American Outdoor Brands, Inc.

Good day, everyone, and welcome to American Outdoor Brands, Inc. Third Quarter Fiscal 2021 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Liz Sharp, Vice President of Investor Relations, for some information about today's call.

Thank you, and good afternoon. Our comments today may contain predictions, estimates, and other forward-looking statements. Our use of words like anticipate, project, estimate, expect, intend, should, indicate, suggest, believe, and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding our product development, focus, objectives, strategies, and vision, our strategic evolution, our market share and market demand for our products, market and inventory conditions related to our products and in our industry in general, and growth opportunities and trends. Our forward-looking statements represent our current judgment about the future and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings. You can find those documents as well as a replay of this call on our website at AOB.com. Today's call contains time-sensitive information that is accurate only as of this time and we assume no obligation to update any forward-looking statements. Our actual results could differ materially from our statements today. I have a few important items to note about our comments on today's call. First, we referenced certain non-GAAP financial measures. Our non-GAAP results exclude amortization of acquired intangible assets, stock compensation, transition costs, COVID-19 expenses, related party interest income, and the tax effect related to all those adjustments. The reconciliations of GAAP financial measures to non-GAAP financial measures, whether or not they are discussed on today's call, can be found in our filings as well as today's earnings press release, which are posted on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. Joining us on today's call is Brian Murphy, President and CEO, and Andy Fulmer, Chief Financial Officer. And with that, I will turn it over to Brian.

Thanks, Liz, and thanks, everyone, for joining us. Today I'm excited to share our third quarter results, which exceeded our expectations for both net sales and net income. I believe our performance reflects not only the ongoing strength of the outdoor market, but more importantly, the value of our highly authentic brand portfolio, our unique dock and unlock strategy, the harvesting of our strong new product pipeline, and investments we made in our business two to three years ago that are beginning to bear fruit. These elements have long been core to our strategy and they underlie the great results we're reporting today. With a focus on the future, five and even 10 years out, we will continue to make forward-looking investments that we believe will unlock the brand's full potential as they progress along their exciting path from niche to known, regardless of the direction the outdoor market takes in our post-pandemic world. Overall, however, it looks as though the floor has been raised for outdoor participation and we expect a portion of those new entrants to continue recreating in our categories well past the current pandemic. Because of that, we're very excited to continue engaging with a much larger consumer base than we did before 2020. With that, let's talk about the quarter. Highlights include order strength for products across all four of our brand lanes, growth in both our e-commerce and traditional sales channels, the first million-dollar-plus quarter from our recently launched D2C brand, Meet Your Maker, the largest product launch ever from our Crimson Trace brands, an exceptional cash flow generation which further strengthens our balance sheet. Based on our performance and our outlook for the balance of the year, we are again raising our guidance for fiscal 2021, which ends April 30th. Before I address our performance specifically, let me update you on our markets. By now, I think we're all aware of the significant impact the pandemic has had on so many aspects of our world and community. When it comes to the outdoor industry, that impact has been truly profound, and we believe has resulted in a higher foundational level of consumer participation. Whether personal protection, shooting sports, camping, hunting, or fishing, each one has delivered meaningful growth year over year. In camping, the Outdoor Industry Association estimates that camping participation increased 28% in 2020, with nearly 8 million new participants. Millennials represented the strongest increase in participation, with 19% camping for the first time ever, We are excited about what this trend could mean for our Adventurer brand line, which includes Schrade as well as UST, our growing line of camping gear that we recently rebranded with an exciting new youthful, inclusive, and energetic personality. You can check out our recently launched tents, sleeping bags, and mats at USTgear.com. In hunting, according to data issued this week by the NSSF and Southwick Associates, hunting license sales were up an estimated 7.5% in 2020. The brands within our harvester brand lane, particularly Hooey Man, Bog, Uncle Henry, Oldtimer, and our internally developed Meet Your Maker brand, are in a great position to address a variety of pre-hunt, hunt, and post-hunt activities for these new, and in some cases renewed, participants. In fishing, the Recreational Boating and Fishing Foundation reported there were 3 million more fishing licenses sold in 2020 than in 2019. an increase of 14% year over year. Within the Adventurer brand line, our Bubba brand is ready to provide these new anglers with must-have tools to capture the ultimate lifestyle of adventure from water to plate. You'll find new fishing shears, stainless steel pliers, and diving knives at Bubba.com. And lastly, strong participation in firearms ownership led to a record 8 million new entrants in calendar 2020, according to the NSSF. This new and larger installed base of owners suggests strong future participation in shooting sports and the need for new products and accessories, where we are uniquely positioned. In addition to benefiting Crimson Trace, Lockdown, and the licensed Smith & Wesson-related brands in our Defender brand lane, these new consumers are also potential long-term customers for Caldwell, Wheeler, Tipton, and Frankfurt Arsenal, all situated in our Marksman brand lane. Our award-winning puck monitoring device, along with other innovative safety products from our lockdown brand, are especially relevant and offer peace of mind for these 8 million new firearm owners. Turning to our financial performance in the quarter, net sales across our portfolio brands grew an extraordinary 91% in the third quarter, and gross margins expanded by 110 basis points to over 45%. Growth in the quarter occurred in nearly all of our 20 brands, Furthermore, of our top four selling products in the quarter, each came from one of four brand lanes, yet again, demonstrating the diversity we have built across the business. We believe that sales growth across both our traditional and e-commerce channels in the quarter demonstrates the investments we have made over time continue to pay off, allowing us to place our brands wherever the consumer expects to find us, whether that's a physical store or online. The investment we've made in our e-commerce platform was an initiative we began well in advance of the pandemic and positioned us well for the acceleration of consumer shopping online. We believe our e-commerce and traditional platforms will both play an important role in our long-term growth, so we are pleased that our e-commerce channels generated 44% of our total net sales in the third quarter. This represented 129% growth compared to the prior year, and included a sizable increase in our direct-to-consumer sales. Net sales in our traditional channels grew as well, increasing by over 68% year-over-year. Turning to profitability, our adjusted EBITDA performance for the quarter was particularly strong, with adjusted EBITDA margins improving 1,120 basis points year-over-year. In addition to higher gross margins, we delivered greater profitability to the bottom line, demonstrating, we believe, the tremendous leverageability of our business, thanks to the unique structure of our brand lanes and our focus on organic growth through our dock and unlock strategy. This quarter, I'm excited to share another example of our dock and unlock process in action. When we purchased Crimson Trace almost five years ago, it had long been a leader in the market for laser size for self-defense. Essentially, a red or green laser attached to the frame of a firearm allowing the user to aim more rapidly and accurately. Interestingly, when we plugged the brand into our dock and unlock process, we learned that consumers had come to view it as a trusted provider of not only laser sights, but aiming solutions more broadly. We thought, wow, where else could Crimson Trace go with this increased permission to play? So our Defender brand team went to work, expanding the Crimson Trace offering in 2018 to include red dot sights and a small assortment of rifle scopes. but their work didn't stop there. Ongoing research hinted to us what we believe consumers wanted most, and in this third quarter, we announced the launch of over 50 optics in our newly established Hardline and Brushline series of rifle scopes. Like the rest of our Crimson Trace products, the new scopes have undergone what we believe to be the most rigorous and hardcore testing in the industry, which is why they're backed by a lifetime warranty. They have the strength of IP behind a variety of features, and they preview the new design aesthetic that we are incorporating into future Crimson Trace products. Our scopes include aggressive knurling on the magnification ring and turrets, Crimson Trace MOC coatings, and robust aerospace-grade construction. Our pro models feature zero-stop and exposed turrets, larger objective diameters, first and second focal plane options, and a variety of illumination options you'd come to expect from a brand rooted in electro-optics technology. You can find our new scopes at CrimsonTrace.com. New products are core to our strategy, and historically, companies in our industry showcase new products each year at SHOT Show. This year, however, SHOT Show, like so many shows, was canceled. But that didn't slow us down, and we went digital. We redirected our SHOT Show budget towards rich media content and secured two full episodes on the 2021 SHOT Show New Product Premiere, which aired on the Outdoor Channel and Sportsman Channel. Both episodes were basically an American outdoor brand takeover. They were dedicated entirely to new products from across our brand portfolio. This programming included groundbreaking optics, hunting blinds, game cameras, meat processing equipment, revolutionary tools for the reloader and gunsmith, the latest fillet knives and gear for the most desiring of anglers, a complete assortment of land management tools, a brand new line of smart security products, and much more. The reach for these episodes has been tremendous. We estimate that the programs have generated over 35 million impressions across television, print, digital, and social media, and those programs are scheduled to air again in July. The shift we made from a physical event to a digital venue for SHOT Show seemed natural, since our internal capabilities, which include a modern approach to product marketing, content generation, and digital marketing, are core strengths that allow our brands to establish lasting relationships with consumers. We intend to further utilize these internal digital capabilities as we launch more than 300 new products in the coming year. In addition to organic growth objectives, Andy and I continually scan the landscape for potential acquisitions that are a fit with our business. We are currently seeing an uptick in the number of acquisition opportunities, likely for a variety of reasons. That said, we continue to maintain a very disciplined approach when we look at these targets. In particular, we're looking for strong brands that complement our current portfolio and have runway for growth, targets that have large, total addressable markets, and brands where our dock and unlock strategy can provide untapped value for our shareholders. Before I hand it off, I want to especially thank our employees who helped us deliver these tremendous results. Their commitment to our success as a new company Their dedication to the health and safety of their coworkers and their passion for building an exciting and innovative product portfolio made it possible for consumers to continue exploring their connection with the outdoors and our products during these challenging times. Andy?