00:02 Good day everyone, and welcome to American Outdoor Brands Inc. Second Quarter Fiscal twenty twenty two Financial Results Conference Call. This call is being recorded. 00:12 At this time, I would like to turn the call over to Liz Sharp, Vice President of Investor Relations for some information about today's call.

00:22 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. 01:05 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. 01:28 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. 01:43 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, technology implementation, related party interest income other costs 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. 02:30 Joining us on today's call is Brian Murphy, President and CEO; and Andy Fulmer, CFO. 02:37 And with that, I will turn it over to Brian.

02:40 Thanks, Liz and thanks everyone for joining us. I'm very pleased with our performance for the first half of fiscal twenty twenty two. We are in the midst of a growing outdoor market that has welcome new participants to the outdoors. We have a collection of authentic brands that continue to resonate with our core consumers, we own a unique Dock & Unlock process that has organically created innovative brands and products and we have built an operations team that has successfully navigated recent supply challenges to keep our products moving. 03:08 In addition, we have achieved key milestones in establishing our post spin off standalone infrastructure. Together, these elements form a strong operation that will allow us to continue servicing our customers and delivering growth for the balance of fiscal twenty twenty two and for the long term. With that, let me share some details of our recent performance. 03:29 During our second fiscal quarter, our ecommerce net sales grew nearly five percent year over year and over two twenty eight percent on a two year basis, including a meaningful increase in our direct to consumer business. While our total net sales declined in the quarter, we believe this primarily reflects the timing of orders from our traditional channel customers. In our second quarter last year, certain customers increased their orders to address depleted inventories as they reopened from COVID related closures. 03:58 This year, many of our largest customers indicated that they accelerated their orders into our first quarter to mitigate supply chain concerns. These fluctuations in timing are the reason we view our six month performance as a more meaningful comparison than a shorter term quarterly comparison. 04:15 For the first half of fiscal twenty twenty two, we delivered net sales growth of one point five…

13:33 Thanks, Brian. Our performance year to date combined with our outlook for the second half of fiscal twenty twenty two continues to support our long term strategy. 13:43 Net sales for Q2 were seventy point eight million dollars compared to seventy nine point one million dollars in the prior year, a decrease of ten point five percent. We believe the decrease was primarily driven by the timing of orders from our traditional brick and mortar channels as certain customers accelerated their inventory purchases into our first fiscal quarter to mitigate their own supply chain risk. 14:08 In addition, we believe our second quarter last year reflected heightened demand driven by increased foot traffic at retailers in our traditional channel as they reopened from pandemic restrictions. Despite the decline in our traditional channel sales during Q2 of this year, our ecommerce net sales grew nearly five percent over second quarter of last year, as Brian mentioned earlier. 14:32 Net sales for the first six months of fiscal twenty twenty two were one hundred and thirty one point five million dollars, which represents a one point five percent increase over fiscal twenty twenty one and an increase of more than sixty two percent over fiscal twenty twenty. 14:48 Now turning to gross margins. Gross margins in the second quarter came in above our expectations at forty six point seven percent, a reduction of just twenty basis points from last year. Our operations team did a great job staying on top of various transportation options and costs, helping us to minimize the impact wherever possible. 15:11 GAAP operating expenses for the quarter were twenty seven point seven million dollars which is roughly flat compared to last year. Within that number were decreases in our variable selling costs resulting from reduced sales, combined…

25:15 [Operator Instructions] Our first question comes from the line of Eric Wold of B. Riley Securities. Your line is open.

25:25 Thank you. Good afternoon everybody. A couple of questions. I guess one, can you help us bridge kind of your expectations and moving from two-ish percent growth rate this year to the eight percent to ten percent range over the next coming years against what look to be a pretty tough comparison on to your stack. And how dependent is that growth rate on M&A?

25:53 Hey, Eric, this is Brian. So, I would tell you that it's not dependent upon M&A at all. That's just purely based on our organic growth rate. And what drives that is really comes down to new products and new distribution. So, if you recall, new products represents for us anywhere between twenty five percent and I think it been as high as thirty five percent of our total net sales. We have an incredibly robust new product pipeline. If you look at this year alone, most of those new products are coming out in Q4. So part of that Q3, but the majority are coming out in Q4 and kind of giving us a nice tailwind headed into next year. 26:32 And we've got some big plans for our brands that we'll be excited to share. And honestly at those higher ASPs that we've talked about, so innovative new products higher ASPs, so we feel very comfortable with the range set out there.

26:50 Got it. And then given kind of what you saw from the retailers in terms of ordering earlier in the year, where are you right now with retail shelf and your own congress in terms of inventories versus where you'd like them to be? Are they perfectly in line with inventory levels they you expect and want or is it still a little bit less that you're be sure on that?

27:19 Sure. This is Brian again. So the kind of the first part of your question, when we say that our customers accelerated purchases, that is like from conversations we've done top to top and we do those every quarter to make sure we know how we can best support our biggest customers. So, we heard that across the board that they were looking to mitigate supply chain challenges. 27:42 And then in terms of kind of restocking some of those, we feel like there's in certain areas continued sort of hand out depending on what that is. Harvester – and our Harvester lane is good example. In Q2 we saw that there was an elevated hunting season and participation over last year, which kept our replenishment just tugging along to make sure that we could keep up with those service levels. So to me, that was more hand to mouth. But overall, I think mostly those retailers that pulled forward those purchases were also gearing up for the holidays. And I want to make sure they have sufficient inventory. So, it's a mix between the two.

28:25 Got it. Thanks very much

28:27 Yep.

28:29 Thank you. Our next question comes from Scott Stember of CL King. Your question, please.

28:35 Good evening. Thanks for taking my call guys. You talked about in the release -- in your prepared remarks about how -- POS is looking pretty good right now. Are we talking up on a year over year basis at least as we stand right now in the third quarter?

28:57 Yes. I mean coming out of Q2 POS was strong. It was positive over last year. So we are seeing the positive trends in POS.

29:08 Okay. And can you talk about, is there any promotional activity going on? I imagine probably not, but just wanted to see as we get into a little bit more of a normalized atmosphere, what you're seeing?

29:23 Yes, Scott, this is Andy. Great question. So, in my comments I talked about gross margins in the second half of the year, part of that is compared to last year. Part of that is planned, holiday promotions, not a significant amount, but part of it is.

29:41 But nothing out of line from historical, this is all sort of -- this happens every year.

29:49 Got it. Okay. That's all I have for now. Thank you.

29:53 Yes. Thanks Scott.

29:55 Thank you. Our next question comes from John Kernan of Cowen. Your line is open.

30:02 Yes. This is John [indiscernible] on for John Kernan. Building off of Eric's earlier question, can you parse out expectations or how you're thinking traditional versus ecom will contribute to your organic eight percent to ten percent growth target going forward? Thank you.

30:19 Sure. Yes, that's great question. This is Brian. Very, very high level, I would expect our ecommerce business continues to grow relative to our overall company, overall business. Embedded in than that ecommerce number, if you recall, is direct to consumer, and we just gave you a snapshot, a small snapshot of what one of the brands, the one that's exclusively direct to consumer MEAT! how that's performing. So you can begin to see at least one brand, how that's impacting our numbers. 30:49 So we do see direct to consumer continuing to rise. I still believe it's in its infancy. But over time that is what has ranged depending on the quarter and coming out of COVID and going back into COVID and etcetera, has ranged from, call it, twenty percent, twenty five percent up to as much as fifty percent. Fifty percent feels a little high in the near term, but I could see us continuing to drift up to something around that range longer term as direct to consumer continues to become a larger share of our revenues.

31:25 Great. Thank you. Just touching a little bit more on the product pipeline, just going forward, I know you touched on a couple product areas already, but are there any in particular you are pretty excited about going forward as we think about the back half of the year that we should keep our eyes on?

31:42 Yes. Great question. It's Brian again. So, we did talk about the new rods, BUBBA rods that we're coming out with and those will be shipping in our Q4. I would definitely keep a look out for those. We -- every piece of feedback we've heard from our retailers is, they are very excited about it. It sounds like we're going to get great placement of those. And in many stores even like a store within a store concept, which is really a need for that brand as we're trying to tell that water to plate lifestyle. And really, that's a good example too of, I think we had talked about in times past, partnering with retailers or customers who can help us tell those stories over a longer period of time. That just gives us the benefit of when we come out with these new products to be able to tell that story and then you can begin to do what you're going to see in Q4, which is the store within a store concept across several retailers. 32:39 So, we're really excited about that one. We also have some new products planned for Hooyman, UST, Shade, Wheeler. Honestly, most of that falls on what I referred to internally as the right side of the wheel, which would be our Harvester and Adventurer brands.

33:01 Great. Thank you for the color. We'll definitely keep an eye out for those. That's it from me. Thank you.

33:07 Yes, thank you.

33:08 Thank you. Our next question comes from Mark Smith of Lake Street Capital. Your line is open.

33:19 Hi, guys. You talked a little bit about it, but can you just dig into inventory as we look at retailer distributors? How your comfort level with that inventory, have we seen it maybe build too much in any instances or are there any places maybe where there are holes and retail doesn't have what they need?

33:40 Yeah, Mark, this is Brian. I think it's a little bit of a mixed bag. I think we saw the retailer’s stock up pretty heavily ahead of the holiday seasons. And for them, I think the open to buy is going to be limited for a little while, and that goes for all consumer products. But I think as they begin to sell down, as they took that risk out of their pipeline we'll begin to see that coming back up. Like I mentioned earlier, the POS trends are very positive. So the product is selling through without a doubt. 34:12 So, I think as they continue to chip away through inventory levels, you begin to see a more normalized buying pattern from those retailers. But I think they're continuing to look at other things too. You've got potentially this next summer a long shoremen strike that people have been talking about, you've got some other factors, obviously Chinese New Year. So we're keeping an eye on those as well. But I would not be surprised if there's going to be some -- this type of behavior from these retailers for the next few quarters as they look to mitigate supply chain risk.

34:48 Okay. And does that fit in with a little bit of a sequential kind of cadence of sales as you expect April sales to sequentially be a little stronger than January as some of that is just a flow through of that inventory?

35:01 Yeah, Mark, this is Andy. That's exactly right. That's how we're seeing it.

35:06 Perfect. And then, what are you guys seen as we look at the M&A environment, anything that's changed out there? A - Brian Murphy 35:15 It's Brian. It continues to move along nicely. I mean, we -- Andy made a few comments about us getting close on a few deals and we were at the alter on a few different opportunities. And to be honest with you, one of my old mentor said some of the best deals are the ones that you don't do and we want to be very careful that these are the right deals for us and our shareholders. But we do remain actively engaged with several other targets as we speak, and we're excited about those. So, it remains robust.

35:51 Okay. The last one for me, you called out hunting category kind of being strong here, as we look at the marksman lane and some of this falling into the Defender land as well. How do you help a consumer evolve from, let's say, a new firearm owner to a marksman, if that makes sense?

36:15 Yes. That's a great question. This is Brian again. So, when I made mention too, the ways our brands are collaborating with each other and we called out BOG and MEAT!. So, Crimson Trace and Caldwell is a fantastic example that gets exactly what you're asking. So you'll see collaborations between those two brands as we kind of migrate those eight million dollars to ten million dollars new firearm owners up through to shooting sports. And when you go to the range, what are the types of things that you're going to need, hearing and eye production and steel targets. So, we certainly helped the consumer with that journey, no different than we did with BOG and MEAT! in sort of finalizing that field to table movement. It's really about that from the counter to the range movement with those two brands.

37:04 Excellent. Great. Thank you guys.

37:07 Yes, Mark. Thank you.

37:09 Thank you. At this time, I'd like to turn the call back over to Brian Murphy for closing remarks. Sir.

37:16 Thank you, operator. Before we close, please note that we'll be attending Shot Show in January. Excited to be exhibiting at this important event for the first time in two years. We hope to see some of you there. Thank you, everyone for joining us today. We wish you a happy and healthy holiday season and we look forward to speaking with you again next quarter.

37:35 And this concludes today's conference call. Thank you for participating. You may now disconnect.