Q2 2023 Ammo Inc Earnings Call

Ladies and gentlemen, thank you for standing by good afternoon, and welcome to the Ammo, Inc. Fiscal second quarter 2023 earnings call.

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I would now like to turn the call over to Matt Lazy of core IR, the company's Investor relations firm.

Please go ahead Sir.

Okay.

Good morning, and thank you for participating in today's conference call. Joining me from animals leadership team has led whitehall's, Chairman and Chief Executive Officer, Rob Reilly Chief Financial Officer.

John Flynn during this call management will be making forward looking statements.

The address expectations for future performance or operational.

Forward looking statements involve risks and other factors that may cause actual results to differ materially from those statements.

Information about these risks please refer to the risk factors described the Atmos. Most recently filed periodic reports on Form 10-K.

The form 8-K filed today.

Okay.

<unk> press release that accompanies this call, particularly the cautionary statements.

Today's conference call non-GAAP financial measures and they believe can be useful in evaluating performance.

You should not consider this additional information in isolation the substitute for results prepared in accordance with GAAP.

A reconciliation of non-GAAP financial measure to net loss its most directly comparable GAAP financial measures. Please see the reconciliation table located in the company's earnings press release.

This call contains time sensitive information that is accurate only as of today.

<unk> 2022, except as required by law.

Any obligation to publicly update or provide any.

Information to reflect events or circumstances.

That's all my pleasure to turn the call spread.

Yes.

Yeah.

Thanks, Matt Hello to everyone and thanks for joining the call.

I'm going to talk for a few minutes about where our company stands today and what we see moving forward through the end of our March 31st fiscal year and into next year.

Last quarter was equal parts exciting and challenging we find ourselves in a tough market at this time.

We have negative political macro economics at home and abroad.

What are they called pressures huge inflation drives.

And they.

Domestic and global recession.

This means the board our management team and the entire ammo family must be on top of our game.

The domestic and international supply chain remains challenging.

<unk> costs appear to be lowering in some respect but remain volatile.

And the inflation recession double shot is hitting the shooting sports industry squarely in the chops.

That is being felt on the manufacturing and marketplace side of our business.

But even skimming the earnings report of our peers will show the same type of challenges being faced by all.

I also don't point this out as an excuse.

The management team of ammo families with our board assistance and guidance are remaining focused on driving innovation and increasing value through the Morse.

Shelf space sales and more gun broker dotcom users.

With the war in Ukraine entering its night months with no indication. It is slowing down we are seeing increased export opportunities each week as our European allies focus.

Of their ammunition Cape capacity on maintaining a strong defense posture at home.

While supporting a you are correct Ukrainian People's fight.

Just as ammo did when the war broke out.

And as our U S government continues at this time.

The new plant is humming.

With its ribbon cutting ceremony, a few months ago in Wisconsin, we are increasing capacity across the board and are in a position to support the domestic and the expanding overseas and then they shouldn't demand.

Our military programs are moving at light speed.

Two two government procurement timelines.

The ballistic match program and the signature on target programs remain on course and continue to meet the tough timelines and production requirements.

Rightfully imposed by our military partners in the U S and overseas.

And we hope to have additional information to share with you shortly on that important aspect of our business.

It is also important to keep in mind that our newly opened plan was designed to provide loaded ammunition production up to 1 billion rounds.

While also ensuring we could support the cutting edge military programs. We are currently proud to manage.

And answered the bell when they use military ask a select few.

<unk> about the possibility develop when the family and they should never deployed before on any front.

On the marketplace side of our business. We are finally, putting in place a host of leveraging features on gun broker dotcom that we identified as drivers for the acquisition a couple of years ago. When the business was targeted by our management and our board.

The implementation of these features in technology complex, but each of our exciting and all will expand market share and drive shareholder value.

John will touch on some of these developments on both sides of our business when he speaks in a few minutes.

Rob waters CFO will also talk through the past quarters.

The chute doesn't meet our financial performance standards, but it is also tracking in most respects with FIS the old one and there are other peers based upon public available information and management's discussions with colleagues across the industry.

And speaking to you today my goal is to make sure our shareholders and the markets are informed and aware of all of our.

Corporate developments.

The progress we have seen to date and how we are identifying and responding to the current market challenges.

We will continue to do so in order that everyone can understand our performance to date.

Developed there clear one clear picture of the opportunities we present.

At ammo incorporated.

I would once again like to extend my personal appreciation to all our shareholders customers employees for their support to our company during these exciting times.

Hope it never stopped us political unrest didn't Israel us and we are all just surviving a midterm strong.

We will continue to expand the capacity.

Out of our new Wisconsin plant to address the domestic and export demands support our military and move as quickly as possible and improving the gun broker dotcom marketplace experience through better customer treatment.

And leverage revenue drivers.

Which makes its way down to the bottom line for the benefit of our shareholders.

Now I would like to turn the call over to Rob Reilly, our CFO , Rob will provide additional color.

Details on a cognos financial performance through the past quarter.

Thank you, Brian and welcome everyone.

That would be where second quarter financials in more detail.

We ended the quarter, increasing our ending cash by nearly 25% to 29 million.

Current assets increased to approximately $133 million decrease in current liabilities to $31 5 million.

In total for the quarter, we had $424 million in total assets 47 million liabilities $378 million in shareholders' equity.

This compares to our most recent year end with $414 million in total assets 40 million in my abilities and $374 million in shareholders' equity.

We ended our second quarter total revenues of approximately $48 3 million.

In comparison to approximately $61 million in the prior year quarter.

This was a decrease of 21% from the prior year quarter.

This decrease is in line with the industry decline of our peers of 23% quarter over quarter.

The performance of our manufacturing operations has talking with the market.

And the move into our new facility bought brought production offline for a longer period than originally anticipated.

Notwithstanding extensive planning undertaken months in advance at the plant move.

Some broker also saw softening in the marketplace revenue as well of approximately 13%.

Our cost of goods sold was approximately $35 5 million for the quarter compared to $34 $8 million in the comparable prior year quarter and.

In this quarter the manufacturing operations were forced to absorb a significant increase in commodity pricing across the board.

A dramatic increase in shipping costs.

We've seen commodity pricing begin to fall to a more new normalized level, which we believe should have significant impact on our margin in our fourth fiscal quarter. Accordingly. This resulted in a gross margin of $12 8 million compared to $26 2 million.

Coupled with a reduction in sales the company also faced impactful one time like legal expenses related to the proxy contest.

Increased expenses related to the following.

Higher commodity costs.

Increased freight costs stock compensation.

Corporate insurance and payroll.

We will also unfortunately see increased legal expenses advisory service billings and other expenses impact us next quarter directly related to the proxy contest.

This quarter, we recorded adjusted EBITDA of approximately $8 2 million compared to the prior year quarter, adjusted EBITDA of $24 million.

This resulted in a loss per share of one cent or adjusted net income per share of 5% in comparison to earnings per share of 12, and adjusted net income per share of <unk> 17 cents.

The address these increased costs, we have already implemented expense reductions of approximately $5 million in savings on an annualized basis for payroll related expenses.

We are continuing to make cost cutting measures that we believe will not impact future growth of our company at the same time ammo and the market expect to see the stabilization of commodity pricing for our new plant comes to measurably increase production capacity from approximately 400 million rounds at the end of our most recent fiscal year.

Ultimately 1 billion rounds, and better absorbed manufacturing related expenses, which drive down cost of goods and the increased gross profit.

These reductions are designed to benefit both our profit margin and net income.

Also and as you've probably seen in our public announcements, we're implementing several marketplace enhancements at gun broker dotcom, which are designed to drive revenue and gross profit while significantly improving the user's overall experience such as in house, ACTH and credit card processing loyalty programs.

Data analytics offerings as well as cardiac ability on the site.

Management has been working on leveraging these opportunities.

Our suite of others since the acquisition of gun broker.

We are reducing our guidance for fiscal 2023 year to revenues in the range of $220 million to $240 million EBITDA in the range of $30 million to $40 million and adjusted EBITDA in the range of $50 million to $60 million and with that I will turn it over to John .

Thanks, Fred and Rob and Hello to everyone threaten Rob touched on important drivers and market friction everyone within the industry is dealing with right now.

Let me take a few minutes now to expand on some of the areas that they touched upon and tried to provide some additional color where I can now and in the Q&A session that will follow.

First I want to thank everyone and let them know that am I work through the proxy contest issues with direct your urban and came out stronger and even more focused.

With the added benefit of new intellect and experience on our vibrant board through the addition of Wayne Walker and Crystal scientists.

But the guidance for this newly constituted board.

The entire ammo family top down really is fully committed to bringing to market. The full development and production capabilities of our new Wisconsin plants, while building upon the existing marketplace platform at gun broker Dot com.

I wanted to give everyone an update on the new plants as you are undoubtedly aware.

The plant opened on time and within budget.

Itself a notable achievement managed by a dedicated team in our Arizona office in Wisconsin.

The World Class work, our contractor in his subs did in standing up that plant.

That team pushed through the challenges faced globally with major supply chain disruption and fluid if not principally rising material costs.

Cutting a couple months ago was momentous and the Manitowoc, Wisconsin community political powers and representatives from the state.

All came to tour the facility and see all what is going on in this amazing facility.

We've now consolidated almost the entirety of the manufacturing operations within this new 185000 square foot facility and through coordinated efforts and management and the Mayor's office in Manitowoc, We also secured contiguous powder and primary storage.

Minimizes our cost.

And allows us to continue to enhance margin too right in time manufacturing and transportation cost reductions.

Silly now houses equipment and machinery, we've been acquiring over the past couple of years, all of which allows us to strategically and incrementally increased production with the plan to elevate loaded ammunition moving out of the 13 day shipping box from $400 million to 1 billion, allowing further ascend within the global ammunition Mark.

Place among our peers.

We've also designed and constructed a state of the art Engineering lab.

Underground range within this new plant that really allows us to remain on top quality at every level of the production. While also answering the call now regularly receive from a government and U S military partners to design and manufacture cutting edge ammunition.

Best serves our men and women near peer conflicts around the globe.

On the military side of our business, you've all seen what we're permitted to discuss publicly as concerns the beam NPR and S. O T rounds.

M P ours, the ballistic match round that we developed for the U S military and so T round is the signature on target round.

That we developed for the U S military.

These programs are meeting all the critical milestone tests within our with our Dod contracting partners and they're on track and within budget.

We hope to be in a position to discuss other development opportunities through the course of this calendar year and into the next year.

The supply chain challenges do remain.

One it's certainly hoped that would be a thing of the past by now but it isn't.

But we continue to effectively manage through those challenges daily.

The geopolitical forces at work when coupled with U S domestic policies inflation and a recession or is that both unique challenges, but also opportunities for ammo.

Higher Western World has depleted attainment issue munition stocks to levels not seen in many decades as the U S and its allies supply and support the Ukraine effort to push Russia out of its country.

As a result of the U S and its allies are understandably focusing now on utilizing their impressive governmentally owned ammunition manufacturing capabilities to resupply their respective ammunition ammunition depots located throughout the globe.

Are you going to ask what does that mean for Amazon.

We're now attending to an increase in international export business opportunities that we were unable to effectively and positively respond to during the past couple of years as U S demand outpaced current manufacturing output capabilities for ammo and each one of our peers.

So we expect to see marked increase increases in export transactions over the coming months and year.

The flip side of the of this international resupply need is that we were unable during the last quarter to import certain components or backfill certain ammunition round from the open market as those suppliers are maintained within their respective countries, where they were manufactured or they were directed to Ukraine.

I'd like to pivot now for a moment and let's talk about our marketplace operations that gun broker dotcom operated jointly out of our Atlanta base and its real time support from our Arizona Corporate office.

The marketplace team has been refined with the word team being the focus there are hard charging and gold driven and working around the clock to enhance the customer experience. So that from shopping selling closing a transaction or engaging with customer service where needed the processes incrementally more efficient and easier for the end user.

As we have announced we are working right now to launch an onboard the internally managed online payment processing.

Positive impact is at least twofold, if not more.

Importantly, we can better risk manage with our banking partners, while also driving revenue and ammo at the transactional level cutting away heavy fields being born within the operations when they acquired the den broker family of companies.

We're also bringing card into the marketplace, which we depth, but it will definitely make the purchasing or selling experience more fruitful and efficient, allowing you to acquire a basket or cart of items as he swiftly navigate the improved site.

And we have continued to maintain the highest level of security and compliance interface to ensure we're supporting waufle transactions at every turn.

The last quarter has been exciting and challenging for the family.

But we're excited to move on to our annual shareholders' meeting with our new directors and Steve urban fully onboard and in lockstep with the balance of the board and management.

We continue to spend money and time, making certain we have amazing team members in Arizona, Wisconsin, and Atlanta, and we appreciate everything they do for the organization day night and through weekends to support our efforts.

Although we have seen proportionately some of the same headwinds that our peers have in this past quarter, given my review of our public filings and conversations with contemporaries within those organizations.

Management is confident in this team's ability to improve the financial operations at every level as we reduce costs.

<unk> capacity.

Bring new lines of high margin revenue to the income statement and the balance sheet.

We have more money in the bank than ever and management and our board continue to engage in regular discussions within the industry and beyond looking for accretive transactional opportunities.

Thanks to the leadership of Fred there's still of directors and the amazing folks working at all three basis of operation. We remain confident the market leading growth we have experienced since the 2016 berth of ammo.

We replicated as we March forward into 2023 and beyond.

Thanks, again for allowing me to speak to you all today I really do look forward to answering follow up questions. During the Q&A session to follow.

Thank you John I will now turn the call over to the operator for questions. Thank you.

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Today's first question comes from Mark Smith with Lake Street Capital. Please go ahead.

Hi, guys.

First one for me wondering if you can quantify kind of the lost sales as you work through the transition from one plant to another and Manitowoc and at the same time or Alternatively talk about the backlog.

Hi, Mark Thanks for the question. This is Rob wildly. So yeah, we definitely had some lost revenue due to the move into our new.

Are you factoring facility, which in turn will increase our capacity quite significantly.

Another reason for the revenue decrease was in our previous facility. We were limited by the space that we add to our capacity was limited we were able to supplement that revenue with important opportunities.

With the complications happening abroad.

Opportunities starting to tighten up but with the new capacity that we have coming online in the state of the art facility, we're able to transaction that into export opportunities and look for that to continue in the future.

Okay, and any insight into our backlog of orders and kind of where that stands today.

It's between $25 million to $30 million today Mark.

Okay.

And then next question just any guidance is as we think about the revenue guidance that you gave previously you guys have given some split between kind of ammunition in marketplace revenue any thoughts that you're willing to give on that.

The revenue split for each of these businesses built into guidance.

Yeah. That's a good question. Thank you Mark we see the breakdown of revenue in the guidance of two thirds ammunition and one third gun broker marketplace revenue.

Okay.

And then any thoughts just as we think about the cadence of sales in the guidance here in the second half of the year.

We'd be heavier here in this December quarter or.

You still build into capacity and maybe march be a bigger revenue.

Yeah, we expect it to be increasing throughout the remainder of the year pick up from Q2 into Q3, and you know the biggest quarter of the year in Q4, when a lot of the production capacity is online.

Okay, and then last one for me just I just want to confirm as we think about adjusted EBITDA guidance.

The guidance that you gave of $50 million to $60 million adjusted EBITDA that still includes the excise tax add back correct.

Correct, Yeah. Adjusted EBITDA does include the excise tax add back included in adjusted EBITDA or I guess I should say, we do have some increased cost this fiscal year due to the proxy contest.

Some significant expenses in Q2 and as we were mentioned earlier on the call. There are additional expenses that will be included in our third quarter of this year.

Would you expect those additional expenses to outweigh in December quarter to be larger than what they were in September quarter.

They will be larger than they were in the September quarter.

Okay.

Thank you.

Thanks Mark.

The next question comes from Matt Koranda with Roth Capital. Please go ahead.

Hey, guys. Good afternoon, just wanted to drill in to the ammunition segment a bit more here if I could it sounds like it's a bit of a mix of supply and demand issues that impacted the quarter, but just wanted to see if we could kind of drill down further on that.

What what exactly I guess can you share in terms of production rates in the second quarter, where were you in terms of quantifying.

Unit production or utilization, however, you want to characterize it in the quarter, how much was that impacted by sort of the move and then maybe if you could I know it's.

Not the usual here, but could.

Could you share where production is today or where it was in October I guess, just to kind of give people comfort that you've ramped back up.

Production.

Yeah. Thanks for the question, Matt This is Rob wildly.

Production definitely was impacted by our move into our new facility.

Really machines weren't up and running it into a capacity that we would expect we expected until the end of September and further capacity coming online in October we do are starting to see the benefits of adding capacity coming on in this line and feel that we will be close to running at full capacity will be significant.

And the larger I should say in our fourth fiscal quarter of this year.

Okay.

I guess implied in the guidance if I'm, if I heard it right you're somewhere in the mid 150 millions for your core ammunition segment, which would suggest that we're still not quite back up to the levels that we were last year in terms of revenue. So I'm just trying to figure out why that is.

Is it just a lower level of demand going forward that we see or is there something constraining.

Your your production rates.

In the back half of the year.

Hi, This is John let me see if I can put a little bit of color on that the production.

In the September and certainly aggressively moving into October and for all the months are going to fall and now the production output is increasing literally.

If not daily and weekly level.

We had a lot of assets that we acquired over the last 18 or so months that we couldn't deploy because honestly just space issues. So now we have this plant all of that equipment was on boarded placed into the plant and as each all of those elements now and those lines are coming online at full tilt so really started to see.

It towards end of September I'm really.

Fully engaging with it in October and now that those capacity increases continue.

At least weekly certainly monthly and they will continue to climb until we get up into that.

$1 billion loaded ammunition.

<unk> capability.

Okay.

I guess I'll take the other.

Net production questions offline I did want to ask also Rob you mentioned in past periods, I guess, you've covered some excess demand.

Demand in the prior year with the import is there any way to quantify sort of what.

What you serve with imports and the prior year, so I can get a better sense of kind of core production.

No I think that's a hard number to quantify on a quarterly basis. I think you know that we took those opportunities as they arose and that kind of more.

One time opportunities. So it's not like there was a fixed portion of the business.

To that it was just kind of add those opportunities came up but as we do.

Ed mentioned before with the additional capacity that we have coming online.

And the export markets.

Continuing to grow we think that we'll be able to have a great opportunity there.

Yeah, what I'm.

This is John .

Let me add a little of that so there was a.

It seemed like.

It seemed like a sort of a.

Quasi paradigm shift that happened within within at least our market and our operation within the market as it related to the important back show opportunities versus our international transactional App.

<unk> and that's increased.

You know from my personal experience that's increased four five probably more in that five to 10 fold in the last.

Two months.

From.

All different points within the globe.

As people became aware of our plant coming online.

And what those capabilities were you've seen some press about.

Some south American export opportunities that we brought onboard and we're actually performing under right now.

And there's a whole host of those types of transactions that are at different levels of maturation, we shouldn't within our pipeline right. Now. So there was a really a pivot and now the nice thing for US really exciting thing for us is to be able to take this amazing plant now and turn it to not only make sure. We can address the U S demand.

Man, which as you know, we kind of normalize to a new.

A new normal.

While being ready to go with our military programs are really exciting and humming along but also really not addressed and entertaining. These international transactions that we really couldn't entertain them with any kind of fulsome real opportunity to perform based upon.

Strengths of equipment location in plant space, but now we are so we're really working hard our whole team is working hard now to bring those opportunities on board for us.

Okay and are any of those international export opportunities built into the guidance for <unk> for this fiscal year.

Yeah.

No those export opportunities are all upside to the guidance.

Okay, Great and then just on margins sorry to take up so much time here, but sort of a lot of questions.

So gross profit margins in the quarter I guess, obviously suffer just given production was constrained and we've got some under absorption, but Rob just wanted to see if maybe you could help us kind of bridge.

How we got to the 1% gross margin in the second quarter.

How much of that was sort of facility under absorption versus commodity costs versus the freight.

Phrases that you saw just wanted to try to disentangle that as we kind of ramp production back up in my model in the back half of the year.

Yeah. So I think the move definitely took into account some of the hit on the margin this quarter and we did also see higher commodity prices this quarter.

And aren't really our sales prices weren't able to rise at the same rate that the commodity prices were.

As we mentioned, we do see commodity prices coming down and we do expect to benefit from that in our third and fourth fiscal quarter of this year.

Okay, and then just lastly, I'm gun broker I wanted to see if you guys could just address like why is G. M V declining it sounds like you guys have improved the extra grants overall it sounds like you know.

Overall, the experience is better for folks on the site.

But <unk> is down.

And in the low 20% range I guess as I calculated on a year over year basis is that just overall market headwinds from the secondary market is there something going on there that you could just kind of unpack for us just in terms of jam here.

Yes, we are seeing a slowdown in the activity on the gun broker side, but as I'm sure you've seen from our public announcements we are working hard to.

Increase the user experience of that site through programs like ACTH and credit card processing as well as data analytics I'm sure you saw on our press release, our take rate increase from five to five 2% this year up from 5% a year ago and I think.

20% from 2019, so we are working hard to make improvements to the site and expect those to come online in our fourth fiscal quarter and beyond.

If I can add if I can add to that she can take when you're looking at the gun broker operation you do have to deal with the entire market the entire market and that's a that's a good window into the entire shooting sports market.

A metric and a measure that I'm sure you can probably look at.

But we've got a we've got an incredible increase in the take rate, which from operating a business is critically important in operating that business.

A profitable standpoint, you've got.

The onboarding of the payment processing that we're bringing to the market literally right now it's it's happening as we speak all those twists and turns of the dollars are happening technologically.

So that's going to drive that's going to drive additional revenue and high margin dollars into our into our company very swiftly you've got an entire different experience with the onboarding of the customer base with a whole new system that makes it a more frictionless.

Entrance.

Into the marketplace. So it makes it faster.

A swifter more efficient experience for them that is still high level of security that we have to maintain an operating that business and the card and it's also really coming coming to the forefront here shortly in process right now and that's going to allow that that experience that a lot of people are not used to online shopping.

Gathering up their products into this car and completing that transaction, a smooth and efficient way with our increase take rate and increased bucket size in those transactions, it's going to drive additional revenue, while we continue with the rest of the market to deal with these recessionary drivers that we're dealing with but we're really excited about what we're gonna brokers going in the pieces.

We're adding to it right now.

Got it guys.

Thank you.

Thank you Matt.

The next question comes from Edward Riley with E. F. Hutton. Please go ahead.

Yes.

Good to hear about the new sales channel export market I'm, just wondering given the tough environment could you just maybe comment on the state of your relationships with some of our Big box partners that you have.

Yeah.

We've got we've got gradings with John Sorry started there we've got great relationships.

With the big box stores and working hard we've got some.

Some things in development to expand some expansion was relationships with some different program opportunities. While also onboarding some new relationships, we hope to be able to announce here shortly but yeah, I think you're going to see the numbers.

Tilting in that direction in a more profound way long term strategically for the company.

Our stable.

Stable revenue revenue source for us and supporting those important relationships.

Yeah. This is Fred why going to you know I think you all know that I have great relationships with all of the big box retailers and several of my board members.

Have extremely good relationship with bass Pro Johnny Morris.

We see nothing but good things happening from the meetings recently had.

And.

We're bringing on a new person.

Probably can announce him.

First part of December .

Many years' experience in this industry worldwide Europe and the U S.

And we will be announcing a new C O O here real shortly.

And.

He will be running the marketing department and heading it up.

So I'm excited about where were gone.

I think everyone knows that.

My partner and I started this business.

Six years ago.

From 2 million to $2 40.

We believe we're going to beat that number this year I'm excited about where we stand with this company.

This is my second public company that runs.

You know people ask me I've got a lot of calls over the last week further you, leaving or you're gone anywhere.

I'm not gone public jobs finished for me.

I build a company from a card table three.

Three employees.

Two $407 million a year in sales.

It took us from NASDAQ and New York Stock Exchange.

And I'm going to beat that record this.

Companies, you've got a lot of legs behind it.

Yeah.

All of those people that invested in me when we first started.

Not going to let you down we're going to take this company 500 million and above in the next couple of years.

Yeah.

Okay, great and one of the common thread that's it for me.

This concludes our question I wanted to thank everybody for.

Sticking with us coming on board.

We're not going to let you down.

Youre going to see what's going to happen over the next two quarters.

Thanks, a lot have a good day.

Forward to seeing you next quarter.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.