Clarus Corp (NASDAQ:CLAR ) Q1 2022 Earnings Conference Call May 9, 2022 5:00 PM ET

Aaron Kuehne - EVP, COO, Treasurer & Secretary

Laurent Vasilescu - Macquarie Research

Matthew Koranda - ROTH Capital Partners

Martin Mitela - Raymond James

James Duffy - Stifel, Nicolaus & Company

Linda Bolton-Weiser - D.A. Davidson & Co.

Ryan Sundby - William Blair & Company

Mark Smith - Lake Street Capital Markets

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's Financial Results for the First Quarter ended March 31, 2022.

Joining us today are Clarus Corporation's President, John Walbrecht; Executive Vice President and COO, Aaron Kuehne; CFO, Mike Yates; and the company's External Director of Investor Relations, Cody Slach. Following their remarks, we'll open the call for your questions.

Before we go further, I would like to turn the call over to Mr. Slach as he reads the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements.

Thank you. Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today.

These forward-looking statements are subject to the risks and uncertainties that face Clarus Corp. and the industries in which we operate. More information on potential risks -- excuse me, 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 Securities and Exchange Commission.

I'd like to remind everyone this call will be available for replay through May 23rd, starting at 8:00 p.m. Eastern tonight. A webcast replay will also be available via link provided in today's press release, as well as on the company's website at claruscorp.com.

Now, I'd like to turn the call over to Clarus' President, John Walbrecht. John?

Thank you, Cody, and good afternoon, everyone. The first quarter of 2022 is successfully in the books, despite the many challenges people across the world are experiencing, proving once again that activity-based brands in the outdoors are continuing to experience strong momentum. And that Super Fan brands drive those market trends, especially in tough times.

Let me summarize. Our Precision Sport segment continues to execute at a high level, growing sales by 41%. And in our Adventure segment, we are pleased to report early success in our Innovate and Accelerate strategy, especially in North America. In fact, Rhino-Rack's net sales in North America during the first quarter increased 42%, an early proof point of the substantial white space that we believe exists for our Adventure brands in this market. As we continue to experience a strong order book with Black Diamond, but supply chain and logistic challenges impacted our ability to convert all Outdoor segment demand into revenue.

We are incredibly proud of our entire team of colleagues, who continue to drive these strong results, especially given so much uncertainty in the marketplace. We continue to be nimble and decisive in the individual brand levels, which is critical in achieving the level of performance, proof again that great teams build great brands.

Now let me address our performance by business segment. Starting with our Outdoor segment, sales were roughly flat in the first quarter despite strong consumer demand. Due to the continued supply chain and logistics challenges and other delays caused by COVID-19 related shutdowns in Southeast Asia, we were unable to fulfill roughly $10 million in demand with product during the first quarter that had already been produced, but stuck in transit.

Given the high concentration of core equipment that BD sells, we expect to convert this in-transit inventory into in-line or full-price revenue in future quarters. Our global order book for Black Diamond has continued to sustain momentum. Consistent with that, that we stated earlier this year, we are purchasing inventories in line with our demand plans of $270 million to support these higher levels of bookings. However, we are handicapping this order book in our 2022 sales guidance as a result of the supply chain and logistics challenges we continue to face.

As we stand today, along with a very strong fall '22 order book, we have confidence that the Black Diamond brand's top line revenues should accelerate going forward. Most of the logistics challenges impacted our equipment sales as our apparel business was up 53% year-over-year, driven by growth in men's and women's outerwear and women's sportswear.

Most importantly, apparel remains our fastest-growing category, confirming that the Black Diamond positioning of apparel as equipment continues to resonate well with our core consumers. We experienced a strong reacceleration in our direct-to-consumer growth with sales up 38% in the quarter. This was overseen by our new Vice President of E-Commerce, Bryson White [ph], who joined our team in December of 2021.

He has already been successful in activating our digital-first strategy, focusing on performance marketing and balancing that approach across search, top of funnel, paid social and email retargeting. We also did a better job of fulfillment, while still balancing our desire to serve and grow our wholesale, retail partners. As we look to the rest of the year, we expect continued momentum from our direct-to-consumer business within Outdoors.

Moving to Precision Sport. Q1's 41% growth was an exceptional quarter, where several factors worked in our favor. We outperformed on our ability to increase capacity and satisfied an increase in growing OEM demand, while continuing to be scrappy in our ability to deliver ammo across both Sierra and Barnes.

While shell cases continue to be our number one challenge, from a sourcing standpoint, we've done an excellent job sourcing copper and lead, using our balance sheet to secure these materials in advance of the rising costs and accelerated demand. For 2022, we continue to drive towards an end of year bullet production run rate target of 350 million bullets at Sierra and 120 million bullets at Barnes, resulting in the doubling of both businesses and substantially improved margins since acquiring them in 2017 and 2020, respectively.

Through both Sierra and Barnes, we have complementary brands that provide strong runway for long-term growth. Sierra is focused on precision, and we will continue to see to maximize growth through proactive innovations and the expansion of our ammunition collections. Barnes is focused on terminal impact as the hunting brand of reference that has been selling ammo for 30 years, servicing the large addressable market that has been built over decades.

Our brands are gaining market share across all leading categories and bookings remained strong across our portfolio. Although we are tenacious and disciplined in our approach, this doesn't mean that we are immune from the various external supply chain challenges that are currently being experienced as we work towards building increased capacity and product availability to support our longer-term targets of $200 million annually for Precision Sports. Though new product introductions, increased capacity, expanding our distribution globally and maintaining our focus on building the best bullets in the world, we are confident in our long-term vision for this segment.

In our Adventure segment, our Innovate and Accelerate strategy began to take shape in the first quarter. We are excited about the growing momentum of overlanding. However, as many witnessed, Australia was impacted by extraordinary floods, affecting the Australian continent and continued impacts of COVID-19 lockdowns early in the first quarter. This negatively impacted our short-term demand in Australia.

More positively, Q1 marked the first full quarter of Rhino-Rack introduction into the North American market. Reception was strong as sales increased 42% on a pro forma basis. Initially, we are focused on meeting the growing demand of our top 10 key automotive aftermarket retailers and preparing for accelerated opportunities through both the automotive aftermarket and outdoor channels. MAXTRAX, which we acquired in December of 2021 saw an acceleration in the first quarter as we increased the inventory allocations to catch up to the growing demand of our recovery boards within the overlanding space.

In summary, we believe our portfolio of Super Fan brands has us well positioned to continue our market momentum. Our activity-based brands have demonstrated strong resistance to recent economic headwinds, while outdoorism continues to fuel demand for the outdoor activities that we serve. As a result, we believe that we are well positioned for another record setting year in 2022.

I'll now pass it over to Mike to talk about our financial results in more detail. Thanks, Mike.

Thank you, John, and good afternoon everyone. I'll go into some additional detail relating to our financial performance for the first quarter, then address our outlook for the second quarter and full-year 2022 and conclude with a few comments around taxes and our capital allocation priorities.

Sales in the first quarter increased 50% to $113.3 million compared to $75.3 million in the prior year quarter. The increase is primarily driven by a $9.6 million of sales growth in the Precision Sport segment, along with revenue contribution of $24.5 million from Rhino-Rack, an acquisition completed on July 1, 2021, and $4.2 million from MAXTRAX, an acquisition completed on December 1, 2021.

If we had owned these brands during the first quarter of 2021, pro forma growth in Q1 2022 for the entire company would have been 6%. First quarter sales in the Outdoor segment were $51.5 million, roughly flat versus the $51.8 million in Q1 of 2021. If you adjust for foreign exchange, Outdoor sales would have been up 2% in Q1 2022. As John mentioned, supply chain and logistics issues caused growth in Q1 to be challenging in the Outdoor segment. Specifically, we experienced longer lead times, translating into higher value of inventory in transit during the quarter, impacting specifically our hard good sales, specifically around poles and lights at Black Diamond.

However, our apparel business continue to be a fastest-growing category within our Outdoor segment, with sales up 53% in the quarter. This is important as apparel along with footwear and direct-to-consumer are key strategic growth drivers over the next five years. Our direct-to-consumer business grew nearly 38% in the quarter as we are starting to see our e-commerce business gain traction.

Precision Sport sales increased 41% to $33.1 million in the first quarter, with Sierra up 14% compared to the prior year. The increase is largely the result of continued high demand for ammo and significant growth in our OEM business during the first quarter. Specifically, ammo was up 145% year-over-year and our OEM business was up over 55%. Barnes sales were up 88% year-over-year, including 69% growth in black box and 196% growth in ammo. Our teams at Sierra and Barnes did a great job this quarter, increasing capacity, fulfilling strong OEM demand and continuing to be scrappy in our ammo business.

Sales in our Adventure segment were $28.7 million. As John mentioned, the integration of Rhino-Rack in North America is going according to plan and we are seeing it in the results. Total Rhino-Rack sales for the first quarter were down 12% year-over-year on a pro forma basis due to the challenging market environment in Australia caused by the COVID-19 shutdowns and catastrophic flooding in key regions throughout Australia. We expect the Rhino-Rack business to get back to growth for the remainder of 2022. Total MAXTRAX sales for the first quarter were up 5% year-over-year on a pro forma basis.

Switching over to margins. Consolidated gross margins in the first quarter increased 320 basis points to 39.1% compared to 35.9% in the year ago period and it was up 290 basis points to 39.3%, when adding in the $0.3 million of fair value inventory step-up charge associated with the MAXTRAX's acquisition. Improvements in channel and product mix, along with operational efficiencies drove the bulk of this margin performance, that it more than offset the $400,000 of incremental air freight expenses that we incurred in our Outdoor segment during the first quarter.

It is important to reiterate some of the commentary from our last call related to pricing. We will continue to be thoughtful and disciplined in our approach to pricing. During 2022, we have been able to increase pricing by approximately 6% across the Clarus portfolio. A strong characteristic of a Super Fan brand is the ability to raise prices each year, while still growing market share and we believe we are doing both.

Moving further down the income statement. Selling, general and administrative expenses in the first quarter were $34.2 million compared to $20.9 million in the same year ago quarter. The increase was primarily due to the inclusion of Rhino-Rack and MAXTRAX, which contributed $9.4 million in expenses. Non-cash stock-based compensation for performance awards was $3.4 million, a $1.8 million increase compared to the first quarter of 2021.The remainder of the increase was driven by investments in our go-to-market and fulfilment activities in support of growing sales.

Net income in the first quarter was $5.3 million, or $0.13 per diluted share, compared to $5.7 million, or $0.17 per diluted share in the year ago quarter. Adjusted EBITDA in the first quarter increased 85% to a record $19.7 million, or an adjusted EBITDA margin of 17.4%. This compares to $10.6 million, or an adjusted margin of 14.1% in the same year ago quarter. The strong adjusted EBITDA results were driven by our Precision Sport segment and the higher margins those products carry.

Now, I'll shift to liquidity and asset efficiency. Inventory levels were at $152.7 million, up 18% from where we ended 2021. The dollar increase reflects proactive buying across all of our segments given the demand curve. In addition, we experienced longer lead times during the quarter, translating into higher than normal inventory levels. We expect these supply chain challenges to subside in the back half of 2022, as we are now currently starting to see lead times improve, which we expect to also translate into lower levels of inventory at year end.

As of March 31, 2022, cash and cash equivalents were $16.5 million compared to $19.5 million at December 31, 2021.Free cash flow, defined as net cash provided by operating activities less capital expenditures, for the first quarter of 2022, was a negative $12.7 million compared to a negative $3.9 million in the same year. The decrease is primarily due to our investments in inventory previously noted. At March 31, 2022, total debt was $151.9 million, putting us in a net debt position of $135.5 million. Net debt leverage was 1.9x on a trailing 12-month adjusted EBITDA basis, which is right at the low end of the 2x to 3x targeted leverage goals that we shared last quarter.

In connection with future M&A, we may experience and we may expect that we may extend our leverage a bit higher. But when we do, we will always seek to have a clear plan of how to bring it back within this targeted range over the course of a 12-month period. We are owners and operators that are committed to being shareholder-friendly and responsible on how we run the business and manage leverage.

On April 18, we took an additional step to strengthen our ability to pursue other activity-based Super Fan brands by upsizing our credit agreement to $425 million. The new credit agreement is very similar to our prior agreement. But working with our expanded banking partners, we were able to expand our bank group to seven banks and increased our revolving facility from $100 million to $300 million. We continue to have a term loan in the amount of $125 million, bringing the total facility to $425 million compared to our prior credit agreement of $225 million. We look forward prudently using this additional capital to seek to invest both organically and inorganically to create shareholder value.

Let me move on to our outlook for 2022. We expect consolidated 2022 sales to growth 25% to $470 million compared to 2021. By segment, we expect sales for the Outdoor segment in 2022 to increase high-single digits to approximately $237.5 million and sales for our Precision Sport segment is expected to grow low single-digits to approximately $112.5 million. We also expect sales from our Adventure segment to contribute approximately $120 million in 2022.

Specifically for the second quarter of 2022, we expect consolidated sales of approximately $110 million. More importantly, we expect the growth in the second quarter to be broad-based, with all three segments expected to deliver sales growth. On a consolidated basis, we continue to expect adjusted EBITDA in 2022 to grow approximately 27% to $78 million. In addition, we still expect full-year capital expenditures of approximately $9 million and free cash flow is still expected to range between USD50 million and USD60 million for the full-year 2022.

From a tax perspective, I'd like to address our NOLs. We have delivered record sales and profitability that has enabled us to deploy over $350 million of capital on acquisitions, starting with Sierra Bullets in 2017. Since this time, we've also realized over $109 million of tax benefits associated with our NOL carryforwards. In 2022, we expect to realize $39.5 million in tax benefits prior to their expiration at the end of 2022. This is quite a testament to our organization's accomplishments in making accretive acquisitions, while driving significant cash tax savings in value creation for our shareholders.

Finally, I'd like to address our capital allocation priorities. We are very pleased with the direction of our business, which we believe inherently provides us with additional growth opportunities for us to evaluate both organically and through M&A. As we've historically shown, we will continue to seek to utilize our balance sheet as the first and foremost way to growth. We have a business with increasing levels of EBITDA and strong recurring free cash flow.

We are owner, operators that are committed to being shareholder-friendly and responsible on how we run the business, including the amount of leverage we take on. We also maintain a $30 million share repurchase program, which still has approximately $10.8 million available. Over the years, we have purchased nearly 3.5 million shares of our outstanding common stock at a cost of approximately $19.2 million at an average price of $5.42 per share. From a capital allocation strategy, we expect to continue to prioritize organic growth, M&A, our quarterly dividend over share repurchase, but we will continue to seek to accumulate shares on an opportunistic basis.

I'll pause here and hand the call back to the operator as we are now ready for Q&A.

[Operator Instructions]. And our first question will come from Randy Konik with Jefferies.

I guess, Aaron is there, right?

Yes. I just wanted to get your perspective on -- from a supply chain cost perspective, how do you think we're running around in terms of trend lines going forward? Are we kind of still -- are costs still elevating? Or are they starting to kind of flatten out? Just wanted to get some perspective on the cost side of the equation.

And then on the lead times, you spoke about how lead times negatively impacted ability to fulfill demand in the quarter. Just wanted to get some perspective on what you're seeing around those lead times? Are they starting to kind of peter out or at least are they still increasing? Just wanted to get some perspective there as well.

Yes, you bet. So on the cost side of things, of course, enough for us, things are starting to normalize or I wouldn't say normalized, they're starting to stabilize. As Mike mentioned, we have been able to, in a disciplined way, to navigate through that, not only in terms of the way that we've managed the cost inputs with our vendor partners, but also how we've approached the pricing side of things in general. But fortunately enough, in terms of cost inputs, they are starting to stabilize. And so the trend line is more flat, and we are aggressively working with our vendor partners, but also with our R&D teams and our supply chains to find ways to offset that through cost-cutting efforts and also just redesign efforts. And the nice thing about also the Innovate and Accelerate playbook is that each time you come out with new products, it gives you a chance to reset the market price for the associated products as well.

As it relates to the delays that we saw, in particular, on the Outdoor business side of things in Q1, as you're aware of, we've been building up this pipeline of inventory to offset the longer lead times associated with the logistic challenges that were being experienced. We really felt that we were heading in a good way at the end of last year, but about mid-February or so, we started to see -- it was actually towards the mid part of January to mid part of February, we started to see the lead times associated with getting product from Southeast Asia to the US and also to Europe elongate by about 30 days. As a result, we saw a gap started to get created in Q1.

Fortunately enough in April, we were able to start to see that softening up and to stabilize and get back to the traditional lead times that we were experiencing in Q4 and Q3 of last year. The positive side is that inventory is flowing. It's starting to come back into the warehouses. As Mike mentioned, we had quite a bit of inventory on the water, where now that inventory is starting to find its way into the warehouse. And so as we look to Q2, we do expect each of the business units to get back to growing again. And it's not that we're out in the woods there, but we are starting to see a stabilization and to get back into a more natural rhythm that will enable us to get back to growing the businesses.

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

Yes. So, obviously, we really focused on this apparel-as-equipment concept and we've seen that really focused on three initiatives of growth within apparel that are happening, both when we reported last quarter, but also this quarter and moving forward, that being snow, that of performance rainwear, stretch rainwear and that of rock bottoms. And then obviously, from there, we fill in what is the rest of sportswear. And those three categories are growing significantly. We think that now opens up new expansion of opportunities within existing doors, as well as new door opportunities as we head into both the bookings that we saw in fall '22 new door expansion, but then as we now launch into spring '23, which is happening here momentarily.

To your second question, what gives us the great confidence in apparel at this time is that, obviously, we have the Super Fan equipment, apparel-as-equipment strategy that really focuses, first and foremost, on ensuring we're building the right product for the core. And the measurement of that is do we have a higher penetration and success through D2C and through our own expanded retail flagships. And the answer on both of those is yes.

And there, we currently see a global apparel business that's about 15% of our sales globally, but we see apparel represent anywhere between 40% to 60% monthly in our D2C and in our flagship retail stores. And that just gives us the great confidence that we're aligning correctly with this core Super Fan consumer, while at the same time expanding that success into our wholesale distribution.

Long term, I think we'd like to see it somewhere around the 30% of our sales direct-to-consumer. Obviously, apparel has a wide footprint. Men's and women's, eventually in the kids, you name it. So it gives you a lot of opportunity in that. And our big growth in the next few years is to get the level of success that we see in D2C and retail in our biggest key accounts and then our specialty retailers globally.

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

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

No, you understood that right, that -- the $110 million, and we do expect them -- our Precision Sports business to gro -- show growth in the second quarter as well. But as we've been saying consistently here, it's not a question of demand even across Precision Sports. It always comes back to the question around capacity, which the team has done an amazing job, continuing to add capacity. But also when we talk about being scrappy, it's around making sure we can source, specifically from an ammo standpoint, the cell casing, right? We've talked a little bit about the challenges sourcing that. So, we don't have a full view on the back half yet for Precision Sports. We're taking it one quarter at a time.

We've been conservative with our view on that business here. 65 days ago when we released first year-end and gave the guidance for the full year for 2022, and we're going to continue to be prudent with our view on how that business performs throughout the year, but it has gotten off to a great start, as you're noticing. And we do expect it to grow in the second quarter as well as we sit here in May in our understanding, but we're going to be prudent as we look through the remainder of the year.

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

Well, two separate questions there. I'll take the first one on margins, and I'll pass the supply chain question over to Aaron. But from a margin standpoint, just with what we talked about, really, we thought we could get to a 39% margin for the full year, right, even a few -- back in our first quarter call in March. And we did get there this quarter, right? But it's a little bit of a mixed bag. The Precision Sports business fueled much of that margin improvement. So, that's where you see that. Obviously, with the Black Diamond and Outdoor business being flat, margins were struggling a little bit. They're under a little pressure there. But we expect that, as Aaron alluded to, as he just answered the first question, we expect the Black Diamond business to improve throughout the year and margin will flow through consistent with the top line growing at Black Diamond as we see the supply chain ease here in the second quarter and more so in the back half. So, that's how the margin got up to 39%. It's really a combination of those couple of things.

And then, Lauren, on the exposure to China side of things, that's still consistent with where we're at. It really highlights, though, the way that the team has continued to work with our supply chain partners and working through those different variations within the marketplace, whether it be shutdowns or just logistic delays. And also really -- it also reinforces our approach in terms of making investments into inventory and trying to securitize or mitigate some of those exposures by carrying just a little bit more inventory than what we normally would, so that we can hopefully provide the highest level of service to our retail partners, but also to our end consumers in our own D2C channels with higher levels of delivery and on-time fulfillment.

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

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

Well, I'll start, and I'll let John and Aaron add any color. But as we mentioned again in our prior call, hey, we put price increase into effect late last year and across the entire portfolio of businesses. We believe we -- those prices are out there that on average of around 6% across the portfolio. So, I think we're capturing price across the entire business, right? We are incurring higher costs, so too. And I think we mentioned that, that's how we were expanding margins.

We expected costs to probably go up about 500 basis points as well to yield about a 100 basis points improvement in margin, which is even -- which we're realizing that. So, we have realized price, and we're continuing to push across the entire portfolio. And we'll take -- we'll evaluate that here as we continue to go throughout the year based on the input costs that we're going to experience, right? Copper continues to be in the low $4.35, I think, a pound this morning. So, we're continuing to see those types of increases, aluminum as well. So, we'll be prudent and be able to react accordingly if necessary, later in the year with additional price.

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

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

Yes, you bet, Matt. So it was more a commentary around stabilization versus improving. I think that's an important distinction and really highlights once again the approach or the strategy that we've taken from a supply chain side of things, but also the way that we've been utilizing our balance sheet. We do anticipate seeing some of the supply chain challenges subside in terms of just overall improvements in inventory availability, but there still are some challenges out there similar to what we highlighted during our previous call, in particular around microprocessors that are required for our lighting in our avalanche transceiver beacon products, et cetera.

And so it's something that the team is actively working through on a daily basis. But once again, because of the way that we plan for the business, the way that we interact and the way that we're prioritized with our supply chain partners, we do get prioritization and we are in pole position to be able to realize the best possible outcome. But it's also why we'll continue to be very focused in terms of -- and disciplined in how we deploy our capital in the inventory during these periods of time so that we can increase our levels of fulfillment and on-time deliveries.

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

Yes. We always have a certain level of inventory on the water naturally. But when we look at the inventory levels that existed at the end of the quarter, I'd say that we're sitting on $20 million of extra inventory that is just working through the system and that we purposely brought on in order to mitigate some of the supply chain or logistic challenges or delays that we're experiencing.

It is important to highlight, though, that we're very sensitive to, one, the generation of free cash flow and the way that we manage the overall health of our balance sheet, in particular that of inventory, but also the way that we manage our line plans. And as a result, we continue to be very confident that the inventory that we have on the books will translate into full price in-line revenues over the next quarter or two.

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

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

Yes. So if you look at the way we reported it here, we're seeing significant triple-digit increases in our ammo. We're seeing 50-plus percent growth in our OEM businesses. Obviously, as you well know, we're not doubling and tripling our production. So, we make choices between what we call reloading bullets, green box or black box to that of OEM and ammo.

And as we've often said, we prioritize ammo OEM and in green box in the allocations. Obviously, ammo is a function, as mentioned through this, ammo is also a function of chasing brass and cartridges. And so when we're scrappy and able to pull it off, we see better than accelerated opportunity. And if and when we can't pull off the brass, then obviously, we reallocate towards the OEM and the green box or black box depending on the brand, mix of bullets.

Okay. And in that business, as we look at international, you had your best quarter, I think, ever in that segment in international. Was that a function of Europe coming back or just having some capacity to be able to ship into international markets? What was the -- really, what's the main driver there?

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

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

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

Yes. So the focus, as we said, going back to the premises that we have approximately 50% plus market share in Australia, and we had under 2% in the US. We started a pre-season program last fall that we mentioned in previous calls. We focused really the first quarter on what we would call the top five to seven key accounts in the automotive aftermarket opportunity. And we allocated -- we used the situation in Australia to reallocate inventory from Australia to the North American market to accelerate and catch up to that.

Now, again, we were only able to focus on arguably the top five to seven. We weren't even able to maximize all of that, and we weren't able to maximize the automotive aftermarket across all of North America to live in more doors than top five, seven accounts. And long term, obviously, our goal is also to accelerate the Outdoor side as blessing would kind of have it, had the Australian market been chasing at the rate they had been pre-COVID or biblical floods, we would have had a difficult time allocating inventory to chase those markets. And so the premise would have been a little slower. We just were able to accelerate that North American market opportunity. And it just proved out what we always said that there was somewhere between 2% -- 50% is the opportunity in North America.

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

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

Yes. So that's part of that $20 million of -- and I wouldn't call it excess inventory, but just higher than normal or higher than optimal inventory levels. So, we do have close to $5 million of raw materials that is within that bucket. We've -- this was something that was really important to us is that, as we can see within the Precision Sports side of things is that if we can make sure that our capacity is being optimized, not only in terms of the way that the plants are run, but also in terms of the flow of inventory that we can really crank. And this was a real important piece of the equation that we were still missing coming into the year with in terms of just having those -- the raw materials or the components that would enable us to optimize our operations and be able to increase our capacity in a more efficient way as well.

And so that's something that we've been able to securitize. We're not all the way there in terms of where we'd like to be able to be. But we -- through being scrappy and opportunistic, we've been able to securitize more components than what we previously had, which enables us to continue to be very optimistic about the rest of the year, in particular, our ability to load out ammo and continue to build out those initiatives for both the Barnes and Sierra business.

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

Yes. So as we look out, obviously, we think of this business in three perspectives, that of the reloading components, what we either call green box or black box depending on the brand Sierra here versus Barnes. And then there's obviously the OEM businesses, which is a bigger proponent of that is in Sierra. And obviously, again, recognizing that Sierra is on track to a run rate of 330 million of bullets, whereas Barnes is on a run rate towards the end of the year of 110 million to 120 million, right? So a big OEM component.

And then ammo. At Barnes, we can load our own ammo. At Sierra, we don't load our own ammo. We're not vertical, and so we use partners. Order books for OEMs are strong and growing. Order books for green box or black box is strong and growing. And obviously, we see opportunities in our prioritized ammo, but ammo in the case of Sierra is not 100% driven by us, both in terms of loading capacity at other facilities, as well as chasing brass cases to this.

And at Barnes, there's more demand, specifically around centerfire going into fall '22, and that driver of the limiter right there again is brass. And fortunately or unfortunately, it's the same problem across the whole industry. So strong order books. We'll continue to be scrappy as we say, and chase the opportunity there. If and when we over-index, as we did in the first quarter, then you see the results. We see a strong order book for the second quarter, as well as our ability to chase that. And as Mike referenced, we would love to keep that momentum through the third and fourth quarter, but we can't see that far out in the crystal ball and know exactly when we can receive cases and opportunities to fulfill that.

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

No. We're still very optimistic about the footwear business. We've seen huge explosion in what we call the outdoor lifestyle side, which -- the approach, we've seen growth in the technical approach, which we call hike. We still continue to chase the climb footwear. And with climbing gyms coming on, we start to see that turn back along, launching a brand-new shoe here in '23 -- spring '23.

And clearly, we still think one of the big opportunities is in that of trail run. Honestly, we're just trying to keep our notes for the quarter concise, just didn't put out every single category. I think one of the other surprises, which obviously tends just to footwear is that now that climbing gyms have opened, we're seeing a surge in climbing equipment and climbing footwear, again, which we didn't see the last couple of years during COVID just because of lockdowns.

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

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

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

Got it. And the rest of my questions have been answered.

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

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

So, one of the key characteristics of the Super Fan brand is that, that it's activity based. And this is really important because those consumers do not change their approach or their lifestyle based off of economic tailwinds or headwinds. Instead, they're very loyal and they're very focused on those activities. One of the things that we've also seen historically, in particular with that of Black Diamond is during recessionary environments, it's actually been able to grow in a pretty substantial way. And we do believe that that's because of just once again, what the brand represents to the core enthusiasts, but also this concept of being activity based.

And so as we think about the different backdrops of the current marketplace and what that may -- how that may impact or represent itself in the current business, we're very confident and we're very optimistic about where we're going with the businesses and our ability to achieve our overarching objectives because once again, the end consumer that we serve and the nature of the activities that we serve are very resilient. They're very durable, and they've been able to prove that time and time again.

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

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

No. I think we've been always upfront of our M&A strategy. One, we like to find Super Fan brands that do perform in both good times and bad times, even better in bad times. We look for brands in the outdoor space. I think we currently have a pretty strong pipeline of companies that we're looking at. We think there are clearly opportunities in the Outdoor segment, but we also continue to see strong demand and growth in the overlanding segment.

To your commentary on pricing, I think what we are going to find and we're watching is just the valuations of businesses may trade lower as the market has now started to trade lower on that. And some of these brands that are in -- we don't typically chase processes for the mix. We typically try and do them on the side. But I think that some of the processes are probably not going to go all the way through and we'll see the market change.

More importantly for us, I think it's really making sure that each acquisition is accretive in our business and really lines up to the way we think of our segments of Outdoor, Precision Sports and Adventure, and making sure that the brands we pick, every time we announce the next M&A that everybody's answer is, aha, that's perfectly aligned. I would have done the exact same thing at the same time. And that's really important to us. And again, going back, we're operators, we're owners, we're going to be long term. And so each and every acquisition is super meaningful to our stores.

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

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

Without a doubt, Ryan, a great question. That transition continues to go extremely well. The European team has fully embraced what it means to service core markets within the EU, in particular some of the reasons that we did transition over being the U.K. as well as the core markets, considering the dock markets, France, and then also Scandinavian. That's one of the areas despite the noise that's taking place with the Russian, Ukrainian conflict and all that's going on there is a reason that we continue to see a lot of growth opportunities, a lot of momentum, both in terms of bookings, but also that of ASAP replenishment orders.

I think what's -- it's really highlighted is that, one, that team has done a really good job of connecting with key retail partners and really providing them with a high-level of support. But also we, as a collective group and the focus that we've placed on one of the sacred 7 categories, really making it very clear for our retail partners to understand the strategy, but also then backing that up with better than industry standard results in terms of our ability to deliver on time and in full, has really helped support those efforts.

And some of the feedback that we've even got just recently associated with Brexit was that BD was recognized as one of the top brands in terms of managing through that process, both in terms of the way that we communicate, but also supported those retail partners in the UK. So, that definitely reinforces that region for us, especially for the Black Diamond brand, but also continues to line out a model that we're very comfortable with, as we think about expanding our distribution on a global basis across the different brands within the portfolio.

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

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

Yes. So the apparel piece is one that represents just -- once again, this is -- we've purposely over-indexed on the apparel initiative. It truly is a strategic initiative by the entire organization. But also the real reason why we saw some of the delays on the inventory front from the hard goods side was specific to key items such as lighting and trekking poles. One, we saw the delays in the logistics side of things, but also, as we know, aluminum is under a little bit of pressure as well.

So, that just created this gap that we weren't able to overcome because once again, the logistic delays of 90 days also became 120 days, and that's what created the real gap within the hard goods or the equipment side of things within Black Diamond in Q1. That supply chain and the flow of inventory is back on track. We will continue to expedite some of that inventory because the demand is extremely high for those product categories. Those are two of the top categories within equipment. And so when we don't deliver that, it's naturally going to have an impact on our ability to continue to grow the business.

On the Rhino-Rack piece, this is something that we knew was going to be an opportunity for us in terms of Rhino-Rack has a very strong position in Australia. But through our due diligence and also through the integration efforts, we knew that North America was going to be an area of focus and a real opportunity. That's always been part of the thesis in terms of the transaction for Rhino-Rack. And so we started to put a few things into place already in last fall to try to get the right inventory in the right place at the right time, including that of North America.

What took place as well with the flooding and the COVID shutdowns that also took away some of the pressures to kind of balance it out, where it enabled us to over-index the North America market and really position ourselves not only to be able to capture the results that we did in Q1, but as we know, so much of this is dependent upon our ability to truly show support and the ability to service the market through on-time deliveries, high-levels of fulfillment, et cetera, et cetera.

And so one of the questions was, did we expand distribution? And the answer is no. We just continue to service the top 10, top 20 accounts that we had. And by us being able to now position Rhino-Rack U.S.A. or North America in a way that it will be able to expand distribution, we can do that now with a higher level of confidence because the inventory is sitting in our warehouse.

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

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

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

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