Good day, everyone, and welcome to Smith & Wesson Brands, Inc. Third Quarter Fiscal 2024 Financial Results Conference Call. [Operator Instructions] This call is being recorded. At this time, I would turn the call over to Kevin Maxwell, Smith & Wesson's General Counsel, who will give us some information about the 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 move of our headquarters and certain of our operations to Tennessee 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 EBITDAS is to adjusted EBITDAS. 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 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. 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. Our team delivered another strong quarter on both the top and bottom line in Q3. We believe we gained market share as our shipments outpaced the overall firearms market, reflecting the continuing robust demand for our best-in-class innovative new products and sustained momentum in our core product portfolio. On the bottom line, our persistent focus on cost discipline combined with increasing production rates and solid operational execution against key initiatives, including our Tennessee move, drove better-than-expected EPS of $0.17. In consistent with our commitment to return value to our stockholders, we continued to buy back shares during the quarter and paid out $5.5 million in dividends. Top-line revenue was up just under 7% over last year, whereas shipments were up almost 11%. This reflected mixed factors stemming from strong reception to the launch of our second-generation entry-level pistol, the SD 2.0 and holiday promotional activity. By category, our long gun shipments doubled versus the year-ago period, and our handgun shipments were largely flat, down less than 4%, while the overall market, as measured by NICS checks, was up only 5% in long guns and down 4% in handguns. This highlights the power of our new products, which made up over 20% of our sales in the quarter, led by the FPC, which continues to be the top-selling product for many of our channel partners. As we've covered many times before, an important factor in comparing our shipments to NICS is fluctuating inventory levels at retailers and distributors. Notably, channel inventory levels during the quarter remained healthy, with unit inventories at our distributor, strategic retail partners actually decreasing, by about 12% throughout the quarter. This indicates strong consumer demand, and pull-through at the retail counter for Smith & Wesson products and…

Thanks, Mark. Net sales for our third quarter of $137.5 million were $8.4 million or 6.5% above the prior year comparable quarter. During the quarter, inventory in the distribution channel declined from October levels, in terms of actual units and weeks of inventory, indicating strong sell-through of our products at retail. As expected, ASPs declined from Q2 levels, due to promotions and a shift in mix and handguns, to lower priced products, while ASPs in long guns increased, due to new product introductions. Gross margin of 28.7% was better than anticipated at 3.3% above Q2 and 3.7% lower, than the comparable quarter last year. The decline from last year was due to the impact of operating the new Tennessee facility, combined with inefficiencies associated with the start-up of that facility, and inflationary factors in both material and labor, partially offset by higher sales volume, lower spend on the relocation, and the January 1, price increase. It should be noted that, while the Tennessee facility is increasing costs at the margin level, some of this is due to geography on the P&L, as we are no longer operating the Missouri facility, which was entirely recorded in operating expenses. In addition, the cost savings associated with operating the Tennessee facility, have not yet been fully realized, as we are ramping up our operations, and have not begun some of the automation that will improve efficiencies. We also have yet to realize the savings associated with closing our Connecticut facility and the off-site Massachusetts 3PL location. Operating expenses of $28.1 million for our third quarter, were $438,000 higher than the prior year comparable quarter, primarily due to an increase in depreciation, on the new facility and legal costs. Cash generated by operations, for the third quarter, was $25.4 million, $18.5 million better than…

Thank you. [Operator Instructions] The first question comes from Mark Smith from Lake Street. Please proceed with your questions, Mark.

Hi, guys. This is Jason on for Mark. Appreciate you taking our questions. I just want to start with the Tennessee facility transition. I know you talked a little bit about some efficiencies, but what are you seeing from a product innovation capability standpoint? And then if you could go into any early wins, or challenges you've encountered since the move?

Sure. From the innovation side, the Tennessee facility is - houses, as we covered before, houses our assembly operations for modern sporting rifles and pistols, and as well as our logistics operation, and our plastic injection molding. So, the innovation and the design work still is, based here out of the Springfield, Massachusetts facility, and that will continue. So in terms of any disruption to that, there shouldn't be any from the Tennessee move. As far as the move itself, it's going very well, as I kind of covered in the prepared remarks. I think, frankly, we're kind of a little bit ahead of schedule, and that led to some of the positive news on the margin line. So that said, though, we're still starting up a Greenfield facility. And we're still going through some of the transitions there, and some of the start-up inefficiencies from new staff, et cetera. And - we were very pleased with the first couple of months, and should only get better here as we kind of start to settle down and going into the second half of Q4 and into FY '25. So our costs slot, and our duplicate costs, we do have some that are kind of lingering and probably will, some minor costs that will linger through the end - of calendar, sorry, '24, but they'll be pretty de minimis, as we kind of get into Q1 of FY '25.

Got it. That's helpful. And then looking at ASPs, I know you mentioned you expect them to be up sequentially here in Q4. How should we think about those trending beyond Q4?

Yes, good question, Jason. So, the new product pipeline, as I kind of covered and we've demonstrated over the last two to three years, that's really been a focus of ours. The new pipeline remains robust going into FY '25. And so, right now what we're anticipating, is we'll definitely be increasing overall ASPs, mainly driven by long gun ASPs. So, we're kind of anticipating largely flat handgun ASPs throughout FY25. But those long guns should increase nicely, with the launch of the lever-action rifle and some other new products we've got coming.

Okay. Perfect. And then just the last one from me, and I'll jump back into queue, just curious your thoughts on demand levels, with this year's election. Is it comparable to historical years, or how are you thinking about that profile?

Yes, I mean, I don't think we'll be able to give you too much color on comparable to historical years, but just in general, look, I mean, the election year is always a healthy demand period, for the firearms industry. I think you can kind of, we expect the NICS results, and the firearms market to remain healthy, throughout the calendar year. And then after the election, we'll kind of have to see where it goes from there. But overall for our, generally in our FY '25, including the first couple months of calendar '25, we expect it to be a good year. We expect it to be healthy. So, we're looking forward to it.

All right, that's it from me. Appreciate the call here. Thank you.

Thanks, Jason.

Thank you. The next question comes from Steve Dyer from Craig-Hallum. Please proceed with your question, Steve.

Good afternoon to you both. Congratulations on the good execution. I appreciate all the color, by the way, on all the different sort of puts and takes in the business. You're obviously gaining a lot of share. Can you help us sort of, you know, to the degree you're willing to kind of give granularity, as to where you feel it is, long guns, handguns, and even to the product line level, maybe where you're seeing some momentum?

Yes, sure. Yes, I mean, that's been our goal, obviously, for the last couple of years, since we kind of took over as a new management team, is to really focus on firearms and focus on taking share within firearms. And I think, you can kind of see, that's really bearing fruit. The share gains on the long gun side, were frankly, nothing to do with lever-action. It was all, a product that, the main driver was probably introduced as I covered in the prepared remarks about this time last year, that the FPC, that's performing extremely well for us out in the retail channel. And we'll be kind of phasing out now as, we measure our new products as, products introduced in the last 12 months. Well, as I just said, it was - introduced about this time last year. So that'll be phasing out as a new product, but quickly replaced now with the lever-action rifle. So, should continue to, get a lot of momentum from that lever action rifle. It is a platform product for us, and completely new white space that we don't really, we don't really play in today. So, cannibalizing, really nothing from our product line. So, we're really excited about that as - an opportunity for growth in the future. And on the handgun side, it's an area where we just feel it's our bread and butter, and we need to continue focusing on, on holding that leadership position there. So, that's a lot of new products coming out on the handgun side in fiscal '25.

Yes, that makes sense. With respect to the lever-action, are you, is that, you said it's a platform product, so assuming sort of multiple calibers, et cetera?

Yes, you'll see a lot of new line extensions, et cetera, coming out on that over the next, 12, 18, 24 months. And we really expect to build out that entire category into all of the calibers, all your typical calibers that you'd expect from a lever-action rifle, and maybe even some that you wouldn't.

Cool. And then, yes, going forward, it sounds like gross margins are certainly on the upswing. A lot of puts and takes on the operating expense line with sort of new costs, depreciation, and so forth, along with some other stuff falling away. But on an absolute basis, I mean, can you talk a little bit about what you sort of expect, or how we should think about operating expenses next year, maybe, I don't know, either as a percentage of sales, or growth or et cetera?

Yes. I mean, we don't expect our operating expenses, to materially change next year. As we've talked about many times before, that's - kind of one of the core tenets of our flexible model is that, when we're profitable in any environment, and what that means, is that when we're in a surge environment, and even an extreme surge environment, we found ourselves during COVID, if you'll notice, we really didn't change our fixed cost base, right? So our fixed cost base largely stays the same. We don't get carried away. We lead with a steady hand understanding that the - top line can be volatile in this industry. And so, that doesn't change next year, right? So we expect that our fixed costs and our OpEx will be flat, will be very comparable to this year.

Got it. And then last one from me, I guess it sounds like pricing and promotional activity is pretty rational on the channel. Competitors behaving fairly rationally. Anything you're concerned about there? You feel like you're in a pretty good spot?

Yes, I mean, we've obviously, as you can see, if you've been, if you've done some channel checks, you can see we've definitely been participating in promotions, but they, as you, that's a good word for it. They've been very rational, but, there hasn't been any kind of panic promoting, by our competitors. We don't anticipate that changing. As I said, I think the demand is going to remain healthy through '24, calendar '24, which will, obviously moderate that. That said, I think, the promotional activity that you've seen, from us is probably going to continue. Probably won't get any less, but it won't get, we won't get really get any more either.

Got it. Okay. Thanks for taking my questions.

Thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd now like to hand the call over to Mark Smith for closing remarks. Thank you, sir.

Thank you, operator. And just want to thank everybody for joining us today, and your interest in the company and Smith & Wesson. And we look forward to speaking with you all again next quarter.

Ladies and gentlemen, that does conclude today's call. Thank you very much for joining us. You may now disconnect your lines.