Q2 2022 Smith & Wesson Brands Inc Earnings Call
Yeah.
Good day, everyone and welcome to Smith, <unk> Wesson brands, Inc. Second quarter fiscal 2022 financial results Conference call. This call is being recorded.
It at.
At this time I would like to turn the call over to Kevin Maxwell General Counsel, who will give us some information about today's call.
Thank you and good afternoon.
Our comments today may contain forward looking statements.
Our use of the words anticipate project.
Estimate expect.
<unk> believe and other similar expressions are intended to identify forward looking statements.
Forward looking statements May also include statements regarding topics such as our product development objectives strategies market share demand consumer preference for our products inventory conditions related to our products growth opportunities and trends and industry.
Conditions in general.
Forward looking statements represent our current judgment about the future and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by our statements today.
These risks and uncertainties are described in our SEC filings, which are available on our website along with a replay of today's call.
We have no obligation to update forward looking statements.
I have a few important items to note.
First we reference certain non-GAAP financial results our.
Our non-GAAP financial results exclude cost related to the planned relocation of our headquarters and certain manufacturing and distribution operations to Tennessee.
The spin off of the outdoor products and accessories business in fiscal 2021, COVID-19 related expenses and other costs.
Reconciliations of GAAP financial measures to non-GAAP financial measures can be found in our SEC filings and in today's earnings press release, each of which is available on our website.
Also when we reference EPS, we are always referencing fully diluted EPS.
Finally, when we discuss Nyx results, we are referring to adjusted mix a metric published by the National shooting Sports Foundation based on FBI Nicks data.
Adjusted mix removes those background checks conducted for purposes other than firearms purchases.
Please remember that adjusted mix 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.
<unk> generally does not directly correlate to 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 would like to remind you that any reference to income statement items refers to results from continuing operations unless otherwise indicated.
Joining us on today's call are Mark Smith, our president and CEO and Dana Macpherson our CFO.
With that I will turn the call over to Dana.
Thanks, Kevin.
Revenue for our second quarter with $235 million and $18 3 million dollar or seven 3% decrease from the prior year second quarter with nearly $13 million of this decline coming from our discontinuation of the Thompson Center product line.
The decline also reflects an easing of demand combined with a channel that has largely been replenished. After an 18 month consumer surge that began in March of 2020.
Although our revenue was lower than in the prior year quarter.
Current quarter's results remain remarkably strong representing a two year compounded increase of over 140%.
Compared to the quarter ended October 2019, our revenue was up $116 $8 million or more than double.
Reports from our channel checks indicate that consumer foot traffic continues to be elevated above 2019 level, but is lower than it was during late calendar 2020.
Because of our ability to deliver in such large volumes. We believe that we have now fully replenish the channel for most product lines.
Gross margin in the second quarter of 44, 3%, a 370 basis points above the 46% realized in the prior year comparable quarter.
This increase in margin was due to the impact of two price increases since the prior year second quarter and.
An increase in production volume as we were still ramping production throughout most of late calendar 2020.
A favorable product mix, including the lack of low margin hunting products.
And reduced promotions as we were still fulfilling certain early calendar 2020 promotions late in the year.
Margins were slightly negatively impacted by increased volume related spending.
Inflation impact and payroll related accruals associated with our pending move to Tennessee.
Operating expenses of $36 6 million for second quarter.
Flat to the prior year comparable quarter.
The current quarter includes $4 $5 million related to our relocation to Tennessee, and $2 9 million of increased legal costs, which were entirely offset by spin related costs in the prior year of $4 $8 million and lower compensation related costs of $1 $6 million due to synergy savings really.
From the spin.
The decrease in revenue was more than offset by increased gross margin and a reduction in interest expense.
And a $1 8 million increase in net income.
This increased profitability combined with a reduction in share count of over seven 8 million shares resulted in GAAP earnings per share of $1 <unk>.
Compared with 87 in the prior year.
And non-GAAP earnings per share of $1 13.
Compared with 93.
During Q2 of last year.
Finally, adjusted EBITDA of $84 million with $1 $6 million higher than the prior year and 34, 9% of revenue.
During the second quarter, we used $3 $7 million of cash from operations, primarily as a result of investments in inventory and spent $4 4 million in capital equipment, resulting in $8 $1 million of free cash utilized in the quarter.
We did not repurchase any shares of our common stock during the quarter and continued to have $50 million available for us to use through August 2022, the two year anniversary of the spin off.
We paid $3 $8 million in dividends and ended the quarter with $159 $4 million of cash.
And no bank debt.
Our board has authorized the payment of our <unk> per share quarterly dividend to shareholders of record on December 16th with payment to be made on January 3rd.
Looking forward into our third quarter fiscal 2022 inventory.
Inventory in the channel began to replenish during our first fiscal quarter and continued to grow throughout our second quarter.
As of today, our distributors have approximately 15 weeks of supply in the channel representing a broad range of products.
This growth in inventory in the channel and within our company is a good thing.
There are often periods of increased consumer demand for which we cannot produce enough product.
Inventory in the channel and internal inventory levels help us to provide our products to consumers whenever and wherever they need them.
That being said however.
Inventory levels in the channel indicate to us that our third quarter sales are likely to be quite a bit lower than what we realized in the third quarter of fiscal 2021.
Last year's third quarter was impacted by strong consumer demand driven by the height of the pandemic a recent change in the presidency civil unrest and virtually no inventory in the channel.
None of these factors exist in our current third quarter in response, we have reduced production rate by nearly 27%.
In addition, we expect that our internal inventory will continue to build during Q3 and our effort to restock. After last year's complete depletion of finished goods inventory and due to our mitigation of supply chain issues that all manufacturers have been dealing with over the last several months.
In spite of the expected reduction in sales and approximately $3 million in expense related to our Tennessee move.
We will continue to meet or exceed the targeted gross margin EBITDA and cash metrics that we shared in June.
Our strategy of investing in our business and returning capital to our shareholders has not changed and we will continue to pay our quarterly fixed dividend and be opportunistic regarding share repurchases.
Finally, our effective tax rate is approximately 23%.
With that I'll now turn the call over to Mark for a deeper dive into our results.
Mark.
Thank you Dana.
And thanks, everyone for joining us.
Before I provide commentary on the quarter's results and the outlook going forward I'd like to quickly take a step back and reflect on the past 18 months.
As you all know we have seen a historic increase in firearm demand. During this time and as always our team met the challenge by taking immediate action to increase our production to meet that surge in demand and we owe a great deal of gratitude for the tremendous success over the past year and a half to all of our employees and particularly those who have worked hard to.
Our manufacturing operations going strong through some pretty difficult times.
At the same time and equally as important we remain focused during the demand surge on positioning our business for long term success.
Knowing that while the firearms industry has experienced healthy long term growth over the past several decades, and we expect that trajectory to continue.
It can be cyclical often coming in fits and starts.
And so we always need to be thinking several moves ahead in anticipation and preparing to maintain our strong financial performance and industry leadership position in any market condition.
Our operating model is designed to deliver strong financial results in a range of market conditions.
And the most recent quarter for example, we experienced a decline in topline revenue, but actually increased our gross margin and net income.
We are constantly investing in our operations to not just identify efficiencies in production, but also to continue making improvements to our flexibility in manufacturing.
This continues to pay dividends by allowing us to rapidly adjust not just overall volume levels, but product mix to meet changes in demand positioning us to capture market share in any environment.
We continue to invest in and see results from our marketing and consumer preference efforts initiatives like guns marks and point of sale kiosks have resonated with our consumers and keep the Smith <unk> Wesson brand at the forefront for new consumers and enthusiasts alike.
And certainly one of our biggest opportunities as market demand levels ease from the historic highs will be our full pipeline of exciting new products.
Our product and engineering teams remain focused during the surge and in addition to the successful launches of the MMP 10 millimeter MMP 12, shotgun and the shield plus we have several more new product launches scheduled for shot show in a few weeks.
Even more scheduled shortly thereafter throughout the winter.
Our loyal consumers are going to have plenty to talk about and I am very optimistic about Smith <unk> Wesson <unk> continued leadership in the marketplace.
Turning now to our Q2 financial results and market conditions.
Our team adjusted to changing demand patterns and continued to drive historically strong results.
Our Q2 sales this year were our second highest for the period in our history and as I just mentioned, we actually achieved the highest second quarter profit level ever.
And the efforts to reach our consumers through innovative marketing and product offerings is also paying off as we continue to maintain a strong leadership position in the industry, even as other manufacturers have begun to catch back up and brand selection and improved at the retail level.
Consumers now have a choice and we believe they are continuing to choose Smith <unk> Wesson.
It is also important to note that while the overall firearms demand has certainly eased from the Red Hot levels. We saw in the comparable quarter last year, we believe that the new consumers that entered the marketplace during the pandemic.
Growing interest in the shooting sports.
Charge political environment.
<unk> events driving our continued desire for personal safety have kept the market healthy.
As a matter of fact adjusted Knicks during our Q2, where their second highest ever.
Up 10% versus the last big surge in Q2 of FY 2017.
And the most recent November <unk> results were released just yesterday indicate that consumer interest in firearms still remained strong while returning to more normal historical seasonality.
That said where last year, we essentially sold through every unit. We produced we have now fully replenish the channel in preparation for the busy winter season and have the ability to rebuild our internal inventories.
So we have begun adjusting production levels accordingly, as Dana mentioned.
So just a reminder, our flexible manufacturing model. This allows us to ramp up production to meet surges in demand without adding large fixed costs and therefore also allows us to dial back production in response to changing market conditions without incurring any large absorption issues in our manufacturing operations.
As a result, we believe that we will be able to maintain healthy levels of profitability and varying demand conditions and that we will continue to operate at or above the top end of our financial model that we provided during our call in June.
Finally late last quarter, we announced our intention to relocate our headquarters in certain of our operations to Maryville, Tennessee in 2023 and work on this project has begun in earnest.
With a successful groundbreaking ceremony held on November five we are excited about the opportunity to shape our company for generations to come.
The new state of the art facility will serve as our headquarters and will be the new home for our plastic injection molding Assembly and logistics operations and will solidify the future of Smith, <unk> Wesson and innovative nimble organization, who has dedicated employees leverage the latest technology to produce products that set the standard for firearms enthused.
Yes around the globe.
We would like to thank the state of Tennessee, and the Blunt County community for such a warm welcome and we look forward to calling Marvel Hall.
With that operator can we please open the call to questions from our analysts.
To ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Alright, Brian first our first question.
Comes from the line of Ryan Meyers of Lake Street Capital. Your line is open.
Hi, guys. Thanks for taking my questions.
First one here you kind of alluded to this on the call a little bit, but I just wanted to dive into the revenue slowdown a little bit more.
Did you guys experience any shutdown or production related delays or is this just kind of what you talked about with demand starting to normalize a little bit more on the inventory is starting to be resold.
Hey, Brian its mark.
No.
Our second quarter.
Does have one week of shutdown from from our summer shutdown. So there is a little bit of that in there but.
But the.
As we talked about on the call. We were we were able to rebuild some inventory so it's.
It was more related to the to the market coming off the kind of Red Hot historic levels of last year right. At the same we had the same production days in Q2 of this year as we did last year.
Okay that makes sense.
And it looks like we saw a pretty healthy asps for both the handguns and long guns. How are you guys thinking about this for the rest of the year and if youre thinking about it any promotional environments hadn't at shot show on the new product launches.
Great question.
So you saw in there for our Q2 that we had some pretty healthy asps.
And I think the way to think about that going forward is really going to be it's going to be a combination of mix as the MSR is we're pretty heavy as we all the way through.
The pandemic and the surge in.
And thats going to shift a little bit now towards more towards the handguns. So but then we've also got a couple of price increases in there that are going to muddy the waters. So I think probably that just to give you guys a little bit of color on it.
Our overall average asps will probably.
Going forward here will probably be somewhere in between.
Where we ended Q2 and where we kind of were in Q3 of last year.
Alright.
That's all I got for you guys. Thanks for taking my questions Alright, Thanks, Brian.
Yeah.
Thank you. Our next question comes from the.
Rumor of Cowen.
Your line is open.
Yes. Thanks, so much so have you seen any.
Now that the inventories have basically been replenished.
Have you seen any change in the pricing because the follow up on Ryan's question that looked like really pretty robust pricing.
That you had there.
Yes, we haven't.
Obviously, there is some activity going on to to some kind of more normal activity as we kind of come into the to the <unk>.
Typical shopping season for the holidays and Black Friday.
So, but it's really been more focused for us and for a lot of our competitors as well just really on on providing more value in terms of offering different accessories with the firearm or maybe youre doing a promotion where it comes with a box of ammunition or it's really not gone to pricing and.
As I've said before.
We're going to we're going to do everything we can to stay away from that and don't foresee any need to do that here in the near term.
Got it that's great and then.
Let's see so.
As I recall this quarter is the quarter, where you really have I'm trying to think I'm looking at my model, where you have a big downtick in terms of.
Days workdays.
My numbers have like you usually do 56 versus <unk> 59 in the second and then you go up to the mid Sixty's and the fourth quarters.
Right.
Let me just.
59 days at 59 days.
Got it.
Q3 is 59 Q4 64.
Got it so yeah.
Mentioned, you have 15 weeks of channel inventory.
What's the normal level I mean.
Yeah.
What would I think it was used to I remember a number like eight is that correct or.
Yes, but we try to target eight but you got to remember that the eight is the average across the year and right now.
When you look at our inventory level as youre coming out of a period of.
If you look at the normal seasonality of the firearms Nix checks, which are the best obviously measure of consumer activity, usually kind of ramps up into the winter in November December the highest.
So we're coming into the peak period.
So we expect that that weeks of supply will be a little elevated at this time and then we'll.
Bleed out as we go through the holiday.
Season under 10 into the into the spring.
Last question.
You mentioned, the move to Tennessee, and the efficiencies, but also that there was sort of more difficult.
Regulations in Massachusetts.
You also showed that that I guess, the legal expenses are up to $2 9 million are you seeing any more legal challenges.
In any of your.
Any of your states are.
That might require.
No more legal expenses or potential litigation risks.
No I mean, obviously, we've always got legal expenses and litigation risk, but it's no. It's no different today than it was last year.
Dissipate any changes.
The difference there and the legal expense was really was just timing.
So in terms of kind of the overall long term, it's not a it's not a change to the model.
Excellent. Thank you very much thanks, alright, thanks, Jeff.
Thank you. Our next question comes from Raimo <unk> of <unk> capital. Your line is open.
Thanks, Good afternoon.
So I just wanted to ask about the new shock on the <unk> 12.
<unk> launched in August, but there was a recall that I read about in October.
I can't imagine those that many units.
Cost of the recall is there's all that significant but more importantly, I mean this is an entry into a new category for you and.
I just wonder does this kind of throw a wrench in the works of plans to kind of expand the product line. There are there any sort of longer term repercussions for entry into the shock and category I imagine you would've launched different calibers and that sort of thing and does this kind of slow down that process or delayed or kind of change your thoughts about that category. Thanks.
Hey, Ross Great question.
No. The short answer is no it doesn't it doesn't change the plans at all.
I think we have a very.
I'll call it strict approach to to our products to the quality of our product and we want to make sure that everything that we're putting out is of the utmost. So we're going to probably have a little bit more conservative approach and if we see any issues whatsoever, we're going to do a recall and I think our consumers understand that about us and actually ends up you can believe it or not be coming up.
A bit of a marketing.
Positive for US is that there's a lot of trust in our products because our consumers know that if we ever see a problem that we're going to let them know about it.
That recall frankly.
As <unk> went off without a hitch.
I mean, maybe even large part in that you've just mentioned because it was it fairly.
Low number of units in the channel, we got those back and immediately corrected the problem and they are actually most of them are already back out in the channel again and really haven't.
It hasn't caused any issues whatevers.
So fairly in the rearview mirror and fairly minor bump in the road.
Again, frankly, if you look at the recalls and consumer goods in our firearms industry. They are unfortunately, not uncommon and I think the consumers just expected.
As long as you take care of it now.
You'll appreciate that you let them know about it.
Sure Mark well around the topic.
Prior to that those first few weeks of sale could you just show how that had gone through was well received in the market. Thanks.
Yes extremely well received.
I think our consumers are pretty excited about us coming back into that category that hunting category.
I think as Dino mentioned.
In the prepared remarks topline was awful low versus last year and a large part of that was was the.
The hunting products, but.
Also a large part of our ESP increase was the hunting products and so we were off on the topline but actually.
On the gross margin and on the bottom line, we were up and I thought I think.
Amongst other things, it's a reflection of.
Our strategy to kind of exit out of that kind of lower end in the market and come back in with a product on the Smith <unk> Wesson brand and that's going to be.
Is going to be a lot more profitable for us and frankly that should be a lot more successful.
Great. Thanks, very much okay.
Thank you again to ask a question. Please press star one on your Touchtone telephone again Thats Star one on your Touchtone telephone to ask a question.
Our next question comes from the line of Scott Stemmer.
King Your line is open.
Good evening guys.
Got it alright.
David you were talking about I guess production in the third quarter down about 27% I guess that was year over year.
Should we be looking at flu commensurate.
The decline in revenues as well when we look at modeling.
Yeah. I think you said, we are talking about about unit capacity you have to keep in mind that asps will be as mark kind of walks through where asps will be that the overall unit.
<unk> will be down 27%, although keep in mind also that we said that we would be adding to inventory. So production is a piece of it but if that doesn't I'll go through in sales, which by building inventory. We're telling you that it's probably not going to go off through sales. So there'll be some level of inventory build so it's kind of a complex calculation for you but.
It's just based on what we're seeing right now that we expect.
A reduction in unit produced an increase in units into inventory and then they.
ASP.
In the range that Mark gave you.
Yes, Scott I think just to give you a little help on that I think if you think about our asps.
Versus last year that you cant just do a price increase because there's a lot of noise in there in terms of mix I just mentioned, so think about asps last year.
Think last year, you can pretty much assume as you guys, probably well understand that everything we sold was everything we made was sold through.
So there's a pretty nice tight.
Correlation there and then this year I think you can probably expect it just in terms of dollars will build maybe a little less in inventory in finished goods than we did in Q1 to Q2.
So.
It should give you enough data to kind of get there.
Got it.
With regards to I guess your flexible cost structure I guess right now the rubber hits the road and you can really start to show.
In a declining production environment.
Your margins will hold up could you just give us.
For the back half of the year, assuming that we see a similar decline in the fourth quarter.
Your ability to hold onto these gross margins in this mid 40% range.
Yes.
If you remember back to our model will be shared back in June.
And as I said in the prepared remarks.
The most amount of color I can probably give you. There is that we will continue to operate at or above.
<unk>.
That said.
Our margins are.
As we kind of come into.
The slower timeframe, there are going to come down a little bit.
But.
We'll still be very very healthy margins, and we will be at or above those.
That model that we shared back in June.
Got it Thats all I have thank you alright, thanks Scott.
Yeah.
And I am showing no more questions I will now turn the call over to Mark Smith.
Thank you and thanks, everyone again for joining us today once again I do just want to thank all my fellow Smith <unk> Wesson team members for yet another strong quarter.
Everyone. Please stay safe have a merry Christmas and happy holidays to everybody.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
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Sure.
Good evening.
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