Q1 2022 Smith & Wesson Brands Inc Earnings Call

September 1, 2021

[music].

Good day, everyone and welcome to Smith, <unk> Wesson brands, Inc. First quarter fiscal.

<unk> 2022 financial results conference call.

This call is being recorded at this time I would like to turn the call over to Chris Scott Acting General Counsel, who will give us some information about today's call.

Okay.

Thank you and good afternoon, our comments today may contain predictions estimates and other forward looking statements our use of the words anticipate project.

Expect intend 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 market share demand and consumer preference for our products as well.

Inventory conditions related to our products growth opportunities and trends and conditions in our industry in general.

Our forward looking statements represent our current judgment about the future and they are subject to various risks and uncertainties that could cause our actual results levels of activity performance or achievements to be materially different from those expressed or implied by our statements today.

These risks and uncertainties are described in detail in our securities filings, including our reports on forms 8-K, 10-K, and 10-Q, which you can find on our web site at Smith, <unk> Wesson Dot com, along with a replay of today's call.

Our actual results levels of activity performance and achievements could.

Could differ materially from those expressed or implied by our statements today and we expressly disclaim any obligation to update any forward looking statements.

I have a few important items to note about our comments on the call today first we reference certain non-GAAP financial results on this call are non-GAAP financial results exclude acquisition related amortization and one time transition costs, COVID-19 expenses spin related stock compensation and the <unk>.

Effect related to each of these exclusions reconciliations.

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 and also in today's earnings press release.

Our securities filings and today's earnings press release can be found on our website also when we reference EPS, we are always referencing fully diluted EPS.

Finally, when we discuss next results we are referring to adjusted mix a metric published by the National shooting Sports Foundation based on the FBI next data.

Adjusted next removes those background checks conducted for purposes other than the purchase of a firearm.

Please remember that adjusted next background checks are generally considered to be the best available proxy for consumer firearm demand at the retail counter because we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers and not to end consumers next generally does not directly correlate.

Two our shipments or market share in any given time period, we believe mostly due to inventory levels in the channel.

Before I hand, the call over to our speakers today I want to remind everyone that unless otherwise indicated any reference to income statement items. During this call refers to results from continuing operations.

Joining us on today's call are Mark Smith, President and Chief Executive Officer, and Deanna Macpherson, Chief Financial Officer with that I will turn the call over to Mark.

Thank you, Chris and thanks, everyone for joining us.

First as always I would like to thank the entire Smith <unk> Wesson team for a tremendous start to FY 'twenty two.

Continuing on the momentum from the record breaking FY 'twenty one the results for the first three months of the new year were the highest ever for our first quarter. Both in terms of revenue and profitability and marks the fifth straight record breaking quarter.

Even with the difficult comps versus the very strong results from last year increased manufacturing capacity due to our flexible model combined with increased market share and consumer preference for our products drove nearly a 20% increase in sales year over year.

This is a great accomplishment, but more impressive is when we take a step back the two year compounded growth rate for the company at the end of our first quarter was nearly 170% and really puts into perspective, the market share gains that the team has been able to achieve over the last 18 months.

But simply out producing the competition during the surge periods that we experienced in our industry will only lead to short term share gains.

In order to hold those gains long term, we need to ensure that during these times. We are working just as hard if not harder in sales and marketing developing marketing plans and programs to connect with the consumer launching new products strengthening channel partnerships et cetera. So that we are ready and waiting when the supply inevitably catches up with the <unk>.

Rand.

We have heard time and again from our customers that we have earned the title of clear market leader throughout the past year and a half by outperforming the industry and delivery of our product and.

And we intend to hold that leadership position into the future regardless of market conditions.

We continue to make significant investments in connecting with our consumers in new and unique ways for our industry keeping ahead of trend understanding and targeting drivers of purchase intent and developing a feedback loop that ensures that our product portfolio marketing message and ultimately our brand always resonates with our loyal consumer and remains the number.

One firearm brand in the industry going forward.

Here are just a few of the recent highlights we've begun shipping interactive kiosks to major retail locations across the country. These state of the art touch screen displays are a very unique and effective point of sale tool to connect with that consumer who is ready to make a purchase at a retail store.

They prominently Kerry Smith, <unk>, Wesson branding and by using disabled and Earth product allows the user to safely physically handle and interact with Smith <unk> Wesson firearms without having to request assistance from our retail associates.

The interactive screens are remotely controlled allowing our team to customize the content as needed and provide up to date relevant information on popular products as well as video content designed to inform and entertain.

Not only do these kiosks highlight the Smith <unk> Wesson brand they provide a very approachable and safe way for the first time, our newer consumer to learn about.

And handle firearms.

We launched the next phase of our <unk> program that we've highlighted on previous calls the new content follows the natural evolution of the firearms ownership and proficiency journey.

Starting to include advanced concepts and the training videos.

In addition to helping the new consumer getting confidence and skills. These new instructional videos are now broadening the reach of the program to include seasoned members of the firearms community, while still keeping the millions of new firearm consumers engaged with our brands.

Argon smarts videos have been viewed and nearly 4 million times and are widely hailed amongst our consumers and our industry partners as the gold standard for training and outreach to new consumers.

In August we launched a full scale coordinated national advertising campaign across all media and advertising platforms from Billboards to radio to TV and digital with the goal to reach over 180 million impressions with empowering messaging that will resonate with existing and potential firearms owners.

All walks of life.

And finally, the highly successful launch of the MMP 12 shotgun has opened up an entirely new category for the iconic Smith <unk> Wesson brand and we couldnt be more excited about the potential that this brings.

This entry into the shotgun market generated nearly 3 million impressions and 300000 engagements on social media and email and the first 24 hours, making this one of our most talked about product launches ever.

Within 48 hours of introduction, we had received orders, reflecting 43% of our force first year forecast.

The success of the launch and the Buzz generated by Smith, <unk> Wesson reentering, the shotgun market after more than a decade reaffirms our brands loyal following and our ability to continuously wow, our consumers and the marketplace.

With an extremely healthy new product pipeline stay tuned for a steady cadence of exciting new products over the next 12 months.

So of course, the tangible results from all of this hard work is measured by our ability to continue outperforming the competition when the inventory becomes available at the retail level.

And as the country started opening up at the beginning of the summer although the demand for firearms remained very strong we did start to see a return to normal summer seasonality during our first quarter, which allowed our channel partners to be able to begin stocking some inventory again for the first time in over a year.

As a result, many of the consumers who had been limited to only the products in stock now of the ability to choose from a wider selection of products and brands and new consumers that entered the firearms community over the past year started to come back for subsequent purchases.

And Smith <unk> Wesson continued to be the brand of choice comparison of our unit sales in the quarter versus the next results in the same timeframe show that even after adjusting for the estimated channel inventory build we held our market share gains in handguns matching the knicks number for the period nearly exactly.

And we actually continued to gain market share in long guns outperforming mix in this category in spite of not participating in hunting with Thompson Center arms during the period.

And before I hand, the call over to Diana to cover financials I wanted to highlight one last thing from our financial statements. Our team has delivered nearly 170% two year compounded growth record revenues five straight quarters in a row sustained market share growth several major product launches including entry.

And to a brand new category executed marketing campaigns gun smart rebranding initiatives consumer research studies et cetera, all while not just holding operating costs flat, but actually reducing them and not just in relative terms in dollar spent.

The restructuring of the business over the past year since the spin transaction and our subsequent commitment to driving efficiency in all of our business functions and processes has created a nimble efficient and effective organization, which is flexible and profitable in any market condition.

The results speak for themselves and our impressive operating and EBITDA margins and combined with our capital allocation strategy of returning value to the shareholders positions us very well long term for consistent delivery of healthy returns.

With that I will turn the call over to Diana to cover our financial results before we take questions.

Thanks Mac.

For our first quarter with $280.0 million, a $51.0 million or 19, 5% increase over the prior year first quarter.

This increase is exceptional considering that it is on top of last year's enormous increase and resulted in a two year compounded increase of nearly 170%.

The increase in sales over the prior year was possible due to an increase in capacity that was implemented in our second quarter last year and all the more remarkable given that the first quarter of last year had inventory on hand at the beginning of the year well inventory at the beginning of this year was very low.

As Mark noted when summer started demand began to seasonally soften as people begin to get outside to enjoy summer sports and recreation for the first time in over a year.

Reports from our channel checks indicate that consumer foot traffic remains elevated above 2019 levels, but is lower than it was during 2020 at this time when the pandemic was still fairly new and fear for personal safety without a very high level.

Because of our ability to deliver some of our very high volume products are now more available within the channel than they have been in 18 months.

Gross margin in the first quarter, a 47, 3% with 710 basis points above the 42% realized in the prior year comparable quarter.

This increase in margin was due to increased production and the impact of two price increases since the prior year first quarter one in November and one on June 14th.

Margins were slightly negatively impacted by increased volume related spending some <unk>.

Inflation impacts increased depreciation on machinery purchases and compensation related costs associated with increased head count.

However, it is important to note that production output in the first quarter. This year with 42, 6% higher than in the prior year first quarter, while fixed production costs were only eight 1% higher damage demonstrating our ability to control costs, while flexibly growing manufacturing output.

Operating expenses of $31.0 million for our first quarter were $9.0 million lower than the prior year comparable quarter due entirely to spin related costs in the prior year quarter.

Excluding those costs operating expenses were flat with the prior year in spite of increased volume related shipping costs and customer allowances due to the synergy savings realized from the spin primarily in compensation related areas again, demonstrating our ability to control costs.

The increase in revenue and gross margin combined with strong expense containment led to net income of $85.0 million, a $39.0 million increase over the prior year.

This increased profitability combined with an over seven 2 million reduction in share count resulted in an earnings per share of $58.0

Compared with 77% from the prior year.

Finally, adjusted Ebitdas of $115.0 million was $37 million higher than the prior year and a record 39, 9% of revenue.

During the first quarter, we generated $110.0 million of cash from operations and spent $13.0 million on capital equipment, resulting in over $100 million in free cash in the quarter.

We spent $40 million to repurchase approximately 2 million shares of our common stock and paid $11.0 million in dividend, resulting in the company ending the quarter with over $170 million of cash and no bank debt.

As we announced on our call last June our board of directors authorized an additional $50 million share repurchase program for which we have not yet repurchased any shares.

Because of the timing of our spinoff of the outdoor products business last August and the Safe Harbor rules regarding tax free spend.

This authorization represents the final value that we're able to execute.

Until August 2022, so we're biting our time and intending to be opportunistic for this program.

Consistent with our dividend strategy. Our board has authorized a payment of <unk> <unk> per share quarterly dividend to shareholders of record on September 14th with payment to be made on September 28.

Looking forward into our second quarter of fiscal 2022.

For the past four quarters, we have shipped every fire and we can produce.

We're now at a point, where we're able to begin to rebuild inventory in the channel and replenish our own inventory so that our customers can order and receive product ahead of the consumer coming in their door.

Our distributor inventory as of today its approximately eight weeks of supply, which is our target level and this return to a more normalized level has been expected.

However, our internal inventory levels are still well below our target and so we expect that our internal inventory levels will continue to be replenished throughout our second quarter.

Remember inventory in the channel and in our warehouse is a good thing.

We expect there will continue to be periods, where demand outstrips, our ability to produce and having inventory on hand helps us continue delivering to our customers. While we work with our supply chain to adjust capacity. This is part of our flexible manufacturing strategy, which works well in times of increasing demand and works equally well when demand decreases.

As we are able to reduce our capacity without reducing our ability to absorb overhead.

As always our production schedule is important in order to understand our cost and margin structure.

Our first quarter had 58 operating days in our second quarter, we'll have 59 operating days due to our two week shutdown that crosses over two quarters.

We continue to monitor our supply chain for indications of stress related to our increase in demand or issues related to the pandemic.

At this time, we have seen nothing to indicate a concern but as always supply chain risks are subject to change and our team continues to develop contingencies to offset and avoid any interruptions.

And finally, our effective tax rate was approximately 24%.

With that operator can we please open the call to questions from our analysts.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key again Thats Star one and you touched on the telephone to ask a question. Please standby, while we compile the Q&A roster.

Our first question comes from the line of Mark Smith of Lake Street capital.

Line is open.

I guess.

First question you addressed it a bit on the call, but just as far as pure consumer demand you kind of foot traffic within retailer. What you guys are seeing today and if you are seeing even even some shifts within that demand more towards hunting rifles or any any shifts that you're seeing in consumer demand.

It would be great.

Sure Hey, Mark.

Yeah.

Yes, the demand continues to be pretty strong I think mixed results just came out today.

Obviously, we're lapping some pretty tough comps with the.

Historic demand levels, we saw at this time last year throughout the summer I think the difference between this year and last year as this year, we saw normal seasonality that we usually see in the summertime, but when you. When you look at the stack chart of the Knicks results. This year versus you know frankly, the last 10 years. This is by far the SEC.

Biggest year ever on record versus versus.

All of those previous years, except for obviously for last year. So the demand continues to be strong.

<unk>.

In terms of what we're seeing recently.

We are anecdotally hearing that you know the fall is kicking off like it always does in traffic is picking up just even in the last few days and weeks even versus where it was at.

The beginning of August so.

Point, there is I think we're entering into our normal seasonal period and if you look at that stack chart in <unk>, usually the fall and the early winter is kind of at the busiest periods that we get into an environment industry.

I think the second part of your question was about the mix and usually this time of year, we see a lot of you know.

The default kind of kicks off with hunting as people start to again, all kinds of weather cools and they start to think about getting out there and enjoying the outdoors and doing some hunting and that tends to kind of bring the rest of the firearms industry along with at this time of year I think the difference. This year is you know and I think you can see it if you look at the mix detail from from the results of <unk>.

Today handguns is definitely leading the way versus you know versus previous years.

And as we look at your new product mix it looks solid during the quarter as well.

Look at kind of your launch calendar you should we expect more new product launches maybe over the next 12 months that we saw over the prior 12 months.

Yes, I think.

Address it in the prepared comments, but yes, we have a very robust new product pipeline and as I said I think we talked.

During the during the surge in last few quarters, we had kind of said look where we're kind of building up a backlog. If you will of new products because it doesn't make any sense for us to launch them now.

Just because we are sold out on everything we can make and we're going to be we're going to be strategic and smart about that and you saw the shotgun launch here.

That was.

<unk> been ready without one for frankly for a little while here, but it made sense for us to do that now as we had a little bit of capacity availability.

And we've launched that our extremely successful and we have plenty more let's just say in the waiting and waiting in the wings behind it.

Okay.

Talking about the shotgun just as we look at long guns.

Business looked good for your numbers, especially on volume during the quarter UN didn't include the shotgun launch, but how do you feel about how the shotgun launch has gone so far and then your opportunity in long guns and this includes shotguns outside of that kind of.

Typical MSR platform.

Yeah, we've talked about it when.

When we talked about divesting the Thompson Center arms brand that we were going to be coming back in with the.

Into the Chuck on and long gun Martin the traditional more traditional if you will hunting categories under the Smith <unk> Wesson brand and this is the first of that.

That strategy.

Immediately beginning to execute on that I think the shotgun area is.

Chuck on market that category are great for us I think it fits well with our brand and I think.

We're starting off with more of a self defense shotgun.

But we very much income to continue that expansion into that category and we will as we've said before when we when we divested again.

Thompson Center arms business, we will be getting back in on the bolt action side as well.

Okay.

Yes for me is just any updates on Thompson Center.

We're still going through the sale process.

Some of them and update there yet.

Alright, great. Thank you guys.

Thank you. Our next question comes from Scott <unk> of CL King Your line is open.

Good evening guys.

Hey, Scott.

Yes, you were talking about.

It seems like Youre back to your eight weeks of threshold.

From a comfort level from an inventory standpoint are you, saying that your customers are pretty much where they need to be as well and then also maybe just talk about the commentary about the internal inventory.

How far below your you are.

Below what you really wanted to be yes. So yeah. They can we'll certainly started to rebound and fill up theyre still in our pockets of areas where.

That customers are looking for more inventory.

We're definitely still.

Anyhow as many revolvers as we possibly can so there are areas, where we can do more but they're there.

I think a reasonably good place and I think that's because we were able to ramp up our volume and get them the inventory that they wanted.

With regard to our internal inventory.

We have.

Over the over the many years had a lot more finished goods than we have right now we'd like to have quite a bit more so it will take a little bit of time to be able to ramp back up to that certainly through the second quarter and probably further into the year to get us to where we want to be and that really does depend on how much the.

Fall season starts to kick back in our ability to ramp will be based on you know how much more inventory goes out from our consumer so.

Well it will take us a little bit of time, and if you look back in history, you'd see that where we're very comfortable holding quite a bit of inventory and what we have right now it's still not a lot Scott.

Scott. This is mark if you go back to 18 or ninth calendar 18 COVID-19 in the fall.

And at the end of our Q2 I think you can kind of take a look at.

Quote unquote typical inventory levels, we're not going to be able to get their current current projections say that you know.

We're just not going to be able to rebuild those level of inventories, but we will be able to kind of.

Start to put a little bit of inventory back into the warehouses. So we're pretty we're still pretty tight.

Even as we sit here today.

Okay.

The promotional environment now that inventories across the channel or.

Back to normal I know you guys are doing some work with discuss March program, but.

Could you just talk about where it is now is it back to a more normalized environment or is it still very very low way below historical levels.

The promotional environment is definitely way below historical levels.

We are just at trade shows over the last few weeks and there is.

If there are no promotions everybody is still selling we do channel checks multiple times a week in different areas of the country and I can tell you that.

It's extremely rare to hear even at retailer who is offering anything but full MSRP. So I mean I think.

As we said earlier I mean, I think we.

The difference between this year and last year as we went through what unquote normal summer seasonality and I think everybody is very much expecting and we are as well that we're going to be getting into a pretty as we go into are typically heavier typically busy season, it's going to be a good busy season and there is no reason to be running promotions.

Yeah.

Got it.

Alright, Thats all I have right now thank you alright, thanks, guys. Thanks Scott.

Okay.

Thank you. Our next question comes from Cai von <unk> of Cowen Your line is open.

Yes, thanks, so much so.

Your G&A has been running under $18 million for the third.

Third quarter, how should I think about where the G&A is going to be in the next couple of quarters.

Thank you.

We've pushed pretty hard.

And we talked to you guys at the end of last quarter.

Efficiency through.

Driving efficiency into the business and everything we do in the back office and that restructuring we did right after the spin transaction.

I think that.

And fluctuate a little bit here and there of course, it will but I think thats in terms of order of magnitude you can expect that that's going to continue going forward.

So basically somewhere below near the current level I mean, obviously it could go up some but it's not going to be it shouldnt jump appreciably from where we are is that essentially the way to think about it.

It is yeah, I mean I think.

It's pretty impressive what everybody is on the.

Projects and deliverable that it raised <unk> two.

To achieve over the last year $2.0 billion last year end and with that G&A. There is no reason to increase it going forward.

And.

Gross margin was particularly impressive maybe give us some color about how we should think about.

Where that might be over the next couple of quarters.

Yes, I think if you again going back to the to the model that we talked about on the on the.

On the analyst call at the end of last quarter.

Look we went through a normal summer seasonal seasonal demand period, but if you again, if you look at the next stack chart, we're going to be.

This is the second.

Second busiest year ever so far on record and no indication that they're not going to continue so we're going to be at or above the top end of that model.

Okay and then.

The shotgun you mentioned that Youre at 43% of the expected orders right.

Box.

How should we think about shipments I mean did you ship have you been shipping 43% and the <unk>.

First couple of weeks or how should we think about the shipping profile Photoshop John.

Yes, that's a great question Cai.

<unk>.

We.

We're a little more successful with that project, obviously than we thought than we thought we're going to be coming out of the gate. So that we're very very well received by the marketplace.

So we are currently investigating increases in capacity there that.

That product I mentioned earlier that we are strategic in the launch of that because it is.

It does take a lot of capacity to produce that product. So we're investigating increasing that production right now our capacity on it is fairly limited at this point so.

And then.

Our June June price hike, how big was that.

3% Cai.

Okay, Great and last one.

Do you have any comment on the New Jersey.

New Jersey legal challenge.

We don't really comment too much on ongoing.

Legal matters sky, but I mean, suffice it to say obviously we.

We didn't.

We fully respect that the attorney General has the authority to investigate issues. Obviously, we didn't we didn't feel that that subpoena was appropriate.

So we're going to respect the court's decision on that.

We move forward from that.

Great. Thank you very much.

Thanks Scott.

Thank you again to ask a question. Please press star one on your Touchtone telephone again, Thats Star one and you touched on telephone to ask a question.

Yeah.

Okay.

At this time I would like to turn the call over to CEO, Mark Smith for any closing remarks, Sir.

Alright, Thank you and thanks, everyone for joining us once again I just wanted to say thanks to all my fellow Smith <unk> Wesson team members for yet another record breaking quarter and just as a reminder, remember that we will be holding our virtual annual stockholder meeting on September 27th at 12 noon eastern time.

The details on the meeting, including the call information is provided in our filings in the communication that was sent out to all of our stockholders.

With that stay safe and look forward to speaking with everybody next quarter.

This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

Okay.

[music].

Good day, everyone and welcome to Smith, <unk> Wesson brands, Inc. First quarter fiscal 2022 financial results Conference call.

Call is being recorded at this time I would like to turn the call over to Chris Scott Acting General Counsel, who will give us some information about today's call.

Thank you and good afternoon, our comments today may contain predictions estimates and other forward looking statements. Our use of the words anticipate project estimate expect intend 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 market share demand and consumer preference for our products as well as inventory conditions related to our products growth opportunities and trends and conditions in our industry.

In general.

These risks and uncertainties are described in detail in our securities filings, including our reports on forms 8-K, 10-K, and 10-Q, which you can find on our website at Smith <unk> Wesson Dot com, along with a replay of today's call.

Our actual results levels of activity performance and achievements could.

Could differ materially from those expressed or implied by our statements today and we expressly disclaim any obligation to update any forward looking statements.

I have a few important items to note about our comments on the call today first we reference certain non-GAAP financial results on this call are non-GAAP financial results exclude acquisition related amortization onetime transition costs, COVID-19 expenses spin related stock compensation and the <unk>.

Effect related to each of these exclusions reconciliations.

Our securities filings and today's earnings press release can be found on our website also when we reference EPS, we are always referencing fully diluted EPS.

Finally, when we discuss next results we are referring to adjusted next metric published by the National Shooting Sports Foundation based on the FBI next data adjusted next removes those background checks conducted for purposes other than the purchase of a firearm. Please remember that adjusted next background checks are.

Generally considered to be the best available proxy for consumer firearm demand at the retail counter because we transfer firearms only to law enforcement agencies and federally licensed distributors and retailers and not to end consumers next generally does not directly correlate to our shipments or market share in any given <unk>.

I'm period, we believe mostly due to inventory levels in the channel.

Joining us on today's call are Mark Smith, President and Chief Executive Officer, and Deanna Macpherson, Chief Financial Officer with that I will turn the call over to Mark.

Thank you, Chris and thanks, everyone for joining us.

First as always I would like to thank the entire Smith <unk> Wesson team for a tremendous start to FY 'twenty two.

Continuing on the momentum from the record breaking FY 'twenty one the results for the first three months of the new year were the highest ever for our first quarter.

Both in terms of revenue and profitability and marks the fifth straight record breaking quarter.

But simply out producing the competition during the surge periods that we experienced in our industry will only lead to short term share gains in.

And.

We have heard time and again from our customers that we have earned the title of clear market leader throughout the past year and a half by outperforming the industry and delivery of our product and.

And we intend to hold that leadership position into the future regardless of market conditions.

One firearm brand in the industry going forward.

They prominently carry Smith, <unk>, Wesson branding and by using disabled and Earth product allows the user to safely physically handle and interact with Smith <unk> Wesson firearms without having to request assistance from our retail associates.

Not only do these kiosks highlight the Smith <unk> Wesson brand they provide a very approachable and safe way for the first time, our newer consumer to learn about.

And handle firearms.

We launched the next phase of our <unk> program that we've highlighted on previous calls the new content follows the natural evolution of the firearms ownership and proficiency journey by starting to include advanced concepts and the training videos.

Argon smarts videos have been viewed nearly 4 million times and are widely hailed amongst our consumers and our industry partners as the gold standard for training and outreach to new consumers.

In August we launched a full scale coordinated national advertising campaign across all media and advertising platforms.

Billboards to radio to TV and digital with the goal to reach over 180 million impressions with empowering messaging that will resonate with existing and potential firearms owners from all walks of life.

This entry into the shotgun market generated nearly 3 million impressions and 300000 engagements on social media and E mail in the first 24 hours, making this one of our most talked about product launches ever.

Within 48 hours of introduction, we had received orders, reflecting 43% of our force first year forecast.

With an extremely healthy new product pipeline stay tuned for a steady cadence of exciting new products over the next 12 months.

So of course, the tangible results from all of this hard work is measured by our ability to continue outperforming the competition when the inventory becomes available at the retail level.

As a result, many of the consumers who hadn't been limited to only the products in stock now has the ability to choose from a wider selection of products and brands and new consumers that entered the firearms community over the past year started to come back for subsequent purchases.

And Smith <unk> Wesson continued to be the brand of choice comparison of our unit sales in the quarter versus the next results in the same timeframe show that even after adjusting for the estimated channel inventory build we held our market share gains and handguns matching the next number for the period nearly exactly.

And we actually continued to gain market share in long guns outperforming mix in this category in spite of not participating in hunting with Thompson Center arms during the period.

Major product launches, including entrance into a brand new category executed marketing campaigns gun smart rebranding initiatives consumer research studies et cetera, all while not just holding operating costs flat, but actually reducing them and not just in relative terms in dollar spent.

With that I will turn the call over to Diana to cover our financial results before we take questions.

Thanks Mac.

For our first quarter was $280.0 million, a $51.0 million or 19, 5% increase over the prior year first quarter.

This increase is exceptional considering that it is on top of last year's enormous increase and resulted in a two year compounded increase of nearly 170%.

As Mark noted when summer started demand began to seasonally soften as people begin to get outside to enjoy summer sports and recreation for the first time in over a year.

Because of our ability to deliver some of our very high volume products are now more available within the channel than they have been in 18 months.

Gross margin in the first quarter, a 47, 3% with 710 basis points above the 42% realized in the prior year comparable quarter.

This increase in margin was due to increased production and the impact of two price increases since the prior year first quarter one in November and one on June 14th.

Margins were slightly negatively impacted by increased volume related spending some <unk>.

Inflation impacts increased depreciation on machinery purchases and compensation related costs associated with increased head count.

Operating expenses of $31.0 million for our first quarter were $9.0 million lower than the prior year comparable quarter due entirely to spin related cost in the prior year quarter.

Excluding those costs operating expenses were flat to the prior year in spite of increased volume related shipping costs and customer allowances due to the synergy savings realized from the spin primarily in compensation related areas again, demonstrating our ability to control costs.

The increase in revenue and gross margin combined with strong expense containment led to net income of $85.0 million.

A $39.0 million increase over the prior year.

This increased profitability combined with an over seven 2 million reduction in share count resulted in an earnings per share of $58.0

Compared with 77% from the prior year.

Finally, adjusted Ebitdas of $115.0 million was $37 million higher than the prior year and a record 39, 9% of revenue.

During the first quarter, we generated $110.0 million of cash from operations and spent $13.0 million on capital equipment, resulting in over $100 million in free cash in the quarter.

We spent $40 million to repurchase approximately 2 million shares of our common stock and paid $11.0 million in dividends, resulting in the company ending the quarter with over $170 million of cash and no bank debt.

As we announced on our call last June our board of directors authorized an additional $50 million share repurchase program for which we have not yet repurchased any shares.

Because of the timing of our spinoff of the outdoor products business last August and the Safe Harbor rules regarding tax free spend this authorization represents the final value that we're able to execute on.

Until August 2022, so we're biting our time and intending to be opportunistic for this program.

Yes.

Looking forward into our second quarter of fiscal 2022.

For the past four quarters, we have shipped every fire and we can produce there.

Now at a point, where we're able to begin to rebuild inventory in the channel and replenish our own inventory so that our customers can order and receive product ahead of the consumer coming in their door.

Our distributor inventory as of today is approximately eight weeks of supply, which is our target level and this return to a more normalized level has been expected.

However, our internal inventory levels are still well below our target and so we expect that our internal inventory levels will continue to be replenished throughout our second quarter.

Remember inventory in the channel and in our warehouse is a good thing.

As we are able to reduce our capacity without reducing our ability to absorb overhead.

As always our production schedule is important in order to understand our cost and margin structure. Our first quarter had 58 operating days in our second quarter, we'll have 59 operating days due to our two week shutdown that crosses over two quarters.

We continue to monitor our supply chain for indications of stress related to our increase in demand or issues related to the pandemic.

At this time, we have seen nothing to indicate a concern but as always supply chain risks are subject to change and our team continues to develop contingencies to offset and avoid any interruptions.

And finally, our effective tax rate was approximately 24%.

With that operator can we please open the call to questions from our analysts.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key again star one and you touched on telephone to ask a question. Please standby, while we compile the Q&A roster.

Our first question comes from the line of Mark Smith with Lake Street Capital. Your line is open.

Hi, guys.

First question you addressed it a bit on the call but.

As far as pure consumer demand you kind of foot traffic within retailer. What you guys are seeing today and if you are seeing even even some shifts within that demand more towards hunting rifles or any shifts that you're seeing in consumer demand would be great.

Hey, Mark.

Yes, the demand continues to be pretty strong I think mixed results just came out today.

Obviously, we're lapping some pretty tough comps with the.

The historic demand levels, we saw at this time last year throughout the summer I think the difference between this year and last year as this year, we saw normal seasonality that we usually see in the summertime, but when you. When you look at the stack chart of the Knicks results. This year versus frankly over the last 10 years. This is by far the SEC.

Biggest year ever on record versus versus.

All of those previous years, except for obviously for last year. So the demand continues to be strong.

In terms of what we're seeing recently.

We are anecdotally hearing that the fall is kicking off like it always does in traffic is picking up just even in the last few days and weeks even versus where it was.

Beginning of August.

No.

There is I think we're entering into our normal seasonal period and if you look at that stack chart of Nyx, usually the fall and the early winter is kind of at the busiest periods that we get into in the firearms industry.

I think the second part of your question was about the mix and usually this time of year, we see a lot of.

The default kind of kicks off with hunting as people start to again, all kinds of weather cools and they start to think about getting out there and enjoying the outdoors and doing some hunting and that tends to kind of bring the rest of the firearms industry along with it. This time of year I think the difference. This year is and I think you can see is if you look at the mix detail from from.

Our results just came out today handguns is definitely leading the way versus versus previous years.

And as we look at your new product mix it looks solid during the quarter as we look at kind of your launch calendar year should we expect more new product launches maybe over the next 12 months that we saw over the prior 12 months.

Yes, I think.

We are addressing in the prepared comments, but yes, we have a very robust new product pipeline and as I said I think we talked during the during the surge in last few quarters. We had kind of said look where we're kind of building up a backlog. If you will of new products because it doesn't make any sense for us to launch them now.

Just because we're sold out on everything we can make and we're going to be we're going to be strategic and smart about that and you saw the shotgun launch here.

That was.

<unk> been ready without one for frankly for a little while here, but it made sense for us to do that now as we had a little bit of capacity availability.

And we've launched that our extremely successful and we have plenty more let's just say in the weighting.

Waiting in the waiting in the wings behind it.

Okay.

And talking about the shotgun just as we look at long guns that business looked good for your numbers, especially on volume during the quarter didn't include the shotgun launch, but how do you feel about how the shotgun launch has gone so far and then your opportunity in long guns and this includes shotguns outside of it.

That kind of uptick.

Typical MSR platform.

Yes, we've talked about it.

When we talked about divesting the Thompson Center arms brand that we were going to be coming back in with the.

Into the Chuck on and long gun Martin the traditional more traditional if you will hunting categories under the Smith <unk> Wesson brand and this is the first of that.

That strategy.

Immediately beginning to execute on that I think the shotgun area is.

Chuck on market that category is great for us I think it fits well with our brand and I think.

We're starting off with more of a self defense shotgun.

But we very much intend to continue that expansion into that category and we will as we said before when we when we divested again.

Thompson Center arms business, we will be getting back on the bolt action side as well.

Okay.

Last for me is just any updates on Thompson Center.

We're still going through the sale process.

Some of them and update there yet.

Alright, great. Thank you guys.

Thank you. Our next question comes from Scott <unk> of CL King Your line is open.

Good evening guys.

Hey, Scott.

Yeah.

Yes, you were talking about.

It seems like Youre back to you eight weeks threshold.

How far below your you are.

Yes.

Below what you really wanted to be.

So yeah. They can all certainly started to rebound and fill up there are still pockets of areas where.

Is that customers are looking for more inventory.

We're definitely style.

Standing out as many revolvers as we possibly can so there are areas, where we can do more but they're there.

And I think a reasonably good place and I think that's because we were able to ramp up our volume and get them in the inventory that they want it with regard to our internal inventory.

We.

Over the over the many years had a lot more finished goods than we have right now we'd like to have quite a bit more so I will take a little bit of time to be able to ramp back up to that certainly through the second quarter and probably further into the year to get us to where we want to be and that really does depend on how much the.

Fall season starts to kick back in our ability to ramp will be based on how much it more inventory goes out that from a consumer so.

Well it will take us a little bit of time, and if you look back in history, you'd see that where we're very comfortable holding quite a bit of inventory and what we have right now is still not a lot Scott.

Scott. This is mark if you go back to 18 or ninth calendar 18 COVID-19 in the fall.

At the end of our Q2, I think you kind of take a look at.

Right.

What unquote typical inventory levels, we're not going to be able to get their current current projections say that.

We're just not going to be able to rebuild those level of inventories, but we will be able to kind of.

Hard to put a little bit of inventory back into the warehouses. So we're pretty we're still pretty tight.

Even as we sit here today.

Okay.

The promotional environment now that inventories across the channel or.

Back to normal I know you guys are doing some work with this guidance March program, but.

Can you just talk about where it is now is it back from a more normalized environment or is it still very very low way below historical levels.

The promotional environment is definitely way below historical levels.

We are just at the trade shows over the last few weeks and there is.

If there are no promotions everybody is still selling we do channel checks multiple times a week in different areas of the country and I can tell you that.

It's extremely rare to hear even at retailer who is offering anything but full MSRP. So I mean I think.

As we said earlier I mean, I think we.

The difference between this year and last year.

And we went through quote unquote normal summer seasonality and I think everybody is very much expecting and we are as well that we're going to be getting into a pretty as we go into are typically heavier typically busy season, it's going to be a good busy season and there is no reason to be running promotions.

Okay.

Got it.

Alright, Thats all I have right now thank you alright, thanks, guys. Thanks Scott.

Okay.

Thank you. Our next question comes from Cai von <unk> of Cowen Your line is open.

Yes, thanks, so much so.

Your G&A has been running under $18 million for the third.

Third quarter, how should I think about where the G&A is going to be in the next couple of quarters.

Thank you.

We've pushed pretty hard.

As we talked to you guys at the end of last quarter.

Efficiency through.

Driving efficiency into the business and everything we do in the back office and that restructuring we did right after the spin transaction.

I think that.

Fluctuate a little bit here and there of course, it will but I think thats in terms of order of magnitude you can expect that that's going to continue going forward.

So so basically somewhere below near the current level I mean, obviously it could go up some but it's not going to be it shouldnt jump appreciably from where we are is that essentially the way to think about it.

It is yeah, I mean I think.

Pretty impressive what everybody is on the.

Projects and deliverables that are raised.

Two.

To achieve over the last year $2.0 billion last year end.

With that G&A. There is no reason to increase it going forward.

And.

Sure.

<unk> margin was particularly impressive maybe give us some color about how we should think about.

Where that might be over the next couple of quarters.

Yes, I think if you again going back to the to the model that we talked about on the on the.

On the analyst call at the end of last quarter.

Yeah.

Yes.

Look we went through a normal summer seasonal seasonal demand period, but if you again, if you look at the next stack chart, we're going to be.

This is the second.

Second busiest year ever so far on record and no indication that they're not going to continue so we're going to be at or above the top end of that model.

Okay and then.

The shotgun you mentioned that Youre at 43% of the expected orders right.

On the box.

How should we think about shipments I mean did you ship have you been shipping 43%.

First couple of weeks or how should we think about the shipping profile Photoshop John.

Yes, that's a great question Cai.

<unk>.

We.

We're a little more successful with that project, obviously than we thought than we thought we're going to be coming out of the gates. So that we're very very well received by the marketplace and so we are currently investigating increases in capacity there that.

That product I mentioned earlier that we are strategic in the launch of that because it is.

It will take a lot of capacity to produce that product. So we're investigating increasing that production right now our capacity on it is fairly limited at this point so.

And then.

June June price hike, how big was that.

3% Cai.

Okay, Great and last one.

Do you have any comment on the New Jersey.

New Jersey legal challenge.

We don't really comment too much on ongoing.

Legal matters, Cai, but suffice it to say obviously we.

No we didn't.

Fully respect that the attorney General has the authority to investigate issues. Obviously, we didn't we didn't feel that that subpoena was appropriate.

So we're going to respect the court's decision in that.

And move forward from that.

Great. Thank you very much.

Alright, thanks, guys.

Yes.

Thank you again to ask a question. Please press star one on your Touchtone telephone again star one and you touched on telephone to ask a question.

At this time I would like to turn the call over to CEO, Mark Smith for any closing remarks, Sir.

At 12 noon eastern time.

The details on the meeting, including the call information is provided in our filings in the communication that was sent out to all of our stockholders.

With that stay safe and look forward to speaking with everybody next quarter.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q1 2022 Smith & Wesson Brands Inc Earnings Call

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