Good afternoon and welcome to the American Outdoor Brands Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to 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, goodwill impairment, stock compensation, shareholder cooperation agreement costs, facility consolidation costs, technology implementation, acquisition costs, other costs and income tax adjustments. The reconciliations of GAAP financial measures to non-GAAP financial measures, whether 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. With that, I'll turn the call over to Brian.

Thanks, Liz, and thanks everyone for joining us. Over the past three years, our industry experienced a surge in consumer demand caused by the COVID pandemic, followed by challenges stemming from high inflation and rising interest rates, which reduced consumer spending and drove retailers to focus on destocking their inventories. All of this change occurred in parallel with our first few years as a new public company. And while the factors driving this change were largely out of our control, they presented us with a unique opportunity to reconfirm our strategy and fine tune our focus towards areas we can control and where we can drive progress. The first of these is innovation. We are proud to have introduced several breakthrough products in fiscal '23, planting the seeds for future growth. We are reinventing the way people fish, manage their food plots, shoot clays and reload. Our cutting-edge offerings have been developed to meet the evolving needs of our customers, ensuring we stay ahead of the competition and capture new market opportunities. Second, we have completed critical infrastructure projects that lay the foundation for future growth. These initiatives include implementing a new ERP system that links our strategy with operations, consolidating our Oregon and Michigan facilities, and securing additional distribution space in our Columbia, Missouri facility to accommodate future planned growth. These strategic investments are now complete and they demonstrate our commitment to enhancing operational efficiency, optimizing resources and preparing for future expansion. In parallel, we effectively managed our cash flow, generating $30.7 million in operating cash in fiscal '23. By closely monitoring our financials and implementing stringent measures, we've been able to strengthen our financial position and ensure a solid foundation for future growth and profitability. This disciplined approach safeguards our ability to invest in key areas and seize…

Thanks, Brian. In fiscal 2023, we strengthened our balance sheet generated significant operating cash flow, controlled our costs, continue to invest for our long-term growth and demonstrated effective capital deployment all on navigating market challenges that included weakening consumer demand and cautious retailer inventory management. We ended the year with several significant achievements and highlights. So let me walk you through the details. Net sales for the year were $191.2 million, a decrease of 22.8% compared to fiscal 2022 and an increase of 14.2% over pre-pandemic fiscal 2020. Our Shooting Sports category was down 30.7% and our outdoor lifestyle category declined 14.3% compared to fiscal '22. We believe these declines were mainly driven by reduced consumer spending as well as retailers' efforts to lower their overall inventory levels. Compared to pre-pandemic fiscal 2020, outdoor lifestyle increased 33.8% while Shooting Sports was down slightly by 2.2%. Outdoor lifestyle in fiscal 2023 represented nearly 54% of our total net sales compared to 48% of total net sales and fiscal 2022. Turning now to our traditional brick-and-mortar sales versus e-commerce. Net sales in our traditional channel decreased 30.7% compared to the year ago period and decreased 8% from fiscal 2020. Net sales in our e-commerce channel were down 10.5% compared to the prior year, but they were up almost 61% over fiscal 2020. E-commerce net sales of $87.2 million include our two direct-to-consumer-only brands, MEAT and Grilla. These two brands performed very well in the year and helped us grow our direct-to-consumer sales by 76% over fiscal 2022. On a quarterly basis, net sales in Q4 came in above our expectations at $42.2 million, a decrease of 8% from the prior year quarter, driven by declines of 7.5% in Shooting Sports and 8.6% in outdoor lifestyle. On a three year basis, total net…

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Mark Smith with Lake Street Capital. Please go ahead.

Hi, guys. First off, can you just speak broadly about consumer trends a little bit during the quarter? And maybe more importantly, any insights you can give us on what you're seeing since April with consumers?

Yes. Hey, Mark, it's Brian. So in regards to consumer trends, we had alluded to previously about the convergence between POS sales at retail and the inventory at our retailers being driven down. So we're seeing consistent trends, I would say, versus some of the more recent quarters, which has continued, I would say, continued strength with the consumer, especially at the higher price point items where we tend to play versus the kind of beginning to mid-price point. And then also the direct-to-consumer side of the business continues to do very well. So the consumer that's willing to spend more money in some of those higher ticket items, we see continued strength.

Perfect. And then I think Andy talked a little bit about it at the end the M&A outlook. Just curious kind of what you're seeing out there in M&A markets? I know you said that you're going to stay disciplined, but are you seeing valuations come down? Are you seeing maybe some increased opportunities to make some acquisitions here?

Yes. Good question. It's Brian again. So on the M&A front, certainly, if you do not have your own pipeline of prospects, it's -- you're not seeing a whole lot is my guess. So we've seen fewer banker-led deals come to market. That's been pretty slow. But with that said, we do have -- we are seeing quite a bit of activity on our own pipeline of targets that we've cultivated over the last few years. Some of those are situations where they might need to sell and others are founder-led businesses that would be a perfect size for us. That just frankly are looking for an exit. So, yes, we're seeing activity, but it's mostly through our own pipeline instead of M&A processes run by a banker. And then, sorry, you mentioned valuations, too. I'll touch on that real quick. I would say that valuation, there seems to be some correction there with sellers. And so we are seeing valuation expectations come down, which is a good sign for us. And at this point, too, we're buyers. We'll be very cautious and disciplined, but it's -- we're in a good spot. It's a good place to be in when we're looking at deals.

Excellent. Thank you guys.

Yes. Thanks, Mark.

The next question is from Eric Wold with B. Riley Securities. Please go ahead.

Thanks. Good afternoon, guys. I guess two questions. I guess, one, the 3.5% or as much as 3.5% net sales growth for the year. I know you talked about that turning positive in the back half. What are you assuming for retail point-of-sale sell-through and kind of in that assumption?

Hey, Eric. This is Andy. Yes, when we take a look at the back half of the year, we had a really good line review season last year, which kind of translates towards the back half of our year. And our discussions with retailers, we do see open-to-buy kind of improving and especially going into that period. And our inventory is in a great spot. We said we're down 26% year-over-year. So that's a great spot for us to go into the year. If you have any?

Yes. Look, over the last two to three years, the retailers were in a period of just get me everything you can. They were really starved for inventory with supply chain constraints. And the result of that is they really didn't have a chance or an opportunity to see who the winners and losers were, which brands and products were performing well and which ones won't. And so then they had too much inventory and obviously, they're lowering that overall amount. But they now have a year or so under their belt where they've been able to analyze who's doing well and where do we need to make some changes. So the beginning of, I'll call it, a normalization in terms of their own process. And as Andy spoke to this last fall, we had our very successful line review season that will allow us to capture market share in the back half of this year and also some success with new product placement.

I guess maybe let me ask you a different way. I mean do you expect point-of-sale for your products to grow this year? Or is that sales growth more a catch-up from retailers being too cautious on the "winners" and taking your inventory down too much, you're just kind of recouping back from inventory? Or do you actually expect point-of-sale to increase this year?

It's a great. It's a really good question. It's Brian again. I think that, like I said, that what we know today, right, is POS, we alluded to is down in the single-digits for our products. But I would say that's fared very well compared to the opening and mid-level price point options that are out there where we don't tend to play. And so I think within that higher price point item in the brands that we have, I would expect it to remain pretty stable. But with that said, I think the icing on the cake there is the market share gains from the line review process and the new products.

Got it. That helps. And then last question. Just last question. I know you talked about your expectation for outdoor lifestyle to continue to gain share, market share or gain share as a percentage of your sales going forward. Maybe give us a sense of the other side, what is your current view on kind of fire of demand, the inventory landscape out there for your products? And when you expect outdoor lifestyle to gain share do you expect Shooting Sports sales to grow as well or but just less than outdoor lifestyle or do you actually don't expect growth in that side of the business?

Yes, Eric, this is another great question. So over the long-term, outdoor lifestyle, we look at the total addressable market for outdoor lifestyle is just much bigger. With that said, we're firmly entrenched in the Shooting Sports. We have great new products from Caldwell to Frankford arsenal. So we expect that Shooting Sports will grow over time. It's just that the outdoor lifestyle has a bigger market to grow into.

Yes. The thing that I'll add real quick to is we've really focused on some of the larger stable categories within Shooting Sports, which is why you're seeing products like the Claymore, Caldwell Claymore, performed very, very well for us, new product and the Frankford Arsenal extent. So they're in portions of that market that we feel are very stable and will continue to grow over time along with that installed base. And that's really where we're focusing most of our efforts. Still, obviously, Crimson Trace brand in aiming solutions is an important brand, and it's a blue-chip brand within that space. But we like the diversification of getting into some of these other categories for long-term.

Got it. Thanks a lot. Thank you guys. It's helpful.

Thanks, Eric.

[Operator Instructions] The next question is from Matt Koranda with ROTH MKM. Please go ahead.

Hey, guys. Good afternoon. Just wanted to see if we could start by connecting the dots between sort of the near-term growth outlook that you have for fiscal '24, which is in the low single-digits. What do we need to do? What environment do we need in place to get back to sort of the longer-term growth algorithm? I think you guys have highlighted, which looked like it was more of a mid-teens sort of overall growth rate. Maybe you could just highlight some of the things that need to happen to kind of get back to that level?

Hey, Matt, this is Brian. So in terms of connecting the dots between the two, the near-term outlook and the capability we outlined in our Investor Day of getting to 400 over the next four to five years, really the backbone of that success and driving towards that larger number over that time period is based on new product launches. So you see at the end of this last fiscal with like the Smart Fish Scale, which hopefully enjoyed me going on and on about that product. And the Claymore, the X-10, I mean, those are like the most recent ones. But you can quickly -- you start adding those up and layering them on top of each other. And when you already have an existing base of business that is going to grow and it's going to perform well. And it's complementary. But you have these WOW products that we're introducing that have been in development for several years, and they begin stacking, they individually can become very meaningful parts of the business. So we see like we talked about the successful line review season that we had this last fall and us taking share as a result of that in the back half of this next fiscal year. A big part of that is also new product placement and those are those WOW products that we talked about and getting those on shelves, which is just the building blocks continue to stack those over time, which will -- which is our plan. And then you look beyond that to by geography, by channel, and you've got a nice, I think, pathway to be able to reach that number we put out there. So we're still very bullish on that. I think you're probably looking at the full year and saying, look, first half you said that you could be down even in the first quarter, but second half is looking strong. And we have all indications that that's going to be the case, which will give us a nice tailwind heading into next year.

Okay. All right. That's helpful. And I think it dovetails well with my other question, which was just any change in expectations around the percent of sales coming from new products this year it sounds like we'd expect that to tick up, all things being equal, relative to kind of the 25% step that I think you guys put in the release this last fiscal year.

Yes. It's Brian again here. I think it's possible. I do. Yes, I think we've got, again, tremendous success plan for these new products. And so I think it is possible that, that percentage ticks up this next year.

Okay. And then just any other commentary on the Smart Fish Scale launch? Just curious if there's any early reads you might be able to share with us in terms of sort of the success of that product and the app sign ups and whatnot?

Yes. We're smiling here on the side of the phone because the reception has been absolutely tremendous. And we've -- we're not going to disclose how many users we have today on it, but it has exceeded our expectations. And so we've seen tremendous consumer demand for that product. We've also seen a lot of professionals come forward on their own, unsolicited and support that product as it's not a fishing scale. I mean it does that, but it's really a new way to approach fishing. And there are, look, 50 million anglers out there in the United States that fish on a regular basis, but there's another 25 million on top of that, that don't fish on a regular basis, but have and they're waiting for something interesting and new to come along before they jump back into it. So we're thinking about this much larger than just this base of, let's say, Baas anglers, we could see this being a pretty big game changer for fishing overall. So we're -- consumers love it so far, and we're really excited about the prospects.

Okay. Great. And then just maybe one for Andy. I have a two-part modeling one, if I could. So I think you mentioned in the prepared remarks expect gross margins to be higher year-over-year this coming fiscal year. Just any way to quantify the benefit you're getting from lower inbound freight as you kind of burn off some of the higher cost inventory, does that pick up more in the back half of the year, maybe just speak to the seasonality of the gross margin profile? And then on OpEx, any stuff to take into account as we think about modeling the year, especially with the Columbia lease takeover that you got going? Just any color or help there on sort of the movement of distribution costs throughout the year?

That's two great questions. So on the margin side, the way that I would think about it is the two pieces I talked about in the prepared remarks, improvement in freight and then the facility consolidation. The way that I would look at that is improvement in freight, we did have a chunk of improvement in fiscal '23. So I would not expect a full year of improvement in fiscal '24 just because we had a little bit. And then on the facility consolidations, that piece in gross margin flows through inventory. So that inventory has to turn. So I would probably plan on that benefiting kind of more of the back half of the year just as that inventory turns. And then on your OpEx, you're spot on OpEx. The additional lease starts on January 1st, so I would definitely model those additional costs for the last four months of the year.

Got it. Okay. Appreciate it guys. I'll jump back in queue.

Thanks, Matt.

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

Thanks, operator. In closing, I want to thank each of our employees across American Outdoor Brands for their loyalty, hard work and dedication. Your contributions throughout fiscal '23 and every day have helped us move forward on the path for an exciting future. Thank you, everyone, for joining us. We look forward to speaking with you again next quarter.

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