Smith & Wesson Brands, Inc.

Good day, everyone, and welcome to Smith & Wesson Brands, Inc. Second Quarter Fiscal 2022 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Kevin Maxwell, General Counsel, who will give us some information about today's call.

Thank you, and good afternoon. Our comments today may contain forward-looking statements. Our use of the words anticipate project, estimate, expect, intend, believe, and other similar expressions are intended to identify forward-looking statements. Forward-looking statements may also include statements regarding topics such as our product development, objectives, strategies, market share, demand, consumer preference for our products, inventory conditions related to our products, growth opportunities and trends, and industry conditions in general. Forward-looking statements represent our current judgment about the future and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by our statements today. These risks and uncertainties are described in our SEC filings, which are available on our website, along with a replay of today's call. We have no obligation to update forward-looking statements. I have a few important items to note. First, we reference certain non-GAAP financial results. Our non-GAAP financial results exclude costs related to the planned relocation of our headquarters and certain manufacturing and distribution operations to Tennessee. The spinoff of the outdoor products and accessories business in fiscal 2021 COVID-19-related expenses, and other costs. Reconciliations of GAAP financial measures to non-GAAP financial measures can be found in our SEC filings and in today's earnings press release, each of which is available on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. Finally, when we discuss NICS results, We are referring to adjusted NICs, a metric published by the National Shooting Sports Foundation based on FBI NICs data. Adjusted NICs removes those background checks conducted for purposes other than firearms purchases. Please remember that adjusted NICs background checks are generally considered to be the best available proxy for consumer firearm demand at the retail counter. Because we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers and not to end consumers, NICS generally does not directly correlate to our shipments or market share in any given time period. We believe mostly due to inventory levels in the channel. Before I hand the call over to our speakers today, I would like to remind you that any reference to income statement items refers to results from continuing operations unless otherwise indicated. Joining us on today's call are Mark Smith, our president and CEO, and Dena McPherson, our CFO. With that, I will turn the call over to Dena.

Thanks, Kevin. Revenue for our second quarter was $230.5 million, an $18.3 million or 7.3% decrease from the prior year second quarter, with nearly $13 million of this decline coming from our discontinuation of the Thompson Center product line. The decline also reflects an easing of demand combined with a channel that has largely been replenished after an 18-month consumer surge that began in March of 2020. Although our revenue was lower than in the prior year quarter, the current quarter's results remain remarkably strong, representing a two-year compounded increase of over 140%. Compared to the quarter ended October 2019, our revenue is up $116.8 million, or more than double. Reports from our channel checks indicate that consumer foot traffic continues to be elevated above 2019 levels, but is lower than it was during late calendar 2020. Because of our ability to deliver in such large volumes, we believe that we have now fully replenished the channel for most product lines. Gross margin in the second quarter of 44.3% was 370 basis points above the 40.6% realized in the prior year comparable quarter. This increase in margin was due to the impact of two price increases since the prior year second quarter, an increase in production volume as we were still ramping production throughout most of late calendar 2020, a favorable product mix including the lack of low margin hunting products, and reduced promotions as we were still fulfilling certain early calendar 2020 promotions late in the year. Margins were slightly negatively impacted by increased volume-related spending, some inflation impacts, and payroll-related accruals associated with our impending move to Tennessee. Operating expenses of $36.6 million for our second quarter were flat to the prior year comparable quarter. The current quarter includes $4.5 million related to our relocation to Tennessee and $2.9 million of increased legal costs, which were entirely offset by SPIN-related costs in the prior year of $4.8 million and lower compensation-related costs of $1.6 million due to synergy savings realized from the SPIN. The decrease in revenue was more than offset by increased gross margin and a reduction in interest expense to result in a $1.8 million increase in net income. This increased profitability, combined with a reduction in share count of over 7.8 million shares, resulted in GAAP earnings per share of $1.05 compared with 87 cents in the prior year, and non-GAAP earnings per share of $1.13 compared with 93 cents during Q2 of last year. Finally, adjusted EBITDA of $80.4 million was $1.6 million higher than the prior year and 34.9% of revenue. During the second quarter, we used $3.7 million of cash from operations, primarily as a result of investments in inventory, and spent $4.4 million on capital equipment, resulting in $8.1 million of free cash utilized in the quarter. We did not repurchase any shares of our common stock during the quarter and continue to have $50 million available for us to use through August 2022, the two-year anniversary of the spinoff. We paid $3.8 million in dividends and ended the quarter with $159.4 million of cash and no bank debt. Our board has authorized the payment of our $0.08 per share quarterly dividend to shareholders of record on December 16th, with payment to be made on January 3rd. Looking forward into our third quarter of fiscal 2022, inventory in the channel began to replenish during our first fiscal quarter and continued to grow throughout our second quarter. As of today, our distributors have approximately 15 weeks of supply in the channel representing a broad range of products. This growth in inventory in the channel and within our company is a good thing as there are often periods of increased consumer demand for which we cannot produce enough product. Inventory in the channel and internal inventory levels help us to provide our products to consumers whenever and wherever they need them. That being said, however, the inventory levels in the channel indicate to us that our third quarter sales are likely to be quite a bit lower than what we realized in our third quarter of fiscal 2021. Last year's third quarter was impacted by strong consumer demand driven by the height of the pandemic, a recent change in the presidency, civil unrest, and virtually no inventory in the channel. None of these factors exist in our current third quarter. In response, we have reduced production rates by nearly 27%. In addition, we expect that our internal inventory will continue to build during Q3 in our effort to restock after last year's complete depletion of finished goods inventory and due to our mitigation of supply chain issues that all manufacturers have been dealing with over the last several months. In spite of the expected reduction in sales and approximately $3 million in expense related to our Tennessee move, we will continue to meet or exceed the targeted gross margin, EBITDA, and cash metrics that we shared in June. Our strategy of investing in our business and returning capital to our shareholders has not changed, and we will continue to pay our quarterly fixed dividend and be opportunistic regarding share repurchases. Finally, our effective tax rate is approximately 23%. With that, I'll now turn the call over to Mark for a deeper dive into our results. Mark?