Thank you for standing by, and welcome to the First Quarter 2023 Smith & Wesson Brands Earnings Conference Call. [Operator Instructions] 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 spin-off of the Outdoor Products & 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 FDI NICS data. Adjusted mix removes those background checks conducted for purposes other than firearms purchases. Adjusted NICS is generally considered the best able proxy for consumer firearm demand at the retail counter. Because we transfer firearms only to law enforcement agencies in 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 Deana 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 on 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 Deana 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 FY '23 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 of Q1 of FY '20, which was the last normal summer, although top line…

Thanks, Mark. Net sales for our first quarter of $84.4 million was $190.2 million or 69.3% below the prior year comparable quarter and $11 million lower than the first quarter of fiscal 2020, the last pre-pandemic comparable first quarter. As we noted in last quarter's earnings call, we expected our Q1 sales to be the lowest quarter of the year at roughly 10% to 20% of the full year total and we came in towards the lower end of that estimate. Total units shipped were below fiscal 2020 levels, mainly due to an inventory correction, as Mark covered earlier. Additionally, discipline in promotions during the current quarter resulted in ASPs that were approximately 50% above fiscal 2020; and in handguns, even higher than fiscal 2022 levels. All of this led to gross margin in the first quarter of 37.3%, which was well below the 47.3% realized in the prior year comparable quarter, but equal to the first quarter of fiscal 2020 in spite of lower sales. Excluding relocation costs, however, gross margin would have been 38.8%, 1.5 percentage points better than in 2020 with approximately 12% less revenue. The decrease in margin from last year's high was due primarily to a combination of reduced sales volumes across nearly all product lines; unfavorable fixed cost absorption due to lower production volume and employee-related costs associated with the relocation, partially offset by decreased compensation costs due to vacancies and favorable inventory valuation adjustments. Operating expenses of $27.6 million for our first quarter were $2.5 million lower than the prior year comparable quarter, primarily due to lower sales-related expenses, such as co-op advertising and freight as well as decreased compensation-related costs driven by temporarily unsold positions, we believe as a result of the relocation. Offsetting these temporary cost reductions were increased legal and…

Certainly. [Operator Instructions] And our first question comes from the line of Mark Smith from Lake Street Capital.

You guys addressed a lot of this in the -- in your commentary, but I just want to walk through a little bit more, just the inventory kind of out there in the channel. Obviously, pretty overbuilt early in the quarter. Can you just talk about maybe... [Technical Difficulty]

Mark Smith, your line is open again.

Sorry, Mark, well, technical issue.

No problem. Can you guys hear me now?

We can.

Excellent.

Yes, let me just give you -- answer your question. So the question was inventories in the channel, right, and some -- a little more color there on what's going on. So throughout the quarter, our inventory units, so probably looking at our weeks of supply, remained relatively flat, but our inventory units dropped fairly significantly. And we don't go into -- we don't know anymore on to the exact details there. But what I will tell you is that our inventory units in the channel today are about what they were this time in -- in calendar 2019, our fiscal '20. So we're on par about with where we were then. However, our weeks of supply today is significantly lower than it was in '20, which tells us, and again, as we've talked about before, is that the demand for our product was there. And we corrected that. We're through that now. And the demand is higher today than it was, obviously, over the summer period, it's higher now than it was in fiscal '20 if that makes sense.

No, that's helpful. As we look at your inventory in the channel maybe versus peers, competitors, can you talk about the rest of the industry in inventory? Is it similar to what we saw for your products? Is it maybe overbuilt or less that's out there? Any insight you can give there would be helpful.

Yes. I can't -- I don't really have that level of insight, obviously, into any kind of detail. I can talk directionally just based on our conversations with our channel partners that the competitive products were pretty bare at the retail level throughout the pandemic. And we were the only ones who are really kind of delivering in any kind of significant meaningful fashion with a couple of others. I'm not going to get into names, but we're doing a fairly good job, but that we definitely were well out in front in terms of deliveries. So that was good for us. Unfortunately, when that inventory inflection point comes, as it did in the late winter, spring and over to the last summer, you become a victim of your own success a little bit and that everybody else is now got inventory coming into the channel. And we ended up becoming a little bit overstocked. And I think it is a fair statement to say that we're a little more overstocked than some of the competitive products. But again, that was a temporary headwind, and we seem to be through it now.

Okay. And with that said, as we look into more historical seasonality and coming into a more important time of the year here, how do you guys feel about promotional pricing and maybe what we may see over the next 6 months, given the inventories built back up, do you expect us to get into a more promotional environment?

I think versus the pandemic, for sure, but you're right to compare it to pre-pandemic levels. I think it's going to be -- in my opinion and our position is it's going to be a lot more muted. I think we can be a lot more thoughtful about how we drive sales rather than just kind of the knee jerk, let's just put a buy X, get Y out there or do it a rebate card. And that's not to say we wouldn't be doing anything like that, but I think we can get a lot more creative in doing bundles and providing the extra value adds to the consumer through providing whether accessories, whether it be holsters or range bags or other things like that. In terms of the competitive market, it's -- and what the competitors are doing, you can definitely see that there's a lot more a lot more promotional activity going on, but everybody else kind of seems to be in that same mode of let's try and get a little more creative and a little more thoughtful about how we're trying to drive sales out there rather than just dropping price. And that's really the environment we want to see. And as you saw, that allows us to maintain those ASPs. And again, the old saying revenues for vanity, you look at our revenue in Q1. And although we were lower than we were at that time, the last time we were pre-pandemic profitability significantly better, right? So that's the mode and the model we want to continue going forward.

Okay. And then you talked about kind of new products that you've introduced and new ones potential to come in here very soon. Can you talk about the mix or quantify at all kind of sales in the quarter that skewed towards new products? And maybe how much that helped ASP?

In our first quarter, there wouldn't have been a whole lot of new product there. We did a couple of line extensions and a few special makeups, but -- so that was kind of the -- that was the core product line. As we look forward into the rest of this fiscal year, that is a focus for us. So in Q1, we would have had the -- the newer products would have been things like the CSX and et cetera, things we launched kind of SHOT Show and maybe the 30 Super Carryies in those products as we look forward though, as we kind of come into the fall season now, that is going to be a much larger percentage of the revenue is going to be coming off of some of these exciting new products we got coming.

Yes. So the -- as we design new products, anything launched in the last year, that impacted the quarter by 21.3%, and that's pretty standard, not -- it's -- I think it's a great thing. But the newest products came out just recently.

Okay. And then just as we think about longer term, if you can give any more update on kind of the relocation, it sounds like still cost, you're still in but maybe an update on kind of where you're at in the process and what still needs to happen over the coming months? And then also, I'm curious about as we think about flexible manufacturing, what your opportunities are as you move, do you continue to have this kind of flexibility in manufacturing?

Sure. So first part of the question is the move is on, the building is on track. So walls are actually going up right now, the concrete pad for both the front office and the -- and the manufacturing -- and the distribution space is poured. So well on track, and we're still within our contingency budgets there. So no significant changes to the cost either. The longer-term plan as we expect by about this time next year to be starting to move the front office towards the beginning part of next summer will be -- starting to ramp up the operations in earnest and start to be manufacturing and distributing product out of that location. In terms of the flexible manufacturing, it shouldn't really have any impact because let's remember that all of the machining operations, which is really where that flexible manufacturing comes into play. All those machining operations are staying here in Springfield. So there really isn't a whole lot of change there. So in terms of the new facility and what that means for us in terms of flexibility, it will significantly enhance our efficiency and our nimbleness because our assembly operations will be right in line with our distribution operations. So that will be -- and also our plastic injection molding operations. That will allow us to take a lot of steps, work in process inventory, et cetera, out of the system, which allows us to be more nimble and efficient, but from the flexible manufacturing side, that all is staying here in Springfield. So that structure we have and that relationship we have set up with that vendor base really -- there really isn't a whole lot of impact to it.

Our next question comes from the line of Steve Dyer from Craig Hallum.

Just a little bit broader, curious when you look at sort of personal protection versus shooting sports versus hunting, are there any particular pockets of strength or resilience that you'd call out versus the others?

Yes. I think personal protection and the shooting sports is right now where we a lot of our time and effort from the marketing perspective. And I think that's kind of one of those, if you want to call it, more resilient and kind of has that -- always has that obviously to go through the surges as we all know, but has that really steady base. And then I would say the next one is probably hunting, right? I mean hunting, there's -- that tends to be a slower moving -- slower moving trends as more people -- and I think that is one of the things that's encouraging a lot of people get into hunting throughout the COVID pandemic, as they add a lot of free time in their hands, a lot of folks who used to hunt when they were younger out in the field. So that -- we kind of see that category picking up, but that's kind of more of what you would think of as a traditional consumer good where it moves slowly in the single digits growth or if it's going to fall off, it falls out in the single digits. The personal protection and shooting sports is kind of the one where you see those huge surges, but things to remember is that if you think about surges to the sine wave the bottom of those sine waves is fairly consistent. And that is where kind of we -- and that's our whole idea to be on the flexible manufacturing. That's where we watch that, the bottom of those sine waves to see as we go into a surge and now we're coming out of it is the bottom of this sine wave higher than the last time, right? And the answer to that right now, frankly is what we're seeing is the answer is yes. And so -- and when you talk about resiliency there, we do see some resiliency there and some stickiness to that. So -- and one more thing to just point out is our revolvers. So for that, that's kind of what we're known for. That was the foundation of the company. We're still sold out on revolvers. So from that perspective, we see a lot of strength there.

Got it. That's helpful. Couple of modeling questions. You talked about OpEx increasing 10% to 15% above Q1 levels once you're in the new facility, which won't be for another nine to -- nine-ish months yet. So is the level in Q1 from an OpEx perspective sort of the right level until then?

No. So I'm sorry that, that wasn't clear. OpEx between Q1 and Q2 will go up 10% to 15%. We've been experiencing what you would think of as normal attrition when you announce that you're relocating and closing a facility. So right now, our operating expenses are what I would say, lean. So going into Q2, they will increase 10% to 15% over Q1 levels because of adding back headcount that we've lost and also because we expect revenue to be higher. So revenue-related items such as co-op advertising and freight will be higher relative to the increase in revenue.

Got it. Okay. And then when you talk about assumptions sort of similar to calendar '19. Are you talking about units or revenue? Or are you sort of thinking about it as one and the same? I'm just trying to sort of solve for ASPs.

We're talking about it in units.

Got it. Okay. And then just one cash flow question. I'm trying to sort of reconcile. So you have about $110 million in cash on the balance sheet right now. You've talked about generating another $70 million, $75 million plus. And I'm thinking of that after CapEx is the way I'm sort of reading that. But then you talk about ending the year with $100 million on the balance sheet. So to my mind, it should be closer to $200 million, but maybe help me where I'm missing that?

Yes. No cash generation is actually cash from operations. So we're going to use up cash during the year.

Okay. So that's not a free cash flow number.

Yes, that's a cash from operations, that’s cash generation.

Okay. And then can you remind me, what’s your guided CapEx for the year?

So $20 million to $25 million or so in normal CapEx and $90 million to $95 million in relocation CapEx.

Does that answer your questions?

Steve, you're still there?

Can you hear me?

Yes, we can hear you.

Yes, we can now.

Yes. No, that answers my question. Thank you. I'll hop back in queue.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Mark Smith, President and CEO.

All right. Thank you, operator, and thank you, everybody, for joining us today. We'll talk to you next quarter.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.