Smith & Wesson Brands, Inc.

Good day, everyone, and welcome to Smith & Wesson Brands, Inc., fourth quarter and full 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, Smith & Wesson's 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 on topics such as our product development, objectives, strategies, market share, demand, consumer preferences, inventory conditions for 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. 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 is generally considered 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, I would like to remind you that any reference to income statement items refers to results from continuing operations unless otherwise indicated, and any reference to EBITDAs is to adjusted EBITDAs. 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 Mark.

Thank you, Kevin, and thanks, everyone, for joining us today. Before we discuss our results, I want to express the deep sorrow that all of us at Smith & Wesson feel for the victims of the unthinkable acts of evil that have befallen our nation recently. It is impossible to rationalize the actions of these perpetrators of violence, especially those who show such disregard for the lives of the most innocent among us. Smith & Wesson continues to work closely with the ATF, industry partners, lawmakers, and law enforcement to find real solutions and to augment existing programs that will have a meaningful impact in making our community safer by keeping firearms out of the hands of criminals and the mentally unstable. while always respecting the constitutional rights of law-abiding Americans. Please join me in offering prayers for our nation and our communities, but most of all for the families facing unimaginable loss. Our top and bottom line results for the fourth quarter were in line with expectations. Our fourth quarter revenue was up approximately 2% on a sequential basis, reflecting slightly higher volumes despite adjusted NICs being down 3% over the same timeframe. Compared to the prior year period, we faced very difficult comps. As 12 months ago, we were in the height of the pandemic surge, and we were able to leverage our flexible manufacturing model to significantly outpace the competition. Therefore, and as expected, in comparison to last year's fourth quarter, our revenue this year was significantly impacted by the overall normalization of consumer demand for firearms. As I have mentioned before in the past, during the surge, we were able to make long-overdue pricing and product portfolio adjustments, which has resulted in ASPs rising by nearly 12%. Although our fourth quarter results benefited from these adjustments, their impact was not enough to offset unit volumes being down approximately 50% from prior year. Turning to profitability, the strength of our flexible manufacturing model was again evident in our latest quarterly results. As we've pointed out many times before, not only does this model allow us to rapidly react to upswings in market demand, but it also allows us to maintain strong profitability during periods of sharp declines in revenue by keeping fixed costs low and manufacturing cost absorption rates high. In the fourth quarter, our gross margin improved by 20 basis points sequentially and was still near the upper end of our long-term financial model, despite a significant deceleration in year-over-year net sales. Similarly, EBITDA's margin in the fourth quarter improved 260 basis points sequentially, driven by higher gross margins and lower operating expenses. Looking forward, we expect that throughout the remainder of FY23, market demand will continue to be down significantly from the pandemic surge levels of last year. While interest in the shooting sports remains healthy, and we are encouraged to hear from our channel partners that many first-time consumers are returning to purchase additional firearms, with the offsetting impact of record inflationary pressures on the pocketbooks of Main Street American households, we are anticipating that demand in the firearms market this year will look a lot like calendar 2019. which as a reminder would have encompassed the second half of our fiscal 19 and the first half of our fiscal 20. Like all companies today, we face challenges with managing the impact of inflationary factors. Pricing actions have helped, but with the pace of inflation accelerating at near record levels in recent months for key inputs like material cost, transportation, and labor, there is potential risk to our margin over the near term. That said, we feel good about the relative position of our products and pricing versus our competitors' offerings, and so we do not see heavy promotional activity as a significant risk. Additionally, our brand is a real asset, and we are comfortable that we could take pricing actions in the future if needed. All told, we remain confident in our ability to deliver full-year results that are within the long-term financial model we shared last year during our Investor Day, which, as a reminder, includes gross margins of 32% to 42%, EBITDA margins of 20% to 30%, and generating more than $75 million in cash each year. But again, we expect that this will come on unit volumes and top line revenue that will be much more in line with the traditional normal year, which at this point is tracking closer to calendar 2019 rather than calendar 2021. From a product development perspective, Consistent with our past communications, we expect to release approximately half a dozen new products by the end of fiscal 2023, and in terms of our relocation to Maryville, Tennessee, we have no significant updates. We continue to make steady progress and remain on track for completion in the second half of calendar 2023. Turning to capital allocation, last year we spent $90 million to repurchase 4.8 million shares, and we paid $15 million in dividends. We estimate that our share repurchases over the last two years were accretive to EPS in FY22 by 65 cents, and we are committed to this strategy that rewards long-term stockholders. As a matter of fact, today we are announcing that our board has approved a 25% increase in our quarterly dividend to 10 cents per share. In summary, we believe that we remain well-positioned for long-term growth. with an agile business model designed to quickly adapt to changes in the marketplace and deliver strong, consistent levels of profitability, no matter what, driving value for our stockholders. With that, I'll hand the call over to Dina to cover the financial details.