Good day, everyone, and welcome to Smith & Wesson Brands, Inc. Second Quarter Fiscal 2024 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 in certain manufacturing and distribution operations to Tennessee, the spin-off of the outdoor products and accessories business in fiscal 2021 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, and any reference to EBITDA is to adjusted EBITDA. Before I hand the call over to our speakers, I would like to remind you that 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 purchase. 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. 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 were very pleased with our second quarter results, which continued to reflect our innovative new product introductions and our consumers enduring loyalty to the Smith & Wesson brand. Top line revenue and unit shipments were both up just over 3% versus last year, while distributor inventories actually decreased slightly in the period by about 4,000 units during a time that traditionally sees channel inventory build in the preparation for the busy holiday season. This robust sell-through, combined with our shipments outperforming NICS in the quarter by over 7%, underscores our belief that our strong performance was due to share gains at the retail counter. Our new product portfolio and reputation for quality continue to be key differentiators, and we are proud to have been the recipient of the 2023 Innovator of the Year awards from 2 major industry partners, Guns & Ammo magazine and the NASGW, the trade association representing our distribution partners. New products remain an important driver and accounted for 29% of our overall revenue mix in the quarter. Recently introduced products, including the M&P 5.7, the FPC and the Response have all been very well received by the market. In the first half of the fiscal year, new products accounted for 31% of our sales, and we expect this momentum to continue. We have some very exciting launches planned for SHOT Show next month, which I look forward to discussing in more detail very soon. Accordingly, ASPs remained strong in Q2 as we continue to maintain a healthy balance between new products and core products, up slightly versus last year and down mid-single digits sequentially. All of this is consistent with what we shared with you on the Q1 call, where we noted that the return…

Thanks, Mark. Net sales for our second quarter of $125 million were $3.9 million or 3.2% above the prior year comparable quarter. Inventory in the distribution channel remained steady with the weeks of inventory declining as sell-through has increased in line with our increased shipping levels. After a temporary spike in ASPs during our first quarter due to the favorable impact of new products, ASPs have returned to fiscal 2023 levels due to increased volume, which resulted in new products having a smaller impact on ASPs than in our first fiscal quarter. Gross margin of 25.4% was negatively impacted by a $3.2 million legal settlement accrual. Excluding this onetime charge, gross margin would have been 28% or 1.4% better than our first quarter and 4.4% lower than the comparable quarter last year. The decline from last year, which we continue to believe is temporary, was due almost entirely to a combination of unfavorable fixed cost absorption as a result of lower production levels, inflationary factors and inventory reserve adjustments. Due to the persistence of these factors, we now expect margins to recover to more normalized levels later in fiscal 2024 than previously anticipated. Operating expenses of $28 million for our second quarter were $1.3 million higher than the prior year comparable quarter, primarily due to the onetime costs associated with our grand opening event at our new Tennessee facility, combined with an increase in compensation-related expenses, partially offset by lower profit share accruals and the reclassification of sublease income from other income to operating expense. Cash used in operations for the second quarter was $2.9 million, $32.4 million better than last year. This reflects a $7 million reduction in inventory during the current quarter versus a $14 million increase in the prior year quarter, partially offset by a seasonal increase…

[Operator Instructions] And our first question comes from Mark Smith with Lake Street Capital.

I guess, first question, just looking for any additional insights, Mark, that you may have on the promotional environment today and continued outlook into ASP, maybe excluding new items. Do you feel like it's going to have to push lower in the promotional environment? Do you feel like everybody is kind of staying relatively same out there today?

Yes, Mark, I think it's -- there's definitely -- the promotional activity has definitely picked up. We're -- as we said in the prepared markets, the demand is good for sure, and it's picked up nicely from the summertime and it was encouraging to see, and we expect that to kind of continue. If you look at NICS in the last couple of months, in the last 60 days, October, November, that kind of increased. We don't see anything that's going to slow that down. So that's kind of what we're forecasting going forward. That said, it's still a competitive marketplace out there. So a lot of promotions. We do anticipate that, that promotional environment will continue, but it's not crazy. It's not going to go to maybe go back 5, 6 years ago, really, really heavy promotion. We had a lot of dollars being spent there. We don't see that as kind of we're coming back into that normal cadence. So as Deana said, I think we do anticipate a little bit of pressure on the ASPs, but it's going to be in the 5% range. It's not going to be anything crazy.

Okay. And then you brought up the NICS and kind of the demand environment. As you guys look at the demand out there, did you see that kind of uptick in October, early October, around outbreak of conflict? And then as we've seen NICS remain higher here through November, do you feel like this is sustainable growth? Or was November maybe getting some tailwinds from events in October?

Yes. I mean I think that it definitely turned the corner in October. You got to remember, it usually turns the corner in October. That's kind of when the season kicked off, kicked off a little bit later than maybe has been in some previous "normal years". But it's remained pretty steady. And I'll tell you, as we kind of sit here today, it's still steady now. So we're kind of into the busy holiday season, which is traditionally, and if you look at the NICS stack chart, this is our busy time, and it's holding up. So we don't see anything again that's going to materially change that. And we're going into an election year next year, which usually tends to the firearms industry to be elevated demand due to a lot of rhetoric around the industry and around the firearms.

Okay. And then new products, mix pretty solid here this quarter, but especially as we look at the long guns, it sounds like you've got some things coming up here next month as we move into SHOT Show. Maybe any insights you can give us into your comfort level with your pipeline around new products? Do you feel like maybe we'll be stacked a little heavier around SHOT Show? Or should we still see a pretty steady flow of new products throughout the year?

Yes, I'll answer that in 2 ways. Yes, the long gun is definitely kind of the bigger increase in NICS, and we're participating very well on that. So the FPC particularly is doing extremely well for us. We believe we're taking a lot of share with that product, and we anticipate to continue that cadence of new product introductions. I mean, as I mentioned in the prepared remarks, I think we're definitely the undisputed leader out there in innovation over the last 2 years, and we're anticipating to continue that cadence and keep that pressure up. So SHOT Show will definitely have a couple of big launches. It's a great opportunity for us to get everybody all in the same place and get a lot of coverage on our new products. So we've got a couple of big ones coming up then, but that's not going to be it. We got more coming out. There's going to be a cadence of new products coming out. And you've got to look back to the last year, that cadence, we expect that to be repeated again this year.

Okay. And I think the last one for me. Just as we think about the balance sheet, it sounds like you're saying that a year from now, you guys would expect to be debt-free. Over that period, do you expect to have some excess cash flow to still be able to do some share repurchases? Maybe walk us through kind of your thought process around capital allocation.

Yes. I mean, as Deana covered, obviously, we're not -- if we see the right opportunity, we're not against doing some share repurchases when we still have -- when we don't have a debt-free balance sheet. We've got $65 million out on the line right now, and we repurchased $8 million in the last couple of months. So -- but I will say that going forward, while we're kind of getting back out of the line and getting to debt-free, we'll probably be -- we'll continue to obviously be in the market and be opportunistic, but it's going to be a little bit more of a cautious approach. As we kind of move past the move towards the tail end of Q3 and then a little bit into Q4, all of that major spending will largely be done, and we'll be in a position to really kind of start to generate. If you remember, we've always kind of communicated we want at least a minimum of $75 million in cash generated. But I'll just point you to the cash generation in the first half of this year alone is $37 million, and those are our 2 lowest quarters, usually. So this year, obviously, we're on track for a nice beat on that target. And again, next year, we're going into an election year. So I think the short answer to your question is, yes, we should be in a position where we've got a healthy balance sheet to start looking at returning share -- returning value to the stockholders.

Our next question comes from Steve Dyer with Craig-Hallum Capital Group.

Ryan on for Steve. Maybe staying on the last topic. Last quarter, you were targeting to be debt-free by year-end, now it sounds like Q2 next year. I guess what are the puts and takes to shift that out?

Yes. We said by year-end would be April, right? So we're being cautious. We are planning to make sure that we're providing that information to you right now. It could be April, it could be December. We're being cautious. And we have done share repurchases. We're looking at that authorization is still out there, and we're going to play it by year and make sure that we protect our balance sheet, but also make sure that we're doing right by our investors as well.

Yes. I think there's obviously some range in there, Ryan. And so I mean, the -- it will be some time. It's not materially changing, I guess, is what I'm trying to get to. So we said before, it was going to be April, which is the end of our fiscal year. It will be within a couple of months of that, if it's not April.

So it sounds like it's more reallocation of capital potentially. You bought some stock back potentially leaning in there versus a change in the underlying business and cash generation of the business. Is that right?

Correct.

Yes, it was a very good assumption. Yes.

Good. Maybe switching over to gross margin. So getting back to the low 30% target for Q4. Is that sustainable in the next fiscal year given Q4 you have the greatest production days, which helps you from an operating leverage and absorption standpoint. So I guess, is that sustainable? Or is that -- how much of the benefit in Q4 from the higher production versus other factors that are maybe sustainable into next year?

Short answer is yes, it's sustainable into next year. And the reason is that this year, you got to remember, we built a lot of inventory as we kind of came towards the move and the tail end of a surge always gets a little bit of natural inventory build internally. So our production rates have been kind of artificially suppressed this year while we brought that inventory down. Next year, that production -- those production rates will be back to normal, and we do anticipate some -- also some efficiency gains from the new facility in Tennessee. So I'll tell you, the Q4 numbers that we're looking at right now also include just a little bit at the beginning also of some continued dual costs. So there's -- still even that 30% has got some headwinds associated with. So the short answer to your question is that's sustainable, absolutely.

There are no further questions at this time. I'll hand the floor back to Mark Smith for closing remarks.

All right. Thank you, and thank you, everyone, for joining us today and your interest in Smith & Wesson. I hope everybody enjoys a Merry Christmas. Have a safe and Happy New Year, and we look forward to speaking with you all again next quarter.

Thank you. This concludes today's conference. All parties may disconnect. Have a good evening.