Good day everyone and welcome to American Outdoor Brands Inc. First Quarter Fiscal 2023 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 for some information about today's call.

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, shareholder cooperation agreement costs, technology implementation, acquisition costs, other costs and income tax 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 the call over to Brian.

Thanks, Liz, and thanks everyone for joining us. Given recent economic and industry conditions, I am pleased with our first quarter results, which reflect our ability to deliver net sales growth of over 31% above our pre-pandemic levels of fiscal 2020, while marking a number of achievements that support our long-term strategic priorities. Our results reflect our dedication to building authentic lifestyle brands that help consumers make the most out of the moments that matter. During the quarter our e-commerce net sales grew nearly 24% year-over-year supported by strength in our direct-to-consumer only business, particularly our MEAT! Your Maker and Grilla Grills brands. Together, these two brands generated over 50% of our net sales in Q1 and helped our outdoor lifestyle category generate over 53% of total net sales in the quarter. We consider our direct-to-consumer sales to be one gauge of how well our brands are resonating with consumers since those sales are not impacted by retailer issues such as inventory levels or limited open to buy. Net sales in our traditional channel, on the other hand, decreased by about 48% compared with last year, although they were up slightly versus pre COVID levels. The year-over-year decline was due to fewer orders from retailers as they responded to reduce foot traffic and continued to limit their open to buy in order to reduce inventory levels across all of their offerings. While this dynamic impacted retail sales across our brand portfolio, it was more pronounced in our shooting sports category, which includes personal protection products, such as laser sights, and sales of shooting accessories to firearm OEMs, dealers and distributors. It's also important to note that strong net sales growth of over 70% in our traditional channel last year reflected that certain customers had accelerated their purchases to offset potential…

Thanks, Brian. Net sales in Q1 were $43.7 million, a decrease of 28.1% compared to the prior year, and an increase of 31.5% over pre-COVID Q1 of fiscal 2020. Our e-commerce channels accounted for 47% of our Q1 net sales, while traditional channels were 53% of the total. Net sales in our e-commerce channels grew by 23.7% driven by strength in our direct-to-consumer business. Our Grilla and Meat brands continue to perform very well. And on a combined basis, these direct-to-consumer only brands accounted for over 50% of our total net sales in Q1. Our traditional channels decreased 47.6%, driven by reduced orders from retailers, which we believe is due to lowered foot traffic and retailers efforts to reduce overall inventories. In addition, sales of shooting sports products to OEM dealer and distributor customers declined year-over-year. And as Brian noted, strong orders in the traditional channel last year reflected that certain customers had accelerated their purchases to offset potential supply chain disruptions, creating a tough comp for the current quarter. Turning to gross margins. Gross margins were 43.6%, a 410 basis point decrease over the prior year. The decrease was mainly driven by lower sales volumes, increased inbound freight, and a return to more normalized promotions, which we expected. GAAP operating expenses for the quarter were $24.6 million, down slightly from $24.8 million in Q1 last year. Variable selling and distribution costs decreased in terms of dollars due to the overall reduction in net sales, but they increased as a percentage of net sales year-over-year mainly due to higher outbound freight. Other reductions in OpEx spending included decreases in advertising, headcount and other compensation related expenses. These were offset by increases in planned IT costs, R&D, and increased legal and advisory fees resulting from shareholder cooperation agreement. Excluding technology implementation…

[Operator Instructions] And our first question will come from Matt Koranda with ROTH Capital.

I just wanted to start out with the commentary that Brian made on POS data in the first quarter and wanted to see if we can specify, was it actually positive in the first quarter? And then maybe just if you could square the POS commentary with sort of the guidance for the year, which looks like somewhere around down mid-teens or so on a year-over-year basis? I assume the easy answer is inventory levels at your retail customers but maybe just a little bit more data or color on that would be helpful.

So they've done the POS side, we did see positive trends, meaning they're actually -- they're positive year-over-year in the quarter. And we talked a little bit about inventories, but specifically we did see our retailer inventories at least the inventory that we could see, come down pretty significantly. They were up quite a bit call it, three, four months ago. And the retailers really have been spending their time driving down inventories in our in our products, and we've heard very similar across products that are outside of our company. So we see that as a very positive sign. So positive POS driving down inventories to a point now where across our channels they're at or below where they were last year, which I think is a good thing. And then in regards to your question around guidance and what that infers for guidance, first, we didn't provide guidance, just more or less a framework for how we're thinking about the rest of the year. There is a -- obviously a tremendous amount of uncertainty out there. So we're taking a cautious approach. But just seeing how POS has driven down inventories at retail for our products, again, that's a positive sign, which would lead us to believe as based on history that that will start to kick off more consistent replenishment. I think the biggest factor that we're weighing here is just what the consumer is going to do, and how our retailers, other inventories they may have that are outside of our categories, there might be some spring large type products, at least that I've heard that are out there that are taking up, they're open to buy and we'd like to see sell through some of those other types until they begin to open it back up. But where we can control things which is predominantly on the direct to consumer side, we're seeing tremendous success. So like you saw on the quarter ecommerce was up in excess of 23%, 24%.

And then curious if you could maybe comment by brand names, if there's any dispersion of performance in that POS data that you're seeing? We've heard from industry participants, generally consumables have been a little bit stronger than sort of some of the bigger ticket items that maybe people are pushing out a little bit but maybe just your thoughts on sort of the different categories and the brand names within payout?

It's actually been pretty positive across the board. I actually would have expected that shooting sports would have been not as strong as it has performed, but it's been up and as high as some of our outdoor lifestyle brands. So really not a divergence between the two but strong across the board for those two categories. Q - Matt Koranda Okay, great. And then just a couple more if I could. So on -- you mentioned that Grilla and MEAT! Your Maker were north of 15% of revenue in the quarter. Just curious, is it roughly evenly split between the two? Just wanted to kind of get a sense for how Grilla is tracking and then just maybe any thoughts you have since you've now got Grilla under your belt for several months now? Just want to get your thoughts on sort of how that is tracking relative to your initial expectation?

Yeah, Matt, this is Andy, it's great question. We don't have to break up between the two. But we do have a new IR deck to file today, you'll see a slide in there that shows TTM MEAT! Your Maker sale at 7.8%, I think it's up 164% or so TTM year-over-year, that's performing really well. Grilla again, is performing really well as well. So we're happy with both of those.

Yeah, one thing to note is MEAT! Your Maker with meat processing is just how we’ve traditionally positioned that brand in the marketplace is we do see a lot of activity in the fall. So it is somewhat seasonal, but we are seeing again, strong year round demand for it. Like with the numbers that Andy said, 160 plus percent, just for the quarter year-over-year. And then on Grilla that does tend to be more of a spring summer type product. So you're going to see a little bit more waiting on that side of the year as well. With some strong like tailgating season, we do see a pickup there as well. But it varies by quarter.

And then just thoughts on inventory levels and sort of the sequential inventory levels as we move through the year, I guess the signal that you guys sent pretty strongly is that we're going to see some reduction in inventory. And you've kind of slowed in terms of intake of vendor inventory. I wanted to get a sense for just maybe how much inventory we can see flush for the rest of this year. And then I got one more follow-up and then I'll leave it.

Yeah, Matt, this is Andy, we haven't quantified that, we definitely expect second half of the year cash conversion from that decline. Like we said in the comments, we have multiple initiatives going on now. They're already underway. They kind of helped us in Q1. So we -- most of the benefit we'll see is going to be in the second half of our year.

Okay, great. And then just any updated thinking around cash flow priorities, it seems like just given the working capital flush in the back half of the year you guys are going to be generating some decent cash. Why not hold on another buyback program kind of at these levels? Are there priorities like in the funnel in terms of M&A? Is that -- are more attractive in terms of rate of return? Maybe just the latest updated thinking there would be really helpful?

Yeah. This is Brian. So we are -- we've listed out the three priorities, and I'm sure you know them very well, Matt, but for those that don't growth, M&A, and then returning capital to shareholders. So again, our priority is organic growth. We do have very strong pipeline of new products that Andy mentioned, we’re strategically placing in the remainder part of this year and then likely some will move into next year because we want to get the most eyeballs on those new products when people aren't focused on older products that are being discounted at retail from other brands. So we want to optimize that as much as possible. So we're focused on that. Second is M&A, we have nearly zero net debt and we are actively continuing to look at M&A targets, continue to talk to founders in particular, we would love to find more Grilla's, more BUBBA's, et cetera. But -- so we're continuing to look at that. And some get close and others aren't. So it's just a constant dynamic, fluid situation around M&A. And then returning capital to shareholders, hear you loud and clear, this is something that we have -- is in an ongoing discussion with our Board of Directors as we think about the three priorities. And we don't have one to report today. But I can assure you it's an ongoing topic for us as we look at our own value relative to some of the other opportunities.

Our next question will come from Eric Wold with B. Riley Securities.

A couple questions. I have a follow-up on the guidance question from before or just certain guidance, kind of the framework about as much as 25% growth over fiscal '20? What could that number be if we were in kind of a normal retailer open to buy stocking environment? So just trying to get a sense of kind of the assumption there in terms of normalized demand growth?

That's a tough question to answer, just based on kind of what we're seeing in the marketplace right now, consumer buying trends, the inventory reduction that we're seeing at our retailers. So I'm not really -- not too sure how to answer that one.

And then on the same-store sale or sort of the e-commerce revenue growth in the quarter of 24%, do you have kind of what that would be like on a same store sales basis if you took out Grilla Grills acquisition from the mix?

This is Brian. Unfortunately, we didn't break that out. So we're not going to be able to give that to you today. We did break out and MEAT! Your Maker. So MEAT! Your Maker was up 164% or so. Was it, Andy?

Yes.

On the quarter, year-over-year. But embedded in that ecommerce number as well, just to -- I'm sure you already know this, but it includes all online retailers and our direct to consumer business.

And then final question for me. Point of sale, pause in the quarter, solid e-commerce purchasing trends. If you kind of drill down beneath the surface with the data you have, what are you seeing if anything in terms of basket size, trading down from higher price points and lower price points, anything that would kind of maybe not be as positive in those numbers or still showing up as strong as you reported?

I think we're seeing a few different things -- a few different things happening at retail. We've talked about our retailers and they're open to buy, but we also need to consider that. Our consumers have limited open buy as well. And I do think that they are being presented with a lot of deals right now for lots of different products, whether it's grills or patio furniture or different things that didn't sell or were over-inventoried in the spring. And so they're being confronted with some of those opportunities at a discounted price. And so I think you've got some of that happening right now. I'll call it a distraction from a normalized environment, from a normalized selling period. And then I think you also have folks that, some of the higher earners that are spending money, continue to spend money, and might be looking to trade up into something if they've tried an activity last year, looking to get into that mid, maybe high price point. Maybe buy a BUBBA product, they're still going to buy it regardless if it's on sale or not. So we are seeing strong sustained demand for those types of purchases as well. And we really see that too, again, we see POS data that really are direct-to-consumer. I mean, we're -- people are still going out and spending money for a high quality commercial grade grinder that's $500, $600. So we're not seeing a slowdown there.

Got it. And maybe a final question, if I may, just to kind of parse out the language a bit. Kind of the framework of 25% then sales growth over fiscal '20 as much as -- is that kind of a little bit more cautious imputing there? Is that more of a base case, worst case scenario, maybe just help us understand kind of the language and the nuance of where that could land?

Yeah. Eric, I think that word you hit on with cautious. So when we're looking the consumer demand trends, the retail inventory trends, we want to be cautious in that, that framework that we gave. So that's why, we kind of use that, that 25%.

Yeah, I think this is Brian, too. We see the -- like the trends that I mentioned around POS, again, we can see about 50% of our total POS sales. We view that as a positive, right? I think if inventories were higher than prior year, we would have -- even be more cautious. So the trends seem to be moving in the right direction. But the -- in conversations with retailers where they are continued to be over inventoried in other product categories that are outside of our control or outside of our space altogether, that's where their focus lies right now in trying to drive those down, headed into the sell -- into the kind of holiday selling season and try to clear the decks, so that next year can be more normalized year. I think you're going to see more of that. So we're just trying to, again, be cautious. We are very optimistic in our business. We are continuing to plan towards that $400 million long-term. And we see this as a temporary period of time.

[Operator Instructions] Our next question will come from Connor Jensen with Lake Street Capital.

Thanks for taking my call this evening. I was just wondering in relation to the Defender, Marksman, Harvester Adventure brands, is there a specific area you’re kind of the most optimistic about going forward or something that you think may perform better than others during an economic downturn?

Yeah, I mean -- this is Brian, Connor. So we had talked about the shooting sports side being down relative to Outdoor Lifestyle up slightly over pre-COVID levels. I do think that that will normalize over time and continue to grow. But in terms of product categories and brands that I think are longer term, we've positioned all of our brands, probably a simple answer, but division, all of our brands to expand into larger addressable spaces. And while we've pivoted on the launch timing for some of our new products, new product development is incredibly important for us in our brands as they grow, this last quarter being about 25% of our total net sales. And in the end, like in the investor materials, and I made mention to it in my prepared remarks, but we teased out a new product under BUBBA called the Electric Fish Scale, the EFS, which is, in our opinion, we're not -- it's not out for consumers yet, can’t go buy it. But we believe it's going to be a complete game changer when you think about competitive, tournament fishing. Just got a huge -- overwhelming reaction at ICAST. And those are the types of products that I think consumers wants to get past this. I'll call it kind of hangover of products that are getting into the market, they’re going to be looking for new innovative products, and that's what we do best. So I think it's going to be across the board. But we've got lots of really neat examples in the pipeline and more of this fall as well.

And then kind of go in a little more off of that, it sounds like you're trying to focus a little more on organic growth over the M&A. Do you think you might try and push back M&A, a little farther out? Or is it still kind of both those things go hand-in-hand? A - Brian Murphy They definitely go hand-in-hand, and the reason for that is we've taken taking the time to understand where our company where American Outdoor Brands has permission to play, which product categories, and then where each of our brands have permission to play. So we're executing on the organic growth, side of things on making that a reality. We know exactly what the next three, five plus years looks like, on the organic side. And on the M&A side, it's really where our brands don't have permission to play, but where we as a company have permission. And that has narrowed the focus very clearly for us. That's why we were chasing after outdoor cooking pretty aggressively, in particular, really liked a brand that was doing direct-to-consumer. Because with that infrastructure in place, now we can more easily integrate that type of a business and drive it from day one. And so there are other areas as well, that we just haven't publicly stated, but are still within our wheelhouse as a company that we'll continue to look at. So they do go hand-in-hand.

And then last, I know you said you aren't giving formal guidance. But do you think there's maybe a ceiling for revenue around $210 million this year? Are we thinking about that correctly? Or is that conservative?

I think if you do the math based on what we said in the comments, I think you're in the ballpark.

[Operator Instructions] Our next question will come from John Kernan with Cowan.

And what do you think is the normalized amount of inventory days on hand in fiscal '21, inventory turns ramp is inventory days on hand came down? Inventory got a little backed up at the end of last year and like we're going to continue into the first half of this year. How much inventory how should we be modeling inventory turning data on? Can we think about the cash conversion cycle?

That's a great question. And it also depends on the quarter as well. As you know, John, we're, we have seasonality, especially Q2, Q3, usually our highest quarters. So we typically ramp up inventory a bit in Q1 to be ready for those quarters. Now, if you rewind back to last year, you know, we have the strategy in place to build inventory to offset some supply chain issues. So we feel like we're in a great spot, we have great initiatives to drive down that inventory in the second half of the year. So it's a little tricky when you start to break it down by DSO because of that cyclicality. And the fact that we did build inventory to reduce that the supply chain risks last year.

Understood. We always think about when normalized EBITDA margin structure for the business, gross margin obviously is going to be down this year, OpEx rates are going to be up. How do we think about a normalized EBITDA margin as sales starts to recover? There's clearly a lot of operating leverage in the business given the incremental margins we saw in fiscal '20 and '21, and now in fiscal '22 and '23. So they help us think about, you know, multiyear margin potential for the business.

Yeah, Hey, John, this is Brian. So, we've set out there achieving mid to high teens EBITDAS margins, and I that's still our plan. So the way that we've shared this business as we continue to grow, would be certainly to achieve those levels. And then as we look at acquisitions, we're looking for accretive acquisitions. Grilla is a great example of that, it's accretive across all measures, to kind of help either get there or help us even exceed those numbers in the future. But today, once we see things normalizing, certainly we feel that’s achievable.

Got it. And then, any commentary on which categories are declining the most within the traditional channels of retail?

Sure, this is Brian, again. The one that really stands out, I'd say relative to the pack, are personal protection related. So last year, we talked about traditional channel’s growth of 70% year-over-year in our first quarter. And a big driver, there was two things: one, retailers pulling forward inventory; and the second is there was still heightened demand, pretty significant demand around personal protection. And when you look across our brands, it's the types of products that are really associated with that personal protection. Still have good demand. It's just down relative to the rest of the pack. Andy, anything else you'd have to…

This concludes our question-and-answer session. I would like to turn the conference back to Brian Murphy for any closing remarks.

Thank you, Operator. Before we close I want to let everyone know that we'll be participating in two conferences next week. The CL King Best Ideas Conference, which is a virtual event on Monday, September 12th. Then we’ll be in person at the Lake Street Best Ideas Growth Conference in New York on Wednesday, September 14th. We hope to see some of you there. In closing, I want to acknowledge the loyalty, hard work and dedication of our employees who continue to move American Outdoor brands forward on the path towards an exciting long-term future. Thank you, everyone for joining us today. We look forward to speaking with you again next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.