Smith & Wesson Brands - Earnings Call - Q1 2020

Transcript

Operator (participant)

Good day, everyone, and welcome to American Outdoor Brands Corporation first quarter fiscal 2020 financial results conference call. This call is being recorded. At this time, I would like to turn the call over to Liz Sharp, Vice President of Investor Relations, who will give us some information about today's call.

Liz Sharp (VP of Investor Relations)

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, intend, believe, and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding revenue, earnings per share, non-GAAP earnings per share, fully diluted share count, and tax rate for future periods, 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, including our Forms 8-K, 10-K, and 10-Q.

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 on this call. Our non-GAAP results and guidance exclude acquisition-related costs, including amortization, recall-related expenses, one-time transition costs, fair value inventory step-up, and the tax effect related to all those adjustments. The reconciliations of GAAP financial measures to non-GAAP financial measures, whether or not they are discussed on today's call, can be found in today's Form 8-K filing as well as today's earnings press release, which are posted on our website.

Also, when we reference EPS, we are always referencing fully diluted EPS. For detailed information on our results, please refer to our annual report on Form 10-K for the year ended April 30, 2019. I will now turn the call over to James Debney, President and CEO of American Outdoor Brands.

James Debney (President and CEO)

Thank you, Liz. Good afternoon, and thanks to everyone for joining us. With me on today's call is Jeff Buchanan, our Chief Financial Officer. Later in the call, Jeff will provide a recap of our financial performance as well as our updated guidance. Our results for the first quarter reflected our ability to remain focused on executing our strategic plan while addressing the challenges of ongoing softness in the firearms market. Today, I'll share with you some details of our first quarter, then Jeff will provide information on our financial results and our outlook for the coming fiscal year. As you know, we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers, not directly to end consumers. That said, Adjusted NICS Background Checks are generally considered to be the best available proxy for consumer demand for firearms at retail.

In our fiscal Q1, background checks for handguns increased 2.1% year over year, while our units shipped to distributors and retailers decreased by 7%. For the same period, background checks for long guns declined by 2.2% year over year, while our units shipped to distributors and retailers declined 8.1%. This result was expected. Recall last quarter when we cautioned that a Q1 correction relative to Adjusted NICS was extremely likely, given the success of our year-end promotions and our strong outperformance of the market in Q4. In a more recent update, July Adjusted NICS were up only slightly year over year. And while Adjusted NICS appears to be following its typical slow summer seasonality, this was the second largest sequential monthly decline in the past four years, indicating to us that the consumer market for firearms remains very soft.

Distributor inventory of our firearms increased sequentially from 127,000 units at the end of Q4 to 178,000 units at the end of Q1. Distributor increases in inventory are very typical this time of year due to the seasonal slowdown in sales velocity in the channel, as well as planned inventory build-up leading into the fall hunting and holiday shopping seasons. This year, those inventories also reflect the success of our Q1 buy-in programs that positioned participating distributors to take full advantage of our full promotions in Q2. In addition, distributor inventory grew in the long gun category as we proactively worked to reduce our inventory of a certain product line with enough time for that inventory to clear out of the channel in advance of an upcoming new product launch. Since the end of Q1, distributor inventories have increased and remain above our eight-week threshold.

Turning to new products, innovation to support our organic growth strategy remains the highest priority across our entire business. Within each of our divisions, creative new product development teams focus on innovating for the consumer to meet their needs, wants, and desires. In firearms, we continue to prepare for several major new product launches scheduled for the current fiscal year. While I won't share details at this point, I can tell you that we look forward to providing consumers with some exciting new products from brands that they know and trust, so please stay tuned. Also note that this is one of the reasons our internal inventory increased in Q1 as we built up inventories of our existing product portfolio in preparation for shifting capacity over to new products when they launch. In outdoor products and accessories, our decision to organize into brand lanes is yielding exciting results.

Each lane consists of a highly agile team that provides dedicated brand management, creative design, content production, product management, new product development, and engineering. These entrepreneurial teams have been very productive over the last few quarters. During Q1, we attended ICAST, one of the largest fishing trade shows in the world, to showcase our new Bubba Lifestyle brand and to demonstrate our ever-growing portfolio of fishing tools, including the new Bubba electric fillet knife, which we launched in February. To say the show was a success is truly an understatement. Not only was the booth packed nonstop with attendees, we came home with the best-of-category award in cutlery, hand pliers, and tools for the Bubba electric fillet knife. I want to commend the team for their success in energizing the new Bubba brand. While it's still a small product line today, our Bubba sales delivered year-over-year growth of 65% in Q1.

Bubba is a great example of the value that can be quickly created from small, tuck-in acquisitions. We also made some exciting developments in our newly rebranded BOG line of shooting rests. During the quarter, we re-engineered the BOG product line with innovation that delivers a variety of solutions for hunters. Our Global E-commerce and Technology Division is at the forefront of our digital innovation, providing best-in-class sales and marketing technologies that power our online business. We utilize our newly expanded digital capabilities to harvest the growth potential of our existing brands. We do that by building brand-immersive and content-rich websites, delivering intelligent, targeted, and personalized campaigns, and providing exceptional customer experiences. During Q1, we demonstrated these capabilities with the launch of our new brand websites for Caldwell, Frankford Arsenal, Wheeler, and BOG.

These new websites will allow our customers to connect with us and form deeper emotional relationships with our brands. We've also made important organizational changes in support of these initiatives, combining the customer service functions from our Firearms and OP&A businesses. Under the focused leadership of the E-commerce and Technology Division, the customer experience group will have the agility and focus we need to drive seamless and efficient customer interactions with all of our brands. Now, I want to touch briefly on the topic of tariffs. Since much of our outdoor products and accessories business involves China manufacturing, tariffs are obviously presenting us with an ever-changing landscape. Our team in China has done their best to address this challenging environment. That said, as the tariff situation continues to escalate, opportunities to offset that impact have begun to rapidly diminish.

As we continue to navigate this volatile and dynamic environment, we are continually exploring mitigation opportunities such as securing sources in other low-cost countries. However, our supply chain in China is relatively sophisticated compared to those available in other low-cost countries, so rapid change is difficult. In addition, bringing in an entirely new manufacturer online takes time, and the duration of the tariffs is still very unclear. Later in the call, Jeff will share a bit more detail regarding the timing and financial impact of the tariffs as they stand today. During the quarter, we achieved significant milestones at our new Missouri campus, which serves primarily as the centralized logistics, warehousing, and distribution operation for our entire business. First, we completed the transfer of our firearms logistics and warehousing operations to the new facility.

This is important since firearms are highly regulated products, and the establishment of the strict control processes at the new facility was a key milestone. In fact, we just completed yet another full serial number count at the facility on Saturday, and as we expected, we achieved 100% accuracy in that count. Second, we consolidated and shuttered our Jacksonville, Florida business during Q1, eliminating 100,000 sq ft of office and warehouse space. These significant achievements coincided with a strong quarter-end order flow driven by the success of our late-summer firearm promotion. As a result, we were forced to prioritize firearm shipments over OP&A shipments, which in turn negatively impacted our OP&A revenues for the quarter. The vast majority of those delayed OP&A shipments were completed at the beginning of Q2.

We don't anticipate a recurrence of this type of conflict since the transfer of the firearms logistics and warehousing operations and the shuttering of the Jacksonville business are now complete. In addition, the heightened quarter-end activity provided us with meaningful insights that will be valuable as we grow our Missouri campus in the future. The next consolidation will be our original 145,000 sq ft BTI office and warehouse space. Our Missouri campus is an important strategic initiative which will ultimately allow us to lower our costs, better serve our customers, and support the achievement of our objective to be the leading provider of quality products for the shooting, hunting, and rugged outdoor enthusiasts. With that, I'll ask Jeff to provide more detail on our financial results and our updated guidance. Jeff?

Jeff Buchanan (CFO)

Thanks, James. Revenue for the quarter was $123.7 million, a decrease of 10.9% from the prior year. Revenue from our firearms segment was $95.4 million, a decrease of 9.3%, and revenue from our OP&A segment was $33.2 million, a decrease of 10.8%. Intercompany eliminations were $5 million. It should be noted that the decline in our OP&A revenue was as a result of the timing of shipments to a major customer, as well as the impact of the shipping conflicts that James outlined. For the full year, we expect OP&A revenue to be up versus the prior year. Now turning to gross margin. In Q1, the total company gross margin was 38.7% compared to 37.8% in the prior year. In the firearms segment, gross margin increased to 37.1%.

Although unfavorable product mix increased promotional costs and higher manufacturing spending negatively impacted gross margin, that impact was more than offset by favorable manufacturing absorption and inventory variance adjustments. In the outdoor products segment, gross margin declined to 42.4%, primarily as a result of tariffs and increased shipments to larger customers receiving discounted pricing. In the quarter, GAAP operating expenses were $46.7 million compared to $38.9 million in Q1 of last year. On a non-GAAP basis, operating expenses were $41.5 million as compared to $33.5 million in the prior year. Expenses were higher because of increased compensation, advertising, and marketing costs. In addition, with the startup of our new Missouri campus, operating expenses increased $3.8 million, which includes $1.6 million of depreciation, $1.6 million of shipping costs for firearms, which were previously reported in cost of goods sold, and $600,000 of other costs, including compensation and facility-related costs.

Eventually, the impact of these additional costs will lessen as we consolidate other facilities. For the first quarter, GAAP EPS came in at a $0.04 loss as compared with EPS of $0.14 last year. Our non-GAAP EPS was $0.03 as compared with $0.21 in the year ago quarter. Note that the non-GAAP tax rate this quarter was nearly 54% because non-deductible items represent a much higher percentage of the low pre-tax income number. Adjusted EBITDA in the first quarter was $17.5 million for a 14.1% EBITDA margin as compared with a 20.4% margin in Q1 of last year. So now, turning to the balance sheet. In Q1, cash used in operating activities was $29.1 million. Cash flow was primarily impacted by our $31.7 million build in inventories.

As we have noted in the past, cash flow in the first half of the year is typically neutral to negative. During the summer months, when the retail sales cycle is at a low point in firearms and we have our seasonal shutdown, we typically build our inventory levels. We also had additional inventory this quarter as a result of our planning for two items. First, safety stock for the ongoing consolidations into the Missouri campus, and second, inventory built in connection with planned new product launches for the second half of the year. CapEx for the quarter was $3.7 million, and we expect to spend a little over $25 million in CapEx for the full fiscal year, mostly on IT, new products, and maintenance.

At the end of Q1, we had $30.7 million of cash, with $25 million drawn in our line of credit, a term loan of $79.8 million, and bonds of $75 million. As a result, total net borrowings at the end of Q1 were $149.1 million. Our one-year trailing EBITDA is about $100 million, so our net leverage ratio is only about 1.5 to 1. Now, I will discuss guidance. We expect Q2 revenue to be in the range of $140-$150 million. At that revenue range, we expect GAAP EPS of between -$0.04 and breakeven, and non-GAAP EPS of between $0.03 and $0.07. The higher sequential revenue in the second quarter is not fully benefiting the bottom-line estimate for several reasons, including the absence of favorable inventory variance adjustments, the impact of increased tariffs, and increased promotional activities.

Although we expect the slowness in firearms that we saw over the summer to continue for the next few months, we are planning some exciting new product introductions for the second half of the fiscal year. Thus, for the full year, we are maintaining our expectations that revenue will be in the range of $630-$650 million. Our profitability, however, will be impacted by the tariffs. Without that impact, we believe our EPS would have been within our most recent guidance, but tariffs now make that result unlikely. As a result, we now expect full-year GAAP EPS to be between $0.41 and $0.49, and non-GAAP EPS to be between $0.70 and $0.78. All these estimates are based on our current fully diluted share count of 55 million shares and a tax rate for the full fiscal year of approximately 30%. James?

James Debney (President and CEO)

Thanks, Jeff. With that, operator, please open up the call for questions from our analysts.

Operator (participant)

Ladies and gentlemen, at this time, if you have a question, please press the star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. And our first question is from Cai von Rumohr from Cowen. Your line is now open.

Cai von Rumohr (Managing Director)

Yes, thank you very much. So could you give us a little more color on the Chinese tariff issue, both in terms of the incremental impact you're assuming and what that assumes regarding how long the tariff is in place? You also mentioned, I think, last quarter that you would try to secure price concessions from your suppliers and implement price hikes of your own. Maybe discuss those issues.

Jeff Buchanan (CFO)

Right. Hi, Cai. It's Jeff.

Cai von Rumohr (Managing Director)

Yes.

Jeff Buchanan (CFO)

I mean, we said that the guidance EPS for the year, the amount that we had lowered it by was just a little over $5 million, and it was attributed almost entirely to tariffs. That's sort of the number. The impact is mainly in the second half of the year because we currently have inventory. But basically, what happened, Lists 1 through 3, went from 25%-30%, so it's 5% higher than we thought. And then, of course, you have the new List 4 that was at 10%. A lot of people talked about the deferral of List 4, but List 4 really was 4A and B. And most of our products were on 4A, and that was not delayed until December. That starts on September 1, and of course, then that was raised from 10%-15%. Those are the tariff impacts.

It's obviously the amount that we are estimating in guidance is not the full amount of the tariff impact. We are assuming that we have successfully undertaken some mitigation efforts like price increases. We're sort of reaching the end of vendor concessions because we've been negotiating that for a while. But we'll continue to work on that. We'll continue to work on getting vendors outside of China. But as James mentioned in his prepared remarks, other Asian companies don't have as sophisticated supply chains, can't acquire, procure all of the material and components that we need, and it takes a long time. And we don't know how long it's going to last. We don't know how long the tariffs are going to last.

James Debney (President and CEO)

We've got to be really careful, Cai, with taking price increases because if we're not careful, we'll just become uncompetitive. So we'll keep a close eye on what's happening at retail at the quarter.

Cai von Rumohr (Managing Director)

Got it. So if I'm to sort of simplify this, the tariff impact predominantly hits in the second half because you entered the year with some buffer inventory. Therefore, if those tariffs persist at that level, the amount probably would be larger next year. Is that a fair assumption? Or, I mean, all other than that?

Jeff Buchanan (CFO)

Larger in 2020 on 2021. Yeah. Yes.

Cai von Rumohr (Managing Director)

Yes. Okay. Got it. Okay. And last one.

Jeff Buchanan (CFO)

But our expected impact for the second half of 2020 on the tariffs as they stand right now is in our guidance.

Cai von Rumohr (Managing Director)

Got it. That's excellent.

James Debney (President and CEO)

Yeah. And what you described, that, Cai, is the tariffs are here to stay. And there's a lot of uncertainty about the timing of tariffs, whether they're here to stay or not. So if they did stay, then obviously, I think you could go back to taking some price increases because the market will be able to stand it.

Cai von Rumohr (Managing Director)

Got it. Last one. Maybe give us sort of what are we looking for for cash flow for the year, a rough range?

Jeff Buchanan (CFO)

We are looking for positive cash flow and neutral to positive cash flow in quarter two. We typically, first half of the year, is neutral to negative. Second half of the year, we're looking for really strong cash flow on par with the prior year because quarter one was a cash outflow because of the build in inventory.

James Debney (President and CEO)

Yeah. Absolutely. We've invested a significant amount in inventory, as you can see on the balance sheet. And that's for a number of reasons. One, we've spoken about a lot before, which was the transfer of the firearms business in terms of logistics and warehousing to the New DC and Missouri. Of course, as I mentioned in the prepared remarks, we're in the summer period, which is extremely slow. We always build inventory. And then we have major new product launches coming down the pipe as well, which we've built inventory for that as well of our existing portfolio because we're going to have to dedicate a large portion of our capacity to building the new products prior to launch and then, obviously, after launch to satisfy the demand.

Jeff Buchanan (CFO)

Yeah. And Cai, also the numbers that we are giving for guidance, it's roughly the same as last year, except last year we spent a lot on building our logistics operations center, our Missouri campus. And we don't have that this year. So we do think that the cash flow is going to be quite good for the year.

Cai von Rumohr (Managing Director)

Excellent. Thank you so much.

Jeff Buchanan (CFO)

Thanks, Cai.

Operator (participant)

Thank you. And our next question is from James Hardeman from Wedbush Securities. The line is now open.

Hey, good afternoon. Thanks for taking the call.

So I guess first question just on the quarter. I think people care more about the outlook than the quarter. But you came in at the low end of the earnings range. You've come in towards the high end or better for, it seems like, a while. Maybe talk a little bit about what in the quarter wasn't quite as good as you had hoped. It doesn't seem like the tariff issue really pinched you. It seems like that's more of a later portion of the year issue. But just maybe talk about how the quarter came in versus your expectations.

Jeff Buchanan (CFO)

Yeah. Okay. I mean, as far as the top line is concerned, the entire miss from the midpoint of our guidance and actually a bit more was almost entirely related to the shipping constraints that James mentioned. All right? And so at the end of the quarter, when you're limited by manpower and you're trying to prioritize what goes out, we prioritized firearms because the higher ASP based on the ability to go ahead and ship. So that is most of it. And then from an earnings standpoint, if we had done that, then we would have been probably spot on on the earnings number. Another bit of a difference as compared to the prior comparable quarter is that our earnings tax rate was above 50%, mainly because of some non-deductible items that impact you more when your taxable income is lower.

So those two items alone, it basically accounts for everything.

Okay. That's helpful. And then as I think about the full-year guidance and the second quarter guidance, I mean, if we hit the midpoint of the second quarter, you're basically going to do $0.08 in the first half of the year, which would mean you'd have to do $0.64 in the back half. I know there's some things with Missouri, but walk us through why it's going to be such a dramatic uptick in earnings. It seems like it's probably more margin than it is sales. But again, given the fact that tariffs are the big issue in the back half, how are you going to accomplish that big ramp?

I mean, basically, the earnings, the EPS is as a result of the strong top line in the second half of the year. When you have, and as you know, you've been an analyst here for several years, when firearms is putting out that much product, then we get a lot of efficiencies. And we have a lot of new product introductions in firearms for the second half of the year that we're really quite bullish on. So those new products are accounting for a large portion of the sales in the second half of the year. In fact, those new products are part of the reason that we have a lot of inventory now because we're shifting the lines of manufacture, and we had to build certain products that we won't be able to manufacture in the second half of the year.

So that sort of had a dual impact on the quarter. On outdoor products, a lot of the timing and pacing of the quarter and outdoor products is dependent on large customers, especially one or two large customers that we have. We have a lot of new products and, again, fairly bullish on the second half of the year in outdoor products. As we do believe that—so outdoor products was down this quarter, but we think for the whole year, it's going to be up by single digits, probably mid to upper single digits. So again, we think there's strong growth in outdoor products.

That's helpful. And then one last question, if I may, along those same lines. Obviously, there's the expectation that new products are really going to drive shipments in the back half. I guess with that in mind, why shouldn't I be concerned about the distributor inventory numbers here? 178, I think that number was more like 145 a year ago. At what point do we need to be concerned that distributors are going to be less willing to buy that new product that you're going to try to ship in the back half?

James Debney (President and CEO)

I'd start off with saying, James, I'm not concerned about the level of inventory with our two-step distribution partners. We're moving towards the busier season. As you know, we'll soon be in the full hunting season. We'll quickly transition into the holiday season. Those are peak periods at retail, as we all know. Adjusted NICS checks for those months tells us that. And even moving through into a new year, the first three months, I would actually have to take out January, but certainly February, March, and somewhat April are all strong months as well. And typically, that's why, as a firearms business, we've always ended with the second half of the year much stronger than the first half of the year. So we'll have our normal cadence of promotions in place. We'll be doing both bundle promotions. We'll be doing our typical show special, spring buy-in promotions.

We've described those before where it's buy-six-get-one-free, for example. It's not always that number, but that's a typical number. Those promotions will be adequately strong as in to match the market. So obviously, if the market's strong, then we'll dial those back. If it's weak, if it weakens more, we'll dial them up and we'll be aggressive. Okay? We have plenty of inventory to allow us to do that, and we have plenty of capacity. So I think to survive in this market, which is a soft market, I think we can all agree on that, is you both need to be aggressive in your new product development and aggressive in your promotional activity, and we are doing both those, and we have proven and demonstrated over the past few years that we are very good at both of them.

Jeff Buchanan (CFO)

Yeah. And I just wanted to add a bit, and I've mentioned this each year, but the promotional activity that we do, we measure the cost of the promotional activity against the benefit of the absorption in the factory. And I generally have found that we are ahead even when we strongly promote.

James Debney (President and CEO)

Yeah. And you can draw a direct comparison with one of our primary competitors in terms of margin as well. But also, going back to the subject of inventory, we still have less inventory in terms of units with our two-step distribution partners.

Makes sense. Thanks, guys.

Thanks, James.

Operator (participant)

Thank you. And our next question is from Scott Stember from CL King. Your line is now open.

Scott Stember (Analyst)

Good evening, and thanks for taking my questions.

Jeff Buchanan (CFO)

Hey, Scott.

Scott Stember (Analyst)

Hey. A question on the second quarter guidance. Assuming, I guess, a modestly up NICS environment, and you talked about how there was a little bit of payback in the first quarter because of the fourth quarter promotions. Assuming that's gone and assuming that some of these constraints on the outdoor product side are gone, am I thinking of this wrong? Shouldn't you be predicting to maybe be up a little bit or flat in the second quarter? Or is there something else where I'm off with my timing for some of those things to go away?

Jeff Buchanan (CFO)

It's a soft market out there. And so our guidance is based on our view of the market out there. In outdoor products, we are also forecasting that the increase that I talked about comes almost entirely in the second half of the year, again, because of the pacing of the orders from a major customer in outdoor products. So the combination of the soft firearms environment and the customer order pacing of outdoor products has led us to the guidance that we're giving.

Scott Stember (Analyst)

Got it. And just fleshing out the operating expenses a little bit, you talked about, I guess, in priority of, I guess, impact, compensation expense, and marketing and advertising. Is it fair to assume that's the order? And then also just trying to get a sense of what you would expect for the entire year for operating expenses.

Jeff Buchanan (CFO)

Our first quarter is usually our lowest, so I do think operating expenses are going to kind of go up to $3 million and then sort of plateau out the rest of the year. Just remember a couple of things on operating expenses. One is that we have moved some shipping costs from cost of goods sold down to OpEx. Also, remember that we are still in the build mode for the DC. We are still operating duplicate facilities. Just for example, we have two facilities operating in Missouri right now, the new Missouri campus as well as the old campus that was there when we bought Battenfeld, which is about 150,000 sq ft warehouse. Most of those duplicate costs will be gone by the third and fourth quarter.

We actually expect additional savings in 2020, 2021, as we move other areas, as we close down other areas and kind of finish the move into the DC.

Scott Stember (Analyst)

Got it. Yeah. I guess I'm just trying to figure out I know you haven't given guidance, obviously, for 2021, and we're a little ways out. But I'm just trying to look at where you would look or how much eventually comes out of the equation here related to the new DC so we can get an idea of what kind of leverage you could get beyond this year. Because this year's obviously going to be a challenge, and some of the numbers on the OpEx line are going to be significantly above last year.

Jeff Buchanan (CFO)

Last time we said about $0.07 were the expenses that we had this year that won't be repeated next year. Those will almost all be in OpEx. I would probably just use that as your number of comparing OpEx in this year to next year.

Scott Stember (Analyst)

Just one last follow-up on that. The marketing and advertising, I guess, just would be safe to assume in this tough environment that it probably will stay at these elevated levels for the future?

Jeff Buchanan (CFO)

Yeah. Yeah. Actually, yes. And then, of course, if you're launching new products in the back half of the year, there's more advertising associated with these new product launch costs, in other words.

Scott Stember (Analyst)

Got it. That's all I have. Thank you.

Operator (participant)

Thank you. And our next question is from Steve Dyer from Craig-Hallum. Your line is now open.

Steve Dyer (CEO, Managing Partner, and Senior Research Analyst)

Thank you. Good afternoon.

Jeff Buchanan (CFO)

Hi, Steve.

Steve Dyer (CEO, Managing Partner, and Senior Research Analyst)

Just want to drill down a little bit more on second quarter guidance. So we've had three straight months of positive NICS. August should be up pretty significantly according to our checks. And again, the down 10% revenue at the mid range, which would imply, I think, a little bit better than that in outdoor products, a little bit worse than that in firearms. It seems like a large delta vis-à-vis how you guys have been running with the NICS sort of over time. This would be the second consecutive quarter of a fairly big deviation to the downside. Is there any sort of additional color you can give timing-wise or why that would be? I'm assuming you don't feel like you're losing share.

Jeff Buchanan (CFO)

No. I mean, you said it's a big deviation to the downside, but that's just based on your assumption on NICS. So I don't think we really know what's going to happen on NICS. But our distributor inventory is a little bit elevated. As James said, we're comfortable with it, but it's higher than it was last quarter. So I don't think I can add anything more than I had mentioned earlier on the call. That midpoint is what we have come out at.

Steve Dyer (CEO, Managing Partner, and Senior Research Analyst)

Presumably, because I don't think you have in the past, I mean, presumably you're not until August comes out and it's final. I mean, you're not including any point of sale data that you're seeing month to date. I mean, our checks are suggesting up on the order of 20% year over year in August.

Jeff Buchanan (CFO)

Yeah. Yeah. I mean, obviously, this is the one quarter that we release earnings without having the NICS of the, in essence, the first quarter of the next or the first month of the next quarter. So I guess we'll just have to wait and see what happens.

Steve Dyer (CEO, Managing Partner, and Senior Research Analyst)

So presumably anything more than call it flattish for August and September would be, I guess, upside to your sort of base assumptions going in?

Jeff Buchanan (CFO)

Yeah. I don't think we would. I think we have a policy of not commenting on our degree of certainty of our guidance or any potential changes. I can say this is like, "That's great on your checks, but.

James Debney (President and CEO)

Yeah. Steve, I love your next number. I hope that comes true.

Jeff Buchanan (CFO)

Yeah, but we're seeing that.

James Debney (President and CEO)

20% will take you to one of the highest in the last five years.

Steve Dyer (CEO, Managing Partner, and Senior Research Analyst)

It's through three weeks, and it's through one state. Anyway, I'll move on. Obviously, a supplier went bankrupt or a distributor went bankrupt in the quarter. Did that have any material impact on you guys or the channel period, I guess?

Jeff Buchanan (CFO)

No. It hasn't had impact because that was a long time in the making. Probably hadn't shipped for quite a while. What we have reserved with respect to that distributor happened last quarter. I think probably there's some dumping of inventory as a result of it, but.

James Debney (President and CEO)

Yeah. I think we covered that last time as well, and we said they had ceased to become really relevant for the last 18 months, let's say, prior to that bankruptcy.

Steve Dyer (CEO, Managing Partner, and Senior Research Analyst)

All right. Got it. Last one for me. So you guys have a couple of $75 million notes due, one in June of 2021 and in August. Any commentary on plans for that, your ability to refi, etc.?

Jeff Buchanan (CFO)

Yeah. We've already spoken with our banks. I don't think there's going to be any problem on refinancing those. We'll probably undertake that effort early autumn. And interest rates are actually down from the last time that we engaged in these kinds of negotiations. And the outlook, obviously, is fairly on a flat yield curve. So I think that the negotiations should be good with respect to what we want to do.

Steve Dyer (CEO, Managing Partner, and Senior Research Analyst)

All right. Got it. Thanks, guys.

Jeff Buchanan (CFO)

Thanks, Steve.

Operator (participant)

Thank you. And our next question is from Mark Smith from Lake Street. Your line is now open.

Mark Smith (Senior Research Analyst)

Hi, guys.

Jeff Buchanan (CFO)

Hi, Mark.

Mark Smith (Senior Research Analyst)

First off, can you just walk through how much new products typically mix in sales?

Jeff Buchanan (CFO)

Well, it typically is not typical, but I would say that it ranges. It was like 15% this quarter. It's been as high as 25%-28%. So I think it ranges from, let's say, 30% to 12%-15%, sort of depending on what's happened in the last several quarters. OP&A is 20% this quarter. That's probably more of a constant because OP&A has a very sort of formalized process of introducing new products every year, whereas in firearms, it's not as regular.

James Debney (President and CEO)

Yeah. It's a steady stream of new products comes out of OP&A. Development times tend to be a little shorter. Development times for firearms tend to be extremely long, pretty intensive in terms of consuming resources, can be capital intensive as well, depending on tooling requirements and so on. So that's why we talk about major product launches rather than line extensions and so on. And we're very excited about the major product launch that we have coming up this fiscal year.

Mark Smith (Senior Research Analyst)

Okay. And then can you talk a little bit about the cadence of sales primarily in firearms throughout the quarter?

Jeff Buchanan (CFO)

In quarter one, you mean?

Mark Smith (Senior Research Analyst)

Yeah.

Jeff Buchanan (CFO)

Yeah. It was backloaded, so heavily backloaded. Not unusual in the summer months. Maybe this quarter was a bit more backloaded because of bringing up the DC. So we had a situation in which you had to move a lot of inventory up to the DC. In the past, with the Springfield facility being shut down for a couple of months towards the end of a quarter, we probably shipped a little earlier than we did this quarter. But the Missouri campus is not shut down. And so the combination of everything made it probably more back-ended than it typically is.

James Debney (President and CEO)

I think another big influence on firearms in terms of their order patterns for the quarter was our success in Q4. And we described that in a lot of detail. And as you know, we overperformed versus adjusted NICS by quite a large amount. And we said in Q&A there will be a correction in Q1. So there's no doubt in my mind in the first two months of the quarter, distributors and retailers alike took a bit of a break because they've taken in some inventory at the end of Q4 before starting ordering again late in Q1. And that's one of the reasons that we got so compressed at the end of the quarter and had that capacity constraint at the DC.

Mark Smith (Senior Research Analyst)

Okay. And then this question's been asked a little bit, but just to ask it directly, what are you seeing in kind of current firearm demand? And as you look into your crystal ball here, what you see from the customers out there today that gives you that leads to your guidance here in Q2 and a heavily back-end loaded year, excluding kind of new products?

James Debney (President and CEO)

I think it's really what we said is the firearms part of the business is just following normal seasonality. So we're slow right now. We expect it to be slow. We expect it to start pick up at the back end of this month even, but more so it will accelerate as we go into September and October and then into the gift-giving season. So we think just normal seasonality is at play. We talk to our retail partners and our two-step distribution partners all the time. Everybody is optimistic, but I will say cautiously optimistic. In terms of a crystal ball, it's offline right now. Nobody knows. There are lots of macro influences that can start to really kick into gear. But I think I just come back to it's one of those years where it's flattish again. We've used that term before, and we'll use it again.

Mark Smith (Senior Research Analyst)

Okay. And then anything happening for end users here in the used firearm market that is maybe skewing NICS data away from what we're seeing from you guys?

James Debney (President and CEO)

Nothing that we've picked up on. We monitor that. We do do a monthly market share analysis, and a component of that is used firearm sales. They seem to be fairly consistent. Some retailers are better at it than other retailers, but nothing odd there.

Mark Smith (Senior Research Analyst)

Okay. And then last one for me, just a housekeeping item. The kind of guidance that you gave on tax, I believe it was 30% for the full year. I assume that's on a GAAP basis.

Jeff Buchanan (CFO)

Yeah. Exactly. And that is for the full year, but that's because we had an over 50% rate in Q1. So the rest of the quarters will probably be around 27% or 28%.

Mark Smith (Senior Research Analyst)

Okay. Great. Thank you.

Jeff Buchanan (CFO)

Thanks, Mark.

Operator (participant)

Thank you. Our next question is from Maxine Nitro from Max Financial Services. Your line is now open.

Good afternoon, guys.

Jeff Buchanan (CFO)

Hi, Mark.

So you've already addressed all of my financial analyst-type questions. I only asked a couple of gun guy questions. About a quarter or two ago, you have reorganized Crimson Trace and Electro-Optics. So I've played a lot of the Optics World at SHOT Show and I freaked out. I love them. Can you talk about possibly what the industry acceptance is of the brand, particularly as Crimson Trace is moving from the traditional lasers to now being an optics company?

James Debney (President and CEO)

Sure. It's slow progress. It's going well. Crimson Trace is an incredibly strong brand. But as you quite rightly say, it is focused very much just on lasers. So moving into the optics, we knew it would be slow to begin with, but I have to say that we are getting some good traction. We think this has got great growth potential over the long term. So I don't see any favorable step change in terms of revenue or taking market share in the near term, but I am very confident over the next five years.

Awesome. Moving along the product line. So one of the ones we haven't heard much about recently was Gemtech. So any thoughts on the suppressor market and as it relates to Gemtech? I mean, do you foresee making future investments into it to try to steal market share from your larger competitors, or is it more or less, "Hey, let's maintain what we can do with it and then just wait for something big to happen in the suppressor market"? And a follow-up to that is, is Gemtech going to be rolled into the unified distribution center, or is that still going to be separate?

Okay. So starting with the first part, Gemtech, another great brand, very strong, got great consumer awareness. So we're very happy with the value in that brand as well. Suppressor market, pretty soft right now, I think, as we're all aware.

If there had been a change in legislation, then it would be a different picture. That legislation change did not take place. So for us right now, it's just steady away. Let's keep our market share. We'll start to invest slowly in it over the next few years in terms of new product introductions. We have some new products in the pipeline. So again, stay tuned on those. But other than that, it's really a soft market.

Cool. And I guess the last question is, so I guess today and yesterday, there's the new gun legislation bills being heard in Massachusetts. Any thoughts or comments to it as potential impact that would impact you as a local manufacturer?

Jeff Buchanan (CFO)

None of the proposed laws would impact us as a manufacturer. And the laws would have, regardless of what Massachusetts does, the laws would have little impact on us because Massachusetts, in terms of the volume of firearms that it consumes, is very low.

Okay. But as far as there was nothing that was going specific, none of the proposals were going after manufacturers specifically?

No.

James Debney (President and CEO)

No.

Okay. And I guess my last question, if I can sneak that one in. So going through the 10-Q, there's a couple of new litigation notes. So one I think of on the T/CR22 and then another frivolous lawsuit. Any commentary or any color you can make on that?

Jeff Buchanan (CFO)

Nope. Other than what we specify in the Q. I think you used the right.

So now I'm just really excited about all the new product innovations that are coming out later this year. I'm wondering what those are.

We're excited about them too.

Awesome. Thank you very much, guys.

James Debney (President and CEO)

Thanks, Max. Take care.

Operator (participant)

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Mr. James Debney, President and CEO, for closing remarks.

James Debney (President and CEO)

Thank you operator. I want to thank the American Outdoor Brands team for their commitment and dedication to excellence. Great job, everybody. Thanks, everyone, for joining us today, and we look forward to speaking with you next quarter.

Operator (participant)

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.