Smith & Wesson Brands, Inc.

Good day, everyone, and welcome to Smith & Wesson Brands, Inc. Second Quarter Fiscal 2023 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. 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 EBITDA. 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. With firearm demand continuing to normalize, our second quarter results once again demonstrated the significant progress we've made over the past several years in creating a highly adaptive, and robust business model that consistently delivers strong profitability regardless of market conditions. A comparison back to our fiscal 2020, which was the last period of normal firearm demand, provides a great illustration. While top line revenue increased by 6% in Q2 of this year versus FY20, EBITDA increased by nearly 90%, driven by higher ASPs and lower operating costs. Looking forward to the second half of our fiscal year, While we anticipate more normal demand levels, our seasoned team has effectively managed through these cycles before, and our business model is specifically designed for this. And we expect to continue delivering strong levels of profitability, even with the significant one-time expenses associated with our move to Tennessee. All of this is thanks to the hard work of the Smith & Wesson team in remaining steadily focused on the long-term success of the business, no matter the conditions. And as always, our appreciation for their dedication cannot be overstated. Turning now to the market, consumer demand for firearms as measured by NICS was largely consistent from our fiscal Q1 to Q2, tracking below the surge period. The trend worsened in the latter half of our second quarter, as evidenced by the accelerated year-over-year decline in monthly NICS, ending with October only nominally increasing sequentially and representing the lowest sequential increase over September on record. Not surprisingly, this deterioration coincided with the broader consumer slowdown driven by persistently high inflation, the beginning of the winter heating season across the northern half of the country, and rising interest rates. But this said, the most recent data from November NICS released last week indicates a return to more normal demand patterns, and firearm demand does remain healthy when compared to historical levels and remains elevated when compared to our FY20, which again was the last pre-pandemic period. This indicates that the temporary headwinds are being offset by longer-term tailwinds. As you'll recall, there were more than 10 million new consumers added to the firearms market over the past 18 to 24 months, many of whom are now returning for subsequent purchases. With these new entrants, previous studies indicating that firearms enthusiasts will own an average of seven to eight firearms, and recent data showing that concealed carry is on the rise, we believe long-term demand trends remain very healthy. However, with the uncertainty surrounding the current economy and its impact on firearm demand levels, many firearm retailers and distributors continue to take a cautious approach and continue to adjust inventory levels. This is creating near-term headwind to our business, as we discussed on the last earnings call. Importantly, this is a normal and healthy process and consistent with how we have seen the market adjust in past periods following significant surges in demand. And we note that inventory levels for our products within our distributors and strategic retail accounts are down considerably sequentially and versus prior year, marking the third consecutive quarter of significant channel inventory declines, and indicating, therefore, a solid pull-through of our products at retail. All of this means we remain in a highly competitive environment, and winning profitable market share at the consumer level remains our core focus. With many consumers squeezed by inflation and record prices for household essentials, consumer price sensitivity on discretionary purchases has increased, predictably leading to increased promotional activity within the firearm space. As we have mentioned before, we take a very strategic approach to pricing and are confident in the pricing actions we've taken to align our ASPs with the power of the Smith & Wesson brand and our longstanding reputation for quality and innovation. We believe we are now well positioned versus competing products across the full feature value spectrum. The resulting higher ASPs have driven strong profitability by helping us mitigate inflationary pressures, and also partially offsetting lower volumes. We expect our use of promotional activity in this competitive landscape to similarly remain aligned to ensure we do not erode those gains long term. However, we may increase promotional activity on certain of our core product lines in the second half of our fiscal year to address the realities of the current challenging economic conditions. Additionally, and now more than ever, Innovation and new product introductions are critical to continuing our leadership position in the industry. Thanks to the hard work of the Smith & Wesson engineering and product management teams throughout the pandemic, we are very well positioned to continue our steady cadence of product launches. Just in the past few months, we introduced our M&P Metal, a full metal version of our iconic M&P full-size pistol, our Equalizer, a 15-round concealed carry pistol featuring our patented EZ technology, which reduces slide-racking force by over 35%, and our competitor, made by our Performance Center in collaboration with our legendary pro-shooting team of Jerry Michalik and Julie Golub, a full-featured metal-framed pistol ready for competitive shooting straight out of the box. These products have been very well received by the market and are exceeding our expectations. And stay tuned, we have several more exciting new products lined up for introduction throughout the second half of our fiscal year. In summary, we continue to manage the business for the long term, ensuring we consistently deliver high levels of profitability regardless of which direction demand is trending. Fiscal 2023 continues to be a year of recalibration and adjustment for our industry and Smith & Wesson. Interest in shooting sports remains strong, and participation rates remain above pre-pandemic levels, which bodes well for the long term. Over the near term, the industry is facing the dual challenge of a cyclical downturn and more intense macroeconomic headwinds pressuring consumer spending, particularly on discretionary items such as firearms. While this will likely to continue to impact our top-line revenue over the balance of fiscal 2023, it is precisely the type of environment for which our flexible model was built, and we expect to remain highly profitable and continue delivering on our commitments to our customers, employees, and stockholders well into the future. With that, I'll hand the call over to Dena to cover the financials.