Good afternoon, and welcome to the American Outdoor Brands' Second Quarter Fiscal 2025 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Liz Sharp, Vice President of Investor Relations. Please go ahead.

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, intent, should, could, 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 reference certain non-GAAP financial measures. Our non-GAAP results exclude amortization of acquired and tangible assets, stock compensation, technology implementation, nonrecurring inventory reserve adjustments, other costs, and income tax adjustments. The reconciliation of GAAP financial measures to non-GAAP financial measures, whether 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 Web site. 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, CFO. And with that, I'll turn the call over to Brian.

Thanks, Liz, and thanks everyone for joining us. I'm very pleased to share that our second quarter performance surpassed our expectations, showcasing the strength of our strategy. More specifically, we believe our results validate the long-term commitment we've made to being an innovation company, yielding differentiation in a highly dynamic environment. We believe our ability to innovate year after year has given us a unique and compelling advantage. Our goal is to leverage that innovation advantage to widen our distribution, expand our brand awareness, and increase our profitability, while staying agile and asset-light, allowing us to seize new opportunities while adapting to evolving market conditions. We successfully achieved our objectives in the second quarter. Here are some examples. We delivered net sales of over $60 million, a 4% increase over last year, and higher than our expectations. We grew international net sales by nearly 15% year-over-year. We achieved our highest single shipping month ever in October out of our Columbia facility. We delivered year-over-year growth in adjusted EBITDAS of 43%. We achieved year-over-year net sales growth in both the Outdoor Lifestyle and Shooting Sports categories. Importantly, we delivered positive growth across every single sales channel, including traditional, e-commerce, domestic, and international. And it is especially notable that our growth in the quarter was driven entirely by inline products, well ahead of the new product launches that we have planned for the second-half of our fiscal year. Our innovation-driven strategy continues to foster new and expanded relationships with our retailers and consumers, strengthening our foundation for future growth. This innovation advantage comes in three forms; our consistent pipeline of new products, our distinctive merchandizing solutions, and our role as a cross-category innovation partner. Let me quickly touch on these advantages, each of which serves as a part of a mosaic that…

Thanks, Brian. As Brian mentioned, we're very pleased with our results for the second quarter, with net sales and profitability coming in above our expectations. We maintained a strong balance sheet and continue to return capital to shareholders with our share repurchase program. Let me walk you through the details. Net sales for Q2 were $60.2 million, a 4% increase over the $57.9 million in Q2 last year. As Brian shared, we achieved our highest ever shipping month in October from our Columbia, Missouri facility. Our ability to ship to this unprecedented level was made possible in part by efficiencies we gained by expanding our facility lease in January 2024. By controlling 100% of our Missouri facility, we've been able to optimize our floor plans, workflow, and shipping logistics, all of which combine to make October's record-level shipments possible; great job to the distribution team. In our outdoor lifestyle category, which consists of products relating to hunting, fishing, camping, outdoor cooking and rugged outdoor activities, net sales grew by 5.4%, products form our MEAT!, BOG, and Grilla brands delivered strong hunting, meat processing, and outdoor cooking performance. In our shooting sports category, which includes solutions for target shooting, aiming, safe storage, cleaning and maintenance, and personal protection, net sales grew by nearly 2% compared to last year. Products from our Caldwell Claymore family and our Tipton brand drove strength in shooting accessories that more than offset a slight decline in personal protection products. And here I'll just add a reminder that while we don't produce firearms, our shooting sports category tends to align with adjusted NICS background check results, which were up by about 1% for the same period. Turning now to our distribution channels, increased and expanded distribution channel opportunities are one of the avenues that comprise our long-term…

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Mark Smith with Lake Street Capital Markets. Please go ahead.

Yes, hey, guys. Yes, it's Alex Sturnieks on the line for Mark Smith today. Thanks for taking my questions. First one for me, could you give us more insight into the purchasing timeline for retailers? You noted that you're seeing good reception from retailers. But I guess just curious if there's any other drivers that give you confidence in that longer-term sales outlook?

Sure. Hey, Alex, it's Brian. So, you're right. So, the purchasing timeline typically around our second quarter, and it even flows all the way through sometimes to the first week of February, is when we typically have most of our line reviews with our customers. And really what they're doing is giving us -- making some big decisions. They're trying to figure out, for the following year, what they're going to be adding of our products, which means taking out some of the incumbents. And so, those decisions are made over that course. I think the interesting thing year is our inline products, like we said in Q2, are performing very, very well, so resonating with the consumers. And retailers caught note of that. And they want to bring people into their stores, they want to increase foot traffic, and they see AOB as a way to do that, so excited with the traction of our products. They were excited in our line reviews to see what else we had to offer. And when we showed them some of the new products that we're planning to come out with and begin showing next month, the response was, across the board, just beyond excited. And they see it as another opportunity to just bring more people into their stores. So, instead of waiting for some of those load-ins to typically occur a year later, which is why we typically give that -- the following year's guidance usually in the summertime, they want load-ins a lot sooner. So, what we saw from that is we're going to have inventory coming up a little bit towards the end of the year. Obviously, wanted to put some of those points into context, that inventory would be going up towards the end of the year. And we're frankly just going to see stronger load-ins about six months earlier than we typically would because the retailers want to get ahold of these products sooner than later. So, they've given us great line of sight. It's what has led us to be just as bullish as they are.

Okay. And then, given some weakness in the shooting sports industry recently, you saw some good growth there. But could you provide some additional color on how products in that market performed in the quarter?

Sure. So, it's Brian again. So, yes, I would say, generally, we made the comment that we do tend to track with the mix. There are some exceptions to that. One of the things that we laid out a few years ago, one of our strategies within shooting sports is to really expand into the categories and activities that tend to have stronger and more reliable long-term growth. And one of those areas is shotgun sports. And so, we put that into place a few years ago. It came out with our Claymore line to being with. And we've used that as our -- we've called that our beachhead. And then, we've brought out additional products since then. And that that line especially -- we called out that line in the prepared remarks, has done exceptionally well for us in terms of new products. And it's really helped diversify our revenue mix in the shooting sports side. So, we did see, like we said, a little bit of softness in the personal protection side of our business. But what's nice is, because of that diversity and because of those initiatives that we put into place several years ago, we're actually seeing great growth into some of those stronger and more reliable growth areas.

Okay. Then last one for me, and you also mentioned it in the prepared remarks a little bit. But in terms of the balance sheet, are there any new changes to your philosophy around the use of capital between investments in the business buybacks and in M&A, I guess more so just focused on what are you seeing out there in the M&A market right now?

Yes, Alex, this is Andy. I'll take the first part, and then Brian can talk about M&A. So, our capital allocation philosophy has remained unchanged. So, we have three priorities. First and foremost is organic growth. And again, that organic growth piece really supports what we've talked about on this call, the new product development, that innovation advantage. M&A is our second priority. So, we're always looking for complementary brands, authentic brands that would fit kind of in our permission to play in the space we're in. And then, number three, in the absence of compelling M&A is buyback. So, we're going to be opportunistic when we believe we're undervalued, we're going to buy our stock back. And I think you saw the -- our Board supports that with our new $10 million authorization.

Yes. And then, I'll add in on -- to further support the philosophy. We did suspect that, coming into potentially a new administration, we would need to be flexible. And we're not in the business of trying to place our bets before we have facts. And so, one of the ways that gives us that flexibility and be able to respond appropriately to any changes is really to make sure what Andy said, to have that strong balance sheet because we do continue to believe that our greatest opportunity is the one that's in front of us. And we're seeing that play out right now with our innovation engine. So, that's one thing. We just want to make sure too that we've got -- [technical difficulty] buffer, and that speaks to sustainability over time. As it relates to M&A, we continue to be very, very aggressive in looking at M&A targets. The problem that we have is that Andy and I are very -- one, we're very frugal. Secondly, we also -- we're looking for the right business and the right brands that could fit within our system. And I think that's a very important word. We certainly have a system. And ultimately, any new brand or a company, we want to have the same attributes that we have, which is sustainable innovation. And it's hard to find the right vessel for that, the right brand for that. I would say that we have seen a little bit of a slowdown in the pipeline for M&A over the last two or so months. Curious to see if that begins to open up again after the new year, and there could be a variety of reasons for that, but overall, we're continuing to look at companies, continue to be very aggressive. There are, the list of things that we want to see before we commit our shareholders' money is pretty extensive. Be disciplined, but also be very open-minded.

Perfect. Thank you, guys.

Yes, thanks, Alex.

[Operator Instructions] The next question is from Matt Koranda with Roth Capital. Please go ahead.

Hey, guys. Good afternoon. Maybe just with the fiscal '25 outlook, if I combine sort of the full-year with the third quarter that you're giving, it suggests that we are seeing an acceleration in sales heading in toward the end of the year here. Just wondering if you could put a finer point on the items that are driving that acceleration, it sounded like, Brian, you were saying there's some additional willingness to take a load-in, given the innovation product that you're introducing, but is there also some play out here of the sell-in that we get from MEAT! and Grilla, especially Grilla, I guess, entering the traditional channel? Maybe just any additional color on what you're seeing for the rest of the year here in terms of the acceleration in sales?

Yes, absolutely. Matt, this is Brian. Yes, we are -- I expected a question like that, and I thought long and hard about how I would answer that type of question because -- [technical difficulty] you would think that there would be one brand or two brands of our horses that would be leading the charge. And really what we're seeing as an acceleration, to your point, is across the portfolio. And I think it really gets back to this idea of retailers seeking innovation right now. They're willing to move off of the status quo in a way that they haven't before, because it's painful for the retailers, oftentimes, to change out planograms and to bring a new product. That's why they only do it once a year, for the most part in a given -- [technical difficulty] So, the fact that they're willing to move off of the status quo and take in product earlier because they want innovation is really what's leading to that, whether it's in line or it's some of the new products, but it's really across the board, across our entire portfolio that we're seeing that. And it gets back to this idea of, if I can make a plug for it again, this is really our advantage when it comes to innovation. It's new products. They have access to new products. It's our ability to provide compelling merchandising. When people walk in their stores and they walk by our products, it grabs their attention. And then, also just being a turnkey provider of truly cross-category innovation. So, it's a shortcut, like I said in the prepared remarks. So, it's those three things that I think are really standing out right now above some of our peers. And so, that's what's led to this across-the-board willingness to take on more AOB product. So, it's across-the-board. I wish I had one or two brands to give you, but it's very strong across the board.

Okay. That's good to hear. And then, maybe just the further outlook on fiscal '26 that you're providing, I guess, wanted to get your thoughts on the philosophy of why provide something. I mean, it's not so far out, I guess, but at least in terms of Wall Street is concerned, it's pretty far away. And I guess the mid to high single-digit growth outlook that you're giving, maybe just any additional color on what's driving that. Again, is it sort of some load-in you're seeing on the traditional channel? Is it some demand inflection that you've observed, maybe just additional sort of rationale for why provide an outlook that's kind of that far out.

Yes, Matt, Brian again. I'll start and then Andy, feel free to jump in. It's something that we gave a lot of thought to before getting on this call and whether or not to give that sort of guidance. The facts that we have are two things. One, the traction with our in-line products, like we saw in the second quarter, and we're seeing an acceleration, to your point, of those in-line products going forward, coupled with those successful line reviews that we had in the second quarter, and then the, of course, line of sight into, not only the rest of this year, but the beginning part of next year, really gave us that confidence. And if it were one or two, let's say, large customers, we would be more hesitant or reluctant to give this sort of guidance. And I think us. We tend to be pretty conservative. So, it's a little out of character for us to provide an outlook that goes out this far. But because it was across such a large number of retailers in different channels, whether it's farm and home or it's e-commerce or it's mass retail, it really expands across all of those. That diversity gave us the confidence to be able to put forward the range that we set for next year. Andy, anything you'd add to that?

Okay. The other thing I wanted to cover was just on the gross margin front. Maybe, Andy, if you could walk us through the headwinds on a year-over-year basis that increasing for the third quarter, especially from the tariff amortization that you mentioned. And then, just also, I guess any clarifying thoughts or comments around tariff exposure that we still have left for -- with the new regime coming in?

Matt, this is Andy. So, the second-half of the year, it's pretty much shaping up in the same pattern as what we saw last year. So, the higher inventory purchases we have in the first-half of the year are going to, we expect to start to amortize off in the second-half. So, the 45% or so that we said we expect for Q3, it's going to be a little bit above last year. I'm showing like roughly 43% or so. But it's pretty much a similar story on the amortization of those variances. The other piece that we talked about in the prepared remarks is part of the expected promos that we had in Q2. We do believe are going to push into Q3, Q4. So, that's going to kind of play into that. And then, do you want to talk about tariffs?

Yes, I can talk about tariffs. This is Brian again. This is a topic that we've given a lot of thought to and not just here in the last few months. This is something that we've been planning for to the degree that we can. Certainly don't want to place bets that we aren't sure about. But realize it's a fluid situation and where things land is really anyone's guess at this point. If I may just give you a quick sort of how we think about it from a philosophical standpoint, and I'll try to keep it brief, and then I'll shed some light on what that looks like for us today. I think that will be really good context, especially as we go forward and learn more from the incoming administration, Matt. So, ultimately what we decided to do going back even years is we're not going to start making big changes to our business based on unknowns. That's why you've heard this theme of us controlling what we can control. That's become a big theme of ours. It's embedded in our culture. And so, what we do instead is what can we focus on here? What can we control as much as possible? And that really comes down to, in the context of tariffs, two things. One is leveraging that innovation advantage, and the second is staying agile as much as possible. So, real quick on innovation advantage, depending on what happens with tariffs, if they do continue to increase, which we all know this, this isn't the first rodeo, we have seen this before, but overall, innovation gives us several levers that I think others perhaps don't have. For one, we do have some pricing power that we believe, largely through our IP protection. We've gone…

That makes sense. Yes. Long-winded is my middle name, so I don't mind long-winded answers. Okay. And then, maybe just lastly, could you guys touch on, you briefly did, but I wanted to see if you could expound upon the M&A funnel, what opportunities you're seeing. It sounds like you've seen a bit of a pause, at least in deal activity, deal flow. But what types of activity are you seeing? What types of opportunities are you getting looks at? Maybe more on the outdoor product side versus shooting sports, just any way you can characterize the funnel and the activity that you've seen, I guess, over the last few months.

Yes, great question, Brian again here. First, I'll break it down by category. So, on the shooting sports side, we're not seeing a whole lot. We're really not seeing many companies coming to market. I think the main reason for that is because that market just has continued to be pretty soft. So, there aren't great run rate numbers for sellers to work off of. On the outdoor lifestyle side, and there's obviously a variety of activities there, we are seeing many more opportunities on that side. I would say it's a little spotty, we're seeing companies that are either doing really, really well or doing terribly. Whereas, rewind a few years ago, it seemed like everybody was doing pretty well and it was hard to see, much like retailers trying to pick the brands to sell. It was really difficult to see the winners and the losers. Now it's very clear, and it's very clear there are very few winners in this environment or have been able to honestly adequately protect themselves and really rally around a core competency of theirs. So, we're seeing less there. I would say we're probably exploring, just because of that, we're exploring a few more businesses, and brands that are, I'll call it, outdoor adjacent for us. Those could be areas like in the backyard. Certainly, we play there today with Grilla, but there are some really interesting opportunities and some pretty innovative brands that play in spaces like that -- [technical difficulty]. Even things perhaps like the pet space, very cautious in entering that space. But there are some really neat brands, again, I'll use the word vessel, but some really interesting vessels for us to potentially use, because we've got, frankly, a vault of new product ideas and innovation that we don't believe our existing brands are the right ones to bring that to market. So, where can we find those brands and then plug in some of those ideas that we already have, which just further adds to upside for those businesses. So, range of things, some outside adjacencies, but we're able to see more of the winners and losers at this point.

Okay, super thorough. I'll take the rest of mine offline. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Murphy for any closing remarks.

Thanks, Operator. So, as we head into the holidays, I'd like to give a special thanks to our employees, whose loyalty, hard work, and dedication continue to move our company forward on the path towards an exciting long-term future. To those employees and to everyone else who joined us today, we wish you a happy and healthy holiday season and we look forward to speaking with you again next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.