Good day, everyone and welcome to American Outdoor Brands Corporation’s Third 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 important 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, 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; 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, 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 later today. 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 referenced certain non-GAAP financial measures on this call. Our non-GAAP results and guidance exclude acquisition-related costs, including amortization, recall-related expenses, compensation related items related to the separation of our former President and CEO, one-time transition costs, fair value inventory step up, change in contingent consideration, goodwill impairment 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 today’s Form 8-K filing as well as today’s earnings press release, which are posted on our website. 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 and our 10-Q for the quarter ended January 31, 2020. Joining me today are Mark Smith and Brian Murphy, who serve as Co-Presidents and Co-CEOs of our company as well as Jeff Buchanan, our Chief Financial Officer. As you likely now, we will be spinning off our Outdoor Products & Accessories or OP&A business later this year. When that occurs, Mark Smith will become President and CEO of Smith & Wesson Brands Inc., the firearms business and Brian Murphy will become President and CEO of American Outdoor Brands Inc., the OP&A business. On today’s call, Mark will discuss third quarter results for our firearms segment, then Brian will discuss results for our OP&A segment. Following that, Jeff will discuss our financial results and our outlook. After which we will open it up for questions from our analysts. And with that, I will turn the call over to Mark Smith.

Thank you, Liz. Good afternoon and thanks everyone for joining us. Our third quarter revenue for the firearms segment was $127.4 million, which represented just over a 3% increase year-on-year. Revenue was favorably impacted by changes in the timing of our excise tax assessment as well as the positive impact of our new M&P9 Shield EZ pistol which I will discuss in a moment. The positive impact of those items however was partially offset by lower than anticipated orders from certain strategic retailers across multiple product categories. We believe that consumer demand for firearms was positive during the quarter, as reflected by adjusted mix in the period, but we also believe that, that demand was partially fulfilled with existing retail channel inventory of our products. Turning now to mix, as a reminder, we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers not directly to end consumers. Therefore, since NICS is a measurement of consumer activity, it does not directly correlate to our shipments in any given time period. 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 Q3, background checks for handguns increased 13.9% year-on-year, while our handgun units shipped to distributors and retailers increased by 4.7%. We believe that our percentage increase in handgun sales did not match adjusted mix for a few reasons. First, reporting changes occurred in certain states during the quarter that drove higher than normal mix results. Most notably, Alabama moved from a state issued license to a required federal background check. We also believe that our performance relative to mix was impacted by the timing of our new product introductions as well as the fulfillment of consumer demand from existing channel inventory, again…

Thank you, Mark. In our OP&A segment, third quarter revenue increased as a result of higher shooting, hunting and cutlery product sales. This increase was driven by demand from several of our large national retailers and by the success of our strategy with certain retailer customers to migrate them from lumpy, bulk buy ordering to a more balanced approach to their ongoing replenishment orders. Point-of-sale data, which we collect from some of our larger customers, appears to indicate that our products in these categories remain popular with consumers as well. Revenue increases in the quarter were partially offset by reduced OEM sales of our laser sight products, bankruptcy and financial distress of certain customers and the unexpected acceleration of one brick-and-mortar retailer’s private label strategy for camping accessories, negatively impacting our branded survival products. Despite those offsets, we believe there is underlying strength in our business evidenced by growth in our shooting, hunting and cutlery categories, which were up collectively 13% year-over-year. As we have discussed previously, the vast majority of our products in the OP&A segment are sourced from China, will reply upon components coming from China. As a result, tariffs continued to negatively impact our gross margins and inflate our inventory values. Accordingly, gross margins declined in Q3 compared to the prior year quarter. With the announced rollbacks of tariff Lists 4a and 4b, we expect to see some benefit down the road, but only as newly ordered products works it way to our inventory, likely near the middle of fiscal ‘21. Turning now to discussion of developments in the business, our OP&A business is organized into four brand names, each representing the core activities of our consumer base. We refer to them as: the marksman, the harvester, the defender and the adventurer. Each of our 21 brands…

Thanks, Brian. Revenue for the quarter was $166.7 million, an increase of 2.9% from the prior year. Intercompany eliminations were $4 million. In our firearms segment, revenue was $127.4 million, an increase of 3.1% over the prior comparable quarter. In our OP&A segment, revenue was $43.3 million, an increase of 3.2%. Mark and Brian have provided the details of the segment revenue. So I will move on to a discussion of margins. In Q3, total company gross margin was 33.1% as compared to 33.4% in the prior year. In our firearms segment, the gross margin was 27.9% about the same as the prior year. Although the gross margin percentage was unfavorably impacted by the change in timing of our federal excise tax assessment, it was favorably impacted by moving certain firearm shipping costs now to OpEx as we have previously discussed. Otherwise, the firearms gross margin improved because of lower manufacturing spending and favorable absorption. In the OP&A segment, gross margin declined to 42.8% as compared to 46.2% in the prior year. This decline was primarily the result of additional tariffs and a one-time increase in inventory reserves for our laser site products. Excluding these two items, gross margins would have been 47.2%. GAAP operating expenses in the quarter declined by 21% or approximately $11.8 million. Substantially, all of that reduction was due to a $10.4 million goodwill impairment in the prior year quarter and a $3.8 million take-back in the current quarter related to compensation and incentive expenses as a result of the separation of our prior CEO. Related to this matter, it should be noted that $1.6 million of expense will be incurred in the fourth quarter due to the recently signed CEO separation agreement. Therefore, the total impact in fiscal ‘20 as a result of this CEO…

Thank you, Jeff. And with that, operator, please open up the call for questions from our analysts.

[Operator Instructions] Our first question comes from the line of Steve Dyer with Craig-Hallum. Your line is now open.

Thanks. Good afternoon. So you under-shipped NICS, adjusted NICS in the quarter fairly dramatically, I mean, is it safe to sort of assume that as a few of these key retailers, lot of them are exiting the – not a lot, a number of them are exiting the business altogether, others are rationalizing moving it out of certain stores. I mean, is that primarily the shortfall in the quarter and the shortfall in the outlook?

Yes, the shortfall in the quarter definitely mostly attributed to the couple of key strategic retailers dropping inventories. I think it’s important to note, we look at market share data pretty closely internally on our own analysis. And that data shows that we are holding our own on our share and actually growing share in certain areas, but when we look at the inventory on certain strategic retailers which has been largely flat for the first half of the year really dropped off dramatically in our Q3 and that really you can kind of point to the loss or the miss almost entirely to that.

And I guess just going forward how long would you expect that de-stocking to persist, I mean, it sounds like certainly for your fiscal fourth quarter, but what’s your sense to be on that?

The underlying market seems fairly steady. Right now, a lot of our – the conversations we have with our industry partners are very cautiously optimistic. So I think through our fourth quarter as long as they continue to – consumers continue to buy obviously at some point there, then the strategic retailers are going to come back online with ordering from us. So, it’s the end of the fourth quarter could have lead into very beginning of the first quarter, we don’t think so, but is that a possibility, maybe, but it should be correct, it’s a short-term issue, it should be corrected within a few months.

Got it. That’s helpful. And then last one for me, you noted an impact from corona here in your fiscal Q4, then who knows potentially beyond that. I mean, is that primarily supply chain issues or are you making some assumption on domestic demand on either side of the business or and if so I guess could you quantify sort of what you took out for that?

Sure. Steve, this is Brian. So as it relates to the coronavirus, I would say in Q4, we did have – we took some time for some of our factories, most of our factories to get back online and so because we have so many new products that are coming out at the timing issue there. Thankfully many of them have already come back online. So we should start to see that product here shortly. But other than that, we are also – there is a lot of uncertainty around it and we are hearing at least that, that maybe reduced food traffic and that could impact our business. So certainly, we will keep an eye on it, but at this point as you know, there is quite a bit that’s unknown.

So it’s mostly preemptive at this point as opposed to anything you are seeing in point-of-sale or anything so far?

In regards to point-of-sale, yes.

Okay, got it. Alright, thanks.

Our next question comes from the line of Cai von Rumohr with Cowen & Company. Your line is now open.

Yes, thank you very much guys. So a couple of questions. First, you talked about the de-stocking and yet it looks like your distributor inventories were up kind of a normal pattern and your sales looked a little bit light. Can you maybe you can explain that divergence if you could?

Hey, Cai, it’s Mark Smith. So yes, the de-stocking was within our strategic retailers. So as you know we have three main channels on the consumer side that we go to market as our distributors buying groups and strategic retailers. Our orders from our strategic retailers and from our distributors and from our buying groups were very strong in the quarter and their inventories largely remained flat. So they were – while they sold out the front to where they were buying in the back door. The strategic retailers not all of them, but a couple of the key ones we saw that they were selling at the front door and not buying in the back and that they are adjusting their inventories why that is, I don’t know and we can’t speculate.

So you give us the distributor inventories, could you give us some color in terms of if they are cutting back their inventories, are they at below average levels or do you expect them to be how should we think about that?

Hi, Cai. It’s Jeff. It’s really more of a pacing issue in terms of the SRAs. So it might be that they have either have or overstocked or are just reducing their stock down to a lower level. It’s hard to get into the specific reasonings but clearly what happened is that the order pattern changed drastically after the end of the calendar year and it’s really isolated right now with the SRAs.

Okay. I mean do you have any sense of their inventories at normal levels or were they at abnormally high levels?

The inventories were, I don’t think we ever provided any color on this SRA inventory. So the ones that we do get their inventory levels from, they were pretty steady for the first half of the year and then for whatever reason as Jeff mentioned, I mean, obviously, there is a lot going on in that landscape right now. They really filled all of their consumer demand out of their warehouses and why that is, I don’t think we are probably not going to be able to speculate, but at some point, again, I mean the good news here is the underlying demand is there and as soon as they correct inventory levels to wherever they want them to be, then obviously they have got to start buying from us again. So, it’s a short-term issue.

And then maybe a little more color on COVID, I mean, if your plants were shutdown, I haven’t been here in about that many plants in China starting up and I assume it didn’t really start to be an issue until towards the end of the quarter. So is that likely to be a bigger factor in the fourth quarter than the third?

Yes. We will see a decent impact in Q4.

Right. And Cai, it had virtually no impact in Q3. So it’s a Q4 impact and because it’s about outdoor products as we have talked about it in the past really carries as much as like two turns of inventory. So when we talked about, for example, the tariffs in the past, you see sort of a delayed impact and it’s going to be the same with COVID that this is going to be delayed impact for us is in Q4. The good news is as Brian says is that the most of the factories that we deal with have reopened, not all of them, but it’s just a little uncertain as to the supply chain shipments are beginning. I read in article today that the shipments of a produce, for example, are beginning. So, our guidance is based on what we know about the orders being placed with respect to the factories that we have. Our guidance does not take into account a widespread pandemic in the United States or any other impacts on shipping that we don’t really understand yet.

And yes, I mean, excuse me for asking – dominating this, but it looks your guide for outdoor products doesn’t assume much of a revenue hit in the fourth quarter, so how come is it that – you are getting the inventory, but it’s just when you are getting it or how come, I don’t understand?

I will let Brian talk about that. But I mean, there is a lot of good things happened in OP&A. Brian, you want to, I mean, again, I guess like reiterate?

Yes. I mean, we – so we are seeing like we talked about in the prepared remarks, we are seeing strong growth, so in hunting, shooting and cutlery for example, growing 13% year-over-year in Q3, we are seeing very strong POS data from some of our largest customers and demonstrating that pull-through. And we also – we do have quite a few new products that are coming online that will flow into Q4, which is also going to support great growth. I also want to mention before Chinese New Year happens every year and so in anticipation of that we do bulk up on inline product. And so that’s also helping us sort of mitigate some of those, some of the factories come back online for that elongated time period. But overall, for Q4, we feel pretty good.

Okay, great. Thank you very much.

Our next question comes from James Hardiman with Wedbush Securities. Your line is now open.

Good evening. Thanks for taking my call. So couple of questions for me. You had previously given us some sort of year one targets for both the firearms business and the agro business, obviously, the guide for this year is coming down modestly but it seems like there was a largely temporary issues should we think about tweaking through the year one estimates for the two segments

We are not going to actually comment on the year on year one estimates if you remember what we gave like sort of a rolling 12 months estimate of what we thought revenue would be for each entity after the date of spin so for the 12 months following the date spin and we are not changing those there is a firearms was 500 to 550 it is a fairly large range because we are little uncertain as to the impact of the presidential election the low end of that arranges is about the same or actually a little lower than our midpoint of our guidance for this year to expect outdoor products it would be fairly up as compared to our guidance for this year 2020 but again there is a lot of things that have happened that Brian talked about in this last quarter Q3 and Q4 in outdoor and products that we are onetime events and there is a lot of good things happening so we are also standing by those numbers which I believe were 200 to 210.

Okay that’s helpful and then I want to talk about end market demand for a minute obviously the mix numbers have been really strong I guess first any reasons as to why you think it has been a strong it has been and do you think it is sustainable I think part of the answer is whether or not there has been some fear based buying taking place here as of late and I Mark I think you have made a comment about may be foot traffic slowing down a little bit I don’t know what that was in reference to do you have any strong the month of February was but may be flush that out a little bit if that is something you are seeing or just maybe it was just distributors or retailers feeling that would happen.

Yes this is Mark so that was actually Brian made the comment about the foot traffic more related to the OPNA so yes NICS is definitely strong very strong start to the year we obviously are talking to our channel partners all the time and everybody is very optimistic but cautiously so I think everybody remembers getting caught in 2016 and nobody wants to do that again so I think the good news is that the underlying demand is still there as to what is driving that there is all kinds of things in the market place that have happened in the last couple of months we had the issues in Virginia we have got the presidential elections kicking off and whether that’s going to continue or fall off I think following the normal trends in terms of the seasonality right now you can kind of look at our January and February this year and it is almost exactly on the same slope line to slightly higher than it was this time last year so we have no reason to think that the seasonality in the fire arms business will not repeat it is normal trend if that is helpful

That’s really helpful and I apologize for the mistakes in the two of you and that makes a lot more sense last question for me Brian there are couple of comments in there about laser sights being weak I guess why are they weak it seems like as a product that would be highly correlated to end market demand is it some of the same reasons we're seeing sort of that delta between the Firearms business? Or how should we think about.

Yes sure and just for the avoidance of that on foot traffic comments it was related to what just may happen with coronavirus that folks choose not go out as much but as it relates to laser sights we have laser sites were very much in vogue over the last few years and while there has been at times a stronger correlation with firearms sale I don’t know if we are seeing a change in consumer behavior but certainly we believe we are one of the largest players in that space and we just are not seeing as much traction I would say as it relates to the comment in the quarter. We do have other OEM customers and we have seen a decline with them as well as it relates to laser sites. For Crimson Trace, we have been preparing for maybe shift in consumer preferences and so while we continue to support that product line, we have proactively and I think some of you on this call have seen some of the new products that we had at SHOT Show, have been proactively coming out with other aiming solutions that harness the Crimson Trace brand. So getting into laser sites, getting into scopes things like that, red dot sites.

And I would add that there still is a deal mentality with consumers looking for lower price point firearm items and at laser, our Crimson Trace laser is an expensive product. So maybe like in addition to the consumer preference perhaps waning a bit on laser, is it might be a little bit of price point also.

All very helpful. Thanks guys and good luck.

Thanks.

Thank you.

Our next question comes from Scott Stember with C.L. King. Your line is now open.

Good evening and thanks for taking my questions. Can you guys maybe talk about the promotional environment, particularly when looking at long guns, you talked about some of the puts and takes of why you under-performed the NICS, it sounds like part of it was the fact that you backed off with some promotions, I don’t know if this bundling or whatnot, but just in general, just talk about the promotional environment and how much of the mix strength that we are seeing is reliant on people looking for deals and having to discount?

Sure. Scott, this is Mark. So, yes, there was some very successful bundles that we had in the comparable quarter last year that we did not repeat this year and so that some of that drop, but again, the majority of the decline in the quarter was really again de-stocking on the SRAs, but in terms of promotional environment, I think it’s still very much is what’s driving the consumer into the retail stores and they are still looking for that deal. There is a lot of capacity out there in the industry right now. And I think it’s how can you differentiate yourselves. The bundles have been great for us. We don’t really do a whole lot of them in the winter time, like this timeframe right now, just because we kind of use those to get an injection in the arm when we needed during our slower times and this is kind of coming to the tail end of the traditional show season where every dollar firearms retailers are offering are the site manufacturers are offering that the deals associated with the shows. So, I think it’s – we are going to continue to participate as we see necessary to continue to getting those consumers, giving them a reason to come into the store and choose our products and hold and take market share.

Okay. And you talked about inventories on the firearms side, can you maybe just talk about where you stand on the OP&A side particularly with some of the changes going on with your customer base?

Hi, this is Jeff. I mean, inventories are I would say at a steady state on the OP&A side. Again if you remember, we did buy extra, couple of quarters ago to help with the tariff situation and to also like deal with DC, but so at this point right now it’s a steady state.

Okay. And just the last question is far enough on coronavirus, you talked about how your factories I guess once a year you are getting parts from – are coming back online, maybe just giving us an indication of how much they are back online just try to – from a percentage standpoint just trying to get a gauge of when we have to start worrying about whether you guys are getting the parts that you need? Thanks.

Yes, this is brain. So, as far as I am aware, they are all back to full strength.

Okay, got it. Thank you.

Thanks

[Operator Instructions] Our next question comes from the line of Mark Smith with Lake Street Capital. Your line is now open.

Hi guys. Thanks for taking questions. First off, kind of a broad question why not as we look at the where you came in versus your guidance why not preannounce or update the guidance especially when we met right here at the end of the quarter?

The answer to that is that we think at the time that we tell you what is happening in the quarter we like to also like let you know what’s happening in the next quarter we have no specific rule about I mean internally about whether we are going to preannounce or not so I don’t think that anyone should assume that a preannouncement it means something different well if we don’t it means something different we judge the situation every time based on the current facts and personally I believe that when we issue our results it is better if we let the street know what is going to happen in the future as well as to what just happened in addition we do like to do a lot of analysis on the reason for the miss it really is only a little over five weeks after we closed the quarter so it takes time to get the numbers we want to be as open as possible trying to explain everything and do the analysis and it takes time so we don’t always make that decision to not but this time we did

Okay and then looking on the firearms side Mark a question for you there are lessons that we learned here was the inventory in the first half of the year pushed too heavy on retail or primarily distributors and then to be able to get these repeat orders from some of your key strategic retailers here are you going to need to reduce prices in a fairly competitive environment to get those reorders?

Okay so two parts of that question so the first half the distributors so again just as a reminder it was not distributors that went to the destock and we think that the inventory levels at distribution are appropriate as evidenced by the fact that they have remained steady their order flow remained steady it is really the SRA and in terms of whether there were two high I guess apparently they felt they were but again they were pretty steady through the first half of the year. So we cannot really point to exactly what happened there and why they decided to lower them but we will work with those customers and understand what they are comfort levels on inventory and again soon as we kind of get through and meet their targets and their goals they are going to start ordering from us again I mean the story again here is the underlying market is very healthy and strong

Okay and then looking at modern sporting rifle in particular pretty recently we have seen three major manufactures that looks like they are exiting the space can you talk about your outlook for modern sporting rifle does this take away some competition and may be give you opportunities in the space or is it really that difficult in that space right now to be profitable

Definitely not difficult but the profitable at least for us in that space and it remains a key part of our product line those I think that there was some exacerbating factors and at least some of those brands that got out I am not going to comment anymore on that but and the other thing I will tell you that for the many have got out we have got some new entrance into the market we are very permutable competitors and have great products so I don’t think we were holding our market share we are growing slightly but I don’t think that is going to have a huge impact on our them getting out is going to have a huge impact they were already a pretty de minimis part of the market place by the time they went out.

I just want to point out that as far as the percentage of firearms MSRs are fairly low it varies but less than 15% right now.

Okay and then last question just looking at OPNA last quarter you guys talked about some timing of shipments out in to the channel that kind of hurt OPNA last quarter you did may be walk through the timing or sequential sales process through the quarter we did a start out stronger and yet weaker may be as went post holiday or just any insight you can give us and to kind of the cadence of sales went in that business would be great

Sure this is Brian so one of the things that you may heard it in the prepared remarks is we really want to get to a healthy level of replenishment with all of our customers and that helps us better forecast demand helps us better align with our supply base and in often times it does not come when you start having that sort normalized demand of our time and replenishment and fewer bulk buys sort of lumpy bulk buys it also helps increase your profitability and you are leaning towards more replenishments so for us we have been trying to work with our customers some of our largest customers to really focus on more normal cadence of replenishment orders which is what you are seeing Q3 I think it is a little masked just because of some of the onetime events but excluding those we said we were up 7.9% excluding those onetime events. And that’s really to me is a more normalized across all product categories what that new replenishment looks like I don’t want to infer that, that is a growth rate you should use in the future but in terms of picking up some of the what we had described and what you described, just due to the timing of some of those customer orders it really is moving away from those lumpy bulk buys to that sustained replenishment demand

Okay great. Thank you.

We have a follow-up question from the line of Cai von Rumohr with Cowen & Company. Your line is now open.

Yes thanks I think in terms of discussing the sales net of a federal excise tax looked like it was about a $14 million disappointment or decline you mentioned three factors so the channel destock the both action clearing and also the MNP could you basically give us some sense in terms of the relative size of those factors

Actually we haven’t really provided the detail Cai on the size of the each of the factors you can sort of look at the long guidance we broke down our guidance between OPNA and firearms for the year you can look at that reduction this year and as we said with respect to firearms most of the unexpected drop relates to this SRA issue so you can just even look at the drop of sales like most of that is SRA and then with respect to the OPNA business without I characterize in it I would say it was all equal contributors of the three things that we had talked about which is the like the weakness in the laser market and as well as the other items that we discussed the private labeling and so hopefully that will directionally give you some ideas

That’s very helpful thank you so much appreciate it

Thanks

I'm showing no further questions in queue at this time. I'd like to turn the call back to Liz Sharp for closing remarks.

Thank you operator on behalf of Mark Brian and Jeff we want to thank everyone across American Outdoor Brands for their commitment and dedication to excellence thank you all for joining us today and we look forward to speaking with you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.