Thank you for standing by, and welcome to the American Outdoor Brands Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. And now I'd like to introduce your host for today's program, Liz Sharp, Vice President of Investor Relations. Please go ahead.

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, should, indicate, suggest, believe and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding our 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. 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. Our non-GAAP results exclude amortization of acquired intangible assets, stock compensation, transition costs, COVID-19 expenses, related party interest income and the tax effect related to all of 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 our filings 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. Joining us on today's call is Brian Murphy, President and CEO; and Andy Fulmer, CFO. And with that, I will turn it over to Brian.

Thanks, Liz, and thanks, everyone, for joining us. Today, I'm excited to share the results of our first fiscal year as a public company, and I'm happy to report that those results exceeded our expectations for both net sales and net income. Fiscal 2021 was a historic year for our company. We completed our spin-off in August 2020 and became an independent public company dedicated to building authentic lifestyle brands that help consumers make the most out of the moments that matter. We believe that sharing our passion for building brands that allow people to pursue their outdoor adventures was especially timely as consumers increasingly looked to outdoor activities such as fishing, hunting, shooting sports, camping and hiking in response to travel restrictions and social distancing and as they continue to demonstrate an increased interest in self production. Some people turned to these activities for the very first time and others for the first time in a long time. Regardless, we are pleased and proud that so many of them took our brands along with them on their journey. As a result, we delivered nearly $277 million in net sales, which represents 65% sales growth for the year and 50% sales growth for the fourth quarter. We are extremely proud of our employees, whose loyalty, hard work and dedication helped us establish our new company, service our customers with consistency and deliver outstanding results despite a year of uncertainty driven by the pandemic. We believe the past year has ushered in an exciting new era for the outdoor industry, resulting in a new higher foundational level of consumer participation, whether personal protection, shooting sports, camping, hunting or fishing, each one of the markets in which our brands play has delivered meaningful growth. And importantly, each has welcomed many new participants…

Thanks, Brian. I am happy to share our full year and Q4 results, which showed significant growth in net sales and adjusted EBITDAS as well as strong free cash flow generation. Net sales for the year were $276.7 million compared to $167.4 million in the prior year, an increase of over 65%. This increase was driven by higher overall demand in the outdoor products market, combined with a consumer preference for the 20 brands across our portfolio. In fiscal '21, over half our brands grew net sales more than 50% over the prior year and 6 of those grew net sales in the triple digits. Net sales in Q4 were $64.5 million, an increase of approximately 50% over the prior year quarter. We saw growth in nearly all of our brands. And similar to the last 2 quarters, our 4 highest selling products in Q4 represented each one of our 4 brand lanes. Our fiscal '21 gross margins were 45.8% a 340 basis point increase over the prior year. The increase in gross margin percentage was driven by favorable product mix and lower promotional spending, offset by sales of discounted slower moving inventory that I've mentioned on earlier calls. For the full year, GAAP operating expenses were $103.3 million, compared to $183.8 million last year. Our fiscal '20 operating expenses included a goodwill impairment charge of approximately $99 million. If we exclude that impairment, then operating expenses increased on a year-over-year basis by $18.5 million or 21.7%. The increase was driven by $11.2 million of variable selling and distribution costs and approximately $4.4 million of compensation-related expenses, both of which resulted from our higher net sales. These costs were netted by a decrease in intangible amortization of $2.6 million and approximately $1 million from facility consolidations that we completed in…

[Operator Instructions]. Our first question comes from the line of Eric Wold from B. Riley Securities.

A couple of questions, if I may. I guess, first off, looking at the fourth quarter specifically, the e-commerce mix versus retail dropped materially year-over-year versus the fourth quarter last year. Is that merely a timing of shipments, the impact of kind of the retail economy picking back up? Or is there something else there? And how should we think about that mix shaking out in fiscal '22 relative to the 40-60 kind of split last year.

Eric, it's Andy. Great question. So when you look at Q4 over Q4, last year Q4 was when the pandemic was starting to affect sales. We had noted last year in the earnings call, there were some anomalies with orders during that time frame and -- kind of brick-and-mortar retail and e-comm. I think if you look at the trends over the quarter, we started Q1 50-50, kind of almost 50-50 split between e-comm and traditional, went back to 1/3, 2/3 in Q2, and that's what you saw in Q4 as well.

Yes. I mean -- this is Brian, Eric. Certainly, we saw year-over-year, there are much -- just many more stores open at this point. I also think that retailers have been doing a lot of hurry-up offense to get their own retail storefronts up to speed online as well, and those would be captured as part of our traditional sales channel. So I think some of the customers that we have there have done a really good job getting up to speed. Obviously, more doors are open compared to -- I think last year, we had set at 1 point that we were tracking over 1,000 retail doors that were closed. So I think it's just the economy opening back up in general.

Perfect. And then just second question, kind of a 2-parter on the supply chain. You noted initially that a lot of your retailers or customers know you did a better job than some of your competitors keeping products on shelf as I assume, transited into market share gains in the period. Any specific categories this would be reflected in? And how do you think that dynamic changes possibly as the supply chain possibly catches up? And then on the supply chain specific, do you -- was there any impact on your ability of product out there? Or is that merely a safety stock issue on inventory? And kind of what have you assumed in guidance around the supply chain?

Yes, I can start, Eric. This is Brian. So first of all, our team did a fantastic job navigating some of the complexities that we were all introduced with here in our fiscal '21. And we definitely relied more upon our insights into POS and strengthening that chain that I've talked about before between POS and our inventory planning. So our -- we have our own analytics team in-house here, and we bought ahead. We started to see some of those trends, and we wanted to make sure that we had sufficient safety stock here. And I think we benefited from that. We certainly, like you said, we took share during that period. And like I said, our competitor -- or not our competitors, but our customers noted that we have done so. And then looking forward, Andy made a mention and he can probably chime in to about where we ended Q4, they were below our expectations when it comes to inventory levels. So part of that is strong sell-through demand has outstripped supply in some cases. But we haven't seen -- you asked the question about like product categories or by brand. We haven't necessarily seen pockets within our portfolio where we're missing the mark. I think it's just across the board with our portfolio given the strong demand, it's just demand is very strong right now. Andy, anything you want to add to that?

Yes. The only thing I would add is kind of going forward, we plan to invest to make sure, as Brian mentioned, to mitigate supply chain risk, invest in inventory, those safety stock levels, especially those high-turning SKUs.

Your next question comes from the line Scott Stember from CL King.

Going forward, could you just walk us through what you expect seasonality to be on a quarterly basis, just to help us model a little bit. In fourth quarter versus a typical third quarter or first versus a second. Just maybe walk us through that given this is the first time that we've been around the block from an earnings perspective with you guys?

Sure. Scott, this is Brian. So I'll start and Andy can chime in. So if you look back historically, pre-FY '21, typically our Q2 has been our highest quarter. This last year in FY '21, we saw that shift a little bit. Obviously, there was a lot of pent-up demand as stores started to reopen in Q2 and Q3. And so actually, our Q3 was our peak in FY '21. I'd say going forward, we're expecting that a similar hump between Q2 and Q3. Some of our retailers, too -- we had talked about returning to some level of promotional environment. We do have some promotional SKUs that we do utilize and those can shift sometimes between Q2 and Q3. But overall, that's kind of the hump that we're talking about. So whether it's going to happen in Q2, Q3, too early to tell. But I would say, between those 2 quarters, you're looking at the biggest hump for the year. Andy, anything you want to add?

No, that's spot on.

So -- and then from Q3 to Q4, a similar cadence here? Or something along those lines?

Yes. So again, if you kind of go back historically when you look at kind of between fiscal '20, '21, it is that hump and it starts to drop from Q3 into Q4.

I guess I'm just trying to figure out, at least for this quarter also lost sales opportunities because of the lower inventories that you talked about, whether it happened this quarter and if it happened in the third -- just get a sense -- it sounds like, obviously, it's going to be a headwind going forward, nothing dramatic, but you have to work through it. But can you just compare Q3 versus Q4?

Yes. I think one stat that you can pick up in the 10-K is the increase year-over-year as of April in backlog. So our backlog at the end of last April was $1.8 million, and that rose to $15.2 million at the end of fiscal '21. So I think that's a good indicator of -- that's kind of twofold. That's both future-dated orders, but it also has a decent chunk of orders we could have shipped if we had the inventory.

It's been carried over.

Got it. And just last question on the guidance. I appreciate obviously that it was a perfect storm of lack of expenses and certain travel and not flying anywhere, and then you're getting just incredible sales throughput. But going forward, is there any other items in there? I know that you had talked about. We're going back to a little bit more of a traditional, I guess, retail versus e-comm. I know that e-comm generates higher margins. Is that baked into your guidance as well?

Yes. This is Andy again. Yes, our guidance really contemplates all of that. Obviously, our model kind of looks at both e-comm traditional. You are correct. We've said that in the past that e-comm margins are generally higher because of the fact that direct-to-consumer is in there. And then, yes, going into fiscal '22, we plan on investing in travel, trade shows and other really brand investments. We saw some really good investments that we made in fiscal '21, and we're going to continue to invest for our long-term growth.

Yes. Scott, if I could add too, this is Brian. We made the comment before, we want to be wherever the consumer expects to find us. And so certainly, in FY '21, they were increasingly going online. Like I had said, some of the traditional customers have done kind of a hurry-up offense to put out their own sites, make sure that they have that capability. So again, we want to continue to be where the consumer expects to find us. Direct-to-consumer is also a big part of e-comm. We continue to believe that we're in the early stages of seeing that growth. So I would expect that, that would continue for us as well.

Our next question comes from the line of Mark Smith from Lake Street Capital.

First question for me is just clarifying, Andy, looking at the transition cost at $0.19 that is fully the IT transition, the IT infrastructure. Correct?

That is correct. If you do the math, Mark, the $0.19 is roughly that $2.8 million that I talked about. So it's about $1.6 million of onetime and then $1.2 million of duplicative costs.

Okay. And then as we look at -- should we expect a little bit of that to continue to roll into fiscal '23 before the full transition in August?

Yes. Yes, that's a great assumption. So I would expect the duplicative to start to ramp down. So those are the types of things where we -- as we get closer to that go-live date, we're using less and less of the transition services agreement and more of our own IT infrastructure.

Okay. That's great. And then just looking at the -- you've talked a little bit about the promotional environment. Can you just kind of rate what you're seeing today in a promotional environment basis versus kind of what you're expecting to kind of ramp later in the year?

Sure. This is Brian, Mark. We're not seeing a whole lot, to be honest with you, at this point. What we're going off of is what we've heard from our customers and what other public companies who happen to be our customers have talked about. So -- and they've sort of alluded to their calendar year or calendar year, call it, Q3 and Q4, maybe part of that in Q2. But we're not seeing a whole lot of that right now. I think that the demand remains robust. But for us, we could see that later in the year. And again, I'm just going off of what our customers are planning at this moment.

Okay. That's fair. And then looking at distribution channels, we've seen some UST stuff at Costco. Can you talk about increasing distribution and maybe any positive impact that, that has had over the last year?

Sure. Yes, I'm glad you asked, Mark, it's Brian. Yes, we've seen a tremendous acceptance for our brands as they've continued to march down the path of niche to now using our Dock & Unlock formula. So yes, we're showing up now in home and hardware stores, which is great as we address the broader land management tool category, which is very large. Obviously, you mentioned UST getting into some of those distribution channels like Costco and even places like REI, which is fantastic. And even some of our BUBBA products are making their way into other distribution channels as well some of the home and hardware, in some cases, even being pulled into the kitchen. So I think we'll see a continuation of that across our brand portfolio that we'll be excited to share with you going forward.

Perfect. And the last one for me. The guidance, I assume, does not include any acquisitions. But can you just talk about what you're seeing out there on the M&A front today?

Sure, Mark, this is Brian. We are seeing a lot of M&A. There -- I've been -- I kind of started in mergers and acquisitions, investment banking, was an advisor for a period of time. And I thought I saw a lot of M&A when I was an investment banker. Now on this side, we're just seeing a ton of volume right now, in particular, founder, sellers that are coming to market. And I think one of two reasons. Number one, they did see a nice pop last year. And we got a pretty good sense of who performed well before that and who maybe saw an uptick, a slight pick due to COVID in their particular categories. And then the second is for tax reasons. I think that some of the founder sellers are expecting or maybe preparing for if there is a change in tax code that they are going to be hit with higher tax rate. So they're trying to beat that and getting to market sooner -- With that said, there's also a lot of competition for these assets, which has created a higher valuation. I would say, floor. It's not uncommon for us to see deals done in the double digits, low to even teens in some cases. So we're -- like Andy had said in his prepared remarks, we're remaining very diligent, making sure that we're finding the right deal. It fits our criteria, and it's out there. But again, we're going to remain very, very diligent.

[Operator Instructions]. Our next question comes from the line of John Kernan from Cowen.

This is Krista Zuber on for John. Could you provide us some sort of like puts and takes around the gross margin drivers for fiscal '22? I know that you touched on some anticipated input and tariff costs as well as what you've commented on, on promotions and freight and inventory levels?

Krista, it's Andy. Great question. So margins going forward, our guidance assumes really no change in tariffs. We don't -- certainly don't know if anything come down the pipeline on that. With respect to kind of other pieces of the margin, Brian mentioned later in the year, some additional promotional costs, those are baked in. And when you look historically, kind of fiscal '20 into '21, we've been kind of typically in the mid-40s with respect to margin percentage.

Okay. Great. And then just touching on the CapEx with the big hike that's coming this year, can you kind of talk to broadly how you sort of anticipate the run rate over the next several years for CapEx, maybe as a percent of sales or dollar amount?

Yes. Another good question. So as we look, we guided kind of $7.5 million to $8.5 million this year with a big chunk in IT. This year, we'll also have more of a onetime cost for trade show booths. And really, that's because under our former parent company, our trade show booths were under that parent company and now spun off after COVID as we attend these trade shows, we're investing in those booths. So if you look back, kind of the rest of it, we look at our business as a relatively low CapEx company. It would be variable with respect to new products and also revenue because most of the remainder of that CapEx is related to product tooling. Back in fiscal '19, we were roughly $2 million or so at a $171 million or $177 million of net sales. And as -- obviously, you can see that as the business is growing, we will invest more in product tooling.

Okay. Great. And then just finally, I think you announced in May the promotion of Curtis Smith to your Chief Marketing Officer. Just in relation to sort of OpEx, how do you kind of see your marketing initiatives evolving from here in fiscal '22 as it relates to customer acquisition costs and retention?

Yes, again this is Brian. So yes, very excited. Curtis was promoted to our Chief Marketing Officer. Curtis and I have been friends for a long time and worked in previous lives together. Curtis really helped with the senior team establish our Dock & Unlock process that we have. So he's been very involved along with me and the rest of the team to really unlock the power of these brands. He's got a lot of experience there. And so we'll continue to make investments in marketing going forward to unlock the potential for the 20 brands that we have. And also, as we look to acquisitions, how do we find these acquisitions and these companies that we believe are underserved, but could the potential be unlocked in our platform. So -- and also with that -- and you mentioned some of the kind of customer acquisition, things like that. We spend a ton of time looking at that. And over the last year, if you look at our Q4, for example, we took some of the savings from our trade shows that we had spent on trade shows and reinvested that into marketing. We have an incredible new e-comm platform, and we have -- we get some really good insights from that. So we plug money into that to retain those new consumers that we've attracted over last year, and we're going to continue to leverage insights into that consumer base. It not only helps with us with our existing products. But as we mentioned, we're going to come out with 300 new products this year. It really helps as we launch new products. So we're very excited about that.

And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Brian Murphy for any further remarks.

Yes. Thank you. In closing, I want to especially thank our employees for helping to make our first year tremendous success. We have a lot of people here who are actually listening to this call. So I want to thank you very much. Thanks, everyone, for joining us here today. We look forward to speaking with you again 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.