Thank you for standing by. And welcome to Smith & Wesson’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program, Kevin Maxwell, Smith & Wesson’s General Counsel. Please go ahead.

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 our 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 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 Deana McPherson, our CFO. With that, I will turn the call over to Mark.

Thank you, Kevin, and thanks everyone for joining us today. We are extremely pleased with our third quarter performance, with our topline increasing sequentially and above the comparable pre-pandemic quarter in fiscal 2020 and our bottomline results continuing to show dramatic improvement over pre-pandemic levels. As we have discussed before, our results reflect the work our team has done to capitalize on the opportunity afforded by our flexible manufacturing model during the surge to fundamentally transform our business model as it relates to product mix and pricing. Our improved model is designed to align our product offerings with consumer’s expectations of our iconic brand and reputation and this drives significantly stronger average selling prices and profitability. As a powerful illustration of the impact of our model, revenue of $129 million in our fiscal third quarter increased 1% from the comparable period in fiscal 2020, while EBITDA increased by nearly 60%, aided by a 440-basis-point improvement in gross margin, reflecting higher ASPs and lower operating costs. These results underscore the value of our purposeful realignment of pricing and mix to capitalize on the key characteristics that underpin the Smith & Wesson brand, including the highest standards of quality and innovation. Additionally, our higher levels of profitability enabled us to make sound long-term decisions as we navigated the headwinds associated with the macroeconomic inflationary pressures and moderation in sales volume that we and the industry experienced coming off peak demand levels during the pandemic. As our results from this quarter demonstrate our model allows us to maintain strong profitability in any environment. Moving now to the marketplace, we believe the adjustment period from the surge is largely in the rearview mirror and consumer demand for firearms has returned to a more normal seasonal cadence. And we will note that the new normal…

Thanks, Mark. Net sales for our third quarter of $129 million was $48.7 million or 27.4% below the prior year comparable quarter, but $1.6 million above the third quarter of fiscal 2020, the last pre-pandemic comparable third quarter. As we noted in our last earnings call, we expected our third quarter volumes to be roughly 20% to 30% of the full year and we came in within that range. For the fourth consecutive quarter, inventory in our distribution channel has declined. This ongoing channel inventory reduction, combined with the impact of trading down by consumers to lower-priced products due to inflationary pressures negatively affected our quarterly sales. On a positive note, however, the discipline that we have exhibited in promotions during the current quarter has improved our overall profitability when compared with pre-pandemic levels, reflecting ASPs that remain approximately 45% above fiscal 2020. Gross margin of 32.4% was below the 39.6% realized in the prior year comparable quarter, but 4.4% above the third quarter of fiscal 2020 due to increased ASPs. The decrease in margins from last year was due to a combination of reduced sales volumes, unfavorable fixed cost absorption due to lower production volume, the impact of inflation on material and labor costs, and unfavorable product liability adjustments, partially offset by decreased compensation costs and favorable inventory valuation adjustments. Operating expenses of $27.7 million for our third quarter were $3 million lower than the prior year comparable quarter, primarily due to a $1.4 million reduction in relocation costs, lower profit sharing, lower sales related expenses, such as co-op advertising and freight, and decreased compensation related costs driven by temporarily unfilled positions, we believe as a result of the relocation. Increases in new product development costs, industry show expenses and customer promotions slightly offset this reduction. When compared to…

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

Hi, guys. First, I wanted to just dig into new products. The launch of 5.7 certainly looks positive. The initial reception it looks like to, the FPC looks really positive. Can you just maybe remind us of where new product sales have historically mixed and potential for that maybe to move higher here with some of your new products?

You might have yourself on mute.

Yeah.

There we go.

Sorry. Hey, Mark. Yeah. So, obviously, new product is doing very well. The competitor also in addition to this 5.7 and the FPC is doing great. So, with that is going to continue going forward kind of being a focus area for us. I think, we talked about before that new product pipeline, as you heard in the prepared remarks, is very healthy. We spent a lot of time in the surge kind of getting ready for -- anticipating that there would eventually be a downturn. So we are pretty well positioned to kind of continue this cadence through the next foreseeable future. So we -- you can kind of expect that we expect that to continue in that same range where we are at right now. Historically, it varies, obviously, based on whether we are in a surge environment or not. But as we have kind of been in one of these normal environments before, it’s been around that same range, in that low 20s, high-teens percentage.

Perfect. And then I did just want to look at ASP and long guns seem to come down a little bit here in the quarter. Is there anything that’s moving that and then I did just want to confirm that the FPC will be in -- reported in long guns even though it’s a handgun caliber.

The FPC, look at Deana here.

Yeah.

I think it’s going to be...

It’s going to be long gun.

Long gun.

Yeah.

And then on the ASPs coming down on the -- in the quarter was really as a result of that rebate and a little bit of mix. But the majority of that was the rebate, as I mentioned before, we got going right now. So, and again, that was pretty targeted to kind of reduce some inventory we had stacked up in the channel and that, as you know, as you may or may not know, we will be ending at the of -- at the end of March, beginning -- very beginning of April.

Okay. And as we think about those rebates, just remind us on maybe the accounting of that, SHOT Show and some of the shows here in the quarter, maybe move selling and marketing higher. Does rebate impact that line and should we expect more kind of reported costs in the April quarter?

Yeah. No. So rebates go against price so it comes off of sales and the way that we account for that is we estimate based on the quarter that like we just closed. How many we believe would be sold. So we are trying to keep up with it, obviously, that’s based on historical information. So that rebate that we have going goes through April will accrue all the way through the end of the year for based on what we think the amount of rebates are in and that will head against the sales line.

Yeah. Mark, I will just…

Okay.

… go ahead and jump to your logical next question. As ASPs for the current quarter will be very much in line with where we just ended and that it’s going to be mix on some of the new product, which is not included in the rebate. So, they will be -- they will definitely be down a little bit, but it’s not going to be significant, it will be modestly lower than where they were in Q4 -- in Q3, sorry.

Okay. I think the last one for me and sorry if I missed it. Did you guys talk about the kind of weeks of inventory that’s out there in the channel and kind of your comfort level with where it’s at today?

We actually didn’t. But what I will tell you is the inventory levels directionally really -- they continue to come down through November and the first part of December as we kind of approach the holidays, they really flattened and actually have come -- even come back up a little bit in some cases. And simultaneously at the same time, our order rates kind of turned the corner. As I said in the prepared remarks, I very much believe that all of that is in the rearview mirror now with the inventory correction. So it’s -- our inventory levels at the distribution channel is very much in line with their demand levels.

Yeah. So it declined slightly from Q2 to Q3 -- from the end of Q2 to the end of Q3, but modestly declined. It wasn’t like the big declines that we saw a year ago. So it’s four consecutive quarters of declines. But as Mark said, we have seen like a stabilization now and given that we see an increase in order rates, we feel like the distributors and retailers feel like they are in a good place with their inventory.

Hope through is much, much stronger now.

Okay. Great. Thank you, guys.

All right. Thanks, Mark.

Thanks, Mark.

Thank you. One moment for our next question. Our next question comes from the line of Rommel Dionisio from Aegis. Your question please.

Yes. Good afternoon.

Hi, Rommel.

Mark, you talked about today and you have certainly mentioned in the past, it’s been flexible manufacturing and we saw the benefits of that during this -- in the last three years in pandemic, you obviously flexed up during the surge and flex down and were able to reduce cost along the way. As you guys look to move to Tennessee, could you just talk about the opportunities for maybe even improving upon your ability to deliver that flexibility throughout the…

Yeah.

… demand cycle the industry sees? And also just as a follow-up to that same topic, as you enter Tennessee with a fresh sheet of paper -- clean sheet of paper. How do you think about some of these moving macro factors in the last few quarters that we have seen from labor rates to inflationary pressures and if that kind of changes your plans at all there? Thank you.

Sure. Thanks, Rommel. So first half of the question on the flexible manufacturing, the move to Tennessee, I think, at a macro level, doesn’t change our ability to ramp up and ramp down. What it does do, I think, though, is change the amount of -- probably the amount of weapon and inventory that we need to do that just because we are going to be a lot more nimble and in line with our manufacturing processes are going to be whereas now we have a facility in Connecticut, a facility in -- doing plastic injection molding facility in Springfield, Massachusetts doing assembly and a facility in Missouri doing distribution, those will all be co-located. So it will allow us to kind of reduce inventory and reduce costs. So we will still be able to continue to ramp up in terms of a major change to the ability to ramp up in terms of our topline capacity or our ability to ramp back down. I don’t think it affects that on a macro level. On the cost base and the inflationary factors, yeah, for sure, I mean, I think, we are like everybody else in the business world right now. We are definitely feeling the macroeconomic impacts of inflation. Major -- as you just mentioned, major impacts on labor, some raw materials. But I will just tell you that kind of where we are today, we have definitely seen an increase over the last 18 months or so, but that the curve, I guess, if you will, has kind of flattened. So while we don’t anticipate any easing of those pressures in the near-term, we also don’t expect them to get much worse than where they are here today. And then in the long-term, as we kind of look forward into 12 months to 18 months down the road, obviously, the efficiency gains we are going to get from the facility in Tennessee and we will continue to look for other gains we will to offset that.

Yeah. In the short-term, though, Rommel, if you are thinking about next year and thinking about your model for next year, we will be going from four sites to three sites with the -- what we are trading over the lease to American Outdoor Brands effective January 1, 2024, which is not this fiscal year, it’s like the end of -- the middle of next fiscal year. And we will be closing the Deep River facility, but that won’t be until the back half. We will pick up additional depreciation from all of the spending in Tennessee. And there will be transition costs next year, we are not really quantifying them at this point, but they will -- it will take us a while to get to the point where we are actually fully seeing the efficiencies, but we are investing in some really interesting and unique equipment and processes so that we are going to gain a bunch of efficiency once we are fully in line.

Great. That’s very helpful. Thank you.

Thanks, Rommel.

Thank you. This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Mark Smith for any further remarks.

All right. Thank you for joining us today and your interest in the company and we will 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.