Clarus Corporation
Q2 2022 Earnings Call Transcript

Published: 2 Aug 2022

[Operator:]

Good afternoon, everyone and thank you for participating in today's conference call to discuss Clarus Corporation's Financial Results for the Second Quarter ended June 30, 2022. Joining us today are Caleres Corporation President, John Walbrecht; and 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. Cody, please go ahead.

[Cody Slach:]

Thanks. Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements and we make these statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to the risks and uncertainties that face Clarus Corp. and the industries in which we operate. More information on potential factors that could affect the company's financial results is included from time to time in the company's public reports filed with the SEC. I'd like to remind everyone this call will be available for replay through August 1, starting at 7

[John Walbrecht:]

Thank you, Cody and good afternoon, everyone. I want to first thank all of our employees for their tenacity and dedication this year. The challenges that our world has faced certainly did not get any easier in the second quarter. But as promised, our portfolio of superfan brands continued to lead growth in each of their categories. At Clarus, we have intensely developed a strategy to target brands that can create markets through our innovate and accelerate efforts, serving the ever-loyal activity-based consumer who has historically shown resilient buying behavior during economic downturns. Our purpose is to innovate the very best products so our consumers can have their very best days in the mountains. Despite seeing a bumpy road ahead, we are in no way putting our foot on the brake. Instead, we are committed to activating the go-to-market activities within each of our brands. Through a disciplined approach to the new product introductions, continuous improvement activities within our supply chain and operations and increasing the number of touchpoints with retail partners and consumers, we believe we are well positioned for continuing market share gains. Our second quarter results continued to showcase the value of superfan brands and their superfan communities, so let's summarize a few key highlights

[Mike Yates:]

No, thank you, John and good afternoon, everyone. I'm pleased to be sharing the results of another strong quarter driven by a resilient portfolio of superfan brands. Sales in the second quarter increased 57% to $114.9 million, compared to $73.3 million in the prior-year quarter. The increase was broad based, with solid double-digit growth in our Outdoor and Precision Sports segments and revenue contributions up $22.8 million from Rhino-Rack, an acquisition completed last July and $4.3 million from MAXTRAX, an acquisition completed last December. If we had owned these two brands during the second quarter of 2022, pro forma growth for the entire company would have been 16%. The 57% reported increase in revenue for the second quarter is comprised of the following

[Operator:]

[Operator Instructions] Our first question comes from the line of Alex Perry with Bank of America.

[Alex Perry:]

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

[John Walbrecht:]

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

[Alex Perry:]

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

[John Walbrecht:]

I think twofold that I would speak to, the first about the consumer. Obviously, we can't -- we all noticed that they're -- that the consumer is facing higher inflationary pressures in their day-to-day activity, whether it's gas, groceries, you name it. I think where and why we have always focused on the superfan brand is because we speak to -- with each of our brands, the premium nature, we speak to the top 10% of each of the industries we play in, right? By the time you graduate to our brand, you're a diehard that defines your ethos by our brands. I'm a climber, I am BD, right? I'm an overlander, I have Rhino-Rack. Because these activities are so critical to the importance and nature of these superfan enthusiasts, despite the headwinds, they will make choices, right and they're feeling it. They will just make choices away from other things to protect these activity-based ethos that make them who they are. And will they feel the pain? Yes. Will it be less so than others? Potentially and that's always our belief on superfan brands that these consumers, despite they may lose their job, they're probably going to spend more time doing these activities than less and these are their escapes. I think beyond that, what we talk about is, yes, is there going to be potential for slowdown in the market? I think, again, the difference is that what we build is apparel as equipment and so our product -- which apparel represents 15% of our business rather than 85%, let's say, of other brands -- our consumer chooses this apparel because they need it in order to perform the activity that they're doing, right? You need a ski coat in order to ski. You need gloves in order to ski, right? And so, in that, we typically see a little more insulation than the market as a whole. And again, the premium nature of the activity-based consumer and our view that what we build is lighter, faster, stronger and more geared to this activity's important activity today gives us a little bit more insulation in the marketplace. And so, we haven't seen that. But again, today, where only 15% of our business is apparel and so we're, again, a little insulated to that by the equipment side of the business.

[Alex Perry:]

Perfect. Best of luck going forward.

[Operator:]

[Operator Instructions] Our next question comes from the line of Anna Glaessgen with Jefferies.

[Anna Glaessgen:]

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

[John Walbrecht:]

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

[Anna Glaessgen:]

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

[John Walbrecht:]

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

[Operator:]

Our next question comes from the line of Matt Koranda with ROTH Capital.

[Matt Koranda:]

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

[John Walbrecht:]

Okay. What I would say to you and I think this is indicative of superfan brand, obviously, we track POS data on a weekly basis. We stay very close to our accounts across all the different brands. What we find is that superfan brands specifically, whether it's Black Diamond, Sierra, Barnes, Rhino, you name it, MAXTRAX, are typically the pullers in the space which means that they are -- whatever the category average growth is and/or sell-through, we typically are at the front of that, if not leading that in this mix. Now, I think what you find is open to buys at retail may be inhibited by consumer sentiment and that potentially could have an impact on our ability to get more allocated to our brand. But the real driver is how fast we can maintain, move, allocate our inventories to align with those sell-throughs at the time that we're having them. And this is where logistics has created the backlog, right, because we can't move the product fast enough to keep up with sell-through at some of the retailers. I think in total sentiment, clearly, the market has seen a slowdown in lifestyle apparel across the market and I think that's been a well-known piece. I think the market has seen a little bit of a slowdown in certain camping categories that had seen a massive surge in outdoorsism during the COVID window. I think, again, in our -- in our nature, because our products are not -- are so activity-based and specific to end-use pieces that I think we've continued to maintain on that and it's really about trying to maximize open-to-buy allocation on a seasonal, weekly, monthly basis.

[Matt Koranda:]

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

[John Walbrecht:]

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

[Matt Koranda:]

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

[John Walbrecht:]

It's not supply. It's more about the supply chain of the vehicles, right? It's the Ford Ranger being introduced in Australia that -- you know, that's [indiscernible] product for us, etcetera. So, it's all about the vehicles, not the supply chain, from an Adventure standpoint. In this space, the -- and the Ford Ranger are the Top 2 vehicles and both had new introductions this year. And until those vehicles hit the market, people wait to buy the vehicles -- buy the racks.

[Operator:]

Our next question comes from the line of Joseph Altobello with Raymond James.

[Joseph Altobello:]

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

[Mike Yates:]

No, Joe, it's Mike. No, it's the same story as 90 days ago. It's all about supply chain, the difference between, like we've talked when we were on the road about being able to convert a bullet into an ammo load, right? And there's a multiple of revenue. So, no, we're -- of course, the $68 million run rate times two is still much higher than the $127 million we took the guide up to but it is all about being able to source those shell casings, like we've talked about in the past, versus just selling the bullet.

[Joseph Altobello:]

Okay, that's helpful. And then, maybe on Outdoor, obviously, supply chain and logistics still a challenge at Black Diamond. But did you see any improvement at all in the quarter? And is the order book still $270 million? It sounds like you're still -- obviously, you're still hair cutting. I'm just curious if that number has changed at all.

[John Walbrecht:]

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

[Mike Yates:]

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

[Operator:]

Our next question comes from the line of Laurent Vasilescu with BNP Paribas.

[Laurent Vasilescu:]

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

[Mike Yates:]

So, from a gross margin standpoint, I think we're still seeing that 38% that we just talked about here in the second quarter. Again, as I mentioned during the call, gross margins would have been even higher. We had a $2 million to $3 million of headwinds from foreign exchange and airfreighting costs to the tune of 80 basis points and 130 basis points from great expedited freight costs. So, if you adjust for all that, you've get almost north of 40% gross margin. Now, to be clear, both those things we expect to continue kind of -- I mentioned that we expect the airfreight costs to kind of continue in order to deal with making sure we can meet the demand. And foreign exchange has improved slightly since the end of the quarter but it's still quite the headwind. As I mentioned, it's a $7 million headwind here in the back half of the year based on the rates over the weekend. So, from a sales standpoint, it's $118 million. As we've talked about, we try to pick a number that we're comfortable with and make sure that we can deliver on that. As we've mentioned, demand across Precision Sports continues to be strong. Demand across the Outdoor and the Black Diamond business remains strong. We've just talked a little bit about what's going on the Adventure side. So, we -- and we did reconfirm the full-year guide of $78 million of EBITDA. We did not give a specific EBITDA guide for the third quarter but that same level of achievement is reasonable, I think, to expect in the third quarter. Like I said -- like I started with my comments, I think it was even higher ex some of the FX and some of the freight inefficiencies that we're dealing with. But those are -- we're viewing those as transitory this year for the remainder of the year, probably. But we're very happy with the way we're scaling gross margins and driving improvements to gross margin.

[Laurent Vasilescu:]

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

[John Walbrecht:]

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

[Laurent Vasilescu:]

Very helpful. And then, Mike, just as a follow-up question, I think you maintained your EBITDA target of $78 million. You maintained the CapEx spend range. You gave us some prepared remarks around inventory expectations for the year. But can you just maybe help us walk us through the lowered free cash flow guide for the year? And then, John, as a follow-up on pricing, that’s great to hear about the pricing that’s sticking at 6%. Maybe can you give us a little bit more context between BD and other parts of the business, if there’s any variance between that 6% pricing?

[Mike Yates:]

Sure. Let me answer the free cash flow question first here. Yes, free cash flow, our guide down to that $30 million to $40 million from the $50 million to $60 million, so that $20 million drop in the guide is really entirely around inventory. We targeted initially to get inventory back to kind of at the beginning of the year level. We're going to come up about a little short of that when I say $143 million compared to the $129 million. That's about $14 million of higher inventory and that's just necessary, primarily plus Black Diamond but also across the Precision Sports business, as that business has grown significantly this year. And then, we've also -- as we were starting to think about a plan for 2023 and the necessary inventory levels that we're going to need in kind of this uncertain environment that we continue to find ourselves in -- and we don't want we caught flat-footed as we enter '23 -- we're also planning to carry about $10 million more extra inventory going into the year. So, that's a $24 million headwind right there and that kind of makes up the gap in the $20 million drop in the free cash flow. So, it's entirely around working capital and planning for the current environment, along with planning for growth in '23.

[John Walbrecht:]

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

[Laurent Vasilescu:]

Very helpful. Best of luck.

[Operator:]

[Operator Instructions] Our next question comes from the line of Linda Bolton-Weiser with D.A. Davidson.

[Linda Bolton-Weiser:]

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

[Mike Yates:]

Linda, Mike; great question. So, yes, we've come -- copper costs, obviously, where copper is a critical element for the Precision Sports manufacturing process, those prices have started to come down here just in the last -- frankly, in the last month, right and are back under $4 a pound for copper. That should be a, I'd call that neutral going into the remainder of the year, right? We budgeted around that level, so I think as you look forward, that's probably more of a neutral thing, right? And as we push some price through, it's offset the higher cost relative to, if you compare on a year-over-year basis back in '21, copper was a little less.

[Linda Bolton-Weiser:]

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

[Mike Yates:]

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

[John Walbrecht:]

I think the other difference, Linda, is that we get to look at this on a seasonal basis. Not every one of these businesses has the exact same seasonal [ph] cadence on pricing and sometimes it's not a one-and-done. In the case of [indiscernible], we have two seasons that we can constantly make those introductions and changes and the same with Rhino-Rack, as opposed to others. But I think the other side is we just -- our goal isn't to gouge on this. It's really just to ensure that we cover our costs and continue to maintain the premium nature of our business.

[Linda Bolton-Weiser:]

Okay. Sounds good.

[Operator:]

[Operator Instructions] Our next question comes from the line of Jim Duffy with Stifel.

[Jim Duffy:]

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

[John Walbrecht:]

Jim, I apologize. I missed the first part of your question. If you don't mind asking it again.

[Jim Duffy:]

Sure. You’ve raised the outlook in Precision Sports. Are there specific product lines or customers driving the more confident outlook?

[John Walbrecht:]

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

[Jim Duffy:]

Okay. So, clearly, the demand is there. How about the availability of materials, the casings, the primer so forth? Do you have that in hand to deliver to the guidance, or should we, as investors, be thinking about that as something you’re still working on across the year?

[Mike Yates:]

Jim, as we've talked about in the past, we have access to the primers. We're still being scrappy and sourcing shelf casings in order to convert a bullet into an ammo sale, right? And that's the difference in, kind of as I mentioned earlier, in the difference in kind of like doubling the first-pass revenue and saying, why isn't the full year guide double that, right? So, that's still a challenge but we're pretty comfortable with that. As John just alluded to, we think we can sell all or nearly every bullet we make. The question it always comes back to is, how many of those bullets will we sell as loaded ammo, right? And we do have a lot of the shell casings but we don't have them all, to answer your question specifically.

[John Walbrecht:]

And we don’t have all against what the potential demand is versus what’s in our plan.

[Mike Yates:]

And hence, the reason to be a little conservative on the guide.

[Jim Duffy:]

Understood. Should you get better availability, that will perhaps be an opportunity for upside, just given the demand backdrop?

[Mike Yates:]

That's correct.

[John Walbrecht:]

100%. 100%.

[Mike Yates:]

[Indiscernible] expectations, not miss them.

[Jim Duffy:]

And then, sticking on Precision Sports, a big step-up in the international, I recognized small numbers last year. But in the first half of the year, you’ve seen a much nicer international contribution. Anything specific to speak to with respect to that?

[Mike Yates:]

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

[John Walbrecht:]

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

[Jim Duffy:]

Understood. Okay. And then, Mike, I don’t know if you’re prepared for this but perhaps some visibility on the amount of airfreight you’re expecting in the back half of the year, just to help us model out the margin some.

[Mike Yates:]

So, in the second quarter, we spent $2 million on airfreight. So, as in my prepared remarks, I think that number is probably going to be about a similar level here in Q3 and Q4. So, that…

[Jim Duffy:]

Okay.

[Mike Yates:]

That's going to bring…

[John Walbrecht:]

That’ll do it.

[Mike Yates:]

A little pressure on the gross margin compared to that over 40% rate that that I said it would have been without it.

[John Walbrecht:]

Understood.

[Operator:]

[Operator Instructions] Our next question comes from the line of Ryan Sundby with William Blair.

[Ryan Sundby:]

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

[John Walbrecht:]

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

[Ryan Sundby:]

Okay. And then, Mike, in the script, it sounded like you were maybe more comfortable [indiscernible] the lower end of the 2x to 3x target leverage range. But it also sounded like maybe deal flow and prices were getting better. So, I guess, should we take that to mean you’re looking at smaller tack-on type deals at the moment? Or are you willing to higher on leverage if the right deal warrants it?

[Mike Yates:]

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

[Ryan Sundby:]

Great. I just wanted to see if there’s any change there. Thanks.

[Operator:]

[Operator Instructions] Our next question comes from the line of Mark Smith with Lake Street.

[Mark Smith:]

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

[John Walbrecht:]

Sorry, Mark, I missed the front end of your question. Can you repeat it one more time for me?

[Mark Smith:]

Yes. No, just how much of the Precision growth came from added capacity at Barnes?

[John Walbrecht:]

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

[Mark Smith:]

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

[John Walbrecht:]

Wow. To be honest with you, I think it's really tough to [indiscernible] that right now because of the inability of all these manufacturers to consistently deliver vehicles on time, whether it's Polaris or the Big 5 auto markets in this. I think for us right now, the real thing we focus on is thickness, both against existing vehicles and then, when the introductions happen, new fitments. When the new Ranger comes to market or the new [indiscernible] and tracing how we fit against those markets. And I think we -- I think, honestly, it's been a shift probably of three to six months in the marketplace just due to the delay of vehicles.

[Mike Yates:]

Mark, we're really focused on the vehicle aftermarket channels here in North America. We don't have great sell-through of where our partners there are [indiscernible] on what types of vehicles they're selling our product on to. So that's a tough question for us today.

[Mark Smith:]

That's fair.

[Operator:]

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

[John Walbrecht:]

Thank you, Tawanda. We’d like to thank everyone for listening to today’s call and we look forward to speaking to you again when we report our third quarter 2022 results later in the year. Thanks, again, guys. All the best.

[Operator:]

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