Q3 2024 Smith & Wesson Brands Inc Earnings Call

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Operator: Good day everyone, and welcome to Smith & Wesson Brands Inc.'s third quarter fiscal 2024 financial results conference call. At this time, all participants are in a listen-only mode.

Good day, everyone and welcome to listen Western Brands, Inc. Third quarter fiscal 'twenty 'twenty full financial results conference call.

At this time all participants are in a listen only mode.

Operator: A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. This call is being recorded.

A question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press Star then zero on your Chin from key pad.

Call is being recorded.

Kevin A. Maxwell: At this time, I will turn the call over to Kevin Maxwell, Smith & Wesson's General Counsel, who will give us information about the 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 such 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.

Speaker Change: At this time I will turn the call over to Kevin Maxwell Smith, <unk> Wesson as General Counsel, who will give us information about the cool.

Speaker Change: Thank you and good afternoon.

Speaker Change: Our comments today may contain forward looking statements.

Speaker Change: Our use of the words anticipate project estimate expect intend believe and other similar expressions are intended to identify forward looking statements.

Speaker Change: We're 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 in the industry conditions in general.

Speaker Change: 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.

Speaker Change: These risks and uncertainties are described in our SEC filings, which are available on our website along with a replay of today's call.

Speaker Change: We have no obligation to update forward looking statements.

Kevin A. Maxwell: We referenced certain non-GAAP financial results. Our non-GAAP financial results exclude costs related to the move of our headquarters and certain of our operations to Tennessee 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, 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 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 background checks conducted for purposes other than firearms purchase.

Speaker Change: We reference certain non-GAAP financial result, our non-GAAP financial results exclude cost related to the move of our headquarters in certain of our operations to Tennessee and other costs.

Speaker Change: 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.

Speaker Change: Also when we referenced EPS, we are always referencing fully diluted EPS and any reference to ebitdas is to adjusted EBITDA.

Speaker Change: 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.

Speaker Change: <unk> published by the National shooting Sports Foundation based on F. B I Nicks data.

Speaker Change: Adjusted Nick removes those background checks conducted for purposes other than firearms purchased.

Kevin A. Maxwell: Adjusted NICS is generally considered the best available proxy for consumer firearm demand at the retail counter. However, 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 this is mostly due to inventory levels in the channel. Joining us on today's call are Mark Smith, our President and CEO, and Deana McPherson, our CFO. With that, I will turn the call over to Mark. Thank you, Kevin, and thanks, everyone, for joining us today.

Speaker Change: Adjusted mix is generally considered the best available proxy for consumer firearm demand at the retail counter.

Speaker Change: Because we transfer firearms only to law enforcement agencies, and federally licensed distributors and retailers and not to end consumers next generally does not directly correlate to our shipments or market share in any given time period, we believe mostly due to inventory levels in the channel.

Speaker Change: Joining us on today's call are Mark Smith, our president and CEO, Indiana Macpherson, our CFO with that I will turn the call over to Mark.

Mark Eric Smith: Thank you, Kevin and thanks, everyone for joining us today.

Mark Eric Smith: Our team delivered another strong quarter on both the top and bottom line in Q3. We believe we are gaining market share as our shipments outpace the overall firearms market, reflecting the continuing robust demand for our best-in-class, innovative new products and sustained momentum in our core product portfolio. On the bottom line, our persistent focus on cost discipline combined with increasing production rates and solid operational execution against key initiatives, including our Tennessee move, drove better than expected EPS of $0.17. And consistent with our commitment to return value to our stockholders, we continued to buy back shares during the quarter and paid out five and a half million dollars. Top line revenue was up just under 7% over last year, whereas shipments were up almost 11%. This reflected mixed factors stemming from strong reception to the launch of our second generation entry-level pistol, the SD 2.0, and holiday promotional equipment.

Mark Eric Smith: Our team delivered another strong quarter on both the top and bottom line in Q3.

Mark Eric Smith: We believe we gained market share as our shipments outpaced the overall firearms market, reflecting the continuing robust demand for our best in class innovative new products and sustained momentum in our core product portfolio.

Mark Eric Smith: On the bottom line, our persistent focus on cost discipline, combined with increasing production rates and solid operational execution against key initiatives, including our Tennessee move drove better than expected EPS of 17 cents.

Mark Eric Smith: And consistent with our commitment to return value to our stockholders, we continue to buy back shares during the quarter and paid out $5 $5 million in dividend.

Topline revenue was up just under 7% over last year, where shipments were up almost 11%.

Mark Eric Smith: This reflected mixed factors stemming from strong reception to the launch of our second generation of the entry level pistol. The S D 2.0 and holiday promotional activity.

Mark Eric Smith: By category, our long gun shipments doubled versus the year-ago period, and our handgun shipments were largely flat, down less than 4%, while the overall market, as measured by NICS checks, was up only 5% in long guns and down 4% in handguns. This highlights the power of our new products, which made up over 20% of our sales in the quarter, led by the FPC, which continues to be the top-selling product for many of our channel partners. As we've covered many times before, an important factor in comparing our shipments to Nick's is fluctuating inventory levels at retailers and distributors.

Mark Eric Smith: By category, our long gun shipments doubled versus the year ago period, and our handgun shipments were largely flat down less than 4%, while the overall market as measured by next jacks was up only 5% in long guns and down 4% in Yangon.

Mark Eric Smith: This highlights the power of our new products, which made up over 20% of our sales in the quarter led by the F. P C, which continues to be the top selling product for many of our channel partner.

Mark Eric Smith: As we've covered many times before unimportant factor in comparing our shipments to next is fluctuating inventory levels that retailers and distributors.

Mark Eric Smith: Notably, channel inventory levels during the quarter remained healthy, with unit inventories at our distributor and strategic retail partners actually decreasing by about 12% throughout the quarter. This indicates strong consumer demand and pull-through at the retail counter for Smith & Wesson products and reinforces our belief that we gained market share in the quarter. And in spite of the mixed factors I mentioned earlier, ASPs also remained healthy during the quarter and continued to trend in line with our expectations. As expected, and as Deana covered last quarter, handgun ASPs declined by about 6% versus a year ago, whereas long gun ASPs beat expectations by improving by about 7%.

Mark Eric Smith: Notably channel inventory levels during the quarter remained healthy with unit inventories at our distributor.

Mark Eric Smith: Retail partners actually decreasing by about 12%, 12% throughout the quarter.

Mark Eric Smith: This indicates strong consumer demand and pull through at the retail counter for Smith, <unk> Wesson products and reinforces our belief that we gained market share in the quarter.

Mark Eric Smith: And in spite of the mixed factors I mentioned earlier Asp's also remained healthy during the quarter and continued to trend in line with our expectations as expected and as Deanna covered last quarter handgun asp's declined by about 6% versus a year ago, whereas long gun asp's beat expectations by improving by about 7%.

Mark Eric Smith: These strong ASPs, combined with excellent operational execution by our team in getting our new facility up and running, led to better than anticipated profitability as we were able to ramp production in the quarter and improve manufacturing absorption. This drove growth margins of nearly 29%, in spite of some continuing duplicate costs, which we'll abate as we enter FY25. Looking forward, with our internal inventory levels now at or below target in almost every category, we are continuing to increase production in Q4 to meet demand. As such, we fully expect our fourth quarter gross margins to further improve and return to levels consistent with our long-term model of 32 to 42 percent. We also anticipate these levels to be sustained into FY25 as the final remaining duplicate costs from the Tennessee move are phased out, and we begin to fully realize the efficiency benefits of our new state-of-the-art facility.

Mark Eric Smith: These strong asp's combined with excellent operational execution by our team and getting our new facility up and running led to better than anticipated profitability as we were able to ramp production in the quarter and improved manufacturing absorption.

Mark Eric Smith: This drove gross margins of nearly 29% in spite of some continuing duplicate costs, which will abate as we enter FY 'twenty five.

Mark Eric Smith: Looking forward with our internal inventory levels now at or below target in almost every category. We are continuing to increase production in Q4 to meet demand.

Mark Eric Smith: As such we fully expect our fourth quarter gross margins to further improve and return to levels consistent with our long term model of 32% to 42%.

Mark Eric Smith: We also anticipate these levels to be sustained into FY 'twenty five as the final remaining duplicate duplicate costs from the Tennessee move are phased out and we begin to fully realize the efficiency benefits of our new state of the art facility.

Mark Eric Smith: Finally, we attended SHOT Show in late January and used this industry event to announce a significant new product that I'd like to spend a few more minutes on. Our new 1854 lever-action rifle has the potential to be a major contributor to growth for many years to come. We view it as a platform product for Smith & Wesson and believe we are well positioned to execute on this vision based on the rich heritage of our brand, loyal consumer base, and successful track record of building out other platform products such as our M&P line. Lever action has been a part of Smith & Wesson's DNA since the beginning. We owned the original lever gun patent that was granted 170 years ago in 1854 and led to the development of the Volcanic, one of the first repeating firearms. This is why we named our lever action rifle the Volcanic.

Mark Eric Smith: Finally, we attended shot show in late January and use this industry event to announce a significant new product that I'd like to spend a few more minutes on.

Mark Eric Smith: Our new 18, 54 lever action rifle has the potential to be a major contributor to growth for many years to come.

We view it as a platform product for Smith, <unk> Wesson and believe we are well positioned to execute on this vision based on the rich heritage of our brand loyal consumer base and successful track record of building out other platform products, such as our M and P line.

Mark Eric Smith: Lever action has been a part of Smith <unk> Wesson as DNA since the beginning we own the original lever done patent that was granted 170 years ago and 18 54 that led to the development of the volcanic one of the first repeating firearms.

Mark Eric Smith: This is why we named our lever action rifle the $18 54.

Mark Eric Smith: As a category, we view lever action today as very underserved and believe that our heritage and authenticity give us a lot of brand permission to look broadly at potential opportunities that intersect with lever action, with new calibers, finishes, purpose-built extensions, and an entry into the broader hunting category. The 1854 represents a significant whitespace opportunity for Smith & Wesson, and we're very excited to put our award-winning new product development team to work expanding into this new area. In summary, we are very pleased with our third quarter result and are looking forward to a strong finish in FY24. We continue to expect the firearms market to experience healthy demand throughout the 2024 election cycle. And with our deep pipeline of new products, leading brand, new state-of-the-art facility now operational, strong balance sheet, and most importantly, world-class dedicated employees, we are excited to continue delivering value for our stockholders. With that, I'll turn the call over to Deana to cover the finances. Thanks, Mark.

Mark Eric Smith: As a category, we do lever action today is very underserved and believe that our heritage and authenticity gives us a lot of brand permission to look broadly at potential opportunities that intersect with lever action with new calibers finishes purpose built extensions and an entry into the broader hunting category.

Mark Eric Smith: The 18 54 represents a significant white space opportunity for Smith, <unk> Wesson and we're very excited to put our award winning new product development team to work in expanding into this new area.

Mark Eric Smith: In summary, we.

Mark Eric Smith: We are very pleased with our third quarter results and are looking forward to a strong finish to FY 'twenty four.

Mark Eric Smith: We continue to expect the firearms market to experience healthy demand throughout the 'twenty 'twenty four election cycle and with our deep pipeline of new products, leading brand new state of the art facility now operational strong balance sheet and most importantly world class dedicated employees. We are excited to continue delivering value for our stockholders.

Mark Eric Smith: With that I'll turn the call over to Diana to cover the financials.

Thanks Mark.

Deana L. McPherson: Net sales for our third quarter of $137.5 million were $8.4 million, or 6.5% above the prior year comparable quarter. During the quarter, inventory in the distribution channel declined from October levels in terms of actual units and weeks of inventory, indicating strong sell-through of our products at retail. As expected, ASPs declined from Q2 levels due to promotions and a shift in mix in handguns to lower-priced products, while ASPs in long guns increased due to new product introductions. Gross margin of 28.7% was better than anticipated at 3.3% above Q2 and 3.7% lower than the comparable quarter last year. The decline from last year was due to the impact of operating the new Tennessee facility combined with inefficiencies associated with the start-up of that facility and inflationary factors in both material and labor, partially offset by higher sales volume, lower spend on the relocation, and the January 1st price increase.

Diana: Net sales for our third quarter of 137, $5 million or $8 $4 million or six 5% above the prior year comparable quarter.

Diana: During the quarter inventory in the distribution channel declined from October level in terms of actual units and weeks of inventory, indicating strong sell through of our products at retail.

Diana: As expected Asp's decline from Q2 levels due to promotions and a shift in mix in handguns to lower priced products, well I S. PS and long guns increased due to new product introductions.

Diana: Gross margin of 28.7% was better than anticipated at three 3% above Q2, and three 7% lower than the comparable quarter last year.

Diana: The decline from last year. It was due to the impact of operating the new Tennessee facility combined with inefficiencies associated with the startup of that facility and inflationary factors in both material and labor, partially offset by higher sales volume.

Diana: Our spend on the relocation and the January 1st price increase.

Deana L. McPherson: It should be noted that, while the Tennessee facility is increasing costs at the margin level, some of this is due to geography on the P&L, as we are no longer operating the Missouri facility, which was entirely recorded in operating expenses. In addition, the cost savings associated with operating the Tennessee facility have not yet been fully realized as we are ramping up our operations and have not begun some of the automation that will improve efficiency. We also have yet to realize the savings associated with closing our Connecticut facility and the off-site Massachusetts 3PL location.

Diana: It should be noted that while the Tennessee facility is increasing costs at the margin level. Some of this is due to the geography on the P&L as we are no longer operating the Missouri facility, which was entirely recorded in operating expenses.

Diana: In addition, the cost savings associated with operating with Tennessee facility have not yet been fully realized as we are ramping up our operations and have not begun some of the automation that will improve efficiencies.

Diana: Also have yet to realize the savings associated with closing, our Connecticut facility and they all state, Massachusetts three P. L location.

Diana: Operating expenses of $28.1 million for our third quarter were $438000 higher than the prior year comparable quarter, primarily due to an increase in depreciation on the new facility and legal costs.

Deana L. McPherson: Operating expenses of $28.1 million for our third quarter were $438,000 higher than the prior year comparable quarter, primarily due to an increase in depreciation on the new facility and legal costs. Cash generated by operations for the third quarter was $25.4 million, $18.5 million better than last year, primarily due to receivables remaining relatively flat to last quarter while inventory declined by $9.8 million. With capital spending of $18.2 million, most of which was related to our relocation, we generated $7.2 million in net free cash during the quarter. We continue to opportunistically repurchase shares under our $50 million authorization. During the quarter, we purchased approximately 71,000 shares at an average price of $12.88 for a total of $916,000.

Diana: Cash generated by operations for the third quarter was 25 $4 million $18.5 million better than last year, primarily due to receivables remaining relatively flat to last quarter, but inventory declined by $9 $8 million.

Diana: With capital spending of $18 $2 million, most of which was related to our relocation we generated $7 $2 million and net free cash during the quarter.

Diana: They continue to opportunistically repurchase shares under our $50 million authorization.

Diana: During the quarter, we repurchased approximately 71000 shares at an average price of $12.88 for a total of $916000.

Deana L. McPherson: We paid $5.5 million in dividends and ended the quarter with $47.4 million in cash and $65 million in borrowings on our line of credit. Subsequent to quarter end, we have already repaid $15 million on this line, and we continue to expect to be in a position to fully repay our line before the end of the calendar year. Finally, our board has authorized our $0.12 quarterly dividend to be paid to stockholders of record on March 21st, with payment to be made on April 4th.

Diana: We paid $5 $5 million in dividends and ended the quarter with 47 $4 million in cash and $65 million in borrowings on our line of credit.

Diana: Subsequent to quarter end, we have already repaid $15 million on this line and we continue to expect to be in a position to fully repay our line before the end of the calendar year.

Diana: Finally, our board has authorized a 12 cent quarterly dividend to be paid to stockholders of record on March 21st with payment to be made on like on April 4th.

Diana: Looking forward to our fourth quarter.

Deana L. McPherson: Looking forward to our fourth quarter. As Mark noted earlier, demand has been good, and channel inventory for our products is healthy, particularly when compared to last year when it was about 50,000 units higher. As is typical due to the seasonality in our industry, we expect our fiscal fourth quarter to be the highest quarter in terms of revenue. From Q3 to Q4 last year, sales grew 12.2% with inventory in the channel declining.

Diana: As Mark noted earlier demand has been good in channel inventory for our products is healthy.

Diana: When compared to last year when it was about 50000 units higher.

Diana: As is typical due to the seasonality in our industry, we expect our fiscal fourth quarter to be the highest quarter in terms of revenue from Q3.

Diana: Q4 of last year sales grew 12, 2% with inventory in the channel declining.

Deana L. McPherson: During our current Q4, we expect channel inventory to remain at the current low levels and demand to be stable. Therefore, we expect Q4 sales to grow at a slightly higher rate sequentially than last year in terms of both units and dollars. Please note that we do expect ASPs to increase slightly sequentially due to the mix of handguns and new products in long guns. As noted last quarter, we expect margins to rebound in the fourth quarter, with operating days increasing from 58 days in our third quarter to 64 days, and production levels increasing as the Tennessee facility begins to exit the startup phase of operation. This means that we expect margin percentage for our fourth quarter to enter the low 30s. Operating expenses will likely be 5-7% higher than in Q3, with an increase in profit sharing driving the higher amount. As a reminder, profit sharing paid to our employees each year represents the lower of 15% of total wages or 15% of operating profit.

Diana: During our current Q4, we expect channel inventory to remain at the current low levels and demand to be stable.

Diana: Therefore, we expect Q4 sales to grow at a slightly higher rate sequentially than last year in terms of both units and dollars.

Diana: Please note that we do expect asps to increase slightly sequentially due to mix in handguns and new products in long guns.

As noted last quarter, we expect margins to rebound in the fourth quarter with operating days, increasing from 58 days in the third quarter to 64 days and production levels, increasing as the Tennessee facility begins to exit the startup phase of operations.

Diana: This means that we expect margin percentage for our fourth quarter and enter the low thirties.

Diana: Operating expenses will likely be 5% to 7% higher than.

Diana: And then in Q3 with an increase in profit sharing driving a higher amount.

Diana: As a reminder, our profit sharing paid to our employees each year represents the lower of 15% of total wages or 15% of operating profit.

Deana L. McPherson: Because the fourth quarter is our highest profitability quarter, profit sharing will be higher than in any other quarter. Our effective tax rate is expected to be approximately 24%. Finally, we continue to expect to have a debt-free balance sheet by the end of the calendar year, if not sooner. With less than $10 million left to spend on the relocation, capital investment for this project is winding down.

Diana: Because the fourth quarter is our highest profitability quarter profit sharing will be higher than in any other quarters.

Diana: Our effective tax rate is expected to be approximately 24%.

Diana: Finally, we continue to expect to have a debt free balance sheet by the end of the calendar year, if not sooner.

Diana: With less than $10 million left to spend on the relocation capital investment for this project is winding down.

Operator: Consistent with prior commentary, we expect to generate operating cash of at least $75 million annually, and normal capital spending requirements are approximately $25 million per year, providing significant excess cash flow. As a reminder, our capital allocation plan continues to be to invest in our business, remain debt-free, and return cash to our stockholders. With that, Operator, can we please open the call to questions from our analysts? Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then 2 if you would like to remove your question from the queue.

Diana: Consistent with prior commentary, we expect to generate operating cash of at least $75 million annually and normal capital spending requirements are approximately $25 million per year, providing significant excess cash flow.

Diana: As a reminder, our capital allocation plan continues to be invest in our business remain debt free and return cash to our stockholders.

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

Speaker Change: Thank you at this time, we will be conducting a question and answer session.

Speaker Change: We would like to ask a question. Please press Star then one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

Speaker Change: You May press Star and then two if you would like to remove your question from the queue.

Operator: For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star key. One moment, please, while we poll for questions. The first question comes from Mark Smith from Lake Street. Please proceed with your questions, Mark. Hey guys, this is Jason on behalf of Mark.

For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the stock East one moment. Please while we poll for questions.

Speaker Change: The first question comes from Mark Smith from Lake Street. Please proceed with your question Mark.

Speaker Change: Hey, guys. This is Jason on for Mark I. Appreciate you taking our questions I just wanted to start with the Tennessee facility transition I know you talked to it a little bit about some efficiencies, but what are you seeing from a product innovation capability standpoint, and then if you could go into any earth.

Mark Eric Smith: Appreciate you taking our questions. I just want to start with the Tennessee facility transition. I know you talked a little bit about some efficiencies, but what are you seeing from a product innovation capability standpoint? And then, could you go into any early wins or challenges you've encountered since the move?

Speaker Change: Windsor challenges you've been countered tends to move.

Mark Eric Smith: Sure. From the innovation side, the Tennessee facility houses, as we covered before, our assembly operations for modern sporting rifles and pistols, as well as our logistics operation and our plastic injection molding. So the innovation and the design work is still based here at the Springfield, Massachusetts facility, and that'll continue. So in terms of any disruption to that, there shouldn't be any from the Tennessee move. As far as the move itself is concerned, it's going very well, as I kind of covered in the prepared remarks. I think, frankly, we're kind of a little bit ahead of schedule, and that led to some of the positive news on the margin line. So that said, though, we're still starting up a Greenfield facility, and we're still going through some of the transitions there and some of the startup inefficiencies from new staff, et cetera.

Sure.

Speaker Change: From the innovation side are the Tennessee facility is a house houses as we kind of covered before houses our assembly operations for a modern sporting rifles, and pistols and as well as our logistics operation in our plastic injection molding. So the innovation and the design work still is based here out of out of the Springfield, Massachusetts.

Speaker Change: <unk> and that'll continue so in terms of you know any disruption to that there shouldnt be any from the from the Tennessee move as far as the you know the move itself, it's going very well as I kind of covered that in the prepared remarks. You know I think were you know frankly, we're kind of a little bit ahead of schedule in there that led to some of them.

You know the positive news on the margin line. So you know that said, though you know we're still starting up a greenfield facility and you know when we're still going through some of the some of the transitions there and some of the start up inefficiencies from new staff et cetera, and you know that we were very pleased with the first couple of months.

Mark Eric Smith: And we're very pleased with the first couple months, and it should only get better as we kind of start to settle down going into the second half of Q4 and into FY25. So our costs, our duplicate costs, you know, we do have some that are kind of lingering and probably will be some minor costs that will linger through the end of calendar year 24, but, you know, they'll be pretty de minimis, you know, as we kind of get into Q1 of 2020. I got it.

Speaker Change: And you know it should only get better here as we kind of start to settle down going into the you know the second half of Q4 and into FY 'twenty five.

Speaker Change: Our costs are duplicate costs you know we do have some that are kind of lingering and probably will some minor costs that will linger through the end of calendar, sorry, 24, but you know that there'll be pretty de Minimis, you know as we kind of get into Q1 of FY 'twenty five.

Speaker Change: Got it that's helpful. And then looking at Asp's I know you mentioned you expect them to be up sequentially here in Q4, how should we think about those trending beyond Q4.

Deana L. McPherson: That's helpful. And then looking at ASPs, I know you mentioned you expect them to be up sequentially here in Q4. How should we think about those trends beyond Q4? Yeah, good question, Jason.

Speaker Change: Yeah. Good question, Jason So the new product pipeline as we kind of covered and we've demonstrated over the last you know two to three years as you know that's really been a focus of ours and new product pipeline remains robust going into FY 'twenty five.

Mark Eric Smith: So, The New Products Pipeline is kind of covered, and we've demonstrated it over the last, you know, years. As you know, that's really been a focus of ours The Procts Pipeline is, and it remains robust going into FY25. And so right now, what we're anticipating is we'll definitely be increasing overall ASPs, mainly driven by long gun ASPs. You know, so we're kind of anticipating largely flat handgun ASPs throughout FY25, but those long guns should increase nicely with the launch of the Wever Action Rifle and some other products. Okay, perfect. And then just the last one for me, and I'll jump back into Q. Just curious about your thoughts on demand levels with this year's election. Is it comparable to historical years? Or how are you thinking about that profile?

Jason: And so right now what we're anticipating is will definitely be increasing overall asp's, mainly driven by long gun Asp's. You know so we're kind of anticipating largely flat handgun asp's throughout FY 'twenty five, but those long gun should increase nicely with the launch of the lever action rifle and some other new products, we've got coming.

Speaker Change: Okay Perfect and then just the last one for me and I'll jump back into queue. Just curious your thoughts on demand levels with this years election is it comparable to historical years or how are you thinking about that profile.

Mark Eric Smith: Yeah, I mean... I don't think we'll be able to give you too much color on how comparable to historical years, but just in general, look, I mean, the election year is always, you know, a healthy demand period for the firearms industry. You know, I think you can kind of expect the NICS results in the, in the firearms market to remain healthy throughout the calendar year. And then, you know, after the election, we'll, you know, kind of have to see where it goes from there. But, you know, overall, for our FY25, you know, including the first couple months of calendar 25, we expect it to be a good year. We expect it to be healthy. So, you know, we're looking forward to it. All right, that's it for me.

Speaker Change: Yeah.

Speaker Change: I don't think we'll be able to give you too much color on comparable to historical years, but just in general look I mean, the and election year as always you know a you know a healthy demand period for the firearms industry.

Speaker Change: Thank you can kind of we expect the next results in the bond market to remain healthy throughout the calendar year and then you know after the election will kind of have to see where it goes from there but.

Speaker Change: Overall for our you know are generally in our FY 'twenty five including you know the first couple months of calendar 'twenty calendar 'twenty five we expect it to be a good year, we expect to be healthy.

Speaker Change: So we're looking forward to it.

Speaker Change: Alright, that's it for me I appreciate the color. Thank you thanks, Jason.

Operator: I appreciate the caller. Thank you. Thank you. The next question comes from Steve Dyer from Craig Helen. Please proceed with your question, Steve. Good afternoon to you both.

Speaker Change: Yeah.

Speaker Change: Thank you. The next question comes from Steve Dyer from Craig Hallum. Please proceed with your question Steve.

Steven Lee Dyer: Oh, good afternoon to you both congratulations on the good Oh execution.

Steven Lee Dyer: Congratulations on the good execution. I appreciate all the color, by the way, on all the different sort of puts and takes in the business. You're obviously gaining a lot of share. Can you help us sort of, you know, to the degree you're willing to kind of give granularity as to where you feel it is, long guns, handguns, and even to the product line level, maybe where you're seeing some momentum? Yeah,

Steven Lee Dyer: I appreciate all the color by the way on the on all the different sort of puts and takes in the business.

Steven Lee Dyer: We're obviously gaining a lot of share.

Steven Lee Dyer: Can you help us sort of you know to the degree you're willing to kind of give granularity as to where you feel that as long guns handguns and even to the product line level, maybe where you're seeing some momentum.

Speaker Change: Yeah sure Yeah, I mean, that's been our goal obviously you know for the last couple of years. Since you know since we kind of took over as a new management team is to really focus on firearms and focus on taking share within firearms and I think you know you can kind of see you know that's really <unk>.

Mark Eric Smith: Yeah, I mean, that's been our goal, obviously, for the last couple of years, and www.thevenusproject.com is bearing fruit. The share gains on the long gun side were frankly nothing to do with lever action. It was all a product when the main driver was properly introduced, as I covered in the prepared remarks about this time last year, the FPC.

Speaker Change: Bearing fruit you know the the law the share gains in the long on the long gun side, you know, where frankly nothing to do with lever action. It was all you know a product that you know the main driver was product we introduced as I covered in the prepared remarks about this time last year the F. P C.

Mark Eric Smith: That's performing extremely well for us out in the retail channel, and we'll be kind of phasing it out now as we measure our new products as products introduced in the last 12 months. Well, as I just said, it was introduced about this time last year.

Speaker Change: It's performing extremely well for us out in that in the retail channel and you know, we'll be kind of phasing out now as you know we measure our new products as you know products introduced in the last 12 months well as I. Just said it was it was about this time last year. So that'll be that'll will be phasing out of the new product, but quickly replace now with the with the lever action rifle. So should continue to.

Mark Eric Smith: So that'll be phasing out as a new product, but it will be quickly replaced now by the lever action rifle. So we should continue to get a lot of momentum from that lever action rifle. It is a platform product for us and a completely new white space that we don't really play in today. So cannibalizing, really nothing from our product line, so we're really excited about that as an opportunity for growth in the future. And on the handgun side, it's an area where we just feel it's our bread and butter, and we need to continue focusing on holding that leadership position there, so there are a lot of new products coming out on the handgun side in Fiscal 25. Yeah, that makes sense. With respect to the lever action, are you, is that, you said it's a platform product, so assuming sort of multiple calibers, etc.?

Speaker Change: You know get a lot of you know momentum from that lever action rifle it as a platform product for us in completely new white space that we don't really you know we don't really play in today. So you know cannibalizing.

Speaker Change: Really nothing from our product line. So you know, we're really excited about that as a as an opportunity for growth in the future and on the handgun side. It's in it you know an area, where we just feel it's our bread and butter and we need to continue focusing on you know on holding that leadership position. There. So you know that's you know a lot of new products coming out on the handgun side and in in fiscal 'twenty five.

Speaker Change: Yeah.

Speaker Change: Yeah that makes sense with respect to the lever action are you is that you said, it's a platform products, so assuming sort of multiple calibers, etc.

Mark Eric Smith: Yeah, you'll see a lot of new line extensions, etc. coming out on that over the next, you know, 12, 18, 24 months. And we really expect to build out that entire category into all of the calibers, all your typical calibers that you'd expect from a lever action rifle, and maybe even some that you wouldn't.

Speaker Change: Yeah, you'll see a lot of new line extensions et cetera coming out on that over the next you know 12, 18, 24 months and we really expect them to build out that entire category into all of the calibers. All your typical catalogers and that you would expect from a lever action rifle and maybe even something that you wouldn't.

Mark Eric Smith: And then going forward, it sounds like gross margins are certainly on the upswing. A lot of puts and takes on the operating expense line with sort of new costs. Please see, Yeah, I mean, we don't expect our operating expenses to materially change next year. As we've talked about many times before, that's, you know, that's kind of one of the core tenets of our flexible model is that, you know, when we're, we're profitable in any environment. And what that means is that when we're in a, we're in, you know, in a surge environment, and even an extreme surge environment, which we found ourselves in during COVID, if you'll notice, we really didn't change our fixed cost base, right? So our fixed cost base largely stays the same; we don't get carried away. We lead with a steady hand, understanding that the model that, you know, the top line can be volatile in this industry. And so, you know, that doesn't change.

Cool.

Speaker Change: And then going forward it sounds like gross margins are certainly on the upswing a lot of puts and takes on the on the operating expense line with sort of new costs depreciation and so forth along with some other stuff falling away, but on an absolute basis. I mean can you talk a little bit about what you sort of expect or how we should think.

Speaker Change: About operating expenses next year maybe.

Speaker Change: I don't know either as a percentage of sales our growth or et cetera.

Speaker Change: Yeah, I mean, we don't expect our operating expenses to materially change next year isn't in it as we've talked about many times before that's that's kind of one of the core tenants of our flexible model is that you know one where we're profitable in any environment and what that means is that when we're in we're in we're in a surge environment and even in extreme surge environment. We found ourselves around during COVID-19, if you'll notice we really didn't change.

Speaker Change: Our fixed cost base right. So our fixed cost base largely stays the same we don't get carried away.

Speaker Change: We lead with us with a steady hand understanding the demand and you know the top line can be volatile in this industry and so you know.

Speaker Change: That doesn't change next year right. So we expected.

Mark Eric Smith: So we expected, you know, our fixed costs and our op-ex will be flat, very comparable, brother. And then last one, for me, I guess it sounds like pricing and promotional activity is pretty rational on the channel. Competitors behaving fairly rationally; anything you're concerned about there, you feel like you're in a pretty good spot. Yeah, I mean, we've obviously, as you can see, if you've been, you know, if you've done some channel checks, you can see we've definitely been participating in promotions, but they, you know, as you, that's a good word for it. They've been very rational, but you know, there hasn't been any kind of panic or promotion by our competitors. We don't anticipate that changing, you know, as I said, I think the demand is going to remain healthy through through 24 calendar 24, which will, you know, obviously moderate that.

Speaker Change: Our fixed cost in our Opex will be flat.

Speaker Change: We'll be very comparable to this year.

Speaker Change: Got it.

And then last one for me I guess, it sounds like pricing and promotional activity is pretty rational other channel competitors, you're hearing fairly rationally anything you're concerned about that or do you feel like you're a pretty good spot.

Speaker Change: Yeah, I mean, we've obviously as you can see if you've been you know if you've done some channel checks you can see we've definitely been participating in promotions, but they you know as you Oh, that's a good word for it and they've been very rational, but you know there hasn't been any kind of panic promoting by our competitors. We don't anticipate that changing as I said I think the demand is going to remain healthy through through 'twenty four calendar 'twenty, four which will.

Speaker Change: Obviously moderate that that said I think you know the promotional activity that you've seen from us is probably going to continue probably won't get any less but it won't get you know we won't get really get anymore either.

Mark Eric Smith: That said, I think, you know, the promotional activity that you've seen from us is probably going to continue. It probably won't get any less, but it won't get, you know, we won't really get any more. Okay, thanks for taking my questions. Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd now like to hand the call over to Mark Smith for his closing remarks. Thank you, sir. Thank you, operator, and I just want to thank everybody for joining us today and for your interest in the company and Smith & Wesson. We look forward to speaking with you all again next quarter. Ladies and gentlemen, that does conclude today's call. Thank you very much for joining us. You may now disconnect your lines.

Speaker Change: Got it okay. Thanks for taking my questions. Thank you.

Speaker Change: Yeah.

Speaker Change: Thank you ladies and gentlemen, we have reached the end of our question and answer session I'd now like to hand, the call is that to Mark Smith for closing remarks. Thank you Sir.

Mark Eric Smith: Thank you operator, and just want to thank everybody for joining us today and your interest in the in the company and Smith <unk> Wesson and we look forward to speaking with you all again next quarter.

Mark Eric Smith: Yeah.

Speaker Change: Ladies and gentlemen that does conclude today's call. Thank you very much for joining US you may now disconnect your lines.

Speaker Change: [music].