, so that $20 million drop in the Sky is really entirely around inventory.
<unk>.
We've targeted initially to get inventory back to beginning.
Beginning of the year level, we're going to come up about.
Short of that when I say, the $143 million compared with $129 million up to about $14 million.
Higher inventory, that's just necessary primarily pluck black.
Black Diamond, but also cost precision parts business as that business has grown significantly this year and then we've also as we are starting to think about plans for 2023 and the necessary inventory levels that we're going to need.
This uncertain environment that we continue to find ourselves in and we don't want to be caught flat footed as we enter 'twenty. Three we're also planning to carry about $10 million more extra inventories going into the year.
That's a $24 million headwind right, there and that kind of makes up the gap in the mid <unk>.
$20 million drop in the free cash flow, but is entirely around working capital and planning for.
The current environment, along with planning for growth in 2003.
On the pricing side, obviously, we look at pricing on BD on a seasonal basis.
We had price increases on a seasonal basis for spring 'twenty three.
And due to the headwinds we are having both with freight but also supply chain. We pulled those prices early in launch them with July one and that was part of the stickiness of the program that we've seen.
And those price increases now will carry through through screen 23, and when we launch our next subsequent season fall 'twenty three we will again look at prices.
Across the board by SKU by category or by geography.
And ensure that we are maintaining both our premium nature in the marketplace.
So our ability to cover the cost relative to air freight and logistics other things.
Input costs across the board.
Very helpful. Thank you very much for all the color best of luck.
Thank you please standby for our next question.
Our next question comes from the line of Linda Bolton Weiser with D. A Davidson your line is open.
Hello.
We've seen oil come down a bit and theres certain commodities that have also kind of rule of law.
Now.
Can you comment on what you're seeing in terms of your commodity input costs and whether you are starting to kind of <unk>.
Jack said, some things are going to start moderating here in the future.
So hi, Linda like.
Great question.
Copper cost obviously.
Our comprehensive critical element or the decision or.
Manufacturing process.
Prices have started to come down here in the last frankly.
Frankly in the last month alright.
Back under $4 a pound for copper.
That should be.
<unk>.
<unk>.
I would call that neutral going into the remainder of the year budget.
Budgeted around that level.
I think.
Look forward, that's probably more of a neutral thing.
First on price through.
The higher cost relative.
If you compare on a year over year basis back in 'twenty, one copper was a little lighter.
Okay.
And then.
I guess.
I'm a little bit.
About the 6% 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 youre not having too much trouble is there a possibility of even greater magnitude price increases here.
We're realizing that level of price in the thinking that was the blended rate I mean youre right.
We have taken price up a little higher in certain.
Categories in the certain segment, but that's what that's what sticking and relative to our cost.
We're comfortable with that and the other thing that John alluded to we are looking at price increases here in the back half of the year or spring 'twenty three license.
Others made taking price up we make a price up again Eric.
Farther into the year.
I think the other difference when we get to look at there from a seasonal basis not every one of these businesses as the exact same cadence on pricing and sometimes it's not a one and done.
So we have.
Two seasons that we can make the introductions and changes on the same with Brian <unk>.
As opposed to others, but I think we just.
Our goal isn't the gout.
Just to ensure that we cover our costs and continue to maintain the premium nature of our business.
Okay. It sounds good thank you very much.
Thank you. Thank you.
Please standby for our next question.
Okay.
Our next question comes from the line of Jim Duffy with Stifel. Your line is open.
Thank you good afternoon.
Guys, you've raised the outlook for precision sports are there specific product lines or customers that are driving more content for that segment and then what's the.
Availability of materials to actually delivered to that is there is still outstanding risks to sourcing components.
Do you feel like you have the components to deliver to that guidance.
And sports.
Jim I apologize I missed the first part of your question if you don't mind asking it again.
Sure you've raised the outlook in precision sports are there specific product lines or customers driving the more confident outlook.
Across the board, we streamed strong demand.
I think again.
Two pieces I would say one obviously.
Both from a bulletin in ammo, we can sell everything we can make at this point, specifically because of the uniqueness and.
Of the precision or the hunting side center fire rifle.
I think the other sides raws 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 100.
20 times, our scale that.
We think theres a lot of opportunity for us to keep playing on this.
Gaming opportunities.
And it's really about delivering case.
Cases in ammo, so could we sell more ammo, yes can we celebrate.
Yes.
I don't necessarily know if it's 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.
Okay.
Clearly the demand so how about the availability of materials.
Casings the primer so forth.
With 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.
Jim as we've talked about in the past we have access to the climbers were still being scrapping sourcing shell casings in order to convert.
OLED into in animals sale right.
The differences.
As I mentioned earlier the difference in kind of like.
Doubling versus past revenue is saying.
Why is it the full year guide double that right. So that's that.
It's still a challenge, but we're pretty comfortable with that as John just alluded to we think we can sell.
All are nearly every bullet we make the question always comes back to is how many of those bulletproof solid loaded ammo alright, and we do have a lot of the shell casing.
We don't have them all to answer your question, specifically and we don't have all against what the potential demand is versus what's in our plan.
And hence the reason to be a little conservative on the guidance.
Understood should you get better availability that will perhaps even opportunity for upside just given the demand backdrop, the 100% 100%.
We just addressed.
<unk> not Mr.
And then sticking on precision sports a big step up in the international recognize small numbers last year, but in the first half of the year, you've seen a much nicer international contribution or anything specific to speak to with respect to that.
I think it's really just another example of John in his prepared remarks referred to the Optionality that 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.
<unk>.
Precision.
Accuracy of our Sierra.
Well it would.
Would be called for.
That's an opportunity again that we've been able to take advantage up here. This year in 2022. Despite the demand is honestly, Jim more than we can get whether it's <unk> or precision 30 cows, given what's taken 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.
The last last year, the availability just wasn't there and the demand in the U S. So far in excess of what we could chip.
Understood. Okay, and then Mike I don't know if you're prepared for this but perhaps some visibility on the amount of airfreight, you're expecting in the back half of the year just to help us model out the margins from.
So.
The second quarter, we spent $2 million on airfreight.
So.
In my prepared remarks, I think that number is probably going to be about the similar level during Q3 and Q4.
Okay.
Yes.
That's going to breakdown.
That growth a little pressure on the gross margin compare to that.
40 over 40% rate that I said, it would have been without it.
Understood. Thank you guys.
Thank you.
Thank you as.
As a reminder, ladies and gentlemen.
Our one one to ask the question.
Please standby for our next question.
Our next question comes from the line of Ryan Sundby with William Blair. Your line is open.
Hey, good afternoon, guys. Thanks for the questions.
John If you look back to the rack marketing 10 years behind Australia.
In North America.
Yes, sorry for today, how should we think about the closing of that gap.
But here are there certain points, where you see adoption jump forward. If you can kind of go back and compare the two markets.
As we look to 2022 and the <unk> 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 of that moving into the second half of this year obviously.
<unk> up and took advantage of the opportunity of a little softer market in Australia to move that inventory subsequent to that we think theres 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.
Thats the typically of side by side, but also the whole pickup truck market would that be too dominant in this market.
Rule of 70 do you just keep putting out 35% average H one growth and.
Youll double every every short periods of time, and we think Thats happened until in time. This will start to close up I think the biggest.
Limiter in in 2020 due to the growth for the whole industry and I think Jeff the seamless showed the speed the excitement of November but the biggest limiter.
Lots and lots of new vehicle introductions by the big five carmakers in this space that being a jeep Toyota for Jeff Dodge, but all those vehicles have been slowed introductions in the market due to chips or other availability and so I think youre going to see what would have been an even bigger acceleration in 2022.
To translate into 2023.
Alright, okay.
Mike in the script. It sounded like you were maybe more comfortable came to lower end of the two to three times target leverage range, but it also sounds like maybe deal flow and prices were getting better.
Should we take that to mean, you're looking at.
Smaller tack on type deals at the moment.
Are you willing to go higher on leverage if the right deal warrants it.
We've said in the past for the right deal we would.
Our target there.
Very deliberate and disciplined plan to pay down any debt that we took.
Thats above that three times leverage right.
Short term I think not.
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 will do the right deal at the right price, we don't have to do any deal. So.
Very focused on returns on invested capital and M&A.
The most important.
Driver sometimes on ROIC.
Denominators Vapers, something so we're going to be patient and disciplined and when the right time. The right deal comes we'll go ahead, and whether it's big or small whether it's a bigger deal or.
Tack on deal tuck in deal.
We'll follow that discipline.
Okay, Great just wanted to see if theres any.
Thanks.
Thank you please standby for our next question.
Our next question comes from the line of Mark Smith with Lake Street. Your line is open.
Just a couple of quick questions on some smaller pieces of the business first with within precision can you discuss maybe how much of the growth maybe came from added capacity at Barnes.
Sorry, Marc I missed the front end of your question can you repeat one more time performance, yes, no just how much of the precision growth came from added capacity at Barnes.
Yes, I think obviously, we continue to look at capacity I would say probably in the 15% when adding capacity.
Other sizes chasing ammo right and.
The ability to load ammo increase.
We increased the capacity of loading ammo.
It was based off of how much of the components, we can get in order to over accelerate that in the space.
Okay and then the second question for me is when we look at the adventure segment, Ken can you give us.
Any idea on the size or maybe the growth in <unk>.
The domestic market, that's coming from or V or should we think about kind of the Polaris business versus traditional truck and Jeep market.
Yes.
Wow.
We obviously I think I think we.
Really tough to break that right now because of the inability of all of these manufacturers to consistently deliver vehicles on time, whether its polaris or the big five auto market.
I think for us right now.
Real thing we focus on his statements both against existing vehicles, and then when the introductions happen new Fitments.
The new range that comes to market or the new high lumps and tracing how we fit against those markets.
And I think we.
I think honestly, it's a shift probably a three to six months in the marketplace just due to the delay of vehicles.
We're really focused on the vehicle aftermarket channels here in North America.
Have great sell through where we're at.
And is there what types of vehicles, they're selling.
Product onto it.
That's a tough question for us.
Great. Thank you guys.
Yes.
Thank you.
At this time. This concludes our question and answer session I would now like to turn the call back over to Mr. Mr.
Mr Wall break for closing remarks.
Thank you John 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.
Yes.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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