Smith & Wesson Brands, Inc.

Thank you for standing by, and welcome to the first quarter 2023 Smith & Wesson Brands Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, 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. 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. 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 EBITDA 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. Beginning with top line revenue, our first quarter results reflect a return to a more normal demand pattern at the retail counter for firearms, combined with temporary headwinds from inventory corrections within the channel. The industry experienced our first normal summer slowdown in three years, and in addition to the usual seasonal foot traffic decline throughout the period, Our channel partners were also selling through existing inventories, and therefore, we believe manufacturer orders were artificially depressed as compared to retail pull-through. Encouragingly, even with this lower retail activity, unit inventory of Smith & Wesson products within our distribution and strategic retailer accounts dropped significantly throughout the quarter, and we believe are now largely within target ranges for this time of year. Since the end of the first quarter, order rates have also rebounded, indicating that the inventory correction should now largely be in the rearview mirror as we enter the typically busy fall and winter seasons. I think it's important to note that this was fully within our expectations. As you will recall, and as Dena will cover in some more detail shortly, we estimated that our unit volume in the first quarter would be lower than it has been historically during a normal year due to this inventory correction. We estimated that Q1 would be between 10% to 20% of our FY23 annual volume, and we believe our results for the quarter were indeed within this range, albeit certainly towards the bottom end. Further, in spite of a challenging quarter from a top-line perspective, impressive Q1 profitability numbers prove that once again, our team can deliver on our no matter what motto. In comparison to Q1 of FY20, which was the last normal summer, although top line was down for the reasons we just covered, the team delivered impressive bottom line profits, which far exceeded this comparable quarter, not just in relative percentages, but in absolute dollars. And we fully expect to continue that discipline in cost control and promotional spending, which combined with the pickup of order rates over the past few weeks, as I just mentioned, bodes well for continued strong profitability over the remainder of the year. Given this, we remain confident in our ability to comfortably maintain our published full-year targets for cash generation of $75 million, cash on hand of $100 million, growth margins of 32 to 42 percent, and EBITDAs at 20 to 30 percent of revenue. With that, just a few comments on the overall firearms market from our perspective. The incredible strength of the consumer demand for firearms over the past couple years vastly overshadowed the inherent seasonality of the business, as demand outstripped the industry's ability to supply. Now, with demand normalizing and manufacturers adding capacity, the industry is returning to the seasonal cadence that was typical throughout much of pre-pandemic history. This has led distributors and retailers to adjust inventory-level targets to be more in line with the normalized demand, as well as adjusting to the incremental capacity that most manufacturers added over the past couple of years. Throughout the past few months, the industry navigated through the inflection point from the largest surge in history, so, unsurprisingly, this dynamic became more pronounced. We believe this created a considerable disconnect over the summer between shipments from manufacturers and corresponding NICS data. Looking forward, however, as indicated by NICS data and our channel partner feedback, interest in the shooting sports remains healthy and elevated relative to pre-pandemic levels, reflecting millions of new participants as well as continued support from core enthusiasts. As mentioned earlier, distributor inventory of our products is very comfortable and currently sits at 14.5 weeks of supply. Please remember that although this is higher than our average target of eight weeks, This time of year is typically higher, as we calculate weeks of supply by looking back across the past 13 weeks of demand, which is the slowest seasonal period, as we simultaneously head into the fall and winter, which are typically the busiest. This, combined with the order rate jump we've seen in the most recent few weeks, gives us confidence that our sales forecasts and production plans are firmly aligned with the current market, and again, We believe that the inventory correction we experienced over the past few months is now behind us. With this said, the return to a more normalized environment has allowed inventory of competitive brands to largely return to pre-pandemic level availability. This obviously drives a much more competitive market versus the surge, when we believe Smith & Wesson significantly outpaced the rest of the industry in deliveries thanks to our flexible operations. In this environment, we believe that we still maintain the advantage, with the Smith & Wesson brand indexing extremely high across the entire customer spectrum, reflecting our 170-year history of consistently delivering high-quality, innovative products. Additionally, we have been hard at work throughout the surge preparing for the inevitable return to a more competitive marketplace. Our marketing team has just released our newest national branding campaign which underscores the amazing employees who make up our iconic company and has been receiving very positive reviews. Our sales team has been working around the clock to ensure that our partners are maintaining a full assortment of Smith & Wesson products. And as with any successful consumer good company, product innovation is critical to maintaining and growing share in a competitive environment. We are very excited about our strong pipeline of innovation for 2023. Just within the last month, we launched the first production revolver in the popular new .350 Legend caliber and introduced the first ever full metal frame M&P, both of which are already exceeding expectations. And we still have two exciting new products scheduled for launch by the end of the quarter and several more to come before SHOT Show in January. In conclusion, the firearms market fluctuations are exactly what our business model is designed for. We will capitalize on the demand surges while remaining nimble and efficient so that we are always profitable no matter what. We focus on driving long-term profitability and strong returns for our stockholders. And so despite the firearms market in fiscal 2023 expected to be down versus last year and well below the fiscal 2021 peak, we still expect to deliver strong top-line performance with profitability ratios and cash flow comfortably within our long-term targets. a testament to the efficacy of that flexible manufacturing model and the power of the Smith & Wesson brand. Throughout the demand surge in 2020 and 2021, we consistently demonstrated our ability to clearly understand the market dynamics, stay ahead of the trend, adapt, and execute to optimize performance and ultimately maximize returns for long-term stockholders. With that, I'll hand the call over to Dina to cover the financials.