Thank you for standing by, and welcome to the American Outdoor Brands Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions].

And now I'd like to introduce your host for today's program, Liz Sharp, Vice President of Investor Relations. Please go ahead..

Thank you, and good afternoon. Our comments today may contain predictions, estimates and other forward-looking statements. Our use of words like anticipate, project, estimate, expect, intend, should, indicate, suggest, believe and other similar expressions is intended to identify those forward-looking statements.

Forward-looking statements also include statements regarding our product development, focus, objectives, strategies and vision; our strategic evolution; our market share and market demand for our products; market and inventory conditions related to our products and in our industry in general; and growth opportunities and trends.

Our forward-looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings.

You can find those documents as well as a replay of this call on our website at aob.com. Today's call contains time-sensitive information that is accurate only as of this time, and we assume no obligation to update any forward-looking statements. Our actual results could differ materially from our statements today.

I have a few important items to note about our comments on today's call. First, we reference certain non-GAAP financial measures. Our non-GAAP results exclude amortization of acquired intangible assets, stock compensation, transition costs, COVID-19 expenses, related party interest income and the tax effect related to all of those adjustments.

The reconciliations of GAAP financial measures to non-GAAP financial measures whether or not they are discussed on today's call can be found in our filings as well as today's earnings press release, which are posted on our website. Also, when we reference EPS, we are always referencing fully diluted EPS.

Joining us on today's call is Brian Murphy, President and CEO; and Andy Fulmer, CFO. And with that, I will turn it over to Brian..

Number one, increasing our market share by launching new products within existing categories; two, by entering new large product categories where our brands have permission to play; three, by entering entirely new consumer markets that increase our total addressable market opportunity; and number four, by broadening our distribution by onboarding new customers that reflect our brand's expanded permission to play.

On a combined basis, we believe this strategy will support organic sales growth at a compound annual growth rate of between 8% and 10% over the next 4 to 5 years, exclusive of any acquisitions. That implies at the low end that we have a plan to more than double the size of our business organically since the separation in August 2020.

And we believe that growth is just the beginning. As we work to achieve that growth, we will continue to focus on delivering long-term profitability.

Our investments in product development and marketing and distribution infrastructure have resulted in a platform with largely fixed costs, helping us deliver record profitability in fiscal '21 as our net sales grew.

As a result, we believe this platform has the ability to deliver EBITDAS margins in the mid- to high teens over the next 4 to 5 years as well. We could not be more excited about our future.

We are proud of the foundation we have established in our first year as a public company, and we are poised to build on that foundation, setting our sights on future growth and taking our brands from niche to known. With that, I'll turn it over to Andy..

first, the significant increase in net sales and the resulting leverage of our fixed costs; second, the absence of promotions in the market; and third, reduced travel and the absence of in-person trade shows driven by the pandemic-related restrictions.

As we've mentioned on prior calls, the spin-off changed the accounting treatment of our Missouri headquarters from a finance lease to an operating lease. Had the full year been treated as an operating lease, adjusted EBITDAS would have been approximately $700,000 lower at $46.6 million or 16.8% of net sales.

Looking ahead to fiscal '22 and beyond, that annual cost will be treated entirely as rent expense. Turning to the balance sheet and cash flow. We ended the year with $60.8 million of cash and no borrowings on our line of credit.

Our full year cash from operations was very strong at $33.3 million and was netted by cash outlays for CapEx and patent costs of $4.2 million, in line with our expectations. As a result, free cash flow for the year was about $29 million.

Our balance sheet is incredibly strong at this point, and we believe it is adequate to support our investments in organic growth as well as any tuck-in acquisitions we may choose to pursue. Now let me turn to a discussion of our IT infrastructure.

You'll recall that our spin-off last year included a 2-year transition services agreement with our former parent company. That agreement provides for 2 years of full IT support while we stand up our own independent AOUT platform. As a result, our spin-off strategy has always included a goal to set up our IT infrastructure by August 24, 2022.

By way of an update, I'm pleased to report we have in place an extremely capable and experienced IT leader and team, who have developed a tailored business-wide IT strategy based on a platform that has been chosen and designed to meet our company's specific needs now and into the future.

This is an exciting investment for us as we look to enhance our analytical capabilities and prepare our company for future organic and inorganic growth. We estimate the implementation costs of this project will be approximately $8 million by the time we go live, a little over a year from now in fiscal '23.

We expect to capitalize $5.4 million of that cost and incur the balance of $2.6 million as onetime operating expense. Let me provide a bit of detail about the cost impact specific to fiscal '22. CapEx spending in fiscal '22 for IT will be about $3.5 million and onetime operating expense in fiscal '22 for IT will be about $1.6 million.

In addition to the $1.6 million of onetime expense, we will also incur duplicative expenses of approximately $1.2 million as we run both the existing and new platform side by side prior to the go-live date.

We will treat both the $1.6 million and the $1.2 million as nonrecurring transition costs when calculating non-GAAP operating expense and adjusted EBITDAS. Turning now to CapEx outside of the IT project.

We expect to spend approximately $4 million to $5 million in capital expenditures in fiscal '22, mainly for product tooling and trade show booths for industry shows. To recap, our total CapEx for fiscal '22, including IT and all other CapEx, is expected to be $7.5 million to $8.5 million. Turning to inventory.

We ended the year at $74.3 million of inventory, up a bit sequentially from Q3, but somewhat below our expectations. You'll recall last quarter, we said we expected inventory to increase in support of new product launches, in order to mitigate supply chain risk, especially for high-volume SKUs.

Unfortunately, supply chain constraints and port congestion hampered our ability to build inventory to our preferred levels. That said, our team is focused on overcoming these hurdles, as we work to build up our inventories in fiscal '22 in support of new product launches and to increase safety stock levels to mitigate these risks.

Finally, we ended the quarter with no outstanding bank debt and the full capacity available on our $50 million line of credit. This facility provides an additional $15 million of availability under certain conditions.

Our cash balance combined with our line of credit capacity provided us with over $125 million of available capital at the end of fiscal '21. Brian and I continue to see a high number of acquisition targets coming to market. We also remain very disciplined in our approach when assessing these opportunities.

Our strategy remains focused on finding brands that complement our current portfolio and have runway for growth, operate in large total addressable markets and allow us to apply our Dock & Unlock strategy to build value for our shareholders. Now turning to our guidance.

We estimate that net sales for fiscal '22 will be in the range of $280 million to $295 million. With net sales in that range, we would expect full year GAAP EPS in the range of $1 to $1.24 and non-GAAP EPS in the range of $2.02 to $2.26. We would also expect adjusted EBITDAS of between 15% and 16% for the full year.

In fiscal '22, we expect to see a resumption of selling and marketing activities to more normalized levels. compared with the absence of those activities during the pandemic-related restrictions of fiscal '21.

As a result, we plan to incur costs in support of increased business travel and costs related to trade show participation, including ICAST next week in Florida and SHOT Show next January in Las Vegas. In addition to this activity, we expect to see some level of promotional activity returning to the market as well.

Finally, we expect our effective tax rate will be approximately 25% and our fully diluted share count will be about 14.5 million shares. With that, operator, we're ready to open the call for questions from our analysts..

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

A couple of questions, if I may. I guess, first off, looking at the fourth quarter specifically, the e-commerce mix versus retail dropped materially year-over-year versus the fourth quarter last year.

Is that merely a timing of shipments, the impact of kind of the retail economy picking back up? Or is there something else there? And how should we think about that mix shaking out in fiscal '22 relative to the 40-60 kind of split last year..

Eric, it's Andy. Great question. So when you look at Q4 over Q4, last year Q4 was when the pandemic was starting to affect sales. We had noted last year in the earnings call, there were some anomalies with orders during that time frame and -- kind of brick-and-mortar retail and e-comm.

I think if you look at the trends over the quarter, we started Q1 50-50, kind of almost 50-50 split between e-comm and traditional, went back to 1/3, 2/3 in Q2, and that's what you saw in Q4 as well..

Yes. I mean -- this is Brian, Eric. Certainly, we saw year-over-year, there are much -- just many more stores open at this point. I also think that retailers have been doing a lot of hurry-up offense to get their own retail storefronts up to speed online as well, and those would be captured as part of our traditional sales channel.

So I think some of the customers that we have there have done a really good job getting up to speed. Obviously, more doors are open compared to -- I think last year, we had set at 1 point that we were tracking over 1,000 retail doors that were closed. So I think it's just the economy opening back up in general..

Perfect. And then just second question, kind of a 2-parter on the supply chain. You noted initially that a lot of your retailers or customers know you did a better job than some of your competitors keeping products on shelf as I assume, transited into market share gains in the period.

Any specific categories this would be reflected in? And how do you think that dynamic changes possibly as the supply chain possibly catches up? And then on the supply chain specific, do you -- was there any impact on your ability of product out there? Or is that merely a safety stock issue on inventory? And kind of what have you assumed in guidance around the supply chain?.

Yes, I can start, Eric. This is Brian. So first of all, our team did a fantastic job navigating some of the complexities that we were all introduced with here in our fiscal '21. And we definitely relied more upon our insights into POS and strengthening that chain that I've talked about before between POS and our inventory planning.

So our -- we have our own analytics team in-house here, and we bought ahead. We started to see some of those trends, and we wanted to make sure that we had sufficient safety stock here. And I think we benefited from that. We certainly, like you said, we took share during that period.

And like I said, our competitor -- or not our competitors, but our customers noted that we have done so. And then looking forward, Andy made a mention and he can probably chime in to about where we ended Q4, they were below our expectations when it comes to inventory levels.

So part of that is strong sell-through demand has outstripped supply in some cases. But we haven't seen -- you asked the question about like product categories or by brand. We haven't necessarily seen pockets within our portfolio where we're missing the mark.

I think it's just across the board with our portfolio given the strong demand, it's just demand is very strong right now.

Andy, anything you want to add to that?.

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

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

Going forward, could you just walk us through what you expect seasonality to be on a quarterly basis, just to help us model a little bit. In fourth quarter versus a typical third quarter or first versus a second.

Just maybe walk us through that given this is the first time that we've been around the block from an earnings perspective with you guys?.

Sure. Scott, this is Brian. So I'll start and Andy can chime in. So if you look back historically, pre-FY '21, typically our Q2 has been our highest quarter. This last year in FY '21, we saw that shift a little bit. Obviously, there was a lot of pent-up demand as stores started to reopen in Q2 and Q3. And so actually, our Q3 was our peak in FY '21.

I'd say going forward, we're expecting that a similar hump between Q2 and Q3. Some of our retailers, too -- we had talked about returning to some level of promotional environment. We do have some promotional SKUs that we do utilize and those can shift sometimes between Q2 and Q3. But overall, that's kind of the hump that we're talking about.

So whether it's going to happen in Q2, Q3, too early to tell. But I would say, between those 2 quarters, you're looking at the biggest hump for the year.

Andy, anything you want to add?.

No, that's spot on..

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

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

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

But can you just compare Q3 versus Q4?.

Yes. I think one stat that you can pick up in the 10-K is the increase year-over-year as of April in backlog. So our backlog at the end of last April was $1.8 million, and that rose to $15.2 million at the end of fiscal '21. So I think that's a good indicator of -- that's kind of twofold.

That's both future-dated orders, but it also has a decent chunk of orders we could have shipped if we had the inventory..

It's been carried over..

Got it. And just last question on the guidance. I appreciate obviously that it was a perfect storm of lack of expenses and certain travel and not flying anywhere, and then you're getting just incredible sales throughput. But going forward, is there any other items in there? I know that you had talked about.

We're going back to a little bit more of a traditional, I guess, retail versus e-comm. I know that e-comm generates higher margins.

Is that baked into your guidance as well?.

Yes. This is Andy again. Yes, our guidance really contemplates all of that. Obviously, our model kind of looks at both e-comm traditional. You are correct. We've said that in the past that e-comm margins are generally higher because of the fact that direct-to-consumer is in there.

And then, yes, going into fiscal '22, we plan on investing in travel, trade shows and other really brand investments. We saw some really good investments that we made in fiscal '21, and we're going to continue to invest for our long-term growth..

Yes. Scott, if I could add too, this is Brian. We made the comment before, we want to be wherever the consumer expects to find us. And so certainly, in FY '21, they were increasingly going online. Like I had said, some of the traditional customers have done kind of a hurry-up offense to put out their own sites, make sure that they have that capability.

So again, we want to continue to be where the consumer expects to find us. Direct-to-consumer is also a big part of e-comm. We continue to believe that we're in the early stages of seeing that growth. So I would expect that, that would continue for us as well..

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

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

Correct?.

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

Okay.

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

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

Okay. That's great. And then just looking at the -- you've talked a little bit about the promotional environment.

Can you just kind of rate what you're seeing today in a promotional environment basis versus kind of what you're expecting to kind of ramp later in the year?.

Sure. This is Brian, Mark. We're not seeing a whole lot, to be honest with you, at this point. What we're going off of is what we've heard from our customers and what other public companies who happen to be our customers have talked about.

So -- and they've sort of alluded to their calendar year or calendar year, call it, Q3 and Q4, maybe part of that in Q2. But we're not seeing a whole lot of that right now. I think that the demand remains robust. But for us, we could see that later in the year. And again, I'm just going off of what our customers are planning at this moment..

Okay. That's fair. And then looking at distribution channels, we've seen some UST stuff at Costco.

Can you talk about increasing distribution and maybe any positive impact that, that has had over the last year?.

Sure. Yes, I'm glad you asked, Mark, it's Brian. Yes, we've seen a tremendous acceptance for our brands as they've continued to march down the path of niche to now using our Dock & Unlock formula. So yes, we're showing up now in home and hardware stores, which is great as we address the broader land management tool category, which is very large.

Obviously, you mentioned UST getting into some of those distribution channels like Costco and even places like REI, which is fantastic. And even some of our BUBBA products are making their way into other distribution channels as well some of the home and hardware, in some cases, even being pulled into the kitchen.

So I think we'll see a continuation of that across our brand portfolio that we'll be excited to share with you going forward..

Perfect. And the last one for me. The guidance, I assume, does not include any acquisitions.

But can you just talk about what you're seeing out there on the M&A front today?.

Sure, Mark, this is Brian. We are seeing a lot of M&A. There -- I've been -- I kind of started in mergers and acquisitions, investment banking, was an advisor for a period of time. And I thought I saw a lot of M&A when I was an investment banker.

Now on this side, we're just seeing a ton of volume right now, in particular, founder, sellers that are coming to market. And I think one of two reasons. Number one, they did see a nice pop last year. And we got a pretty good sense of who performed well before that and who maybe saw an uptick, a slight pick due to COVID in their particular categories.

And then the second is for tax reasons. I think that some of the founder sellers are expecting or maybe preparing for if there is a change in tax code that they are going to be hit with higher tax rate.

So they're trying to beat that and getting to market sooner -- With that said, there's also a lot of competition for these assets, which has created a higher valuation. I would say, floor. It's not uncommon for us to see deals done in the double digits, low to even teens in some cases.

So we're -- like Andy had said in his prepared remarks, we're remaining very diligent, making sure that we're finding the right deal. It fits our criteria, and it's out there. But again, we're going to remain very, very diligent..

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

This is Krista Zuber on for John.

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

Krista, it's Andy. Great question. So margins going forward, our guidance assumes really no change in tariffs. We don't -- certainly don't know if anything come down the pipeline on that. With respect to kind of other pieces of the margin, Brian mentioned later in the year, some additional promotional costs, those are baked in.

And when you look historically, kind of fiscal '20 into '21, we've been kind of typically in the mid-40s with respect to margin percentage..

Okay. Great.

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

Yes. Another good question. So as we look, we guided kind of $7.5 million to $8.5 million this year with a big chunk in IT. This year, we'll also have more of a onetime cost for trade show booths.

And really, that's because under our former parent company, our trade show booths were under that parent company and now spun off after COVID as we attend these trade shows, we're investing in those booths. So if you look back, kind of the rest of it, we look at our business as a relatively low CapEx company.

It would be variable with respect to new products and also revenue because most of the remainder of that CapEx is related to product tooling. Back in fiscal '19, we were roughly $2 million or so at a $171 million or $177 million of net sales. And as -- obviously, you can see that as the business is growing, we will invest more in product tooling..

Okay. Great. And then just finally, I think you announced in May the promotion of Curtis Smith to your Chief Marketing Officer.

Just in relation to sort of OpEx, how do you kind of see your marketing initiatives evolving from here in fiscal '22 as it relates to customer acquisition costs and retention?.

Yes, again this is Brian. So yes, very excited. Curtis was promoted to our Chief Marketing Officer. Curtis and I have been friends for a long time and worked in previous lives together. Curtis really helped with the senior team establish our Dock & Unlock process that we have.

So he's been very involved along with me and the rest of the team to really unlock the power of these brands. He's got a lot of experience there. And so we'll continue to make investments in marketing going forward to unlock the potential for the 20 brands that we have.

And also, as we look to acquisitions, how do we find these acquisitions and these companies that we believe are underserved, but could the potential be unlocked in our platform. So -- and also with that -- and you mentioned some of the kind of customer acquisition, things like that. We spend a ton of time looking at that.

And over the last year, if you look at our Q4, for example, we took some of the savings from our trade shows that we had spent on trade shows and reinvested that into marketing. We have an incredible new e-comm platform, and we have -- we get some really good insights from that.

So we plug money into that to retain those new consumers that we've attracted over last year, and we're going to continue to leverage insights into that consumer base. It not only helps with us with our existing products. But as we mentioned, we're going to come out with 300 new products this year. It really helps as we launch new products.

So we're very excited about that..

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

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

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day..