Clarus Corporation (NASDAQ:CLAR ) Q4 2021 Earnings Conference Call March 7, 2022 5:00 PM ET

Cody Slach - Director of Investor Relations

Michael Yates - Chief Financial Officer

Aaron Kuehne - Executive Vice President and Chief Operating Officer

James Duffy - Stifel, Nicolaus & Company, Inc.

Alexander Perry - Bank of America Merrill Lynch

Randal Konik - Jefferies LLC

Matt Koranda - ROTH Capital Partners

Laurent Vasilescu - Exane BNP Paribas

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

Mark Smith - Lake Street Capital Markets, LLC

Ryan Sundby - William Blair & Company LLC

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clarus Corporation's Financial Results for the Fourth Quarter and Full-Year Ended December 31, 2021.

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 now 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.

Thanks, Crystal. Before we begin, I would like to remind everyone that during today’s call, we will be making several forward-looking statements. And we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to the risks and uncertainties that face Clarus Corp and the industries in which we operate. More information on potential factors that could affect the Company's financial results is included from time to time in the Company's public reports filed with the Securities and Exchange Commission.

I'd like to remind everyone this call will be available for replay through March 21, starting at 8:00 p.m. Eastern tonight. A webcast replay will also be available via the link provided in today's press release as well as on the company's website at claruscorp.com.

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

Thank you, Cody, and good afternoon, everyone. Before we get to our traditional commentary, we at Clarus are mindful of the geopolitical crisis that is taking place between Russia and Ukraine, and stand in solidarity with the people of Ukraine. Our hearts and our prayers go out to them at this time. As part of this unwavering support, we have stopped all exports to Russia and will be suspending all business with the country. We are also actively working to send aid to the Ukrainian people in the form of certain key product items from our various businesses that will assist their efforts in this crisis. We hope and pray that the conflict will end quickly and that peace will prevail.

Now turning to our most recent business results. We are reporting another record quarter of performance in a year filled with record setting sales and adjusted EBITDA. We are incredibly proud of our entire team who make our vision a reality each day and especially with the global backdrop around COVID and the supply chain concerns. We continue to be nimble and decisive at the brand level, which is critical in achieving this level of performance.

As we turn the calendar on 2021, I'd like to provide some perspective on the strategy we set five years ago and how this has positioned us in the market today and where we will go in the future. The question we are often asked is, how did we get to this point? The answer is that we seek to create markets through our understanding of Super Fan brands, their unique DNA, and what drives their success. We take the Super Fan brand, execute our Innovate and Accelerate strategy, and then focus on creating sustainable growth by taking market share with the disciplined go-to-market strategy supported by both commercial and operational excellence.

In 2016, I had the great opportunity to join Clarus to help create something exciting as well as disruptive in the outdoor industry. At that time, we owned Black Diamond equipment, which was and continues to be the world's number one climbing brand. Starting in 2017, we initiated our Innovate and Accelerate strategy, developing more than 100 new products per season for the next four years. We relaunched apparel with a focus on technology and innovation. Treating apparel like we would our R&D heavy equipment categories and we also launched successfully into footwear.

Over the past five years, BD has won more than 371 industry awards across all categories, proving out our focus on product innovation. We accelerated our sales, created an industry winning trade show booth, hiring the best sales team and expanding our distribution. We accelerated our marketing through our athlete and influence our content, amazing photography and strong public relations. We accelerated our digital-first strategy, growing our Instagram, Facebook and YouTube followings by more than 10x.

In 2021, Black Diamond had an impressive total of over 5 billion impressions across all product categories. In particular, apparel grew at a higher rate, recording a 58% year-over-year increase in earned consumer impressions. BD closed out 2021 with a strong December, earning 21 Tier 1 placements and over 598 million impressions. Once again, the apparel category dominated our coverage with its focus on key push products like gloves and our vision down hybrid jacket.

Today, BD is the premium badass image brand of the outdoor industry and the Super Fan brand for climbing, backcountry skiing, trail running and hiking. We are the reference brand for equipment, driving industry-leading growth, resulting in market share gains across all categories, channels and geographies. An important piece of our growth plan is our M&A strategy. We have demonstrated a disciplined approach to acquisitions, focusing on brands, where we are quickly able to deploy our Innovate and Accelerate strategy. We target Super Fan brands that may give as a foothold in a new product group or customer channel as we seek to diversify further within the enthusiast outdoor and consumer markets.

Sierra was the first brand acquired under our Super Fan acquisition strategy in 2017. Established in 1947, Sierra is the reference brand of premium accuracy bullets. With 90% of all long distance competitions won with Sierra MatchKing, Sierra is the definition of Bulletsmiths. Starting in 2018, we turned Sierra into an innovation house, hiring the best product engineers in the industry. We took the last pure play bullet company and in 2019, launched it into an award-winning ammo brand. For some perspective, bullets represent 2% of the industry whereas ammo represents 98% of the consumer industry, selling for 4x to 6x the price of the individual bullet.

Since the launch in 2019, we've taken ammo sales from zero to now representing over 30% of Sierra sales. We have a strong pipeline of innovations anticipated for 2022 and beyond in both bullets and ammunition. On top of restarting the innovation engine, we added an industry-leading sales team and successfully expanded our distribution into the top retailers.

We accelerated marketing initiatives by launching the Sierra performance shooting team, introducing the industry's most demanded reloading manual and expanded our digital-first strategy through our new website and our brand video content. In 2021, we launched all new packaging for both bullets and ammunition, creating a disruptive statement unique to the market. Our customers have responded and we have doubled sales while significantly increasing our EBITDA margins.

With the success of Sierra and specifically seeing our playbook in action, we acquired another brand over the last 18 months. We embarked on a strategic initiative to deploy nearly $275 million of capital, marking an extraordinary transformation for Clarus. We purchased Barnes in October of 2020, representing another great example of our brand acquisition strategy. Barnes was established in 1932 and is known as the most effective all-copper hunting bullet. This brand had the heritage and the innovation of a Super Fan brand, but was treated as a low-end manufacturer of bullets under its prior ownership.

When we acquired the business, it was doing about $20 million in revenue. We set out to reestablish Barnes as the innovator of copper technology, the Ferrari of the bullet industry, so to speak, the leader of terminal impact or tour. Copper bullets and ammo are the green alternative and the fastest growing trend in big game hunting due to their 100% weight retention. We recognized this and saw a clear path to launching new technologies and expanding categories into all hunting ammunition.

Today, Barnes is a $45 million business with a strong pipeline of more innovations anticipated in both bullets and ammunition. Immediately, after acquiring Barnes, we focused on accelerating sales, targeting the OEM and wholesale distribution markets, adding a strong sales team and quickly expanding our distribution to the top hunt retailers. We launched new booths at the recent SHOT Show and Safari International Show, which featured our all new copper ammo collections.

Now that we have reestablished Barnes in its core channel, we will be accelerating our marketing through our digital-first strategy, launching our new website and a national advertising campaign, we are calling Utah proud. We have begun an aggressive social media strategy through Instagram, Facebook and YouTube, partnering with the most influential hunt celebrities, followed riders and industry-leading partners. Again, another proof of an old demand Super Fan brand and its ability to raise prices every year, while still growing market share.

Over the past 12 months, we successfully relaunched Barnes as the reference brand for big game hunting, reconnected with their very strong tribal community and doubled sales while expanding EBITDA margins. We have the inspirational goal of doubling sales again in the next three years.

Rhino-Rack became our next targeted Super Fan brand, when two years ago, we saw the growing demand from our consumers to get outdoors and take our products farther from home. Consumers are getting off the pavement and headed to brown roads and need to wrap all of their gear with them. Under the banner of making space for adventure which has a strong following within the growing overland community, Rhino-Rack is the undisputed leader in platform racks in Australia and the image brand of the outback.

With sales of Jeep's, Toyota's, Fords and SUVs and trucks outgrowing passenger cars by more than two to one, we believe that Rhino-Rack is well positioned to capitalize on this trend relative to its competition. We remain confident that our Innovate and Accelerate strategy can unlock the huge potential both in Australia, and more importantly, in North America.

First, Rhino-Rack already has a leading market share in platform racks. Second, Rhino-Rack’s foundation is in product innovation, winning two Red Dot Design Awards in 2021 for the [Pioneer two rack and the stoic] with a robust pipeline of innovations planned for 2022 and beyond, including the new Recon platform rack for pickup truck beds, which launched at SEMA in 2021 in November. We will be accelerating our innovations in both racks and overlanding accessories, the hottest growing category.

Our sales growth initiative for 2022 include targeting the OEM market, the automotive aftermarket, and the ever expanding outdoor retailer market. In fact, we have already had appointments with the top North American outdoor retailers for a 2022 launch later this year. We will be accelerating our marketing, launching a North American specific website, new overlanding trade booths, new trade and consumer catalogs, and launching an aggressive make space for adventure ad campaign. We will be accelerating our participation in events and gear reviews through our black tops to brown roads public relations campaign.

Over the next 24 months using the same playbook that we have been so successful with in our last two acquisitions, we are confident we can successfully launch Rhino as the brand of reference for the hyper growing category of overlanding in North America. Our most recent acquisition was MAXTRAX, the market leader in vehicle recovery and extraction boards for the overland and off-road market. We closed the acquisition on December 1 and have been busy integrating the business into our Adventure segment. The acquisition was immediately accretive. MAXTRAX was founded based on the need for a system that makes vehicle recovery and extraction a safe, simple one person task that does not require towing.

Today, MAXTRAX is considered the creator of the vehicle recovery board. We are already well underway in using MAXTRAX to help expand capacity and speed up new product developments as well as build our high growth Adventure segment. Like Rhino-Rack, we see substantial opportunity to expand in North American market. In fact, we launched our first go-to-market offering at SHOT Show and the retailer's feedback was very strong.

So here we are today with five Super Fan brands that are all benefiting from the Innovate and Accelerate strategy and strong market tailwinds. We've grown from roughly $150 million in sales that was losing approximately $3 million in a year and adjusted EBITDA in 2016 to a record setting result in 2021 of $375.8 million in sales and $61.5 million in adjusted EBITDA. The transformational change I've just walked through guides our vision for the future.

This growth has required us to also invest heavily in our people. And while all deserve recognition, I'd like to highlight a couple of key senior hires and promotions. First, we announced that Aaron Kuehne was promoted from EVP and CFO to the new role of Executive Vice President and Chief Operating Officer. In his new role, Aaron will have the responsibility for Clarus' operating model, business integration and optimization, as well as our operational support functions.

I'd like to reiterate the partnership approach that exists between our executive leadership team. It is not one of hierarchical nature. Instead, each of us has our own respective roles and responsibilities, which enables us to move quickly and evaluate and execute on the various opportunities for growth and value creation. As a result, we have appointed Mike Yates as our new CFO. Mike joins us with nearly 35 years of financial management, executive leadership, accounting and M&A experience most recently from the IDEX Corporation and S&P 500 diversified engineered products company. At IDEX, he held multiple accounting and financial executive leadership positions, including most recently serving as the Chief Accounting Officer, a role which he held since 2010. In this role, Mike will not only oversee global finance functions, but also lead our Investor Relations.

We are focused on expanding our investor base, increasing our interactions with current as well as future shareholders and broadening our communication. This includes an upcoming Investor Day, the details of which will be forthcoming. He will also be focused on helping to better outline our efforts involving corporate social responsibility and ESG. It is important to highlight that the people and culture of Clarus are rooted in the idea that the style in which goals are accomplished is as important as achieving them at all. And this applies as much for our business as it does to our outdoor activities. That's why we have paired an innovative approach to building equipment with a unique approach to running a company, one that champions conservation and the access to the outdoors while minimizing our environmental footprint.

With the expansion of our leadership team, we have taken a major step to further seek to scale our diversified brands globally and accelerate growth, both organically and through additional acquisitions.

So with that, I'd like to welcome Mike to his first earnings call. Congratulations, Mike.

Great. Thank you, John. It's great to be here today. I'm thrilled to be sharing such strong results on my first call as the CFO for Clarus Corporation. Before I get into the numbers, I want to share that we have renamed our segments to align more with our strategic objectives for the company. Going forward, we will refer to our Black Diamond brand as well as our PIEPS and climbOn brands as the outdoor segment. Our Sierra and Barnes brands will be referred to as Precision Sports segment and our newly formed Adventure segment, which is focused on the overlanding market will consist of our two most recent acquisition Rhino-Rack and MAXTRAX. These name changes have no impact on the previously disclosed financial information and no recast of the results is necessary. It's purely nomenclature.

With that said, I'd love to jump into the results. Sales in the fourth quarter increased 56% to a record $118.2 million compared to $75.9 million in the same year ago quarter. The increase includes revenue contributions of $23.8 million from Rhino-Rack, an acquisition completed on July 1, 2021 and $1.7 million from the MAXTRAX acquisition that was completed on December 1, 2021. Fourth quarter sales increased 16% on a pro forma basis compared to the same quarter a year ago.

Fourth quarter sales for our new Outdoor segment were 17%, up to $65.1 million. Hardgoods at Black Diamond were up 16% in the quarter and we continually see strong growth in our apparel initiative, which grew 22% in the fourth quarter. Apparel is our fastest-growing category and our apparel's equipment positioning continues to resonate well with our consumers. As part of our strategy to innovate and accelerate our apparel offering, I'm proud to say that in addition to having the best-in-class materials and advancement, 90% of our apparel styles meet or exceed sustainability goals in the outdoor industry.

Precision Sports sales were $27.6 million in the fourth quarter compared to $20.1 million in the fourth quarter of 2020, a 37% increase. Sierra contributed sales of $15.8 million for the fourth quarter, which is a 17% increase compared to the prior year. The increase was driven primary by strong domestic demand for ammo. In fact, our ammo business was up 206% compared to the year ago quarter and ammo now accounts for over 30% of Sierra's total sales. To put this in some perspective, our original goal was to achieve 10% of Sierra sales through ammunition.

Barnes sales increased 79% in the quarter to $11.7 million. This was led by an increase across all channels, which includes black box, ammo and OEM. As a reminder, we acquired Barnes on October 2, 2020, since then we've reported five straight quarters of revenue growth while expanding gross margins and improving EBITDA. We remain focused on ramping production by making strategic investments in equipment and processes to seek to fill the expected continued demand in the market. During the fourth quarter, we also closed on a strategic decision to purchase the Barnes headquarters in Mona, Utah for $9.5 million. This underscores our commitment to expand capacity and be better positioned to serve our customers.

Rhino-Rack contributed $23.8 million of sales in Q4, which was a strong result given the COVID lockdowns in the brand's home market of Australia during the quarter. During the first quarter of 2022, we have continued to see constraints in the region with now unprecedented flooding occurring in Australia, but I'd like to thank the Rhino-Rack team for managing these challenges. In the U.S., we're expanding our Rhino-Rack sales and marketing efforts and I'm pleased to say that it's already showing great results. In the fourth quarter, Rhino-Rack grew sales in North America by 25% compared to the prior year on a pro forma basis. MAXTRAX, an acquisition that we completed on December 1, 2021 also contributed $1.7 million of sales in Q4.

Moving on to gross margins. Consolidated gross margins in the fourth quarter increased to 36.1% compared to 35.5% in the year ago period, and it was up 120 basis points to 37.2 when stripping out the 1.3 million fair value inventory step up charge associated with Rhino-Rack and MAXTRAX acquisitions in the quarter. Improvements in the channel and product mix, along with operational efficiencies drove the bulk of this margin performance. However, we did experienced logistics challenges associated with the need to expedite some of our product specifically related to the air freighting of our product, which was a 100 basis point drag on the Q4 margin rate.

Selling, general and administrative expenses in the fourth quarter were $32.6 million compared to $20.9 million in the same year ago quarter due primarily to the inclusion of Rhino-Rack and MAXTRAX, which contributed $7.6 million in expenses, and an increase in stock-based compensation of $1.7 million in the quarter. The remainder of the increase was driven by investments in our go-to-market and fulfillment activities in support of the increased demand.

Net income in the fourth quarter was $14 million, or $0.36 per diluted share compared to a net income of $7.1 million, or $0.22 per diluted share in a year ago quarter. Adjusted net income in the fourth quarter increased to $17.4 million, or $0.45 per diluted share compared to an adjusted net income of $11.2 million, or $0.34 per diluted share in the year ago quarter.

Adjusted EBITDA in the fourth quarter increased to a record $20 million or an adjusted EBITDA margin of 16.9% compared to $11 million, or a margin of 14.5% in the fourth quarter of 2020. It has results like these over the past five years that have enabled us to deploy over $350 million of capital and acquisitions starting with Sierra Bullets in 2017. Since this time, we have also realized a $109 million of tax benefits associated with the NOL carryforwards. In 2010, Clarus had $225 million of NOLs that were set to expire at the end of 2022, but we now expect to realize the remaining $39.2 million that existed from 2010 in 2022 prior to them expiring. This is quite a testament to the organization’s accomplishments in making accretive acquisitions while driving significant cash tax savings and value creation for our shareholders.

Now I'll shift to our asset efficiency and liquidity. Inventory levels were $129.4 million, up 9% from where we ended last quarter and compared to $68.4 million in the fourth quarter last year. Keep in mind that inventory in the most recent fourth quarter includes $27 million of incremental Rhino-Rack and MAXTRAX inventory that obviously wasn't reflected in the comparative 2020 figures. It also includes incremental inventory investments of roughly $34 million across our brands to mitigate supply chain constraints. We believe that our 2021 results through this strategy has been working.

At December 31, 2021 cash and cash equivalents were $19.5 million compared to $17.8 million as of December 31, 2020. For the full fiscal year 2021, we had free cash flow defined as net cash utilized or provided by operating activities less CapEx of a negative $17.7 million compared to $24 million in the prior year. This decline is due to the following items: An increase in working capital specifically related to the incremental $34 million of inventory investments I just discussed. It also is a result of the $9.5 million purchased for the Barnes Bullet headquarters and approximately $12 million in cash transaction expenses related to the 2021 acquisition.

Going forward into 2022, we expect free cash flows to rebound as product moves out in the cadence of our inventory purchases normalized. At December 31, 2021, total debt was $141.5 million, putting us in a net debt position of $122.1 million. Net debt leverage was 2x 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 activity, we expect that we may extend our leverage a bit higher, but when we do, we will always seek to have a clear plan to how we can bring it back within this targeted range over the course of a 12-month period. We are owners and operators that are committed to being shareholder friendly and responsible in how we run the business and manage leverage.

Moving to our expectations for the full-year 2022. I am pleased to share that we expect consolidated 2022 sales to grow 25% to $470 million compared to 2021. This includes a negative impact associated with FX, which are expected to be about $7 million headwind on the topline for 2022 compared to the prior year.

By segment, we expect sales for the Outdoor segment in 2022 to increase high-single digits to approximately $237.5 million and sales from our Precision Sports segment is expected to grow in the low-single digits to approximately $112.5 million. We also expect sales for our Adventure segment to contribute approximately $120 million in 2022.

Specifically for the first quarter of 2022, we expect consolidated sales of around $111 million. On a consolidated basis, we expect adjusted EBITDA in 2022 to grow approximately 27% to $78 million. In addition, we expect CapEx of approximately $9 million and free cash flow is expected to be in the range between $50 million and $60 million in 2022. Consistent with how we managed our guidance in 2021, we continue to be prudent with our outlook as we head into 2022.

We recognized that external dynamics like the unprecedented supply chain challenges and the evolving geopolitical situation in Eastern Europe are and will continue to present new challenges on a regular basis. Accordingly, we have outlined what we believe to be a reasonable outlook and one that we will seek to exceed through our scrappy approach in accelerating each of our Super Fan brands.

I now would like to hand the call over to Aaron, our Executive Vice President and Chief Operating Officer to discuss Clarus' strategies and operations.

Thanks, Mike, and great job. Good afternoon, everyone. It's a pleasure to be addressing you today in my new role, one that I have been unofficially leading over the past 18 months and one to which I am excited to dedicate a 100% of my time. As John and Mike have told you, we are reporting great results that would set the stage for where we plan to take our brands in the future. Now that we have scale significantly, it is critically important to maximize individual brand performance while continue to evaluate strategic M&A. I'm excited by our Super Fan brand portfolio. And I am empowered to drive our operating model for the benefit of all of our stakeholders.

Today, I will address four areas that are important as we think about 2022 and beyond. First, our supply chain; second, an update on M&A and the integration of our brands; third, our flexible capital structure; and fourth, the key operational initiatives we are driving in each of our brands for 2022. First, supply chains. As Mike mentioned, we continued to outperform on our supply chains across each of our brands, geographies and channels. We drive results through our continued focus on connecting directly with our community of users through a digital first approach, a high degree of operational excellence, the flexing of our balance sheet to create additional optionality and our devotion to maintaining and easy-to-do business with mentality with our retail and vendor partners. To provide a bit more context, we continue to seek to leverage the recognition of our Super Fan brands to strengthen our relationships with both our retail and vendor partners.

In our Outdoor segment, we continue to solidify product availability in our sacred seven core product categories, which are apparel, footwear, lights, poles, gloves, packs and snow safety. This focus has allowed us to isolate the needs of our supply chain on the components that move the needle, maximize product availability, all the while supporting our key pillars of growth. The team has done an amazing job in developing an extremely strong order book for that of both spring 2022 and fall 2022, one that exceeds our current guide for this segment in a substantial way.

In fact, we are purchasing inventory 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 logistic challenges we continue to face. As an example, a few weeks ago, one of our key logistics providers was victim to a cyberattack, resulting in the global network being compromised. This has slowed down our ability to move and receive inventory as had previously been planned.

Another one is that of the geopolitical crisis between that of Russia and Ukraine and our commitment to stand in solidarity with Ukraine by suspending all business within Russia. We are also experiencing shortages in electronic components in particular, microprocessors required for our snow safety product. Through our well diversified approach however, we have been able to manage those challenges, recognizing it creates some temporary noise to work through.

In our Precision Sports segment, we purchased raw materials directly from the source were possible and showed up critical raw materials like copper and lead better than our competition. Our overall scrappiness and can do attitude are critical to our execution. And this goes to show that we have the right team in place across our brands to execute in such a dynamic environment. We continue to see that in good times and in bad times, Super Fan brands remain resilient.

Our brands are gaining market share across all of our leading categories and bookings remain strong across our portfolio as we head into 2022. Although we are tenacious and disciplined in our approach, this doesn't mean that we are immune from the various external headwinds currently being experienced as we work toward building increased capacity and product availability to support our longer-term targets of $200 million for Precision Sports segment. Through new product introductions, increased capacity, expanding our distribution globally and maintaining our focus on building the best bullets in the world, we are confident in our longer-term vision for this segment.

Now, number two, that of M&A and integration efforts. As John highlighted an important piece to our growth plan is our M&A strategy. Our M&A engine took flight over the last 18 months, and while we continue to be highly focused on integration, we are also still actively seeking other Super Fan brands within our Outdoor and Adventure segments. We see both the Outdoor and Adventure segments having strong characteristics for growth, supported by large total addressable markets.

For our Outdoor segment, whose TAM is over $20 billion, we will continue to evaluate the Super Fan brands that facilitate a way of life in the outdoors through strong product positioning and deep connections with the end consumer. For our Adventure segment, according to SEMA, the U.S. TAM for utility accessories, which includes racks and related accessories, is over $3.7 billion alone. With these markets in the fold, we will continue to evaluate product-leading brands that bring true solutions to the overlanding and vehicle accessory category.

Overlanding is an incredibly popular space right now, as an increasing number of people want to go outdoors getting from black tops to brown roads. For context, more than 33,000 people attended Overland Expo West in 2021 versus 22,000 people in 2019. As a reminder, we are looking for businesses with sustainable financial profiles that are immediately accretive. The qualitative features we look for in the Super Fan brand are leading market share in at least one product, a history of innovation, 100% brand awareness among the core user and the ability to accelerate the go-to-market strategy. Quantitative requirements focus on sales, gross margin and EBITDA performance over a three-year basis, as well as the ability to convert EBITDA to free cash flow at a high rate.

Now for an update on the integration of our recently acquired brands. Given our scale, it has been imperative to hire the right people across the organization to maximize the organic growth opportunities available to each of our Super Fan brands. A key hire that helps us in this regard includes the hiring of Greg Heichelbech to the new role of General Manager of Rhino-Rack USA. He has over 30 years of leadership, operations and sales and marketing experience working in the branded aftermarket, powersports and outdoor markets. He will be responsible for expanding the presence of Clarus' Rhino-Rack and MAXTRAX brands in North America.

Now I'd like to discuss number three, which is our capital structure. Overall, the strength of our brand portfolio continues to be supported by a strategic and disciplined capital allocation policy. We are extremely pleased with the direction of our businesses, which we believe inherently provides us with additional growth opportunities for us to evaluate, both organically and through M&A. As we have historically shown, we will continue to seek to utilize our balance sheet as the first and foremost way to grow. We have a business with increasing levels of EBITDA and strong reoccurring free cash flow. We are owner operators that are committed to being shareholder friendly, and responsible in how we run the business, including the amount of leverage we take on.

We believe there is an optimal balance here with leverage to rates between 2x to 3x. As Mike mentioned, at year end, we are sitting at 2x leverage with the continued deleveraging focus as we evaluate other acquisitions. We also have great relationships with our banking partners who are extremely supportive our initiatives. In fact, we are in the process of seeking to increase our current credit facility to provide even more drypowder as we evaluate the various opportunities for growth. More to come in this regard, however, this further highlights the partnerships that we foster and the discipline by which we run our business.

Now, I'd like to turn to the last item, which is number four of key initiatives. I'd like to end my prepared remarks on the operational goals for each of our brands that support our 2022 financial outlook. Our operating model is heavily focused on the strategic planning and deployment process, executing on our innovate and accelerate strategy and creating sustainable growth by taking market share with the disciplined go-to-market strategy supported by both commercial and operational excellence. As part of this, it is imperative that we have the right people in the right place doing the right things.

We are streamlining our human resource efforts within each of our brands around people, culture and results through a dedicated organizational development role within Clarus. We've had this role for the past 14 months, developing processes and systems to enable increased bandwidth and tools around recruiting leadership development and pay for performance. We've seen the benefits of such a dedicated role as we embrace and develop the Super Fan brand DNA within each of our businesses and align our respective teams with the overarching values of Clarus being that a team oriented and performance-driven.

At Black Diamond, our goals are to accelerate brand growth, being an enhanced go-to-market process supported by four areas of our business. For our products, we'll continue to focus on the sacred seven. In our supply chain, we are laser focused on product availability and gross margin enhancing activities. In sales, we expect to draw our direct-to-consumer business while still nurturing our key accounts. And within marketing, we will remain focused on the digital-first strategy.

At Sierra, our goals are to continue to increase capacity across our offering and improve fill rates as well as onboard new skilled tool setters while maintaining efficiency. We expect to increase our ammunition lines to include Guide Master, Defense Master and Super MatchKing. We will continue to enhance our strong retail relationships while growing key customer relationships on the OEM and commercial side. At Barnes, our 2022 goals include driving sales of the new Vortex Ammo, which we launched at SHOT Show in January, improved fill rates, build strong retail partnerships and accelerate Barnes marketing, particularly in Utah and the Rocky Mountains.

At Rhino-Rack, our goals in North America are to accelerate revenue through increased market share. We expect to achieve this by expanding our reach through a variety of distribution channels and to enhance our own D2C channel by targeting our focused vehicles with core products in the overlanding space. Our goals in Australia, New Zealand are to gain further market share by improving service and supply of our world class products by targeting our focus vehicles with core products in the overlanding space.

It is worth noting that we continue to run our brands as standalone businesses. As we scale, we can evaluate different options to enable these brands to work more closely together. With increased size and importance to our overall customer base, we see multiple opportunities to expand distribution, to own our own channels and to deepen relationships with vendors, allowing us to share best practices and processes across brands from a commercialization and continuous improvement standpoint.

We believe that scale is adding value to all of our businesses. By the end of 2022, we expect to have accounts that are buying all of our brands. It is important to note though, however, that this wasn't the strategy. It is simply the outcome of the fact that we have premier Super Fan brands in the outdoor space. As you can tell, we are certainly excited by what we've shared today and even more for what we believe the future holds. The outdoorism trend we have highlighted in prior calls is exploding and does not appear to be slowing down. Outdoorism creates the need for micro adventures with demand equipment for these activities.

We believe we are in an enviable position to deliver the broadening range of products for these adventures. Our Innovate and Accelerate strategy has already proven industry-leading growth within Black Diamond, Sierra, Barnes and we expect to do the same for Rhino-Rack and MAXTRAX. We have built a business with unique Super Fan brands that are self-sustaining and generate increasing profits and cash flows. We are committed to continue to execute on our strategic priorities that will yield the highest possible return on invested capital. We are confident in strategy and our ability to consistently drive shareholder value and one of the fastest growing industries.

With that being said, operator, we are now ready for questions and answers.

Thank you, sir. [Operator Instructions] And our first question comes from Jim Duffy from Stifel. Your line is open.

Thank you. Good afternoon, guys, and congratulations on a great year. Mike, welcome.

I wanted to start by asking about inventories and supply of materials to help keep up with demand looking through the K. It looks like you've taken a more aggressive posture in raw materials. Can you speak about how the mix stands across the three different segments, and any kind of choke points you have with respect to supply of raw materials that could present challenges for you?

Yes. You bet. So this is Aaron, Jim, and good afternoon to you. As we think about the inventory position, as you highlight, we were pretty aggressive in terms of our positioning and also the solidification of our supply chains primarily related to key components for the different business units. First and foremost, for that a Black Diamond, we’re more focused on building up finished good inventory, considering the elongated timelines that are being experienced from a logistic standpoint, where traditionally we would see transit times going from Southeast Asia to Salt Lake City of call it, 45 days and the Europe, 60 days. We are now seeing transit times of about 120 days to 150 days, respectively, for those different geographical regions.

As a result of that, the way that you overcome that is to either frankly miss out on the sell or to increase the pipeline of inventory that you have floating on the water. And that's the position that we've been able to take. Now mind you, it's really important to keep note here that our product doesn't rot on the vine and that our product is durable, it's lasting through our line plans and our demand planning cycle, we don't believe that we're overexposing ourselves to that of obsolescence or the need to promote that product from a discontinued merchandise standpoint. But instead, it's our committed focus to our retail partners and our end consumers to provide the highest level fulfillment possible.

Now, what you'll see on the raw material side of things is really associated with that of our Precision Sports segment. As we have highlighted before, one of the key constraints here is that of raw material availability, whether it would be copper, lead, propellant, primers, shell cases, et cetera. And so through the utilization of our balance sheet where we're extremely opportunistic in 2021 to securitize substantial levels of component of inventory that would enable us to securitize not only our output, but also to satisfy market demand.

In particular, we've taken a pretty aggressive approach as it relates to that of copper and lead to the point where we have enough copper in hand or committed to lapses through the first nine months of 2022. This is also important and in line with our strategy in terms of how we manage our exposure to commodities. As we know, the marketplace is a bit volatile at the moment, but these commitments and these purchases that have taken place are well below the current rates of current commodity pricing, which had also been to continue to benefit us and also enable us to appropriately raise prices and accommodate the different pressures throughout the course of the year.

And then on the Rhino-Rack side of things, we also were focused on ensuring that they had sufficient inventory and it was more about not only increasing inventory levels because of the demand that we’re seeing, but really about ensuring that we have the right product in the right place at the right time. As we've highlighted, North America is a key strategic pillar of ours in terms of growth and what we believe that we can really accelerate the Rhino-Rack and MAXTRAX businesses.

And as a result of that, we needed to start to shift the center of gravity away from an Australian centric holding panel when it came to product availability to start to rebalance that across the different regions within the globe. That was an area of focus of ours. In particular, the last three to four months of 2021 and really started to set ourselves up for a better position and more accelerated growth as we head into 2022, in particular, in that of North America.

Great. Thanks for that, Aaron. I want to ask follow-up questions that are probably coming your way as well. I was hoping you could speak to capacity utilization in the Precision Sports business and the capacity opportunity with the acquisition of the Barnes headquarters. And then following up on your last comments, just the – where you stand with respect to capacity to scale the North American business for Rhino-Rack is the manufacturing infrastructure in place, it sounds like you've been working on supply closer to the marketplace?

Yes. So let's start with the Precision Sports segment. As a reminder, when we bought Sierra, it was producing close to 185 million eaches or units or bullets. We finished 2021 producing close to 320 million eaches or bullets through that facility. Also, when we bought Barnes in December of 2020, it was doing close to 65 million eaches and about 25 or so million rounds of ammunition. We finished the year doing close to 85 million to 90 million eaches or units of bullets, and also increased our capacity for ammo loading to close to 35 million to 40 million. Part of our prepared remarks is winding out this long-term target of $200 million, which we believe that combined business can accomplish over the coming years.

As a result, we are very focused on increasing capacity within both locations. And to your point, the acquisition of the Barnes facility was a key component of that because now it not only gives us the ability to commit to that location and to those employees, but also we now have the flexibility to continue to expand our overarching footprint. Not only did we acquire the facility itself, but we also acquired 30 plus acres of land that the building sits on that, and that gives us a lot of flexibility and room for growth that we now own.

On the Rhino-Rack piece, to your point, a lot of the supply chain is still coming out of the existing supply chains that existed at the time of purchase. And so that's still very focused from an Australian and Southeast Asia perspective. Our focus has really been on how we transition inventory levels to the U.S. and really ensuring that we can service our top 25 to 30 accounts with the key items that are really focused on the top 10 to 15 vehicles that we see as being the growth drivers here in the U.S.

As a result of that, we've been very focused on just getting once again, the right inventory in the right place at the right time. As we think about 2022, our focus will really be about increasing systems and processes so that we can provide best-in-class service, as well as tools to our sales folks and also to our retail customers, such as EDI and other tools that will enable them to really embrace and enjoy this whole idea of being easy-to-do business with.

As we go through the course of 2022, we'll also look at where we can source things more local and also start to increase our capacity or our capabilities related to supply chains, but also hitting type operations here in the North America, but that's more of a step-two process compared to where we are today.

The other question on this, Jim, is that these are counter seasonal, which was never really the intention. It just kind of comes as a blessing as we follow what Aaron's saying, having the right product at the right time in the right market. And then as the summer months end in Australia, it becomes the new summer months in overlanding for North America, and chance for us to reaccelerate and rebalance those inventory opportunities.

I see. Thank you, guys. Appreciate all the color.

Thank you. Our next question comes from Alex Perry from Bank of America. Your line is open.

Hey. I'm excited to be here, covering the story here, and welcome, Mike. But, yes, congrats on a strong quarter and thanks for taking my question here. I guess just first going back to the Precision Sports, can you maybe just sort of give us more color what's embedded within this sort of low single-digit guide there? Is the biggest limiting factor for growth above that range capacity still? And then maybe remind us on sort of how channel inventory levels look there and sort of the restocking efforts going on there? Thanks.

Yes. As we entered 2021, we saw demand literally out supply both the industry participants ourselves included, but also the retailers. So obviously everybody chased it. And as Aaron said, it started first with raw materials that we could control lead and copper, but then obviously led to the other ones as ammunition became the real driver for the expansion in 2021, specifically for Sierra and Barnes. Again, at the start, we targeted 10%, became 30% for Sierra. And then Barnes, we accelerated a business that was chasing ammo to 25 million to 28 million rounds of ammo in 2021 with a goal and a capacity of 35 to 45 in 2022. The biggest constraint that we don't own and is still a capacity constraint to us is that a brass or shell cases, right. And that has been a limiting factor and really why the whole industry has been in check the last 12 to 18 months.

Today, inventory is improving in the retailer format, but not across the board, it's running in ways as expected. It will chase against things like nine-millimeter and [223 first]. And yet the hunt side of the industry that particularly focused on by Barnes and even Sierra with game changer has still far in excess less than what the demand is and the demand continues to drive. Within this year, we're going to see lots of waves to be honest in the inventory levels, as well as people chasing different types of rounds. And then we're going to see geopolitical issues like the district place in Eastern Europe, elections and other issues that are going to constantly churn the water on this to say.

And to be honest with you, it probably won't see capacity lined up in our industry in order for all the players, Sierra and Barnes included to be able to deliver on time, have a 100% fulfillment and be able to meet the consumer demands on the shelves until probably following the 2024 election process. So that gives you a little bit of where we see the market. We clearly continue to see strong demand though it shifts seasonally and we think it's going to be this way for at least the next 18 plus months.

That's really helpful. And then maybe shifting gears a bit, I think you called out strong growth in the Outdoor segment being partially driven by the expansion of retail partnerships. Can you give us a little more color there? Are you adding in additional wholesale distribution? Or is that sort of going deeper with existing retailers?

Yes. I think what you're going to find in North America as a whole, obviously, COVID had very few blessings associated with it and we don't say this other than the explosion of outdoors and this people decided to escape and go into the mountains. And what we call black tops to brown roads was really just explosion of outdoors and this new activity based consumer that created additional tailwinds for climbing, backcountry skiing, trail running, hiking and anybody who's been on a trail head in the last year has seen that. So when you talk about that market and what it's done in the U.S., first and foremost, we've seen the explosion of outdoors will become pseudo fashion. And I use that loosely and then you now can find outdoor brands like Patagonia, The North Face, Fjallraven in Nordstrom, right where five years ago, outdoor wasn't the driver to that.

But to your point where we've seen expansion is specialty continue to be aggressive, both in a direct-to-consumer model, as well as expansion of retail stores. We've seen outdoors expanding and impact all the key accounts. And so you see accounts like REI who are growing 15 to 20 doors a year, new expansion as well as you see retailers like Dick's Sporting Goods, Academy Sports, Bass Pro, Cabela's, Seal, Sportsman's Warehouse, you name it, expanding their doors distribution. In fact, Dick's has announced and is successfully rolling out the new public lands retail format.

And all of that not only adds more doors to the market and expands those retailers into the mix, but really more importantly, where the [indiscernible] invites a lot more inclusion to a much wider new consumer base to outdoors. And that's really what exploded. It's not that the core climber climbed more or finally started climbing during COVID. He was always doing it. It's the number of new participants that involved in each and every one of these sports that really drove this, and then the retailer just following the trend.

That's incredibly helpful, and best of luck going forward.

Thank you. Our next question comes from Randy Konik from Jefferies. Your line is open.

Hey, guys. Good afternoon. Good evening. Thanks for taking my questions. I just wanted to unpack the Adventure segment a little bit. You gave us the guide for the revenue of 2022. Can you give us some perspective on how that looks on a full-year, assuming that the businesses were owned in a full-year of 2021? And what that growth rate looks like year-over-year for 2022 just curious?

Yes. So Randy, great to have you, and always a pleasure to speak with you. So when we look at the Adventure segment, keep in mind, this is consistent with what Mike highlighted in the prepared remarks, in terms of how we're providing the guide, just considering the different headwinds that are being experienced. We wanted to make sure that we were responsible in our approach. When you think about the guide though, on a year-over-year basis from a pro forma standpoint, you're looking at high-single to low double-digit growth rates.

Now this is a category that we believe long-term should be much higher than that. And we actually have a clear path for growth to be able to accomplish those types of targets even in 2022. But the limiting factor is, we're dealing with biblical floods in Australia right now, and elongated supply chains coming into the U.S., and there's a few headwinds that we want to be aware of and reflect in our guide, and something that naturally through our scrappy approach will continue to punch through and look to exceed. So we're extremely bullish on this segment. As highlighted, the addressable market is pretty massive. There's a lot of opportunity for growth, both organically and also through M&A, but we're just being a bit tempered right now in terms of our guide just because of some of these external headwinds that are being experienced, not because we believe that the opportunity for that segment is less than what I just stated.

I think Randy, you watched for us now over the last multiple quarters, our goal is to go out, be very clear and transparent about all the headwinds that we anticipate will arise in this category, whether by channel or by geography or political nature, you name it. The upfront about it, temper our guide based on the worst case scenario. Then as we said, be scrappy as hell and do everything we can to overachieve that. But realizing that at the very minimum, if these headwinds continue, we feel very confident about our guide, but then we also believe that with some luck and a lot of hard work and scrappiness that we will exceed expectations and that's been our confidence and consistency over the last few years.

Yes. It's super helpful. And it would appear that the growth rate would also be much higher assuming you were able to get all that distribution synergy for the businesses. So I want to maybe – because Aaron you can kind of…

And we're seeing that in the U.S. market where we can be a little faster where we're not still having COVID lockdowns as we are in Australia nor having biblical floods, at least not yet in this market. And so we're able to fortunately to see that acceleration little quicker in those markets than we are in the home market though, we still see significant upside in market share opportunities for growth in Australia and New Zealand.

Yes. So I wanted to ask about this comment – that's super helpful. And Aaron, you made a comment that you would hope that I believe you said something to the effect of – by the end of 2022, you would hope to have all brands under the portfolio kind of being sold across your distribution pipes. So maybe kind of walk through and talk through how you think about ordering your effort and time and around this using that distribution scale and synergy opportunity across your account base and how you kind of think about kind of executing that and how you kind of think about that providing you guys with much more kind of impact of those accounts because you are just bigger and have more products and services, if you will, or products and brand to kind of meet their customers needs, kind of walk us through your strategy there? Thanks.

Yes. So John and I will tag team this. So first, and just to clarify, what I was highlighting is that there's a real opportunity because of the Super Fan brand nature of each of our brands. Once again, this is not a defined strategy. As we've been pretty open about, we don't view our strategy through the lens of synergization, but instead it's through the lens of innovate and accelerate and embracing and understanding the unique characteristics of the DNA that exists within these Super Fan brands, but also all about taking market share through foundational pillars that we've been able to outline. And one of them being just extremely easy-to-do business with.

Now, with that being said, because of the nature of these brands and the product that we offer, we are seeing that there is strong demand and request from some of our key accounts that span all segments that have asked for us to be able to provide this product to them. Now within Rhino-Rack, specifically, we're going to first and foremost focus on the automotive aftermarket because one of the things that we have been able to learn and identify over the last couple of months is that the Rhino-Rack brand resonates extremely well with the end consumer is just that our level of service or this whole concept of being easy-to-do business with frankly has not been where it needs to be. And so it plays right in line with the overarching strategy and the areas of focus that we implore.

The other piece though is as we continue to look into what's going on in the marketplace, as well as what some of these key outdoor accounts are looking at, overlanding the – the activity of overlanding is real and they want to participate in it. And because of the relationships that we've been able to develop and the reputation that we've developed because of these foundational pillars or elements by which we run the business with, they have approached us asking that we would support their efforts with this in providing them with not only Rhino-Rack, but also MAXTRAX product. And so we do believe by the end of the year that there will be an opportunity where you'll see all product categories from our different segments within certain key accounts because of the way that we run the business, but also because of the gravitational pull that exists with the Super Fan brands.

I think is really important, Randy, on this, when you think – and whether it's the ability to look around the corners, which is one of my favorite new comments on this, we're just lucky that we're playing in the outdoor world. The synergies are really the consumer's behavior that are driving the Super Fan brands. And so one of my favorite experiences right, for the holiday we are standing in a parking lot in Texas with a big retailer, with the GMM retailer and saying to him, what do you think the percentages of vehicles in your parking lot that are pickup trucks, Toyotas or SUVs? And the laughing was, I don't know, 70%, 80%. I said, great. So if you had a 3% for fitment rate on those vehicles, you'd be doing $300 million, $400 million a year and then their eyes went, wow, you're right. It's the exact same consumer. And he's already here. I can either service them or you can go to an automotive aftermarket, but the consumer has already made those choice. They've already picked the activities which I sell them and they're driving a vehicle that fits to the activity base of which their choice is. Now, I just need to combine the two.

Yes. Super helpful. Thanks guys.

Thank you. Our next question comes from Matt Koranda from ROTH Capital. Your line is open.

Hey guys. Good afternoon. Congrats to both Mike and Aaron as well. Just wanted to cover a bit more about the outlook for Precision Sport and just wondered if you could speak to sort of ammo versus bullet mix and the $113 million revenue outlook for the year? And then just any price growth that's embedded in that low single-digit outlook or is that pure volume?

Yes, you bet. So this is Aaron. So as highlighted, within Precision Sport, we expect that our ammo will continue to represent at least 30% of our business. Now Sierra, as we highlighted is plus 30% and Barnes tends to trend a little bit more towards the ammo piece, but we are continuing to see also quite a bit of – a lot of growth opportunities within the component bullet side of things. And it maybe worth just unpacking that a little bit. First of all, it's important to realize that over the last 18 to 24 months, every Barnes been over indexing the domestic market and also really focus on the ammo piece. Now we believe that we have unique points of differentiation and when it comes to our ammo both within that of Sierra and also that of Barnes. We've talked about these characteristics before in terms of whether it would be precision and accuracy or also terminal performance. These are key characteristics that the end consumer really requires and draws after when it comes to the choice of an ammo cartridge.

The other piece though, is that we prior to – taking prior to 2020, 2021, we had a strong presence from an international side and also providing of bullets for OEM customers, that demand has not stopped. And that's also another opportunity as we look to increase capacity that will also look to continue to exploit or take market share within. And so overall, expect that ammo will continue to be in the range of, call it, 30% to 40% of our business, but will also continue to look to increase capacity overall, not only to round out our entire ammo offering, but also to continue to support our customers that are focused on the green box and black box side of things, but also the OEM business.

Got it. And just to maybe deliver the price question, but it sounds like probably more volume growth. I would assume just given the capacity commentary that you just made there, Aaron, just go ahead.

Yes. And we were also able to pass on pricing. As highlighted in the prepared remarks, we believe that this is a true manifestation of Super Fan brands where you're able to increase price, but also to gain market share. And overall at the Clarus level, we were able to increase pricing, call it, 6% or so all in across the different business units for that of 2022. And so there is a benefit to be have there. But for us, it's also about just taking market share and that's increasing units along the way as well.

I think others will ask me that question, Matt. I think it's important to realize every year we look at price as a function of the product, the innovation relatives here in Barnes, and now with MAXTRAX and Rhino and then of course, every season with Black Diamond, we revisit price both through new products through the innovation cycle or just through the constant market share and introduction of the new season products and the cost pieces. And so we're always mindful of that. But it's just one tool in the goal, as Aaron said to really, how do we ensure that we make the very best products so that our consumers can have their best days out in their – show us an activity and that it's ultimately about stealing market share.

Great. Thanks for that, John. And then – so my other question was on the Outdoor segment and the conservatism, I guess, that you guys have called out that's embedded in the outlook. And so I may have misheard you, but I thought, Aaron, in your prepared remarks, you said something about the order book in the $270 million range, but the outlook is 238. So just wanted to see sort of if we could get a little bit more color on the approach – conservative approach and how you factored in maybe some of the more recent developments in Europe into the BD outlook?

Yes. So you are spot on with the commentary around the order book being $270 million. This really once again is a testament to the entire team, the way that we've continued to accelerate and position the Black Diamond brand within the marketplace on a global basis. Now, one of the things that we're looking at is that we are seeing just headwinds when it comes to the logistics and supply chain side of things. As an example, as mentioned, we experienced some issues with our third-party – sorry, with one of our freight forwarders, candidly, that's impacted our business by anywhere from a half a month to a full month of receipts. And that's something that we're working through in terms of how we just overcome that and that's why it's also reflected in our guide for Q1 as well.

The other thing is we are seeing some component shortages such as microprocessors or other electronics, but also some delays as it relates to even aluminum for that of our trekking pole business. And so it's not to give us an out, but it is to highlight that the demand is there, that the team – this is once again huge kudos to the entire team for the amount of work that they continue to put into the business and the way that they continue to execute. But we are seeing some noise in the supply chain and logistics side of things that just causes us to be a little bit more tempered in terms of our guide, recognizing that there's a lot of opportunity for us to be able to exceed in a substantial way depending on how the supply chain logistics side of things take shape.

Very helpful. I will jump back in the queue. Thanks guys.

Thank you. Our next question comes from Laurent Vasilescu from BNP Paribas Exane. Your line is open.

Good afternoon. Aaron, Mike, congrats on your new roles and as strong, if I can say the word scrappy finish to the year.

Thank you for the word.

John, I forgot it. I think I appreciate your comments around the Russia and Ukraine situation, obviously, the market dynamics at play here. I don't know if you – could you quantify how big your Russia business, Ukraine business, and maybe just because, and obviously where the market's going, maybe your Eastern European business because I know 40% of your overall business comes from abroad.

Hey, Laurent, it’s Mike. Sure. Hey. Our exposure directly into Russia isn’t that significant, and it's about $750,000 a year. So it's a smaller number. But it's a value-driven decision on our part and just the right thing to do. And when John and Aaron and I talked about this, so that led to that decision to suspend operations with our customers in Russia.

And to your question on Eastern Europe, obviously we play in Eastern Europe more around Slovenia, Slovakia, Poland, it is a portion of our European and our IGD business. But I think without talking specifically about prioritization and allocation, obviously as Aaron said, our biggest focus and primary focus in 2022 has been first that of North America followed by Europe. And as you just heard in the question-and-answer session, obviously we have a demand book, we're not able to supply all that demand. And so part of this is just about making smart allocation of where you put that inventory because you're not going to get all of that inventory.

Okay. Very helpful. And then I think Mike, I think you mentioned, your gross margin adjusted basis were up a 120 bps of which I think that includes about a 100 basis points incremental air freight. So all said, it's up 220. Just curious to know how much was that driven by the acquisitions and how do we think about first quarter and full-year gross margin, the context of just air freight overall just being such a headwind for everybody?

Well, we haven't guided gross margins, right? We just talked about for the first quarter for the year. The market is still pretty fluid as Aaron alluded to from a supply chain standpoint. So are we still incurring those types of costs? Yes. So I think that's important to understand. We don’t – that could probably be a headwind for the next six months actually. So we are targeting improved growth margins, right? We've put through this price, Aaron mentioned the 6% price increase. Net the way we're looking at that on a price cost basis on a net basis, we expect margins to benefit in 2022 by about a 100 basis points. But there is a long way to go and a lot of challenges out there as we've alluded to over the last hour. So that's kind of how we're – it is how we're looking at 2022 going forward from a margin standpoint.

Very helpful, Mike. And my last question. Aaron, I think you mentioned leverage targets that you could potentially go a little bit higher with the right acquisition. So two part question here; one, how much higher would you go? Like what's the max? I think you mentioned you may potentially revising your credit agreement, but just how much higher would you go? And then would it be – in which segment would it be logical to assume it would be in the Adventure segment if you made another acquisition?

Hey, Laurent. Mike, again. I think we're specific in our prepared remarks, we'd be looking to do M&A in the outdoor space or the adventure space. Could we take our leverage up to 3.75? Yes. All right. But we wouldn't look to go a whole lot past that, and as we said in the prepared remarks, we'd bring – we'd have a plan in place to mitigate that and bring that back into that targeted range over the next 12 months in a pretty disciplined fashion to get it back into that two to three targeted range.

Okay. Very helpful. Thank you.

I think the thing to also highlight there is just, we continue to demonstrate our discipline in how we think about our capital allocation policy and how we manage leverage. And it's important to also note that our banking relationships have highlighted or have shown their willingness to help us stretch through the way that the credit agreements are structured. Now, once again, it also becomes a bit circumstantial depending on the actual type of acquisition and what it all means. What we do commit to everyone is that we'll continue to be very disciplined. We'll be thoughtful, and that we'll always have a clear path as to how we maintain or remain within that range because we believe that on the long-term basis, that's a very healthy range. And also considering the way that the business is progressing from both an EBITDA, but also a free cash flow perspective is not something that we would anticipate getting over the tips of our skis on if you will.

It obviously reloads following each additional acquisition and opportunity. The sooner we deleverage the business and get back in that range and prove out the discipline the sooner the next opportunity is.

Thank you. Our next question comes from Linda Bolton-Weiser from D.A. Davidson. Your line is open.

Hi. I was wondering if you could kind of talk a little bit about – a few quarters ago you were talking about having to balance being able to supply your DTC efforts versus your wholesale, retail customers. Is that something that is still an issue? Or are you able to kind of supply each channel without as much constraint as you did previously?

So that is something that we're currently working through. As highlighted in prior quarters, as you noted, this was a topic of concern just because we weren't seeing the deliveries or the flow of goods according to the lead times that we lined out, despite our best efforts in terms of increasing the pipelines and trying to accommodate that for that. As we look to spring 2022 product, and also the rest of the year, we do believe that we will be in a better position to not only provide a high level fulfillment for each of our retail partners, but also a high level fulfillment for our end consumers through our own D2C channels.

Our direct-to-consumer business is a primary area of focus. We realize the importance of that, and we have longer term targets as it relates to where we want that business to be while also not taking away from what it means to service our wholesale accounts. And so the onerous is really on the operational team and on the supply chain team to make sure that we have the right product in the right place at the right time, so that we can provide the best representation of the brand to the entire consumer base and customer base regardless of channel. And so we do believe though, as we head into the tail end of the first half, and in particular, the back half that we should be in a better position to be able to fulfill the demand that exists across the different channels.

Okay. And then I was just curious on the shipments from Asia in terms of your ocean freight. Do you contract for that, like ahead of time for like several months or a year, or do you kind of buy on the open market?

It's more on the open market, they're called open booking, they’re called bookings and typically end up booking those vessels 30 days in advance or so and so both in terms of lead times, but also the cost associated with what the broader market is seen in terms of increased oceanic freight rates. Once again, we're not immune to it. So we're taking very proactive measures in terms of how we think about where product is sourced, the way that we build up those pipelines and where that inventory goes, how we price it, and then also how we think about alternative ways of getting that product into the different nodes.

One of the great ones on Linda that the team has done well is to get in front of the curve, right? If you know exactly where that curve ball is going to be at exactly at the right moment, because you've gotten in front of it, the chances of hitting it have gone way up. And so planning, hence the operational role and [8-K’s] focus is really on that, getting in front of that because if we can plan this out, buy earlier and be more accurate and move it earlier, then we can get in front of this curve. And that's – the downside as you've seen it increase in our inventory. But the positive is it's allowed us to try and accelerate and keep up with the outdoors and demand and the fulfillment for our top retailers.

Okay. Thank you very much.

Thank you. Our next question comes from Mark Smith from Lake Street Capital. Your line is open.

Hi, guys. I'll just keep it at one here. As we look at the adventure business with – on the revenue guidance, can you just talk about how much you expect in domestic sales?

Yes, that's about 25 or so percent. So when we bought the business, it was, call it, 20% and we do expect that the domestic side of things or the U.S. market will grow faster than that of the international side of things. And so we do anticipate seeing that mix shift from 20% to 25%.

And then as we accelerate that, obviously, and you heard it from us before. We believe that Australia and New Zealand market ought to be similar and equal to that of the North American market in time. And so obviously without slowing down the Australia and New Zealand market, continue to meet and exceed the demand requirements in the North American market.

And that's before we get a chance to look at third markets, whether it be South America, Europe, or others.

Thank you. Our next question comes from Ryan Sundby from William Blair. Your line is open.

Yes. Hey. Congrats, Aaron and Mike, and thanks for all the detailed information today, guys. I'll stay with the Adventure segment, when you bought Rhino-Rack, you touched on new product introductions and category expansion, its growth drivers beyond the obvious geographic opportunity here. I guess maybe just starting with category expansion; can you maybe walk us through the decision process there to buy something like MAXTRAX versus maybe trying to enter a category like that under the Rhino brand?

Yes. So obviously we always look at two ways to go with the brand. One is continue to gain market share and the products that you already have leading market share in, obviously that's the whole function of a Super Fan brand. And then the addition is looking at the next logical adjacency and saying, hey, do we have an opportunity given our brand strength to go into that marketplace? The biggest one opportunity is what we call the overlanding accessories because once you have the rack and we believe we have the best rack technology in the market and the opportunity to expand that, then it's about all the things you can put on the rack. And walking through this, and again, Aaron and I looking at the catalogs of Rhino-Rack when we bought the business and produced the first effectively fall 2021 catalog.

As we looked through page after page, we would see the orange MAXTRAX on the rack consistently. Then I went to SEMA and walked the show, I hadn't been in the show one hour before I called Aaron and said, dude, there are literally orange MAXTRAX on every rack before I even got to the booth. Like this clearly is the Super Fan brand of this space. Now we'd already been in discussions with Brad and the group at that point. And that just reassured what we knew, but you got to be careful, and this is what we believe. You got to be careful trying to supersede the Super Fan brand, who is the dominant market share leader in the space. If you have the opportunity, fortunately, we did to go and acquire that, because we think of MAXTRAX is the Super Fan brand of that space with the leading market share, it's got to be 75%, 80% and a huge opportunity to expand that.

In other areas, we'll look at where there are not dominant players, but this is trying to go and supersede Nike and basketball either make me a shorter path. And that's kind of where we saw it. It clearly was an important part to this. You are going to get stuck. It's not a question of if, its win, and it was the leader. But we also saw it as a brand in of itself. And so to the final, we will create overlanding accessories within the Rhino-Rack brand. We also see extending and expanding the innovations and product adjacencies within the MAXTRAX brand, right. And we see them as separate two. One is about racks and overlanding the other is about recovery. And though they may seem similar to the end use on the moment and the time the rack doesn't help you get unstuck.

Okay. Perfect. Very true. That's great. And then I guess just from a geographic standpoint, it sounds like you're already starting to see some uncertainty in North America. But I guess I'm a little unclear, as you build distribution, how quickly can you scale production to meet those winds? And are there any sales windows that you need to hit or are you able to kind of add placements throughout the year as you can?

Yes. You bring up a really great point. When I went the MBA school, the world was Super Fan brands, but we didn't really call them that yet obviously, but we thought of it from make phenomenal product, go out and sell the heck out of it and then market it. What we have learned, and became a critical understanding either specifically at Clarus in our operating model is that first, you have to make innovative product. Number two, you better have the supply chain that can not only produce that product, but ship it, deliver it, fulfill it on time and be easy-to-do business with then go out and sell it, then go out and market it. We see huge opportunities for Rhino-Rack business. We see current strong product in the pipeline of the existing line that hasn't been maximized in the first distribution, the automotive side, let alone the OEM or the outdoor side.

The second, and literally became the big focus. And again, part of the reason for Aaron's promotion and bigger role of that of the operation side is because at the end of the day, if we cannot produce it and deliver it and logistically get it to the right warehouse at the right time, all the rest of it falls out the window, you don't need a salesman, right. And so that has literally been the focus in the first six months. Now, as we do that and gain credibility through on time delivery and fulfillment with our key retailers, then when you come back to them with innovations and opportunities to expand that brand either deeper in the product categories that you have, or in adjacencies that are next, they're open to it. But as we all saw during the Precision Sports business in the last 12 months, if I went to somebody and said, hey, let me tell you about the new innovations we have in bullets or ammo, they'd say time out.

When am I going to get the order book that you've had for the last 12 months that I haven't seen? Don't worry about innovation, just worry about shipping, then we'll talk about innovation. And so there is a true cadence to the operational model here. We believe we can grow this business significantly over the next 12 to 18 months with the current ranges by just delivering, supporting, fulfilling. The automotive side let alone the expansion – the outdoor side. While that also gives us the time to ensure that all the innovations that we're doing at Rhino and MAXTRAX are literally industry disruptive when we go to launch those probably in the 23-plus range.

Got it. That's super helpful. And then this might be more Mike or Aaron. But just from a sequencing standpoint for the year, I think historically the business has been kind of a 45-55 split. But I know we've got some new platforms now and logistical challenges that you've highlighted. Any thoughts on kind of how the year shapes out as we go?

Yes, still consistent with the 45-55 split or so.

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

Thank you, Crystal. We'd like to thank everyone for your questions and for listening today on the call, and we look forward to speaking with you again, when we report our first quarter 2022 results. Thank you again, everyone, and our present thoughts are with the people of the Ukraine.

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