Smith & Wesson Brands (SWBI) 9 Mar 232023 Q3 Earnings call transcript

Thank you for standing by. And welcome to Smith & Wesson’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]

program recorded. today’s reminder, a is being As And today’s Wesson’s program, like to General host for introduce your Kevin now I’d Counsel. Maxwell, Smith & Please ahead. go

Thank afternoon. you and good

forward-looking Our may statements. comments contain today

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

general. Forward-looking industry growth demand, as inventory consumer product statements conditions statements conditions opportunities objectives, development, for such also topics include products, and preferences, and trends, strategies, in may our on our market share,

represent judgment uncertainties are could to current statements statements subject to expressed cause results today. and Forward-looking the future our those our about actual implied from risks that differ by or and materially our

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

forward-looking to no statements. We our have obligation update

We financial non-GAAP reference certain results.

expenses non-GAAP exclude Our XXXX, and costs. operations the of be SEC our is financial in on Accessories the our and our non-GAAP found planned press in Tennessee, financial measures filings business and GAAP and available to Outdoor the relocation related distribution measures Reconciliations today’s certain each spin-off of of can earnings manufacturing website. & to results release, which other in headquarters costs Products COVID-XX-related financial to of fiscal

based always we metric a published we are when FBI we Also, reference EPS. data. to EPS, Shooting NICS adjusted NICS, by Foundation referencing When are Sports diluted fully on we discuss National referring NICS results, the

we not believe, NICS to and end due consumers, directly shipments we to market to period, agencies at the is purposes consumer levels any demand proxy considered counter, given available distributors than not Adjusted and because the or for channel. those NICS firearms mostly purchases. conducted removes retailers the generally and in federally generally share transfer Adjusted correlate law inventory in licensed NICS time checks other background only for our to firearm enforcement firearms retail best does

speakers, our remind call reference over is that Before any EBITDA hand I to to you to would I the EBITDA. like adjusted to

call Deana our are today’s CFO. Joining and Mark us and CEO; President our Smith, on McPherson,

I With the over Mark. that, to will turn call

and joining for you, us Thank today. everyone Kevin, thanks

We comparable and in and our dramatic continuing levels. quarter with to performance, fiscal increasing the our above pleased are improvement with third over sequentially pre-pandemic bottomline topline XXXX our extremely results quarter show pre-pandemic

and has discussed have capitalize relates we on results business it As our our opportunity to our transform mix as manufacturing the done surge afforded the team reflect model during our model work pricing. before, flexible the by fundamentally product to to

align profitability. iconic significantly consumer’s Our selling product model reputation is average prices and of with to our expectations offerings our drives designed improved brand and and stronger this

XXXX, powerful As our fiscal model, our reflecting aided EBITDA fiscal nearly of the illustration lower XX%, a comparable quarter from while impact period in of higher in X% by improvement $XXX ASPs increased increased a by third margin, XXX-basis-point of gross operating revenue costs. the million in and

quality of of Smith standards key These the innovation. to brand, purposeful underpin results the our the mix value on capitalize Wesson the and including realignment pricing characteristics & underscore and of that highest

coming decisions levels volume sales and sound Additionally, we higher moderation inflationary macroeconomic pandemic. as the make that the our enabled and of the pressures in the levels to us industry with navigated associated peak long-term headwinds profitability experienced demand during we off

profitability strong our demonstrate quarter this from results model in us any our environment. allows As to maintain

expected than a cadence. more during normal the believe higher settled and largely note and seasonal to to Moving as pre-surge, is we adjustment mirror experienced firearms from will new has returned the we prior surge to marketplace, the that period have seems a rearview demand the And the for now surges. consumer in at level normal

the year-over-year basis. our saw QX year-over-year. strengthened NICS basis, a that but were quarter, January. quarterly was a increase increase this XXXX QX X.X% an NICS our time fiscal up On we including digits for in low-to-mid a throughout in single Both first on and the fractionally quarter, third this, NICS Highlighting was down

been or consistent the with and The facing fully volatile entry-level higher market This strongest have other end is industries premium are products. low-end sensitive have featured what in environment. products seen that macroeconomic to areas the of consumer you

demand remained strong. relatively Overall has

innovation, However, consumers and end brand other are quality it value that is and whose price discretionary perception, relative buyers has factors. spending conscious spectrum, end much becoming at on less become up bifurcated more those by the the with core of focused high and to impacted macroeconomic and

our and trends, as maintain are mentioned offerings and profitability perfectly product innovative optimal balance We I aligned to and levels. existing are these upcoming monitoring earlier, constantly volume

an worth are feeling heightened pressure also or is noting on household firearm when there in showing market, anecdotal also of what see increasing aligns budgets, pressures evidence that with more we It’s consumers with activity which with the amount typically spending. inflationary guarded used increased becoming

supports firearm healthy market a Firearms for well generally which time, value secondary retailers. their hold over

sale undergo used at know, retail background transaction you required checks sales gun is gun new as just to As do.

included so to this between data you more purchases And see of explain would may NICS divergence firearms reported and NICS help used manufacturers why in consumer results. be firearms and starting are

much products. also activity expected spoke select to In rebates With quarter. began this, last has promotional we offering seasonal mid-January, on normal returned levels industry when the in months, you to as within recent we

targeted as products. long-range help retail take to a However, sales, our and across distributor to with inventory maintaining profitability and and we share aimed earlier, working very them optimize of & levels mentioned assortment do partners promotional their at full I and Wesson market approach activity Smith

to as low and promotions. maintaining positioning But brand focus in allows Importantly, gains continues our our innovation strong on main we product disciplined base for the be our profitability new long-term and sheet consider us remain fixed cost and to balance introductions.

new an development hard our teams. cadence results, near-term to leader. as world-class of A position our more engineering importantly, new product and but work steady Thanks strengthens not the with innovative helps competitive only industry products extremely of

are competitor, M&P X.X, product physicians seller with partners. channel well top M&P performing and immediately new of for taking Metal During the accounted XX% third quarter, all sales. our extremely products our with Recent launches

in Carbine a of on working Pistol matter own even recent launched to increase week, outperforming high our are We lines. production the expectations the many already as are is last which Folding we and launches, fact, of those they and also M&P demand, just

can You of expect continue new into calendar that this cadence healthy. pipeline our extremely innovation as XXXX is will product

mentioned Moving to mirror. is a the have discussion past channel the call in inventory we of rearview inventory we believe levels, correction now in

the of While holidays. flat a continued decline see big the since have distributor levels the and to remained half in inventories, box retail QX first

seasonal inventories, the both of indicates dramatically, brick-and-mortar at that at partners incoming that more our from levels. This returning our our sell-through channel retailers simultaneously, the have While and order of the the from have rates remained surge of products position improved counter strong. resulted end overstock to and stabilized

that in quarter further Our during we we internal decline end with the accelerating inventories fiscal end. expect year at come the also watermark levels quarter hit this and by of high even inventory down the our second October began to were the

historical in remain upcoming we Tennessee. keep to please However, to to mind will move that levels expect elevated our support inventory compared

of in begun. equipment a The progress its construction On quick Tennessee. matter fact, already note, we is of setup as in making a just project the final phase the has are stages, and on update that

summer October Our office headquarter with the the our through schedule for the space track frame. remains new ready and begin continue fall operational in time the on being start-up to over

half the position a fiscal spending Deana its this, XXXX. project of by cash With in our the second major phase as nearing end, returns us the will is generation to of and cover strong moment, normal

& whom I this has The also can’t project project our talk move loyalty and of the impacted to many throughout Wesson. yet day to possible this deliver beloved company. without our at of each for company this sincerely thanking about and are and dedication employees, of amazing only and their continue because success been it every by absolutely Smith

with In recent strong summary, remains healthy, a large of growth base firearm in core the top of participation and on consumers. loyal years market

compelling brand & All future leading like the a view for to a which of Smith of Wesson. leads

our driven gains generating scalable by of leveraging in is demand. proven rates market business strong focus variations success delivering our Our share growth wide by adept model profitable has at profitability long-term on highly disciplined that flexible and despite

but likely increase on to mirror, The and solid inventory new next product several basis revenues product continue portfolio, inflationary sequential quarters correction to rearview our launches to with the QX be expect in headwinds, by a impacted we strong will from partnerships, industry QX.

consistently the efforts long-term Most their work importantly, grateful of our and vision against on ever commitments our hard deliver our I stockholders. am customers, to employees and for and to team dedicated execute our tireless

hand Deana over that, call With financials. the will the cover to I to

of year $X.X fiscal XX.X% comparable of third Mark. Net $XXX million quarter. million was the third the above sales quarter the third our pre-pandemic $XX.X below last quarter but quarter, prior comparable for XXXX, million or Thanks,

we the full be in volumes within expected of call, third our year we came roughly our As in range. we and noted last quarter XX% XX% that earnings to to

For consumers pressures by products affected channel in sales. consecutive to distribution to lower-priced channel with trading down has reduction, declined. negatively quarterly quarter, ongoing the inventory This our impact fourth the inventory of due inflationary combined our

quarter note, exhibited our when positive XXXX. have approximately the above that ASPs overall has a compared pre-pandemic fiscal On profitability the however, in with remain improved reflecting we promotions XX% levels, during discipline current that

offset margins due the XX.X% comparable of prior ASPs. in above Gross X.X% the was decrease fiscal of was in margin increased the combination a to impact from favorable adjustments. last labor to adjustments, due year XXXX and year of unfavorable partially The realized on absorption but sales below XX.X% quarter, reduced production to decreased product quarter third material volume, valuation lower volumes, of the costs, and cost inflation fixed compensation due and liability inventory costs unfavorable by

show relocation. co-op $XX.X to prior in quarter million we costs decreased by reduction. relocation a sales year development expenses, such product slightly industry the and costs, third profit of driven promotions new sharing, customer unfilled quarter, temporarily lower and as $X were result comparable offset related the than as primarily believe compensation expenses million $X.X lower million of advertising expenses due Operating and this costs, Increases our freight, related in lower a positions, reduction for

normalized XXXX, million quarter $X.X fiscal sharing third our expenses lower, ASP in of million basis, increase to and compared strategy headcount our expense. profit the than a fiscal operating as When were offset benefits XXXX $X.X more on inherent reduced a

net offset the quarter, Net sales lower income in quarter, $XX.X year $XX.X reduced prior and in margin, third comparable reflecting expenses. gross by operating million of slightly million compared the to

to third higher compared $X.X and ASPs when to net income quarter expense. due interest this higher lower the quarter XXXX, of was million fiscal However,

million $XX.X $X.XX share earnings in in sales. $X.XX but earnings QX of third XX.X% fiscal down $X.XX we Non-GAAP the XXXX. of was represented than GAAP XXXX. $X.XX XXXX, from share reported quarter $X.XX year, but than third more from per in down per the higher EBITDA fiscal of last in was of of quarter $X.XX fiscal was

During spending consistent million. operations the our million million facility and quarter, spent of resulting capital from This cash generated in $XX.X on with on Tennessee. expectations cash was given net $X.X free in $XX.X we of in construction our new projects, used

January, we to In $XX expenditure. line capital of borrowed revolving fund on credit our million that

we repay be that time by our complete, able expect sooner. will if is not to We balance relocation this the

With to remain the priorities in allocation facility that as March excess our Tennessee Board fiscal having for paid to payment capital end, prioritize second quarterly in start-up on invest quarter revolver target record returning debt, to to stockholders will utilize stockholders. of we our authorized on unchanged, To but of be business, our XXth on our we in zero funds XXXX, dividend necessary be our March while that to with XXth. our $X.XX made our has

earlier forward volumes now model, appears XX% fourth inventory XX% quarter distributor account that to annual the for fourth estimate to still demand quarter, would normal back reasonable. we as the continue normal Looking our seasonal under our unit with to levels, of operating

on likely will from quarter. low end basis up that we of towards range, be the However, third very sequential but the a

expect relocation, be will continue costs margins with than lower the that volume by inflation two We fiscal in years. the and pressured to associated prior

products on and on ASPs, costs. will an activities have effect margins addition, operating In select likely promotional

took be relocation which to will higher costs offset finally, January. slightly customer marketing quarter, shows, associated a to expenses in more SHOT the and third our which travel with costs with And due operating expected than as decline associated in Show, compared place to are

by year to to expect generated total and from the cash of range in for due the spending Tennessee. to positive inventory fiscal $XXX reduction We the expect $XXX of quarter driven fourth operations in million the capital a in relocation million, be

Finally, expected be our approximately XX%. effective to tax rate is

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

Certainly. And from Instructions] Lake first [Operator Mark of Street. from our comes Smith the question line

please. question, Your

guys. Hi,

X.X higher of remind product to, like that looks reception your new and wanted products? products. The into FPC certainly maybe looks I positive. move looks historically to some just you mixed to with sales new just really here us of First, have it Can launch positive. dig new for where The initial maybe of potential the

yourself might mute. have on You

Yeah.

There we go.

Yeah. Mark. Hey, Sorry.

So, new well. FPC the product obviously, and X.X also great. very competitor in The this is doing is to addition doing

to is us. being So, going focus with area of continue kind going that for a forward

I pipeline, healthy. is the very as new think, product we prepared about that heard remarks, talked before in you

We spent of surge kind anticipating for would a a be downturn. the lot in that ready of time there getting -- eventually

this So positioned future. cadence well we continue pretty through foreseeable the kind are next to of

continue now. same where So that we expect -- kind are of can in that to expect you that right at we range we

as of have high-teens been But on varies, obviously, one around that are we these percentage. range, based it’s in before, been not. that it normal low same in Historically, surge or of kind XXs, in a environments whether we environment

I seem down I and little FPC reported the guns Is here And be though want just to that it’s a bit handgun want ASP that did confirm there long come will at quarter. caliber. to moving in even -- to just in long in then look did and Perfect. then the anything a that’s guns

The FPC, Deana here. look at

Yeah.

to going it’s think I be...

It’s gun. going to be long

gun. Long

Yeah.

And then a result as of really majority as ASPs going But got was the down -- I that the was we in coming and of now. right rebate, the on rebate a little that before, mix. on of mentioned bit the quarter the

the as March, reduce pretty beginning to was that, channel some know, kind not know, may up and that we ending we -- inventory stacked the at -- had of targeted at you the beginning again, very or end in be you and will may as of of So, of April.

we rebate the impact the that, April those reported as accounting in just quarter, expect that And and of rebates, line marketing of should and maybe move the us here of the about on more kind Show remind and Does some Okay. think in shows SHOT we maybe selling costs quarter? higher.

No. Yeah.

price that we against many on just we believe it How of So so for the the off that go estimate like way is sold. would account rebates we based comes sales closed. we that and quarter be

trying are with keep it, that’s historical information. we So on up obviously, based to

way year against through are going the the based on amount all rebate the that that through have we what So that and end goes of the sales April think rebates in accrue will head line. for the we will of

I Mark, will Yeah. just…

Okay.

your go ahead … question. and next jump to logical

with As ASPs new some the for we going it’s and included in the mix current quarter the on be will which be not very just much of to is rebate. in where line that ended product,

they were it it’s be sorry. little will than going they modestly but So, definitely be in bit, -- -- significant, QX not they will be where a down to in be lower will QX,

Okay.

kind the I level about if there guys with today? think that’s channel where it’s it. the me inventory last of weeks and of sorry at out talk one in Did your of you and the for I missed comfort kind

really as of will November what first is and they levels the tell actually We some have -- approach actually they the kind bit cases. and down directionally really come little inventory continue a we to come flattened through -- up you even But the back of come part didn’t. in December holidays, I

of same the kind And order our simultaneously the corner. turned rates at time,

very mirror that all I remarks, correction. now in said of prepared much I inventory in is the the rearview As believe the that with

is our much at distribution So in demand the line inventory with their levels. it’s -- levels channel very

Yeah.

end QX So year of declines QX, the wasn’t declined. -- modestly ago. It QX of end we big QX from the like to saw it declined a that slightly to the but from

of quarters declines. it’s So consecutive four

said, given good Mark now in we and are a that like see they as like seen inventory. with order rates, have we their we like a feel increase feel retailers stabilization the an and But place in distributors

Hope through now. is much much, stronger

Great. you, guys. Okay. Thank

Mark. Thanks, right. All

Thanks, Mark.

Thank you. our One for moment question. next

Aegis. question next comes Rommel of Dionisio line Our from from the

please. question Your

afternoon. Good Yes.

Rommel. Hi,

you flexed and it’s the three today mentioned able flexible benefits we were that manufacturing and Mark, down the the during reduce you -- during you in to in cost this along up last talked of in pandemic, and and the flex have obviously surge about years saw certainly the been way. past,

guys to could improving upon maybe your even move look opportunities talk the… deliver Tennessee, to you for about to As just throughout you that the ability flexibility

Yeah.

the also paper. industry that you think demand And How sheet sees? of enter a cycle … -- fresh follow-up as just clean you to Thank at factors plans a topic, of as that do Tennessee if changes same macro with sheet these last the quarters inflationary rates seen few and of pressures of that some labor there? all your moving kind about you. we in to have from paper

Rommel. Thanks, Sure.

lot of to change -- ramp level, at a do, on inventory are be the whereas co-located. down. in So doing Tennessee, of question Springfield, up it ramp I a our are be line more probably we and have Connecticut, What facility just need facility the going though, because Missouri injection manufacturing and change a and in macro processes I in amount doesn’t think, our do move half all nimble -- in assembly the we will a doing in to facility facility that to to and of to now Massachusetts distribution, the weapon we those flexible first does that doing manufacturing, be is molding plastic ability a amount the going think, with

us allow reduce So costs. it inventory kind will reduce and of to

level. ramp ability of change to capacity down. the back terms So major up think I our to ability topline ramp we of in macro that don’t or will it continue to ramp terms up on still to our be able a to a affects in

sure, I business are in right cost like else the world and yeah, the mean, I think, for we now. base everybody the On factors, inflationary

just on have materials. impacts will, impacts you increase major -- as has of kind of some so, feeling are you if flattened. seen but an Major I we you months tell the We the will just labor, last curve, or over kind macroeconomic the of we that inflation. where mentioned, I But are guess, definitely definitely today, raw that XX

Tennessee then any to months and don’t the today. from gains gains where that. to easing continue XX worse expect anticipate efficiency are going long-term, road, much will will near-term, as we of don’t of obviously, months facility get while So kind the into in down pressures we forward those look than And get the them they we here offset are to to we to the we we also for look in other XX the in

Yeah. you what In the year, short-term, and from -- we year sites the about it’s XXXX, we Outdoor end not year, four effective the next is are -- the Rommel, thinking this fiscal to American middle if next of year. next fiscal Brands going are about will lease which though, your be three model sites to thinking over trading with like January X, for the of

Deep closing will until facility, the And that we be the but back be half. River won’t

fully investing efficiencies, are point once we in and to fully line. to all And at seeing where them Tennessee. while are processes be transition will not We will the in really of in year, efficiency point, we quantifying we next interesting spending from so but equipment are going we that costs this gain we really are unique to pick -- a the take it there additional and us some a bunch of up are they depreciation get will will actually but the

helpful. very you. Thank That’s Great.

Rommel. Thanks,

the Thank to does the program. remarks. Smith hand Mark session of further question-and-answer any conclude for I’d you. today’s back This to program like

today you the and will we Thank and joining talk your you right. us All interest company for to quarter. next in

conclude gentlemen, the for and conference. ladies your in you, participation does today’s program. Thank This

may disconnect. You day. Good now