Q1 2024 Smith & Wesson Brands Inc Earnings Call
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Good day, everyone and welcome to the Smith <unk> Wesson brands, Inc. First quarter fiscal 2024 financial results Conference call. This call is being recorded.
At this time I would like to turn the call over to Kevin Actual Smith <unk> Wesson as 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 intend believe and other similar expressions are intended to identify forward looking statements.
Forward looking statements May also include statements on topics, such as our product development objectives strategies market share demand consumer preferences inventory conditions for 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.
We referenced certain non-GAAP financial results are non-GAAP financial results exclude costs related to the planned relocation of our headquarters and certain manufacturing and distribution operations to Tennessee, the spinoff of the outdoor products and accessories business in fiscal 2021 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're always referencing fully diluted EPS and any reference to EBITDA is to adjusted Ebitdas.
Before I hand, the call over to our speakers I would like to remind you that when we discuss nyx results. We are referring to adjusted next a metric published by the National shooting Sports Foundation based on FBI mixed data.
Adjusted mix removes those background checks conducted for purposes other than firearms purchases adjust.
Adjusted next is generally considered 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 mix generally does not directly correlate to our shipments or market share in any given time.
We believe mostly due to inventory levels in the channel.
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 Mark.
Thank you, Kevin and thanks, everyone for joining us today.
We are very pleased with our first quarter performance. Our top line results reflected strong consumer demand for the Smith <unk> Wesson brand at retail.
Channel inventory of our products remained steady through the seasonally slow period, this summer, indicating healthy pull through of our shipments at both distributor and retailer levels.
Innovation and our iconic brands reputation for quality continue to be big drivers of consumers' preference for Smith <unk> Wesson.
Combined with healthy lean channel inventories as we entered into the traditionally busy fall season, we anticipate these tailwind will allow us to continue delivering strong results.
Our 35% growth in year over year revenue in Q1 was driven by unit volume and higher Asps.
Asps were positively impacted by mix due to the strength of several new product launches coupled with the seasonal factors relative to the demand for our core products.
Team has been effectively managing a balance of innovation and promotions on our core line to grow market share profitably in a highly competitive environment.
With firearm demand now steady and following normal seasonal trends, we anticipate that competitive promotional activity will continue.
And we may experience some moderation in overall ASP through the balance of fiscal 2024.
Diving, a little deeper into new products. They accounted for almost one third of our first quarter revenue as we continued to see significant demand for our latest introductions.
The folding pistol carbon in the MMP five seven launches from late last fiscal year continue to dominate their respective categories and the newest launch in July of the A&P 22, Mag is exceeding our expectations so far.
And our development pipeline remains robust continuing to reflect the strength of our NPD team with additional products launching later this fiscal year.
Turning to market conditions.
We continue to see relatively stable demand and familiar seasonality.
While consumers continue to be pressured by macroeconomic headwinds firearms demand trends are following normal historical patterns.
We believe our products are well positioned reflecting the strength of our brand and innovation and that we are gaining share.
<unk> was down about 13% on a year over year basis during our first fiscal quarter, while our units were up significantly in both handguns and long guns.
Operator: Good day everyone and welcome to the Smith & Wesson Brands Inc. 1st quarter fiscal 2024 financial results conference call. This call is being recorded.
I will note again that while more monthly mix trends moderated during the quarter. This is consistent with the normal seasonal pattern during the summer, which typically marks a low point for increasing as we move into the fall hunting season.
Kevin Maxwell: At this time, I would like to turn the call over to Kevin Maxwell, Smith & Wesson's general council, 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, intend, believe, and other similar expressions are intended to identify forward-looking statements. Forward-looking statements may also include statements on topics such as our product development, objectives, strategies, market share, demand, consumer preferences, inventory conditions for our products, growth opportunities and trends, and industry conditions in general.
And in spite of the higher shipments of our products into the channel during the quarter distributor inventories remained steady during a period, which traditionally marks an inventory build due to slower retail and stock up for the busy fall season.
Kevin Maxwell: Forward-looking statements represent our current judgment about the future, and our 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.
And for context, our channel inventories are down over 35% versus this time a year ago.
Again this reflects the strong momentum we are seeing across our newest products and the success of a number of targeted promotional programs.
We continue to work closely with key retail partners to ensure the channel is clean and closely aligned with SKU level demand.
Finally, our balance sheet inventory is in a great spot down mid single digits versus a year ago. Despite the planned redundancy to mitigate any potential disruption caused by our move to Tennessee.
And finally, a quick update on the tenancy relocation.
Inventory was moved in phases from our Missouri distribution center into the new facility throughout the second half of July and we went live with our distribution operations in August as planned.
Assembly and plastic injection molding operations will now begin to transition over the next several weeks and continue into calendar 2024.
Kevin Maxwell: We reference certain non-gap financial results. Our non-gap financial results exclude costs related to the planned relocation of our headquarters, and certain manufacturing distribution operations to Tennessee, to spin off of the outdoor products and accessories business in fiscal 2021 and other costs. Reconciliation of gap financial measures to non-gap 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, and any reference to Eva Docs is to adjusted Eva Docs.
Construction on the headquarters building is in the final stages and we're looking forward to the Grand opening celebration on October 7th.
I want to thank our entire team of loyal dedicated employees, who have been working tirelessly to ensure the success of the move while all along maintaining the highest standards in our existing operations and simultaneously dealing with the personal impacts of the relocation.
A project of this magnitude is not without its challenges and over the past two years, our employees have consistently delivered on the values that underpin the culture at Smith <unk> Wesson.
Becoming each challenge and putting us in an even stronger position for the future.
Kevin Maxwell: Before I hand the call over to our speakers, I would like to remind you that when we discuss NICS results, we are referring to adjusted NICS, a metric published by the National Shooting Sports Foundation based on FBI NICS data. Adjusted NICS removes those background checks conducted for purposes other than firearms purchases. Adjusted NICS is generally concerned the best available proxy for consumer firearms 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, NICS 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.
With that I'll hand, the call over to Diana to cover the financials.
Thanks Mark.
Our first quarter results 11, again demonstrated the power of our flexible model.
Bottomline profitability remained strong as disciplined cost control offset temporary headwinds from seasonally lower production volumes and inflationary factors.
Net sales for our first quarter of $114 $2 million were $29 8 million or 35, 4% above the prior year comparable quarter with inventory in the distribution channel showing only a slight increase over April 30th level.
As you will recall throughout fiscal 2023, we experienced large sequential declines in channel inventory that negatively impacted our sales.
Operator: Joining us on today's call are Mark Smith, our President and CEO and Dean of Experts and RCFO.
We believe that our fiscal 2024 sales were more closely match consumer demand for our products at the counter.
Mark Smith: With that, I will turn the call over to Mark. Thank you, Kevin, and thanks everyone for joining us today. We are very pleased with our first quarter performance. Our top line results reflected strong consumer demand for this myth and lesson brand at retail. Channel inventory of our products remains steady throughout the season least low period this summer, indicating healthy pull through of our shipments at both distributor and retail levels. Innovations and our iconic brands reputation for quality continue to be big drivers of consumers preference for Smith, and Wesson.
Asp's were stronger than anticipated due to the mix of product, we sold with new products make up nearly a third of our total sales.
Gross margin of 26, 6% was negatively impacted by manufacturing cost absorption and inventory reserve adjustment.
We believe this drop of temporary reflecting seasonal factors adjustments to production and inventory levels as well as one time costs related to our Tennessee relocation.
We remain comfortable with our published financial model of annual gross margins of at least 32%.
Mark Smith: Combined with healthy, lean, channel-inventories, as we enter into the traditionally busy fall season, we anticipate these tailwinds will allow us to continue delivering strong results. Our 35% growth in year over year revenue in Q1 was driven by unit volume and higher ASPs. ASPs were positively impacted by mix due to the strength of several new product launches, coupled with the seasonal factors relative to the demand for our core products. The team has been effectively managing a balance of innovation and promotions on our core line to grow market share profitably in a highly competitive environment.
Operating expenses of $26 $1 million for our first quarter or $1 $5 million lower than the prior year comparable quarter due to lower profit sharing lower legal expenses and a reclassification of sublease income from other income to operating expense.
Partially offsetting these decreases with a $2 million impairment of distribution equipment during the quarter that we recognize as we began to decommission our Missouri operations.
Net income of $3 1 million in the first quarter was $200000 lower than the prior year comparable quarter.
Mark Smith: With firearm demand, now steady, and following normal seasonal trends, we anticipate that competitive promotion activity will continue and we may experience some moderation in overall ASPs through the balance of 2020-24. That being a little deeper into new products, they accounted for almost one-third of our first quarter revenue, as we continue to see significant demand for our latest introductions. The folding pistol carbines in the M&P 5.7 launches from late last fiscal year continued to dominate their respective categories, and the newest launch in July of the M&P 22 mag is exceeding our expectations so far, and our development pipeline remains robust, continuing to reflect the strength of our M&P 18 with additional products launching later this fiscal year.
<unk> earnings per share of <unk> was equal to the prior year first quarter, while non-GAAP earnings per share of 13% was up 2% over Q1 fiscal 2023.
Cash from operations was $46 million more than $33 million above last year, reflecting lower inventory due to strong pull through of our products at retail in spite of the industry's seasonal slow period.
The seasonal reduction in accounts receivable.
With capital spending of $32 $1 million, we generated net free cash of $8 $6 million during the quarter.
We paid $5 $5 million in dividends and ended the quarter with $55 $5 million in cash and $25 million in borrowings on our line of credit.
Mark Smith: Turning to market conditions, we continue to see relatively stable demand and familiar seasonality. While consumers continue to be pressured by macroeconomic headwinds, firearms demand trends are following normal historical patterns. We believe our products are well positioned, reflecting the strength of our brand and innovation, and that we are gaining share. Next was down about 13% on a year of year basis during our first fiscal quarter, while our units were up significantly in both handguns and long guns.
During the first quarter, we received our certificate of occupancy for our new manufacturing facility in Tennessee and began receiving product in preparation to begin shipping to customers in the second quarter.
We will continue capital spending to bring our assembly and plastic injection molding operations online and complete construction of the headquarters of our building.
The majority of the $70 million to $75 million that we plan to spend this fiscal year on the relocation will be completed in our first half. Therefore, they are likely to increase our borrowings on our line of credit during the second quarter and we expect to fully repay during our second half.
Mark Smith: I will note again that while monthly next trends moderated during the quarter, this is consistent with the normal seasonal pattern during the summer, which typically marks a low point before increasing as we move into the fall hunting season. Despite of the higher shipment of our products into the channel during the quarter, distributor inventories remain steady during a period which traditionally marks an inventory build due to slower retail and stock up for the busy fall season.
Finally, our board has authorized our 12 cent quarterly dividend to be paid to stockholders of record on September 21, the payment to be made on October 5th.
Looking forward to our second quarter, we expect consumer demand to be similar to last year with a normal summer seasonal slowness beginning to pick up as we move toward cooler weather and fall activities.
Mark Smith: And for context, our channel inventories are down over 35% versus this time of a year ago. Again, this reflects the strong momentum we are seeing across our newest products and the success of a number of targeted promotional programs. We continue to work closely with key retail partners to ensure the channel is clean and closely lined with skew-level demand. Finally, our balance sheet inventory is in a great spot. Down mid-singled digits versus a year ago, despite the planned redundancy to mitigate any potential disruption caused by our move to Tennessee.
Although we expect a slight increase in units shipped over last year's second quarter, we will likely use promotional dollars to drive some of that volume and therefore anticipate a 5% to 10% drop in asps.
Versus what we saw in our first quarter.
We expect margins to continue to be pressured by promotions and higher costs due to inflation and higher interest rates, although we anticipate margins being up slightly in Q2 compared to Q1.
Mark Smith: And finally, a quick update on the Tennessee Relocation. Inventory was moved in phases from our Missouri Distribution Center into the new facilities throughout the second half of July, and we went live with our distribution operation in Ben August as planned. Assembly in plastic injection molding operations will now begin to transition over the next several weeks and continue into calendar 2024. Construction on the headquarters building is in the final stages and we're looking forward to the grand opening celebration on October 7th.
The opening of the Tennessee facility will also include one time costs in Q2 that will result in margin pressure that we expect to alleviate in our second half.
Operating expenses will likely be 5% to 10% higher in the second quarter versus Q1 due to increased marketing costs associated with the startup of our new facility, including our Grand opening festival increased hiring costs increased promotions and increased profit sharing.
Finally, our effective tax rate is expected to be approximately 25%.
Mark Smith: I want to thank our entire team of loyal dedicated employees who have been working tirelessly to ensure the success of the move while all along maintaining the highest standards in our existing operations. And simultaneously dealing with the personal impacts of the relocation. A project of this magnitude is not without us challenges. And over the past two years, our employees have consistently delivered on a value to the underpend the coaxious Smith & Wesson, overcoming each challenge and putting out an even stronger position for the future.
With that operator can we please open the call to questions from our analysts.
Sure one moment.
As a reminder to ask a question. Please press star one one on your telephone and wait for name to be announced to withdraw. Your question. Please press star one again, please standby with composites the Q&A roster.
One moment for our first question.
Deana McPherson: With that, I end the call over Deana to cover the financials. Thanks, Mark. Our first quarter results once again demonstrated the power of our flexible model. Bottom line profitability remains strong as disciplined cost control offset temporary headwinds from seasonally lower production volumes and inflationary factors. That sales for our first quarter of $114.2 million, between $9.8 million or 35.4% above the prior year comparable quarter. With inventory in the distribution channel, showing only a slight increase over April 30th level.
One moment for our first question.
Our first question comes from the line of Mark Smith from Lake Street. Your line is open.
Hi, guys.
That's it for me.
As we looked at the moment.
Mix can you talk at all about maybe revolvers versus polymer pistols and any impact that that may be add on asps and kind of how the demand is shifting for for each of those lines.
Deana McPherson: As you will recall, throughout fiscal 2023, we experienced large sequential declines in channel inventory that negatively impacted our sales. We believe that our fiscal 2024 sales will more closely match consumer demand for our product at the counter. ASBs were stronger than anticipated, due to the mix of product we sold, with new products making up nearly a third of our total sales. Gross margin of 26.6% was negatively impacted by manufacturing cost absorption in inventory reserve adjustments.
Yes sure.
<unk> demand is usually pretty steady.
Just given the fact that that's a category that obviously, we are always in high demand for and we're always.
Largely in that category capacity constraints, so really the mix change that you're seeing there.
Mark is more the <unk>.
Remember in the summer time were slower typically on our core line of products, you've got what you've got kind of a lower volume there in the core line and then we introduced some brand new products.
That obviously.
Deana McPherson: We believe this dropped the temporary, respecting seasonal factors, adjustments to production and inventory levels, as well as one time cost related to our Tennessee relocation. We remain comfortable with our published financial model of annual gross margins of at least 32%. Operating expenses of $26.1 million for our first quarter were $1.5 million lower than the prior year comparable quarter, due to lower profit sharing, lower legal expenses, and a reclassification of sublice income from other income to operating expense.
Towards the higher end, so obviously those new newer products took up a bigger ratio of the total volume out the door and Thats, how you ended up with higher Asps.
In the timeframe, it's just that when youre looking at the slowest period of the season and some new products that accountants that did very well and so obviously they are going to have a little bit of an outsized impact on the asps.
In the three month time frame.
And as we think about the.
The new products I think you called out the $5 seven in the folding carton.
Deana McPherson: Partially offsetting these decreases, but a $2 million impairment of distribution equipment during the quarter that we recognized as we began to decommission our Missouri operations. Net income of $3.1 million in the first quarter was $200,000 lower than the prior year comparable quarter. Gap earnings per share of seven cents was equal to the prior year first quarter, while mom Gap earnings per share of 13 cents was up to cents over Q1 fiscal 2023.
The primary tours or anything else to call out that's really driving US remember, we launched 22 Mag in July as well. So obviously when we do those launches of those new products like that.
If you remember from I think some of the previous calls and conversations we haven't we kind of model, where we want to make sure we've got that product ready and available to ship. It at the moment of launch so it will be a big channel fill rate and right in the beginning so they're 22, Meg definitely had an impact as well.
Okay.
Great and then how should we think about you made a comment about promotional environment.
Deana McPherson: Cash from operations was $40.6 million, more than $33 million above last year, reflecting lower inventory due to strong pull-through of our products at retail in spite of the industry's seasonal flow period and a seasonal reduction in accounts receivable. With capital spending of $32.1 million, we generated net free cash of $8.6 million during the quarter. We paid $5.5 million in dividends and ended the quarter with $55.5 million in cash and $25 million in borrowings on our line of credit.
What's kind of your outlook for that especially as we move through holiday season, and then it sounds like youre going to or.
Planning on competing a little bit in price, but maybe.
Walk us through kind of your thoughts as we move through.
The important fall and holiday season.
Yes sure. Good question, we've kind of got the luxury right now of being pretty strategic about it.
So we're going to react as needed as I mentioned in the prepared remarks, our inventories are in a really good spot as we kind of come into the busy season.
Deana McPherson: During our first quarter, we received our certificate of occupancy for our new manufacturing facility at Tennessee and began receiving product in preparation to begin shipping to customers in the second quarter. We will continue campus spending to bring our assembly and plastic injection molding operations online and complete construction of the headquarters part of our building. The majority of the $70-$75 million that we plan to spend this fiscal year on the relocation will be completed in our first half. Therefore, we are likely to increase our bowings on our line of credit during the second quarter, and we expect to fully repay it during our second half.
So.
We worked hard on kind of clearing out channel inventories throughout the second.
First half of last year and kind of came in and some are in a good spot and our shipments. So far this throughout the summer pulled through really nicely at retail. So thanks to the sales team and a lot of promotional activity and new products all fed into it. So as we look forward now into the fall into the busy season, it's not like where is my point is we're not sitting and looking at it.
A pile of inventory somewhere that we either internally or at the channel and the channel that we've got to try and move through we can be pretty strategic and targeted about it. So we definitely are going to.
Deana McPherson: Finally, our board has authorized our 12-cent quarterly dividend to be paid to suckholders of record on September 21st, with payment to be made on October 5th. Looking forward to our second quarter, we expect consumer demand to be similar to last year with a normal summer season of flowness beginning to pick up as we move toward cooler weather and vol activities. Although we expect a slight increase in units shipped over last year's second quarter, we will likely use promotional dollars to drive some of that volume, and therefore anticipate a 5-10% drop in ASPs versus what we saw in our first quarter.
Participate.
But it's more going to be strategic in terms of trying to keep from gained market share in certain categories to reactive if necessary to any of the competitive activity that happens out there. If we see anything that we think is going to be a threat. So.
Definitely we'll be participating.
Targeted and then wait and see mode.
Okay.
And the last one for me.
I don't know if you want to take this is deanna.
What kind of gives you confidence.
In the 32% gross profit margin expectation.
Deana McPherson: The expected margins have continued to be pressured by promotions and higher costs due to inflation and higher interest rates, although we anticipate margins being up slightly in Q2 compared to Q1. The opening of the Tennessee facility will also include one-time cost in Q2 that will result in margin pressure that we expect to alleviate in our second half. Operating expenses will likely be 5-10% higher in the second quarter versus Q1 due to increased marketing costs associated with the start-up of our new facility, including our grand opening festival, increased hiring costs, increased promotions, and increased profit sharing. Finally, our expected tax rate is expected to be approximately 25%.
Yes so.
A lot of what's driving the change in the first half are.
Counting reserve adjustments.
Things like capitalized variance and lower production based on where we were last year to this year. So that there is like an amortization of that.
That factors into the first half, but it gets amortized over.
Inventory turns at that kind of a boring cost accounting thing but.
That kind of runs its course in the first half.
The second half, which is traditionally a higher volume and higher production you remember like in Q4, we generally have 65 days of production no holidays. Unlike the first three quarters, where we have holidays. So we were able to produce more during those periods.
Operator: With that operator, can we please open the call to questions from our analysts? Sure, one moment. As a reminder to ask a question, please press star, 1-1, higher telephone, and wait for a name to be announced. To withdraw a question, please press star, 1-1 again. Please send by with compatibility to Q&A roster. One moment for a first question.
And so we get the benefits of absorption, we also get the benefits of higher volume so.
We expect the back half will be much higher in terms of margin than the first half.
Okay, Mark it's been around.
These normal environments. If you just remember that we're always going to happen.
First half.
Second half is always higher margin than first half.
Okay perfect.
Perfect. Thank you guys. Thanks.
Thanks Mark.
One moment for our next question.
Mark Smith: Our first question will come from Mark Smith, from Lake Street. You line is open. Hi, guys.
Okay.
Mark Smith: For Mark Smith, we need to just... Hey, as we look at the mumex. Can you talk at all about maybe revolvers versus polymer pistols, and any impact that may be added on ASP and can have the demand. And the shipping for each of those lines. Yes, sure. Revolver demand is usually pretty steady. Just given the fact that that's a category that obviously, you know, we're always in high demand for and we're always, you know, largely in that category capacity constraints.
And our next question.
Our next question will come from the line of Steve Dyer from Craig Hallum. Your line is open.
Good afternoon, Ryan on for Steve.
Maybe just staying on that last point can you quantify how much that accounting reserve was our amortization either in bps impact gross margin or dollars or both.
Several percentage points, but it's you know, it's not something that we've disclosed.
But it is a it is a couple of percentage points impact.
Mark Smith: Really, the mixed change that you're seeing there. Mark is more, you know, the season. Remember, in the summertime, we're slower typically on our core line of products. You've got, you've got kind of a lower volume there on the core line. And then we introduce some brand new products that, you know, obviously are towards the higher end. So obviously, there's a new product, new products took up a, you know, a bigger ratio of the total volume of the door.
Yes.
As a manufacturing company.
We're full.
Running manufacturing facility.
Max volume, obviously that brings an absorption down.
<unk>.
Like any other manufacturing company.
You drive really high gross margins and <unk>.
From a fixed cost perspective, I can just tell you that fixed cost has stayed very steady and very flat. That's something we focus on a lot is regardless of the market regardless of the volume coming through the facility, we keep our fixed costs both in the operation and in the on the Opex line pretty flat. So it's really.
Mark Smith: And that's how you ended up with higher ASP and the time frame. It's just that, you know, we're, you're looking at at the slow period of the season. And some new products that, you know, accounted, that did very well. And so obviously, they're going to have a little button outside of the impact on, and ASPs in the end of the three months timeframe. Okay, and as we think about the new products, I think you called out the 5.7 and the folding carbine or those of the primary tours or anything else to call out that's really driving.
Giving you some color there.
It is a really big major driver.
So increased production increase.
Increased margin I guess, when I look year over year sales are up 35%.
Gross margins down 1000, so I guess it seemed like those impacts would have been last year in Q1 or not necessarily know because you remember last year in Q1, we built inventory the way that our flexible model works is that we allow our.
Mark Smith: I'm sure we've got that product ready and available to ship at the moment of launch, so it will be a big channel fill right in the beginning. So there, you know, the 22 mag definitely had an impact as well. Okay, great.
Our supply chain to continue producing until they are able to slowly take their volume down that's what makes US successful when we go back to the well later and need them.
Mark Smith: And then as we think about you made a comment about promotional environments, you know, what kind of your outlook for that, especially as we move through holiday season and then it sounds like you're going to or planning on competing a little bit in price, but maybe walk us through to your thoughts as we move through the important fall and then politics season. Yeah, sure. Good question. We kind of got the luxury right now being pretty strategic about it.
To increase there.
Their volumes when the surge happens we allow them to bring their volumes back down slowly. So we were still producing we were growing inventory internally. So we were producing significantly more units in Q1 last year than we produced in Q1 this year.
It's not a function of revenue as a function of production and so by driving inventory down we no longer have suppliers, we're a year past the surge.
Mark Smith: You know, so we're going to react as needed, you know, as I mentioned in the prepared remarks, our inventories are in a really good spot as we kind of come into the busy season. So, you know, we we worked hard on kind of clearing out channel inventories, you know, throughout the second half of last year and kind of came into the summer in a good spot and our ship and, you know, so far throughout the summer pulled through really nicely at retail.
No longer having suppliers, who are still out producing demand.
And we're no longer building inventory so as production curtailed.
Inventory comes down and the.
The absorption of that fixed overhead and like Mark said, it hasnt increased significantly from one year to the next it's just less units going across the same level of fixed overhead.
Mark Smith: So, you know, thanks to the sales team and a lot of promotional activity, new products, you know, that all fed into it. So, as we look forward now into the fall and to the busy season, it's not like we're, you know, my point is we're not sitting as, you know, looking at a pile of inventories somewhere that, you know, we they're internally at the channel that we've got to try and move through.
Got you will come back as we as we get the inventories.
The internal inventories in alignment with where we want them to be kind of.
It's a long range view, we don't we don't knee jerk to two.
The market dynamics is that farmers market. We know it can be very volatile week, you kind of take a longer range view slow it down slowly speed it up.
Mark Smith: We can be pretty strategic and targeted about it. So, we definitely are going to, you know, participate, you know, but it's more going to be strategic in terms of trying to keep and gain market share in certain categories, reactive, if necessary to, you know, it's any competitive activity that happens out there. If we see anything that we think, you know, it's going to be a threat. So, you know, definitely will be participating kind of a, you know, targeted and then wait and see mode. Okay.
Yeah, if you think about.
The production days.
In 57 days in Q.
161 in Q2 58 in Q3 64 in Q4, so more production more volume.
<unk>.
We're not trying to play like a quarterly game with.
We need more production to make our margins higher growing inventory.
Deana McPherson: In the last one for me, and I don't know if you want to take this or be in a, but what kind of gives you confidence in the 32% growth profit margin expectation? Yeah. So, a lot of what's driving the change in the first half are accounting reserve adjustments, you know, things like capitalized variance and lower production based on where we were last year to this year. So, that there's like an amortization of that factors into the first half.
We're managing the business for the long term, we're managing for shareholder returns and so there are times, where you turn production down your margins go down because your fixed overheads don't really change over.
Over time.
At all levels out because you turn that inventory into cash youre able to do more with it so.
It's really a long term.
Goal here this is not a quarter to quarter, but we're going to do the right thing by our investors by doing this cut.
Deana McPherson: It gets amortized over inventory turns. It's kind of a boring cost accounting thing, but that kind of runs its course in the first half. So, the second half, which is traditionally a higher volume and higher production, you remember like in Q4, we generally have, you know, 65 days of production, no holidays, unlike in the first three quarters where we have holidays. So, we'll able to produce more during those periods. And so, we get the benefits of absorption, we also get the benefits of higher volume.
Cut it back and cut inventory back down now that we're able to or beyond the surge.
Yes, it's helpful.
Switching over to next.
Customer demand I guess, we've seen a deceleration here over the last couple of months.
Slow, but we're still comping against those same seasonal.
Slow periods in prior years and it still feels like.
And a bit of a diesel here recently I guess are you guys seeing anything in the underlying metrics are conversations with distributors and retail partners.
Deana McPherson: So, we expect that the back half will be much higher in terms of margin than the first half. Yeah, Mark, it's been a while. I've been in one of these normal environments and if you just remember that, you know, we always gonna have this. You know, first half is, you know, second half is always, you know, higher margin than first half. Okay. Perfect. Thank you, yes. Yep. Thanks, Mark.
Consumer et cetera that gives you that confidence that this is just a temporary.
Kind of summer lull and things are going to turn back up.
Operator: One moment for our next question.
Yes, I encourage you to go back and zoom out a little bit and look at a 10 year stack chart on mix and I think what youll see on that as Youll get a little less alarms and youll see that okay. It's just going back to kind of where it was maybe four or five years ago.
Operator: And our next question.
I think we all knew during the height of the 2000 22021 pandemic surge that that wasn't sustainable.
When we come back to normal.
It's kind of where we're at right now so I encourage you to kind of go back and look at how the firearms trends have looked over the last 10 15 years and Youll see it in stack. This year on top of <unk> following right along almost.
Steven Dyer: Our next question will come from Lionel Steve Dyer from Craig Helm. The line is open. Good afternoon, Ryan and Steve. Maybe you just seen on that last point. Can you quantify how much that accounting reserve was or amortization either in BIP's impact, growth margin or dollars or both? Now, it's several percentage points, but it's, you know, it's not something that we've disclosed, but it is a couple of percentage points impact. Yeah, around the cost point out as a manufacturing company, you know, when we're, when we're full and, you know, running the manufacturing facility at, you know, max volume.
It's a very very predictable.
Summer slowdown and then into the fall, so and yes, and channel checks and sure if you're doing it yourself, you'll find out that it is.
Starting to pick up a little bit now.
We will continue to pick up throughout the fall.
Great. Thanks, guys. Good luck.
Thanks.
Thank you 11 again as a window Thats star one one for any questions start one one.
One moment for any questions.
Steven Dyer: Obviously, that brings a bottle of absorption down and, you know, and like any other manufacturing company, it's, you know, you, you, you drive really high gross margins and, you know, from a fixed cost perspective, I can just tell you the fixed cost has stayed, you know, very steady and very flat. That's something we focus on a lot is, you know, regardless of the mark, regardless of the volume coming to the facility, we keep our fixed cost.
Yeah.
Alright, now I would like to turn the conference back to Mark Smith for closing remarks.
Steven Dyer: It both in the operation and in the, and the, on the effects line, pretty flat. So it's really, you know, I'm giving you some color there. It's, you know, it's been making it a really big major driver. So increase production. I guess when I look year over year, sales are up 35% gross margins down a thousand bills. So I guess it seemed like those impacts would have been last year in Q1 or not necessarily.
Alright, Thank you operator, and thanks, everyone for joining us today and I look forward to seeing as many of you as we can in our Grand opening celebration on October 7th and everybody enjoy the rest of the evening.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
Steven Dyer: No, because you remember last year in Q1, we built inventory. The way that our flexible model works is that we allow our supply chain to continue producing until they're able to slowly take their volume down. That's what makes us so successful when we go back to the well later and need them to, to increase their volumes when a search happens, we allow them to bring their volumes back down slowly. So we were still producing, we were growing inventory internally.
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Steven Dyer: So we were producing significantly more units in Q1 last year than we produced in Q1 this year. So it's not a function of revenue. It's a function of production. And so by driving inventory down, we no longer have suppliers, you know, we're a year past the third that we're no longer having suppliers who are still out producing demand. And we're no longer building inventory. So as production curtail inventory comes down and the absorption of that fixed overhead.
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Steven Dyer: And like Mark said, it hasn't increased significantly from one year to the next. It's just less units going across the same level of fixed overhead. Coach, we'll come back as we, you know, as we get the inventory, you know, the internal inventory is an alignment where we want them to be. You know, you've got to think about it. It's a long range view. We don't need jerk too, to market dynamics as the firearms market we know can be very volatile.
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Steven Dyer: We kind of take a longer range view, slow it down slowly, speed it up. If you think about the production days, we're in, you know, 50 days, 7 days in Q1, 61 in Q2, 58 in Q3, 64 in Q4. So more production, more volume. And we're not trying to play like a quarterly game with, we need more production to make our margins higher growing inventory. We are managing the business for the long term, we're managing for shareholder returns.
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Steven Dyer: And so there are times where you turn production down, your margins go down because your fixed overheads don't really change. And over time, it all levels out because you turn the inventory into cash, you're able to do more with it. So, you know, this is really a long term goal here. This is not a quarter to quarter goal. We're going to do the right thing by our investors by doing this, you know, cut it back and cut inventory back down now that we're able to we're beyond the surge.
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Steven Dyer: Yeah, helpful. Switching over to NYX, the end customer demand, this we've seen a defeleration here over the last couple of months. I get it if too slow, but we're still compiting into the same seasonal slow periods in prior years. And it still feels like there's been a bit of a defel here recently. I guess are you guys seeing anything in the underlying metrics or conversations with distributors, retail partners, the end consumer, et cetera, that gives you that confidence that this is just a temporary kind of summer law and things are going to turn back up.
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Steven Dyer: Yeah, I encourage you Ryan to go back and zoom out a little bit and look at, you know, a 10 year stack chart of NYX. And I think what you'll see on that is you've got a little less alarm and you kind of see that, oh, okay, it's just going back to kind of where it was maybe four or five years ago. You know, I think we all knew during the, you know, the height of the 2020, 2021 pandemic surge that wasn't sustainable.
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Steven Dyer: You know, we come back to normal and you know, it's kind of where we're at right now. So I encourage you to kind of go back and look at how the firearms, you know, trends have looked over less, you know, 10, 15 years. And you'll see and stack this year on top of you see it's falling right along almost, you know, it's a very, very predictable summer slowdown and then into the fall.
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Steven Dyer: So, you know, that's, and yes, I mean in channel checks and sure if you do them yourself, you'll find out that, you know, it's starting to pick up a little bit now and will continue to pick up throughout the fall. Great, thank you guys. Good luck. Thank you. Once again, as you remember, that star one, one Friday question, star one, one one. One moment for any questions.
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Mark Smith: All right, now I'd like to turn the conference back to March made for closer March. All right, thank you operator. Thanks everyone for joining us today.
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Mark Smith: I look forward to seeing as many of you as we can and our Grand Opening Celebration on October 7th and I'm re-enjoyed the rest of the evening. Thank you for your time, and I'll see you in the next video. Thank you. Thank you for your time. Thank you very much for your time, and I'll see you in the next video. Thank you very much.
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