- Earnings call transcript Q2 2023

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Operator

Good day, everyone, and welcome to Smith & Wesson Brands, Inc.

Second Quarter Fiscal 2023 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Kevin Maxwell, Smith & Wesson's General Counsel, who will give us some information about today's call.

Kevin Maxwell

Thank you, and good afternoon.

contain may today comments forward-looking statements. Our

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

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

uncertainties from results current and by today. are filings, expressed risks in our of and with on Forward-looking to implied future subject actual website, our available our materially the statements a replay that judgment represent call. our cause about today's These those uncertainties our or risks SEC differ could are along are to statements which and described

reference We have certain results. no obligation financial to We statements. non-GAAP update forward-looking

can be not planned found & share inventory release channel. we results and and the consumers, agencies licensed costs fiscal business our distribution non-GAAP of any to manufacturing distributors measures to to Products to generally market given not we or the Tennessee, available period, XXXX, operations is to consumer than expenses of our to and based levels press always considered other Sports to law non-GAAP demand Adjusted and EPS, Our earnings Outdoor Accessories is transfer does mostly related in FBI we in firearms proxy diluted measures of headquarters best fully NICS, When believe, we when results, checks purchases. NICS SEC the Shooting EPS. NICS a data. we our relocation National counter. the due referencing retailers for are those costs. which Also, retail firearm certain today's on Foundation to Reconciliations correlate enforcement each on conducted and and directly GAAP in financial COVID-XX-related firearms in end of metric by available are for exclude spin-off generally filings Because reference at time discuss we adjusted other published the NICS our only in website. the shipments financial background referring NICS removes federally NICS purposes and Adjusted the financial

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

Mark our Joining I McPherson, CFO. us call will to President on the over Deana today's call our CEO; are With and that, and turn Mark. Smith,

Mark Smith

highly joining adaptive back market over illustration. significant period of our demand A model business creating Thank robust comparison you, of results normal provides our strong to second the Kevin, made that delivers demonstrated everyone, to again a firearm regardless was which several the conditions. progress continuing XXXX, and demand fiscal great for we've years past the us last and normalize, With thanks, in consistently firearm quarter today. once a profitability

While and in versus this XX%, costs. top line revenue ASPs operating driven QX lower higher year nearly of increased EBITDA FY by increased by by X% 'XX,

through our Looking strong anticipate demand associated to this, these designed our even with our is has of specifically expect cycles Tennessee. year, levels, significant team we to level half managed profitability the one-time normal and delivering more second continue model seasoned move of expenses effectively we the forward to business before, our fiscal and while for with

team be And the their long-term conditions. the to overstated. business, no success this in dedication the the on the steadily work always, thanks our of hard Wesson is of All of cannot focused appreciation remaining Smith as & for matter

are season and increase said, winter the sequential increasing the half The rising below slowdown, last nominally demand monthly the normal high period. of the year-over-year of as But across of broader worsened remains evidenced the deterioration decline Consumer NICS inflation, the data accelerated which surge by and trend tailwinds. record. last market. firearms this the quarter, longer-term by the to country being week compared compared as This QX, does temporary in to FY latter firearm largely a was and NICS rates. measured indicates now the when over driven fiscal our demand surprisingly, QX to the for return heating 'XX, interest remain northern most that by September Not November consistent patterns, levels our NICS, pre-pandemic sequentially from indicates consumer demand was our period. half on to Turning healthy from historical second ending when again with beginning elevated only the more the October and persistently in coincided to lowest by this representing with the released headwinds tracking recent offset

you'll recall, to were of new to whom million there more are past firearms XX over As now consumers than for market added XX the XX many months, purchases. subsequent the returning

recent own and healthy. With firearms showing conceal an believe average of is to these demand new eight very will entrants, rise, seven remain carry on enthusiasts trends the that indicating studies that data previous we firearms long-term

uncertainty firearm as discussed continue on economy a the take cautious to headwind its and demand call. impact approach and retailers is creating last a earnings we surrounding near-term and to inventory our firearm the This to distributors However, with the levels. continue on current business, levels, adjust many

solid our sequentially therefore, and marking strategic retail. pull-through considerably accounts and and channel inventory adjust year, at quarter within with down distributors process Importantly, this third versus that our seen and is consistent the our demand. following note in prior products consecutive and are we the products indicating market how significant normal declines past periods have of levels surges of in retail for a we And healthy a inventory significant

within profitable our in many activity promotional has increased, market firearm we to on and highly the competitive environment inflation sensitivity the level All share With winning by for remain space. and of a essentials, squeezed this consumers leading record consumer focus. means household discretionary remains prices at consumer price predictably, increased core purchases

our believe and we take mentioned brand we strategic to taken long-standing As Smith actions for confident and the in to the pricing pricing the reputation power we've with our approach ASPs have & before, align very are a Wesson of We and also quality The strong offsetting and positioned driven feature have well value across products versus competing profitability ASPs mitigate the full helping by resulting inflationary volumes. we now pressures higher lower spectrum. partially innovation. us are

We do expect similarly to gains this our long we to use erode promotional term. activity competitive in ensure those landscape of remain aligned not

the promotional certain second However, the address our the activity we on may economic of challenging fiscal of core half year lines conditions. our product increase in realities to of current

to industry. position our and team & critical of of are very more to now pandemic, innovation product to in introductions hard work continue Smith Thanks engineering the and the launches. throughout ever, product the new cadence product well Additionally, and Wesson the than are steady our continuing leadership we positioned management

by products for by Golob, Center XX-round in & our throughout continues Just pistol, collaboration second the long Wesson. of straight XXXX with several in iconic legendary And sports a have ready our have a be for months, trending. been well tuned, our are competitor to long received Fiscal our XX% the Performance to out participation and equalizer, recalibration more which racking of remain regardless very lined is of featuring EV which Jerry M&P strong above of new in direction by of products the continue half frame introduced Interest pre-pandemic carry levels, stay made our term, demand few we In slide business shooting year. our profitability the our adjustment an year past and of force up our pistol for box. for metal, we market term. full-size introduction the industry and These exceeding Julie metal manage remains of well reduces deliver for shooting Smith exciting pro-shooting expectations. full-featured ensuring and our levels competitive technology, team Miculek patented and version we a fiscal the consistently pistol, metal M&P the bodes full we concealed rates summary, over a which our high

more the consumer cyclical term, near such firearms. intense the spending, is of a items, on pressuring headwinds, particularly challenge macroeconomic as dual Over the discretionary downturn facing and industry

this continue With that, the expect it balance fiscal future. top flexible we While for our on and which into to continue our highly of to line revenue likely precisely I'll call to delivering built, environment XXXX, to commitments our of will profitable and impact Deana was our to is type the hand the model over over stockholders well financials. remain the cover and customers, employees to the

Deana McPherson

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

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

our reflecting in profitability with inventory during discipline For compared fiscal distribution promotions above the the our by competitors current note, we've improved in quarterly quarter, positive declined. when combined This of and quarter products sales. activity approximately by the our impact our levels, On negatively lower-priced were meaningfully consumers however, promotional exhibited pre-pandemic XX% XXXX. channel a that the affected overall ongoing has down ASPs with the third trading to has that inventory consecutive correction,

year a in was all and inflation due the relocation reduction of the expenses, compensation partially in to we expenses the fixed year by positions, X% resulted reflecting product result to nearly freight and of prior decreased impacted the the $X.X relocation. comparable for and unfilled prior compared as increase quarter over the fiscal X.X%. million labor XXXX. believe, by of unfavorable adjustments Relocation absorption in quarter negatively the decreased comparable costs, valuation material Although by in last cost year inventory were in the million current comparable The offset margin gross combination expenses. below lower by sales costs, quarter net compensation-related sales-related lines second year slightly quarter, realized second quarter, the quarter a and $X.X was operating of than volume lower lower lower liability a last well also in comparable quarter our ASPs prior temporarily as production XX.X% million such to volumes million from XX.X% X.X% to primarily of impact offset due due Net margin the costs gross by and in reduced of $XX.X across reduced gross the unfavorable sales income million a second second improvement year on of Operating in co-op margins and product the margins $X.X in quarter quarter decrease costs. costs advertising driven $XX.X

the in fiscal than in XXXX, in second lower of higher GAAP to quarter year, $X.XX second of interest million the reported down was due to compared earnings last per the $X.XX quarter of $X.XX QX this but we per from share fiscal but more higher XX.X% of income XXXX, when higher was than fiscal $X.XX expenses. ASPs million quarter of in share and quarter $X.X second net However, $X.XX and XXXX. EBITDA represented was operating XXXX. was $X.XX of from $XX.X earnings sales. down Non-GAAP

our performance be the During board increased and new share million we sharing of to of paid our profitability, and authorized on to dividend for of $X.XX To quarter, cash million. during focused capital operations resulting capital XX, XXXX remain projects, profit that record consistent stockholders. cash managing used was $XX long-term with end, We million $XX.X payment spent build used facility our our our fiscal has quarter, on on the construction Tennessee. on quarterly be our December planned This free from made business X. and expectations, from payment stockholders given the to of market inventory of to net January in with spending $XX.X the return for in

the quarter. to third forward Looking

distributor seasonal with third Now are estimate at our comfortable level, quarter inventory earlier more more continues under unit for of appear XX% that volume reasonable. normal operating we a XX% demand the to to model

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

both begins you activities and promotional have year, this trends capital still equipping will financial of of that is and our committed January, to marketing and it grow state-of-the-art being end uncertainty on additional through with combine facility we and negative one-time one-time the also addition, costs. When beyond products rest are to next low long-term and 'XX, created as likely working quarter finally, beginning the impacted remain machinery. the we've expect meet most operating And of with associated our as costs run with flow In affect for these fiscal seasonally. quarterly summer's recent costs ASPs, reach select increase We are to the continue for season in begun to continue to likely Tennessee show margins likely needs move, by the rate. of targets the construction costs will industry during our within to sales while current business cash costs decline to and even inventory our experience preparing we third demand to consumer with cyclical free related which

our approximately XX%. please to Finally, expected we our to open With be operator, is tax the analysts. rate from effective call that, questions can

Operator

Instructions] from [Operator go Our ahead. the question Lake Mark Please Smith first comes of line Street. of

Mark Smith

followed may it more what Is I more then, like seeing Black it talking from here a and It half. it's of holidays suit. promotional It you're steam kind seem going gain of just second correct? have big the in but doesn't like Friday. in out open just environment. like sound little you bit here seems to to half follow want get And to the on sounds that promotional, start in some doesn't picture be guys kind like the overly around be you promotional second a the little peers we're

Mark Smith

a think. good question, Yes. That's I

our is the so of of level haven't competitors. answer the to yes, we participated So, far, some

with little straight with new get bit drive understand conditions we more I also position couple able are, think little what All a we're versus a -- want taking ASPs kind I sorry, of said remarks, the as competition kind that be some one of in I push a on of so products volume all feel able to especially prepared think the thing. like some into reactive going new to We don't longer-term been promotions, items and in bit firearms. We're for to do what things. creative little cetera, more and good said, approach. erode as discretionary do and kind and bundling gain accessories, we've said, should over are we're there's the taking a we We command. of little economic going bit to With brand and of than product et things to being bit more in some a totally try a we're those that maybe we're we last the like just the -- rather that some more and they years. all of can that

to So, the play we're kind of hand we're forward as here. kind to we have go dealt going of

half, a And so, I meaningful think in your question of are we going probably in to participate second more yes. in is answer the promotions

Mark Smith

we any would plus Okay. And the promotional? some know you we quarterly being you're as handguns in are and here I just given guidance. it peers But sold kind peers and looks by haven't I $XXX-or-so saw near given volume at of growth millimeters not don't like term, overly retail, rebates, expect as term look that expecting at near X significant

Mark Smith

Yes.

her expect -- some the some of kind percentages half. for gave the we color the prepared half comments volume to of around second unit versus think that Deana remarks I first that in

of And so, I holding we're think to kind that.

some can based to you first think comments need versus the volume. Deana where half the get I be of probably second gave to half you on unit on that percentages on

Deana McPherson

Christmas the I may QX terribly speaking, don't we're it where to seasonality expect QX. We'll now, reorders terribly in change. than QX see right The forecasting and different season Mark, from we But came. how be January. mean, be different to not generally goes

Mark Smith

QX. us, is is you QX, -- QX while. pickup And get in kind know, usually that QX been you've fiscal then as around usually for you our your a of

had of same kind historical historically that back pickup pre-pandemic. of we've and expect kind to So go

Mark Smith

And the the your at just new I kind to we're speak had through of to that Yes. end your was want some much of new shipments. quarter, at launches Within the walk launching the as norms to kind maybe more of that you product quarter? can of of just build historical moving product how of -- timing products new end you and and of that's inventory kind

Mark Smith

Not a lot of it.

the to timing it. just actual talking that usually prior products, it's we start retail new consumer once into about the Our at it available load we channel of the launch

new at that right So launched we were November. those the note products beginning you'll the of --

of then So, already lot in really a of we and loaded November. those had middle

were starting the they So, into already channel. to ship

of was that a build inventory lot So new associated not products. with

Mark Smith

then And launches that product to continued April Okay. as build a quarter, is primarily distributors and that getting in and little into product you discussed the QX shipments, due maybe just hands? seeing new retailers' bigger

Mark Smith

Yes, yes.

Our will continue. second half

-- of almost month new just right competitor beginning end of of with not pick at pretty the second sorry, of every October, October the anticipate kind saw and most at to launch to up, end since of of half. of then one of one and probably -- one kind of level, had a October, September we end September, do kind then beginning but and the we -- that recently the throughout product You beginning November, cadence cadence the continue that steady

half second products new the lot a So, included of does in. have

Mark Smith

it to bit digging here have your recently have And products at a your be lot been launched of into little but plans just on that might a Okay. mid- launches, you and higher points. going expect introductory out products of forward? a maybe we forward? is that type Or ASPs there chance end going with Should you that price come more and lower

Mark Smith

of but digging for we're said upper are as you play our little little that I'll bit allow & reputation and in believe you brand business think the Smith earlier, the kind give -- Wesson term, managing of tier. do It's I bit mid I I us and we mean, there, long a that a Yes, to color. the does

I command them. you're with we up is kind not as of our is I maintain full And products the new those give anticipate and going ASPs, span a going of But the lower brand-new where that will the so products today intent product. other. kind can new And margin that materially and between shouldn't detail most the is our so, or the impact that color the the of really impact products, as be much to mean, products, our all hopefully able said, to it in can the spectrum you are high-end to into they're way our materially new products way to for we're ASPs end we're that sitting one us the come launching, launching we yes, help

Mark Smith

kind The to just give can Okay. we a seen next timing as relocation far and more one, little just is you according as plan? have Or on shift? of it going still shifting anything update bit, anything costs -- and any

Mark Smith

No, yes, on very basis. appreciate according timing the is yes, question. And well. a going Everything to plan

our just about within north range a going impacts are anticipate still of timing And although towards and we able is perspective, end north inflationary from end. well. we've still to very albeit the budget, little our As to previous we talked in across economy, calls, what but we of expected, the with towards bit it a contingencies, within it's be our the do it the

track, already the out working a office the were mostly of building personnel -- actually location Tennessee, is XX right working employees So, of the out over got out our area personnel on temporary there there. and we've front

So, from as the perspective going well. very a personnel well is move

Mark Smith

picture big another then of question. And kind Okay.

debt far But changed the next negative free. changed allocation cash We've looking investment? cash amount. Just have come come flow down, a anything just of has some still as or has expectation inventory fair plans free that this as at capital you'll sheet quarter, balance cash up, here the seen position still --

Mark Smith

nothing in second. priorities. from Deana generally, terms get changed of let capital I'll a allocation, But in has just the our detail into

from to ago our in priorities and and the back said that we we right that allocation then were our reinvestment cash capital get-go think I three return be would when about the remains spin talking years the priority. back business excess stockholders,

we investing horizon cash be strain, stockholders. which cash the Tennessee, back major in facility our and done cash significant business in So that, as anything we're to a the we'll into and in anticipated. the And fairly right with see now, terms planned with don't expenses continues we're but be returning of for the once the on needed business, to obviously, back

Deana McPherson

in see been cash. that Without higher Yes. just is And in to it ever million $XX quarter spending in capital our year. normally that, you'll is, mind million for the have full $XX than we the higher would

plan we for So it. did

long-term that We expect unfortunately, hold. went business. of We this was I want viability the excellent back that investment cash. the the back don't to to the get that short knowing that an we into we spend to get I the use grand the we'll that, new cash cash cover to the at hold to means of once for investors. how in to everything opening can that But and get term, do need make facility, of looking we our should more And to

Mark Smith

again. time. we've last guys the legislation seen by where the in long piece you not here environment, then just your had that on state give Regulatory that, change me, one of And in picture change any then a an recent on stand for big business? kind or Can legislation state, you update and of nationwide, just first

Mark Smith

We we the state by or and It's will and an ourselves always we Yes. answered we whether local, laws business. it's running things this compliance federal, is do and of pride products Mark, that. we we with make question, and one all continue regulations abide as of the on kind always lawful to -- ethical

for they looking on them continue in kind at -- and are of they There to they NICS come the the folks of you the second said, the there's, of go seen We've it of amendment. Oregon amount and the a And exercise want kind just some of we there. terms legislation of to big long-term react macro that and if rights our have to of impact look you restrictive have guess, while The top as state laws to noise, come I call obviously so spike causing up states. the they second ebb that can. -- in regulations, states lot some temporary a mean still feel business. those is most area that seen the We'll I to flow,

consumers are those business, the willing it's So, loss respective to the even to impact their with exercise fairly rights minimal. still to our

Operator

Instructions] comes from [Operator you. of Dionisio Thank question the Rommel Aegis. Our line next of

Rommel Dionisio

long-term the about the gone forward ago. broad a I shotgun model, if category your going one year And now could it, we're law about launch you Mark, just guess just on the year this has XX, view to enter a M&P just just launched the a the you disclose. the the thoughts of year And I and how through and -- of one about gone to love category SKU how plans I your new category that wonder that product can thoughts response your to you being a how the guys your You extent that go into in year that and you into it. plan would hear didn't terms

Mark Smith

bit in towards we that question, categories tactical yes, earlier, Rommel. been one categories, it more recent gun the reputation niche opportunity the lot very those it's is those The us has the shotguns is end been at higher has have. pumps, us, the -- still cetera. been And more here, shotgun long we and shotguns market, to launched category in The due the brand of and space and again, hard hit. some of for shotguns specialty end unfortunately, of definitely of and one general, a well, quality believe of but for downturn the was of shotguns, XX higher Thanks M&P of et still for and one low is, which Sure. that's the some in more said anecdotally really Yes, that moving a addressed end we in kind category higher that I it's Company. the shotguns. price as bullpump end, hunting a little a That more bullpump commands that white

We at mean, is yes, And product than can one and we fair as new of and give really gain we things I share color we as I of us term, said an to as of interested long I space lever. can those keep our be much evaluate. consumers those one it's go is, great us development the forward. earlier, -- look you white a feel So continues that's a pull in more areas, area for to market those and as

line gives hopefully, you information the you gives you there So need.

Operator

are further [Operator in the as over closing like there And no queue, Instructions] to for Mark questions Smith Sir? call I'd to turn back remarks.

Mark Smith

sir. want us joining you, And to talk just Thank to thank you quarter. We'll today. next everybody I for

Operator

participating. call. conference today's concludes Thank This you for

may You now disconnect.

Smith & Wesson Brands (SWBI) 7 Dec 222023 Q2 Earnings call transcript