Q1 2021 Smith & Wesson Brands, Inc. Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue standby. Thank you for your patience.
[music].
Good day, everyone and welcome to Smith, <unk> Wesson brands Inc. first quarter fiscal 2021 financial results Conference call. This call is being recorded.
At this time I would like to turn the call over to Rob Cicero General Counsel, who will give us some information about today's call.
Thank you and good afternoon.
Comments today may contain predictions estimates and other forward looking statements.
Our use of words like anticipate project estimate expect in 10.
I believe and other similar expressions are 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 or market share and market demand for our products.
Market inventory conditions related to our products and in our industry in general and growth opportunities in trends.
Our forward looking statements represent our current judgment about the future and they are subject to various risks and uncertainties.
Factors and other considerations that could cause our actual results to be materially different.
Our described in our securities filings, including our periodic reports on forms 8-K, 10-K and 10-Q.
You can find those documents as well with a replay of today's call on our website at Smith <unk> Wesson dotcom.
Today's call contains time sensitive information that is accurate only as of this time.
We assume no obligation to update any forward looking statements.
Our actual results could differ materially from are students today.
I have a few important items to note about our comments on the call today.
First we reference certain non-GAAP financial measures on this call.
Our non-GAAP financial results exclude acquisition related amortization recall related expenses onetime transition cost cobot 19 expenses.
And the tax effect related to all those adjustments.
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 securities filings as well as today's earnings press release, which are posted on our website.
Also when we reference heap, yes, we're always referencing fully diluted EPS, yes.
As many of you May know on August 24, 2020, the company completed the previously announced spend all of its outdoor products and accessories segment.
Therefore first quarter fiscal 2021 represents the final period in which our financial results will include the outdoor products and accessories segment.
On the call today, we're going to focus primarily on or firearms business.
Joining us on today's call or Mark Smith.
Resident and Chief Executive Officer, Andina, Macpherson Chief Financial Officer.
With that I will turn it over to Mark.
Thank you, Rob and thanks, everyone for joining us.
First let me recap for everyone. Our response related to covert 19.
From the onset of the pandemic, we have taken aggressive and decisive action to ensure the health and safety of our employees, while continuing to operate our business in this challenging environment.
All of the safety precautions, we spoke about our last call, which we put in place in March and April.
We're still in effect today.
Those include travel restrictions staggered shift enhance cleaning <unk> sanitizing required social destined thing.
Use of face masks temperature screening.
Certified production lines and many other changes to our work flow and daily operations.
All designed to mitigate any virus spread.
In addition to keeping our employees safe. These actions have allowed us to continue operations and also give back to our community.
Over the past six month, we have produced and donated tens of thousands of sets of P.B. for medical professionals and frontline personnel in our community and we are still accepting and delivering donation request.
We continue to monitor daily developments with the grown a virus pandemic and stand ready to make any adjustments as needed.
I'll now turn to our first quarter performance.
I'm very pleased to report that despite the enormous challenges presented by the pandemic. Our team has delivered a record breaking quarter in firearms sales.
Our firearms segment revenue of $230 million represents shipments of more than 584000 units both of which are new records representing milestones in the history of our great company that our employees should be extremely proud of.
This achievement clearly demonstrates our ability to rapidly respond to increase demand through our flexible manufacturing model and our state of the arc distribution facility.
We believe these strong quarterly results have also translated into long term market share growth.
But before we go through those numbers two quick note.
First as a reminder, adjusted Nics background checks are generally considered to be the best available proxy for consumer fire on demand at retail however, since nics as a measure of consumer activity and since we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers.
Not directly to end consumers Nics does not directly correlated to our shipments where market share in any given time period, we believe mostly due to inventory levels in the channel.
Secondly, as you'll recall, we have three main consumer sales channels distributor strategic retailer, whereas IRA and buying groups.
In the path, we have only provided distributor inventory levels going forward. However in order to provide more insight into our business. We will now provide quarterly channel inventory totals that include both strategic retailer and distributor inventory levels.
Additionally, we will break down channel inventory into long guns in hand guns, whereas historically, we have only provided inventory totals.
So with that continuing on with market share.
And our fiscal Q1 overall nics background checks increased 111% over the comparable time frame last year.
For Smith, and Watson total units shipped into the sporting goods channel. During this time increased 114% to 549000 units.
Simultaneously our S array and distributor combined inventory declined by over 112000 units.
Breaking that number down a little further nics checks for handgun increased 141% during the quarter.
Our handgun units shipped increased by 122% to 441000 units.
While simultaneously our handgun channel inventory dropped by 103000 units.
And finally nics checks for long guns increased 96% in the quarter hour long gun units shipped increased 89% to 108000 units.
While simultaneously our long on channel inventory dropped by nearly 9000 units.
This all translates to a 58% decline in channel inventory for our products in spite of a record quarter in unit shipments from our facilities.
We believe indicates very strong market share growth.
Our internal finished good inventory also declined by almost 48% or $28 million during the quarter.
As we've seen before during the search period. These results reflect that despite our record numbers and market share growth consumer demand for our products during the quarter still exceeded our internal manufacturing capacity levels.
This again highlights the unique benefits provided by our flexible manufacturing model.
You may recall that we have referenced this model in prior calls.
This allows us to capture the benefit of sudden increases in demand without incurring long lead times in the high cost of adding manufacturing infrastructure that has been idled when demand decreases.
As we discussed on our last call we have fully Reengaged, our third party component manufacturing partners and are aggressively ramping production to meet incoming orders and this ramp continues today.
Further we were able to utilize our state of the our distribution center to deliver products more efficiently and rapidly than ever before.
Moving now to our go forward plan that we have been speaking about for the past few quarters.
As you're aware, we successfully spun off our outdoor products and accessories segment last week and we have now returned to Smith and lessons heritage as a pure play firearms company.
With a focus on organic growth and returning excess capital to our stockholders.
And therefore very excited to announce that our board of directors has authorized the company to declare a regular quarterly cash dividend of five cents per share.
Our first quarterly dividend will be payable on October onest to shareholders of record as of September 17th.
Before I hand, the call over to Dina for the financial highlights I just wanted to speak about a tremendous program that our sales and marketing teams have launched in the last few weeks.
The current increase in consumer demand for firearms is in many ways unparalleled.
A recent Paula firearms retailers conducted by NSSF estimates that between 40% to 60% of the consumers purchasing firearms are first time gun owners, who are looking to exercise their second amendment rights to protect themselves and their families.
Since March the assets that estimates that nearly 5 million Americans have purchased their first firearm.
Not only are we seeing record new consumer entrance in the market, but those new entrants are serving to broaden and diversify the core base of firearms consumers with the two fastest growing segments of new gun owners being women an African Americans.
In light of this new surge and as part of our continued commitment to safe and responsible gun ownership, we have launched an innovative nationwide outreach campaign called guns marks.
We have three goals with this program.
First.
Welcome these new gun owners to our industry.
Second.
Make sure they know how to safely use can store their firearms.
And finally provide instructional resources from Smith and lesson on increasing shooting proficiency help them understand the basics of firearms function.
And help them locate welcoming hands on training ranges and other resources.
Everything a first time gun owner would want to know, but may not want to ask.
Gun smart to the only program this kind on the market today.
Using the very top professional shooters and instructors and the industry. We have produced over 60 instructional online videos and tips to help convey best practices.
All regardless of the brand a fire on purchased.
Further we are providing free of charge and again, regardless of the brand of fire and purchased a welcome kit to new gun owners that includes Smith <unk> Wesson branded safety glasses hearing protection instructional booklets and a link to our online platform containing the video library.
This program launched in mid August and by mid September we will have donated over 40000 guns, mark boxes to new gun owners.
In collaboration with other industry partners guns March will also offer several sweepstakes over the next few months to keep our new consumers engaged.
As an industry and as a company, we are dedicated to safe and responsible gun ownership.
And we are proud to be able to welcome these new gun owners to our community.
Please visit Www Dot Smith dash Wesson Dot com forward slash gun smarts to see the program tools for yourself.
With that I'll turn the call over to Dino.
Thanks Mark.
But we have now completed this at all of our outdoor product accessories business.
Our filings today represent our first quarter, which ended on July 31st.
Therefore, our form 10-Q, which was filed this afternoon reflects results that includes the spun off business in our operating results.
Beginning with our second fiscal quarter, the outdoor products and accessories business will be reported as discontinued operations.
A significant increase in consumer demand that started in the middle of March continued throughout our first quarter and led to the total combined company revenue of $278 million.
A $154.3 million increase or more than double the prior year results.
This increase was driven by a 134.4 million dollar or a 141% increase in fire arm revenue, resulting in a record first quarter firearms segment revenue of $230 million.
These incredible results are a testament to our operations management team the increased fire arms production output utilizing a combination of targeted headcount increases and continued activation of our flexible manufacturing model all while keeping our employees safe during the pandemic.
Total company gross margin of 42% was 3.3% higher than the prior year on improved volume in both segments.
Turning now to a discussion of just the firearms segment, which generated margins of 40.2%.
Increased unit shipments combined with the reduction in promotional activity and only slightly offset by pandemic related costs resulted in a 3.1% increase in gross margin over the prior year.
In June of last year, we began reporting the federal excise tax change in our revenue.
And now that it has been in place for a full year.
This will be the last time, we referenced in comparison to prior year quarter.
This change if applied to the fiscal 2020 quarter.
Would've had a 4 million dollar impact on revenue and a negative 1.5% impact on gross margin to that prior year quarter.
Total company operating expenses were $4.6 million higher than the prior year due to $3.6 million a spin off costs.
And $2.8 million of increased profit sharing expense.
Increased volume related customer allowances were more than offset by reduced travel.
Lower advertising costs.
And lower employee medical costs.
Likely due to the deferral of elective procedures, resulting from the pandemic.
The increase in revenue and gross margin led to a significant profit gain as compared to the prior year comparable quarter, including.
Net income of $48.4 million.
GAAP earnings per share of 86 cents.
Non-GAAP earnings per share of 97 cents.
And adjusted EBITDA of $84.2 million.
During the quarter, we generated $83.5 million in cash from operation and spent $7.6 million on capital equipment.
Leaving $75.8 million in free cash.
We also repaid $135 million on a revolving line of credit, leaving $25 million outstanding on the revolver and zero net debt.
After the end of the first quarter as part of the spinoff process.
We restructured our credit facility for a new five year term that enables us to maintain an unsecured 100 million dollar line of credit for the foreseeable future.
With that operator can we please open the call to questions from our analysts.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press Star then the number one key on your touched on telephone.
Withdraw your question press the pound G.
I guess that Star then one if you'd like to ask a question at this time.
Our first question comes from Scott Stember with CL King Your line is now open.
Good evening and thanks for taking my questions.
Yes, Scott.
Limited just talk what the market share again, I guess kind of like what we saw last quarter you were speaking to the fact that.
Nicks and your shipments were I guess.
Your your numbers were a little bit lighter to the fact that distributors are working down on your inventory I just wanted to make sure. If that's still if that's what you're trying to get out.
Yeah, if you remember last quarter weird actually talking about the S arrays that really drove that that difference in next Tory. So I mean, obviously you know it's just a mass balance so that mix, obviously as a measure of the of what's happening at the counter with the consumer.
And we have that we have our three channel partners or three channels in between US our shipping dock and what's happening at the counter so that you know the major driver. We believe of difference between our results and Nics results is what's happening with with the inventory in the channel. So during that timeframe. If you recall from.
From that that earnings call, we had a significant increase or sorry significant decrease in inventory at one of our Sri accounts.
So therefore, they were not replenishing from us, whereas this time, we've had significant decreases in inventory across the board internally and all the channels and we are still obviously as you can see from the results.
Pretty heavy on shipments, which tells US that you know there's a significant you kind of got to add those numbers together to get what our true cash flow through was.
Got it and going forward, obviously, you guys have a very favorable set up utilizing outsourcing and stuff like that but how.
How are you seeing the picture for the next few quarters. You think you can easily keep up with demand or well there gets to be a point, where you're not able to close that gap, what you're seeing on the inventory.
Yeah, I don't want to get too much into forward looking statements on I think you know just directionally, we can talk about history and whats happened before in the past you know our when we get into the surge environments like this and as you can see from the next results we've never seen one quite as high.
The you know that the demand in the industry in general just outstrips, the industry's ability to be ability to supply and we're no different.
So you know when that the industry goes through cycles as we've talked about for you know for years and you've seen so when that how that turns around and when it turns around and I guess you know what we're not going up I.
I guess.
Speculate about what you know what those drivers are going to be but again, we are very very well set up as you mentioned with our flexible model to you know to continue increasing work you know I mean as I as I mentioned in the prepared remarks, we're continuing to increase today. There does come a point, though where you know that's you know there's only so much we can do and and I know whether that's gonna.
To meet the demand or.
Or not and I guess, you know I guess, we'll see.
Alright, Thats all I have no. Thank you.
Our next question comes from Cai von Rumohr with Cowen. Your line is now open.
Yes, thank you very much.
Great quarter, obviously so.
I just I didn't quite get so you said the.
The inventories were down 103, and handguns and 90 day.
Excuse me 9000 and.
Yeah, and long guns, so that's year over year correct.
No that no answer that in the quarter.
Center in the quarter, Okay, Okay, so, which which gets to the next point and our you're going to break I think you've said you would break all that Don I didn't see than that in Q.
Right. Okay. We did just send the script information to you. So that you could get the numbers that were in the script. So they could understand what that was what we did just show you what are the reduction in the quarter was and compare that to our units. So like you say with handgun units being in.
Increased shipments of 122% and then the hundred 3000 units you can quickly figure out that the 141% next handgun units up is very comparable so it shows that you know more than likely we're taking market share because of our ability to ship that much and what was taken out of the channel.
Got it and then.
Mix were up a.
51% in August and I'm looking at where your inventory was and where distributor inventories were at the end of July.
Were the mix adversely impacted by just lack of and lack of supply.
Absolutely not.
Oh, yes, absolutely.
Yeah, I I think the the industry in general idea as mentioned I think you know where it we're into one of those surges where that the industrys ability to supply has outstripped by the demand and I think what you saw in you know I mean, obviously.
What is the only you can look at the inventory numbers from us and from some of the other firearms retailers and manufacturers and and I think what does that inventory.
Got it Okay and then so when do you want to give us. The you mentioned that air UTI is gonna be treated as a disco, but and doing our models.
When is that kind of happened that's going to happen with the next quarter. So we'll get all the restated numbers, yes, yes, when we do our second quarter in December.
Everything from May 1st forward will be removed in last years numbers will be restated.
With that as a discontinued operation.
But we won't get them until that.
Correct.
You can look at the 8-K that was filed that will give you the 2019.
Our fiscal 19 disappointing.
Discontinued ops for like an annual.
Got it okay I should help.
Excellent Okay Super Thank you very much.
Thanks, guys.
Our next question comes from James Hardiman with Wedbush Securities. Your line is open.
Hey, good afternoon.
Thanks for taking my question obviously.
A great corridor.
Just a clarification on the the guidance obviously, most companies pulled guidance heading in to coated but is this more than that you go forward assumption that the that the standalone firearms business will will not be giving us guidance going forward.
Yeah, that's correct, if you're calling the last call we kind of talked about going I mean, we really were looking for more of a longer term focus. Obviously this industry is seen as everybody is well aware pretty cyclical.
You know and we're managing for long term, we're not going to be writing quarterly guidance anymore.
Okay, Okay, that's about thought and but just to help me understand.
How to think about where you are for me from a manufacturing perspective.
Obviously your own internal inventories are our way low.
You talked about how retailer inventories are way low it sounds like you're going to be pushing your plan set at sort of maximum output equals the third party manufacturing.
For some time I just want to get my head around.
As I think about what you delivered in the first quarter.
Is there room for upside to that number meeting.
Right, if you're asking your question if you're if you're pushing out as much as you can for the next week and I guess you probably.
Two thirds of the way through this quarter, but.
How should I speak about.
Manufacturing capacity in where you were in the first quarter and if there's any live there.
Yeah, I think you know even though we do have a very flexible model you got to remember the you know were the the lead time from for making a fire arm is too long.
You know in terms of its not measured in weeks as measured in months and so you know a turn up.
And in.
Manufacturing and CNC capacity will translate into finished good coming off the line you know.
It's going to be.
You're looking at somewhere in six day, we kind of timeframe. So we're continuing to ramp as I mentioned in the in the prepared remarks, right now, but you're right. We're pushing we're pushing up the.
We're going to we're going to go to maximum capacity and you know I think you can kind of think of that like what we did in the first quarter, you took $28 million that inventory internal inventory we will replace.
You got to think about that in terms of sales value or not that's cost. So you've got things that that in terms of sales value will replace a significant portion of that better than half.
You know and.
You know so yes, you're going to get to the point where were capacity constraint I think James If you go back and look at the previous surges and kind of look at the tail you know the tail end quarters of those previous urges you can probably give them you know.
Kind of point you in that direction.
Okay, and then last just real quick clarification, maybe I'm doing the math wrong here, but and it's a small point, but longer on unit sales were up.
Not quite double.
But.
Dollar sales are up more than four x. So it seems like there's a there was a big ASP jump in long guns, Hey, My math right.
So what what's going on there.
So what you might remember a is that last year at this time, we had a discontinuation of certain Thompson center products. So there was a bulk purchase that sort of cleared out the channel for a period from July to January when the new products were launched so the.
Hey, SP definitely has been impacted in last year versus this year given that we have the new products out there they're buying on a normal trend.
So this is a more normalized lack of promotional.
Pricing that you are seeing any aspect yeah, I think judging got think last year was abnormally low this year is not an abnormally high.
Okay.
Perfect appreciate it guys.
Thank you.
Our next question comes from Steve Dyer with Craig Hallum. Your line is now open.
Thanks, Good afternoon appreciate the additional granularity.
Just following up on the on the last question. So you know I understand certainly there were some some reasons, but I guess fees were were impacted to the negative last year.
But theyre up fairly significantly even quarter over quarter and I'm guessing that has to do with just little to no.
A little can know discounting is this kind of as we look forward at least the last several quarters or are these sort of.
Reasonable numbers to to use I, just don't want to assume something your mix was really optimal or anything like that.
No I think there you know I mean, obviously you got it I mean its promotions, we're not doing any promotions right now that we didnt really do any promotions that all through our to our Q1, we ramped down the last of them I mean, I am trying to think back now I don't think we shipped them really much of anything in terms of promotional.
Orders in our quarter. So you can kind of pick that.
Driving forward I think that's probably answers your question.
Got it.
And then just sort of similar asking a previous question differently with respect to cold, but have you terms of production capacity of you had any hindrances or impacts from whether it be mid stage of work or just hoping to space things out or or are you are you finding mature.
Sure as efficient as you were sort of a previous surges.
Yeah, I think when when the a pandemic first hit and we were obviously everybody in the country in the World was it was trying to figure out where do we go from here, we definitely had some efficiency and impacts and as we were kind of relating our lines out and you know putting barriers in between stations or couldn't socially distance et cetera.
But as we now we've been dealing with this for the last six seven months.
I think we've kind of hit our stride our operations management team I cannot say enough about what it absolutely tremendous job. They did and you know really being able to keep all of our employees say first and foremost and then and then you know react to this increase in demand that we saw and you know really its kudos to them for these results.
So yeah, I mean, I don't think we're really not seeing much in the way of efficiency losses from and at this point.
Okay.
And then you know I think as we're approaching another contentious election here when you talked a little bit about the lead time being measured in months about weeks and thinking back to the last election. When it was you know the whole industry. Good and the result, Greg I guess sort of Steve, but we didn't do anything different.
We are is your sense in terms of ordering patterns from the channel at all different this time around so that you don't end up in the same predicament and if things don't don't go your way I guess do big making many bets in terms of.
Wrapping up.
Scaling down et cetera.
Yeah I think.
You know what I think it's been talked about a lot I do think that this election cycle is different.
In terms of what's happening now with this with the surge. This third is really not I mean, yes of course, there's some portion of the surge that's related to gun control.
Regulation fears, but the majority of the you know if at least a vast mid.
A large portion I want us and majority we all know if we know that but I mean.
A large portion of the demand is driven by folks who are just fearful of their personal protection and safety with starting with the pandemic and moving onto the civil unrest. So.
I think the analysis that put a number out last week or week before that you know estimating 5 million new shooters into the market or new gun owners into the market and since March. So you know really I do think that this bodes very well for us into the future in terms of those was how significant portion of those.
You know.
We estimate usually somewhere between or somewhere around a quarter of those in a normal environment will stay participating and we're pushing you know we're pushing hard as I mentioned with the guns March program to make sure that we engage those consumers and keep them for the long term.
So I think it's gonna be different after this election I'm not anticipating that we're going to have the large falloff that we did.
And then they other big piece of that is inventories you look at inventory in the channel right now and it's just nonexistent so for us to.
Got to refill the channel even one of them demand you know if and when the demand ever does slow down you know I think we're going to have a little bit of a softer landing, whereas if you look I think if you look at the inventory in the channel and 2016 inventory levels were already fairly healthy and so you know that the there was no channel fill.
After the election cycle, one you said the big than we lag.
So so pedal to the metal for the foreseeable future. One last question just on on the dividend I guess to the extent you you counter are willing to share just the dividend policy is the idea there that it's sort of a baseline level that you could sort of service through through all cycles in any kind of weather or because if you.
Keep generating free cash flow at the rate you're generating it over the next several quarters, you're going to cut up quite a stashes that is the idea that it's going to be a fixed dividend with the potential for.
Special at some point or is it something that you'd like what are your competitor sort of peg to net income or free cash flow something like that.
No, it's going to be fixed and a you're the first part of your question. There is where we're at so I mean, obviously, we came out of the gate here, we want me and we want of we want to we want to get into the dividends, we as we've been talking about for the past.
Past year now we want to return excess.
Capital to the shareholders and we are starting off at a level that we are extremely comfortable with.
You know you can draw your conclusions from there I mean, I think you're right I mean, yes, so theres theres, probably upside there on that on the dividend.
But it is going to be effect got it.
Alright, thanks, well done.
Thank you.
As a reminder, ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
Our next question comes from Mark Smith with Lake Street Capital Markets. Your line is now open.
Hi, guys first stuff wanted to dig into the long gun break down just a little bit sheer on not on units as well see a ASP.
Last year, obviously, some some Thompson center stuff that impacted that is as we look today can you talk at all about mix between kind of to see rifles and kind of modern sporting rifles.
And any impacted that's having as we look at manufacturing's right now in shipping right now.
Your focus really is.
Yeah, I don't think we've.
Ever provided that kind of break down and we're not and we're still not yet mark.
So I mean, I'll kind of pointed to back to you know the how the how the surge is usually work is you know it's gone control.
In an environment, whereas gun control, it's going to be you know the MSR isn't the pistol polymer frame pistols, followed by revolvers and then down to on thing so.
This one's a little bit different in terms of the fact that we got people you know not is not necessarily driven somewhat by fear of gun control regulation and just general feel of pure personal safety, but directionally, that's kind of how this or just go. So I don't fit that provides you any color you can use or not.
Okay do you feel like your youve been able to shift manufacturing to be able to hit the demand high demand for MSR is currently.
Yeah, we're very.
As I've mentioned, we're very flexible in terms of our mix and and as we've talked about before I think on some of the Investor days you know our internal capacity is very flexible in between product lines. So what machines that we used to make revolvers. We can also make festivals. We can also we have very flexible internal much.
Capacity basic and they can move depending on them on the market.
Mix.
Okay.
Then as we look at ASP, maybe in long gun and on handgun can you talk to you excluding kinda promotions going away I'm kind of your your Espeed. If you guys taken any across the board price increases on just kind of a typical you even if we look at MSRP or was selling.
Prices for you guys right now.
We did not in a exceeding our first quarter, but typically our.
Pricing adjustments usually come towards the tail end of our of our second quarter.
Okay.
Okay.
In that kinda leads to my my next question gross profit margin, obviously was was big kinda back to.
Kind of peak gross profit margins is there any reason as you look at the environment right now and I know that you're you're not giving guidance, but is there any pressures out there or any reason that you can't continue to drive gross profit margin in the near term at this let's call it roughly 40% a level.
Oh, just talk too I mean are made drivers of our gross margin as I think bina talked about I mean, the main driver. We're manufacturing facility. We have you know.
Six 700000 square foot facility here in the couple of <unk> point being where we're really manufacturing facility in volume is a huge piece of our ability to to drive the gross margins that you saw in Q1 so side.
The other thing yeah, and the other thing I would say is as long as a promotional environment remains the way it is now.
Virtually nonexistent.
You know the margins are going to be better.
Okay.
And then as we look at manufacturing can you guys speak at all to the cadence of production or maybe the cadence of shipments as we look at this 584000 units can you talk at all about kind of monthly breakdown or how it flowed during the quarter.
I can tell you that.
Again back to the.
To how the you know the surge is usually happen in the we end up going to we you know.
We typically end up in a sold out situation as an industry in general and and I would I would look at the numbers right now and.
Finitely indicate that we're probably in that situation right now so it's.
Come down to a matter of how can you you know.
How much can you produce and get out the door. So the cadence is pretty steady. It's just it's kind of you dictate what it is.
One thing I wouldn't point, though is that we do still maintain our or shut down period, we don't operate.
A week last week in July 1st week of August we do have some.
Like operations during that period of time, but generally speaking.
Let's talk quite a bit about like the number of days of production and so the said the number of days, where a week short and July a week sure in August.
And sort of the second quarter, we are close between Christmas and new years, and then the fourth quarter for US always has the most production days because there isn't a holiday and there isn't the shutdown. So that's just the normal kind of cadence of our quarters.
Huh.
Okay.
And just as we kind of look down the income statement a little bit I don't know if you guys can are willing to give us some breakdown of operating expenses, maybe that would be allocated to Smith <unk> Wesson versus.
American outdoor during the quarter, especially as we look at.
Selling and marketing expense during the quarter.
We can't really do that at this point the only thing we can do is point you toward the segment reporting.
That we do in the queue and you can look at the discontinued ops reporting that we filed.
I think it was August 26, and you can also look at the form 10 that.
Hey, UTI filed on August Threerd.
No other than that unfortunately, we have to wait because we have to go through a a lot of work for the discontinued ops and we have to get auditors to buy off on all of that were too. So we can't really provide that right now much as we might want to.
Okay, and then just to make sure that that we're looking at things are right way as we look at it license revenue would that would the inner segment revenue that you reported I think it was just over a million dollars in the quarter is that purely a license revenue or is there anything else, it's kind of driving no no. That's that's very much purchase.
This back and forth between the companies as you know Crimson trace as a supplier to Smith and lesson for our firearms. So intercompany revenue there would be our purchases from crimson trace or our purchases.
Other products from the 80 business.
Okay.
<unk> wouldn't that'd be hitting the wanting to half million, let's call. It on the on their products and accessory side right on their site I'm looking more so on the intersegment revenue just over a million dollars on the firearm segment.
We sell them certain just as they fill a certain components, we sell them certain components, so I'm not sure.
Yeah, you're aware where that area.
There are a licensee for us going forward so that's us.
Shipping components that that they end up packaging, and then marketing and selling for US right licensing is in that number.
But it's not all of licensing.
Okay.
Great. Thanks, you.
We have a follow up question from the lineup Cai von Rumohr with Cowen. Your line is now open.
Yes. Thank you.
Given the Super cash flow you have.
I took a look at you know your cash flow over the last nine years to kind of take out cycles.
And the totals like 63 million on average, but most of that's clearly has doubled you beyond so as I look at your fixed dividend a little under 12 million.
Got it looks like it's very skip the what's what's your strategy going to be maybe you want to have a fixed dividend but.
Your way under what your average.
Cash flow, it's been so how.
It was this at what point, what it takes you to consider raising that dividend and how do you think about share repurchase and the Max.
Well, there's a couple of things there cry, we're just starting out in and that this this is a board decision, but this is something that you don't want to.
Come out really high and a third environment as a fixed dividend and then try and they have to walk it back we want to give our long term investors.
Something that they can rely on so overtime, if we do find that we are generating.
Quote unquote too much cash, we'll look at whether that can be increased but right. Now. There's you know there's uncertainty with an election, where the with Covance did you know with you know.
What's happening in the world today that coming out during the third and trying to peg something to a surge cash flow is not something that we think would be prudent so right now what we've done as we've.
Spoken with the board and come up with a.
A conservative answer and you know determinable amount, though that we should have no problem whatsoever, continuing over the long term.
And after we get through some.
Time, we'll we'll go back and reevaluate, whether that's something that needs to be incurring Cai I think you can I mean, we're very much thinking of it as a starting point.
Got it and then in terms of your operated uses of cash well, let's see in terms of Capex I'm thinking specifically given this huge surge in demand is there any thought but you would bump capex and I don't write offs.
Where the capex might be or is that still going to be relatively small.
Yes, you can.
As you can see in the Investor presentation that I think we filed on back in July and Weve spoken with some of you about beyond during one of the surge as we expect our capex be somewhere in that.
20 to 25 million range, but could be 10 to.
$10 million to $12 million of surge capacity that we now that we add during one of these periods, if if and when it makes sense, but it's not going to be back and you know back in the in the in the or 10 years ago, we were adding 40 $50 million of capacity. That's just not the case anymore. So that you know that will it won't be any more than 10 to 12.
$9.
And then the last one.
You know I think you said one of the potential uses of cash share repurchase given you know your business has been violently cyclical in terms of swings over the years.
How do you think about about you know about doing share repurchase I mean, how does that fit into your deployment thinking at what point would you say, okay. Now we've got a buy or how do you think about that.
Yeah, I, we can't get too much into detail there because obviously that mean that the board decision.
You know, but.
Yeah.
It's directionally I mean, its I don't think it's any kind of rocket science. If you know if we think the shares are undervalued were going up and we're going to push for share repurchase. So you know in and.
You know if that is definitely one of the options is on the table, but in terms, but specifically how we end up treating some future you know excess cash if we end up in that situation I'm really that's a that's going to be a board decision. We very much are looking for predictability around our dividend. So if we do.
You know increase the dividend, we're always going to be looking for something that we can make sustained in the long run.
And on share repurchases then that's definitely one of the you know one of the things that that at the top of the list for evaluating if we if we think this year as end up being undervalued.
Thank you very much.
We have a follow up question to line up James Hardiman with Wedbush Securities. Your line is now open.
Just a quick sort of big bigger picture question.
We've talked a number of times about how many sort of new consumers. There are purchasing firearms I think the number.
But you mentioned in the prepared remarks, 40% to 60%, obviously, a pretty wide range. There in terms of what you what portion.
Of sales this year or maybe that was since March were first time gun owners, what does that normally so we could sort of Dave.
Yes, I'm, obviously, there's always some new gun buyers, but but is it twice as many new consumers as it normally is how do we think about that.
I don't know that I can actually give you a number on that.
That I wouldn't be taking an educated guess that.
So I would say James the best thing to do their go to the NSSF a web site.
And they can probably have that information there I just don't have a right in front of me, it's significantly higher now than it like significantly I would say you know more.
I think your double numbers, probably in the ballpark or maybe even a little conservative.
So totally certainly yes.
Appreciate it.
That concludes today's question and answer session I'd like to turn the call back to Mark Smith for closing remarks.
Alright, Thank you and thanks, everyone for joining us today.
Just one on the close by congratulating and thanking all of the dedicated and talented employees in the company for an absolutely exceptional quarter everybody. Please stay safe and we look forward speaking with you in December.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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