Good day, ladies and gentlemen. Welcome to the Second Quarter Fiscal Year 2015 Smith & Wesson Holding Corporation Earnings Conference Call. My name is Denise and I will be the operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now turn the conference over to Liz Sharp, Vice President of Investor Relations. Please proceed.

Thank you and good afternoon. Our comments today may contain predictions, estimates and other forward-looking statements. Our use of words like anticipate, project, estimate, expect, intend, believe and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding revenue, earnings per share, fully diluted share count and tax rate for future periods, our product development, focus, initiatives, objectives and strategies; our market share and market demand for our products, market and inventory conditions related to our products in our industry, growth opportunities and trends; and the expected benefits of our proposed acquisition of Battenfeld Technologies. Our forward-looking statements represent our current judgment about the future and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings, including our Forms 8-K, 10-K and 10-Q. You can find those documents, as well as a replay of this call on our website at smith-wesson.com. Today's call contains time-sensitive information that is accurate only as of this time and we assume no obligation to update any forward-looking statements contained herein. Our actual results could differ materially from our statements today. I have a few important items to note with regard to our comments on today’s call. First, we reference non-GAAP adjusted EBITDAS on this call. Note that the reconciliation of GAAP income from operations to adjusted EBITDAS can be found in today's 8-K filing, as well as today’s earnings press release, which are posted to our website. Also, when we reference EPS, we are always referencing diluted EPS. Finally, please note that this call references only our continuing operations. For the results of our discontinued operations, please refer to our 10-Q for the period ended October 31, 2014, which filed this afternoon. I will now turn the call over to James Debney, President and CEO of Smith & Wesson.

Thank you, Liz. Good afternoon, everyone. Thanks for joining us. With me on today's call is Jeff Buchanan, our Chief Financial Officer. Later in the call, Jeff will provide a recap of our financial performance as well as our guidance outlook. Our results for the second quarter met our expectations and reflected ongoing execution on our strategy as we continued to navigate the consumer firearms market as it returns to a more normalized environment. While we are pleased with our results, conditions in the channel have become increasingly competitive. As a result, we are lowering our guidance for the balance of the fiscal year. Before we discussed that, however, let me provide a few important data points from the quarter. Total sales and earnings per share came within our range of guidance, although as expected, they were lower than last year. Lower sales of long guns, including modern sporting rifles or MSRs, drove most of our first quarter decline the decline in handgun sales was smaller due to continued strong sales of our small concealed carry, polymer pistols and revolvers. Adjusted mix for our second quarter reflected that the market followed its seasonal trend, strengthening from typical summer lows as we moved into the full hunting season. Adjusted mix increased slightly just below 1%, while our unit sales into the domestic consumer channel for the same period decline by about 27%. As I noted last quarter, while we would normally use this comparison to tell us whether we gained or lost market share, current movement in inventory levels and noise in the channel make that comparison less meaningful. Therefore, we are relying primarily on our internal monthly analysis and key distributor feedback for more accurate market share information both of those sources indicate that our broad product offering remains popular…

Thanks, James. Revenue for the quarter was within our guidance at $108.4 million, but down 22.1% from the prior year as expected. Gross margin for the quarter was 32.1% as compared to 41.6% in the prior year. The decrease in margin is mostly due to lower fixed cost absorption from reduced volumes and an unfavorable mix of products. Gross margin was favorably impacted as a result of our vertical acquisition of Deep River Plastics. Operating expenses were $24 million or 22.1% of revenue compared with $29.2 million or 20.9% of revenue in the prior year. In dollars, operating expenses decreased due to lower incentive compensation in ERP related expense. Operating margin was 10% in the second quarter as compared to 20.7% in the prior year. Net income came in at the top of our guidance at $5.1 million or an EPS of $0.09 as compared with $0.28 in the prior year. Non-GAAP adjusted EBITDA Q2 was $18.8 million as compared with $36.9 million in the year ago period. Turning to the balance sheet, we ended the quarter with $64.3 million in cash, no borrowings on our line of credit, with $175 million of outstanding senior notes issued into tranches. We slightly reduced our internal inventory in the second quarter. Although we do not think inventory will be further reduced by the end of Q3, we do think that we will have meaningful reductions by the end of our fiscal year. In Q2, a cash reduction of $19.1 million was driven primarily by operating cash outflow of $14.2 million and internal capital spending of $6.6 million. Looking ahead, we expect to reduce capital expenditures in the second half of our fiscal year to $16 million, down about $21 million from the first half. That reduced spending combined with expected positive operating…

Thank you, Jeff. To reiterate our approach at Smith & Wesson, we do not simply react to the market, but rather manage our business for the long-term in a way that gives us the ability to take market share, independent of whether or not the market is growing or shrinking. That strategy drives the way we manage our company for marketing and new product development to operations management to budget planning. Based upon recent adjusted mix background checks it appears that consumer demand is trending to its normal seasonal patterns. This is very encouraging. Since we believe that seasonal increases unfold on winter activity will help to reduce high levels of competitive inventory in the channel that exists following the recent surge in consumer firearm demand. The recent adjusted mix results of Black Friday provided further encouragement. It was a record result with consumers driving more than 175,000 background checks in that single day. As I noted last year, when background checks were only 144,000, the data suggest to us the firearms have now taken that place among the basket of mainstream durable goods that consumers look to find deals on during Black Friday sales. As I mentioned earlier, point of sale analysis that we conduct internally, feedback from one of our major distributors indicate that we held our market share in the second quarter and we remain the market leader in both, handguns and MSRs. Overall, we believe that inventories in the channel still remain elevated and those distributors and retailers continue to hold an unfavorable product mix that includes a number of lesser brands and hard to sell products. On top of this, two more recent developments have occurred and these represent the key drivers in our decision to lower our guidance. First, we are seeing discounting and…

Sure. [Operator Instructions] Our first question comes from Cai Von Rumohr with Cowen & Company. Please proceed.

Yes. Thank you so much. Nice job in getting your inventories down a bit. I note that the finished parts came down. You mentioned that the third quarter, the inventories would be flat to up. Do you still expect to have them to at about $85 million by year-end?

Yes, Cai. We are still on target with the goals that we mentioned last time.

As I mentioned, Cai, as well, we are about to enter a very busy show season as well, so no doubt there is a draw down on our finished goods inventory.

Got it. Then you mentioned, you know, that you are now at 111,000 units, so refresh my memory where is your weeks to cover and what is your estimate as to where the weeks to cover for your competitors are, just give us a range so we can kind of bracket this a bit.

It is tough to do, Cai. I mean, we talk about our own inventory as we said. We will give you and that is what we are really most interested in getting below that eight weeks threshold in terms of cover, so we will see velocity increase especially as we go into the show season and even if our unit stayed as constant will draw or reduce the number of weeks cover that we actually have in inventory. In terms of our competitors it is a huge range. I mean, we have seen anything from 12 weeks up to six months. It is a very big range.

Okay. Do you feel I think, you know, you got surprised going into the first quarter. Do you feel now you have a pretty good read as to where your competitors are what are you doing differently to be able to say that?

Other deeper analysis pretty much building on what we discussed last time, we are just diving deeper into the analytics than we have ever done before. We are actually in a process of recruiting more analysts into the business, so we can do an even better job of doing that. I would say yes we feel confident that we have our arms around the current situation that we see in the market and that we are reacting appropriately. We talk about our more aggressive promotions this time around at the show season. Just as a reminder, we always do promotions at that time of the year, so we have decided that we are going to be more aggressive to gain back any of those share points that we may give away over the next few months.

Terrific. Just last one maybe on the army bid, you know, should we expect any noticeable bid and proposal expenses in the upcoming quarters? Secondly, maybe give us more color on Battenfeld and the revenue synergies and maybe costs synergies. How much, I don't know if you can quantify any it, but any other color you could give us on that would be terrific.

Sure. Just quickly on the military M9 replacement. One of the reasons that we are partnering with General Dynamics is because of the resources that they have and the experience they have of winning and managing these types of contracts. How we were approaching military contracts historically was that we would have to hire an expensive consultants and try and do a lot of that work ourselves, which to be perfectly honest, we were novices at, so heavily leaning on those consultants and they are very expensive, well, really that is the expertise that General Dynamics brings, so it's the perfect marriage for us. We have a designer and manufacturer of a great handgun, the M&P polymer pistol that as I said we are developing a next-generation, so that we completely meet the needs and requirements of the U.S. military and that marriage to General Dynamics absolutely have to navigate these processes, have fulfill over requirements of this type of contracts for us is just perfect. Then just switching to Battenfeld, in terms of best example of our revenue synergies that I can give you the simplest is extracting out of our own $20 million accessory business that we have. One part of that is Thompson Center Arms, a very successful and high margin piece of business. Hereby giving it to a very talented management team at Battenfeld, we feel very confident that they will be able to not only sustain those revenues, but grow and take market share with those accessories. At the same time, they now have as I said, they have access to three very powerful brands, which they can leverage the value of those brands as they develop more accessories they can brand them with those brand names and launch them into the marketplace. The other side of it is we have a licensing business, some licensing revenues which you know is fairly small. We don't talk about it very often at all, but there you have certain accessory manufacturers who are licensing the Smith & Wesson name for example, while we can actually produce those products ourselves now and generate even more revenue. That is just some examples, but I have to say primary attractions of Battenfeld is great brands, a very strong management team, very talented demonstrated excellent growth over the years, very attractive margins extremely accretive and of course the most important thing for us, it is strategic. It is right now we will house [ph] when come to our core firearms businesses. As I said, we already an accessories business in our core firearms business, so we are very excited about that, we think it is a great opportunity to continue to grow the business overall.

Cai, do you want me answer the question on cost?

Yes. As far as anything you could do, would be great, yes.

Right. You know, we actually don't believe there will be any costs on synergies, because it will be operated standalone. The thing they do very well is run their new products business. In fact, we are going to be moving some of our business like towards them. We have said that we expect about $0.07 of EPS next year, so that is assuming that their costs continue, but that is not taking into account any of the revenue synergies. Of course the cash EPS, which is basically the net income and then you add back the amortization and depreciation that we have to do off of the purchase price is more like $0.18 a share, so again very cash-accretive, EPS-accretive and gross margin-accretive and with plenty of revenues and synergies.

Terrific. Just the last one, can you give us a range on your free cash flow estimates for this year?

I don't think we have given that in the past. We didn't plan on giving that right now. As we have said like numerous times, the fourth quarter is always a very strong cash flow quarter. Just as a result of everything that just the way with the with the industry works, this year it will be even particularly strong, because of two additional factors. One, in the past, our CapEx was sort of back-loaded. This year it was front-loaded, so our CapEx is going down. Then of course as you mentioned earlier, we are expecting a good reduction in our inventory in Q4.

Terrific. Thank you very much.

Thanks, Cai.

Our next question comes from Andrea James with Dougherty & Company. Please proceed.

Hi. Thanks for taking my questions. I can tell you were anticipating the questions about Battenfeld, because you gave a pretty through answer to Cai there. I just wanted to see, so my understanding is that was a competitive bid. Was it your sense that you wanted to acquire this company, so your gain as a competitors' loss. I guess, my question is, why this company and why now when you historically have been kind of getting very focused on handguns and getting out of sort of some of your side businesses.

What we have always said when it comes to M&A activity that we are not out there necessarily targeting any brands or company for acquisition, but we said when something comes in front of us opportunistically, we would always strategically evaluate it to see if it is a fit. M&A deals coming across the desk all the time, this is the first - pretty much though we have shown this degree of interest in. Just for the reasons that I described to Cai earlier, we think it's a fit. Accessories is already a part of our core firearm business. I think if you just referenced our investor presentation, which currently is not unavailable by the way, but it is being updated, so it will be back on the web fairly soon, but three of our six strategic corporate objectives, first on protect and grow our core firearm business, while accessories is part of our core firearm business. The second one focused on profitable growth. This is a very profitable company and is accretive to us. The last objective number six, three, four, five don't apply is that few strategic relationships and acquisitions relating to our current business. This relates strongly to our current business, so I think it is a great fit in our respect as you look at what we said before. You could go to the rules for success part of our investor presentation, number one. The most important rule is concentrate on firearm industry. This is very much part of firearms industry. Our well-published strategic event roadmap had FY16 as initiative assess accessories market and potential for expansion and growth, so I just think we are right on target.

Thank you. Then how do we get incentive - quantifying you said you are going to get pretty aggressive with some of your discounts in the show season, but you did that all the time. I mean how many points of the margin? Is it like sort of above how you normally think about your discounting or just can you quantify that in some way for us?

Well, we can't actually. I am not going to. Actually, I quantify points of margin; I am just going to say that our guidance that we gave you, it is included in there. and because we are fairly specific about operating expenses and the things we have said in the past remain the same, the offering expenses are about the same. You are probably going to go up about $1 million or something in Q3, because of SHOT show, but other than that you can pretty much back into the gross margins and you can you can see at a higher number, the gross margins are lower, so there is definitely an impact.

Okay. That is helpful. Then just one more, I am just curious to get your take on what is going on with Caldwell. I know it is sort of an odd question to ask, but do you think there is going to be more industry consolidation with them and does their filing for bankruptcy protection have an impact on your business rather than open up opportunity to share I was just curious to see what you think of it.

Just talking about the chance - I don't see any opportunity to really take anymore share points, because it is modern sporting rifles and we remain the market leader there by far. I would say Caldwell [ph] has a respectable position in terms of market share when it comes to modern sporting rifles, but I will let Jeff comment in more detail. I mean, they seem to be almost back to business as usual.

Yes. I guess we would not really comment on their financial situation. That is for them to work out, so I will leave it at basically what James said.

I appreciate it. Thank you, guys, so much.

Thank you.

Our next question comes from Brian Ruttenbur from CRT Capital. Please proceed.

Yes. Thank you very much. Okay, maybe I will take another shot at this. The discounts in the fourth quarter are going to be aggressive and it is not going to be so much on the growth side more so than historical there was going to be higher operating expenses. Is that the way to read that summary?

No. There will be a lower gross margin than would normally be the case.

Okay. Then thank you.

I was going to say it is like, again, because we give such specific guidance about the top-line, the bottom-line, I think most people know that our interest expense not including the Battenfeld transaction is about like $3 million a quarter. It is pretty easy to calculate the gross margin and what you will find is that it is sort of relatively constant now the rest of year despite the fact that revenue was going up in Q4.

Okay. Perfect. In terms of CapEx in fiscal 2016, the trend is to go down, and now that the ERP system is in can you give us a ballpark for what you think your ongoing CapEx needs are?

Well, as we have said in the past, I mean our maintenance CapEx is probably in the low 20s. You know like what we do like next year that hasn't been entirely deciding to add and we are not forecasting next year, so I can't really comment on next year.

Is Battenfeld a high CapEx business?

No. It is a very, very low CapEx business. I mean, they are mainly focused on product development, their manufacturing is outsourced.

They are just actually relocated and that is probably the most capital they have ever spent, so that is a one-time and we are out of the way of that.

Okay. I am going to ask for a little bit more detail. Hopefully, you can answer on third and fourth quarter on - with the acquisition, where does D&A go from and to?

Well, again, we haven't really quite - we have not closed the transaction having done the analysis that is required when we close the transaction we will file the appropriate SEC documents that you can begin to figure that out. I mean, our D&A without that is $25 million. I sort of gave you a hint when I said that cash earnings next year are $0.18, but we think that the GAAP EPS impact is $0.07. That means there is about $0.11 of D&A that is associated with that next year. That should be able to get you to some rough numbers.

Right, and that is primarily A versus D. Is that correct?

Yes. That is almost all A.

Okay. Then question, share buyback, what did you do in the period and what was your average price?

We did nothing.

Okay.

Because we had purchased everything allowed under our bond covenants last quarter.

Okay. Can you do any in the third or fourth quarter and do you plan to?

According to bond covenants, we cannot.

Okay.

Because right now, there is a maximum amount each year and it is $30 million, so we are at the limit.

Okay. Then starting to beginning in the fiscal year - so beginning in May, you are going to start another $30 million. Is that correct?

That is correct.

Great. Thank you very much.

Thank you.

[Operator Instructions] Our next question comes from Chris Krueger with Lake Street Capital Markets. Please proceed.

Hi. Good afternoon.

Hi, Chris.

Hi. Just a couple of quick ones, can you tell us what percentage of your sales go directly to a retailer versus those that go to a distributor and whether or not there is much difference in their ordering…

What we have called out in past investor presentations, which again the investor presentation and the prices have been updated, was that via two-step distribution, so wholesalers 72% of our consumer business. The balance, so that $0.28 is a combination of direct to the bigger retailers, the big boxes such as Cabela's and Gander Mountain and the two buying groups that we serve directly. As a reminder, buying groups are made up of - the membership is made up of independent firearms retailers.

Okay. Have their ordering trends in general kind of been the same across the board as far as holding off as they reduce inventories?

I can't obviously go into too much detail, because it is something we have never really discussed before in terms of the trends of ordering, but it is variable. What I said, when I referenced independent retailers, some of them have been unwilling to restock their shelves adequately. We actually did some analysis recently of 105 locations all wanting to buy independent firearms retailers and we took one of the most, if not the most popular product out there at moment which is our M&P Shield and 9 millimeter and looked at our opening and closing inventory in October and 40% of them either opened the month with zero inventory or close the month with zero inventory or both. We don't know. How many times they stocked out in the month if they did at all, but 40% for me is a pretty high number and that is one of the big surprises that that is a hot selling product that consumer wants it. You really should be in a good inventory position, be ready for them walking in the stores to ask that product.

Okay. Shifting gears over to the Tri Town acquisition, I think that closed - in the middle of the first quarter. Can you give us an update on how the integration has gone? Also, are you seeing kind of a pipeline of other vertical acquisition opportunities building?

I will answer the question about Tri Town and James can answer the question about other vertical acquisition. It is going very well. It is probably one of the better integrations that I have done in my - I am not doing, but I have experienced in my careers. It is accretive. It has done everything that we wanted it to do, which is give us more insight into plastic injection molding process, allowing us more R&D in that process, reducing the risk in the supply chain, because now we know exactly what is going on behind the curtains so to speak. It has been accretive from day one, it is doing - so far it has been accretive about $0.03 year-to-date, so we are actually probably a little bit ahead of where we thought, because I think we have said it was going to be $0.04 accretive.

Again, another great member.

Unfortunately it for the whole year, it has only been a half a year.

Again, another great management team that we are very pleased to have thought about family, so they bring a lot of stability to our business and know absolute what they are doing. In terms of further vertical integration opportunities, I think I said before there are quite a few. There are certainly two or three that peak our interest, so we remain focused on that and we will update accordingly.

All right, that is all I got. Thanks.

Thanks.

Our next question comes from Scott Hamann with KeyBanc Capital Markets. Please proceed.

Yes. Thanks. Good afternoon. Just on the Battenfeld acquisition, can you give us a sense of what the revenues kind of annually have been historically and have those kind of trended down in the last few years?

No. Actually, the revenues, well, we haven't - I have said what they were in the in past. We are going to file the SEC documentation. You will see that. We did say that it was $55 million-like in our upcoming fiscal '16, and we also said that they have had - I think we specify the compounded annual growth rate since - it has actually been up strongly every year and I think it was - we can find that in the original - 18% since 2006 has been the CAGAR on that and it has been up every year.

Okay. Then in terms of your assumptions for that business in fiscal '16, I mean, should we assume that you believe it is going to do a similar type rate?

I mean, we said that we expected to do basically at least $55 million is the way we had said it with 27% or 28% EBITDA margins.

That $55 million would be at a strong double-digit growth rate versus what they did this year is what you are saying?

I am not saying that. I am saying it has been up every year. We said two things that since we acquired it, we haven't acquired yet. Since, we signed the deal as of right now looking back to 2006; it has been an 18% on CAGAR. It has been up every year and next year it is going to be up again in the $55 million-like is what it is going to be next year. Again, eventually you are going to - like once we close the transaction, we will file and you will see the numbers, but basically it has been up. It has been 18% and we expected to have a double-digit CAGAR going forward.

Okay. Understood. Then maybe a question around a distributor shows coming up. Obviously, you know, a lot of manufacturers have inventory out there and I am sure a lot of people are going to have a plan to go aggressive into these dealer shows. I mean do you have some kind of visibility or had early discussions with some of the distributors that you get the sense that you are going to have a pretty good order book coming out of the distributor shows?

No. Not really, not to that level of detail. I mean, obviously, we have November meetings with them, what is called an ESW [ph], so where manufacturers present their show specials, so the up and coming season, so we participated over there myself, so we meet directly with all our distributors partners. You get a sense for what they are seeing versus what we are presenting, but you get no detail quite rightly.

Okay. Then maybe James kind of a higher level question, kind of just thinking about the environment that we are in now and obviously you and others are going to be pretty aggressive in the fourth quarter with some these specials. Do you think that the consumer condition to the price discounts they have seen and manufacturers being aggressive with the distributors, is going to change ultimately the margin potential of this business to get back to levels you have seen or to grow from the levels we are going to end this year at?

I don't think so. No, I think ultimately that would return in the long-term. I think the good thing about promoting them in the way that we are promoting them is something that is not undoable. It can be reversed. Given our brand, we have an iconic brand versus the lot of the competition, I guess, there is an awful lot of pricing power up and down, so we are very flexible in that respect and that is really what differentiates us when it comes to the consumer is ultimately a family of brands which are very, very strong as you know and are broad and very high-quality product portfolio.

Okay. Then just one last question for Jeff, looking at some of the pieces here with the credit facility and some new debt coming on, can you remind us of where the covenants are under the credit facility for leverage ratios and what are the relevant metrics we have to kind of be focused on?

Sure. TD Bank has a leverage ratio that it EBITDA to leverage of like 3.25. Okay? I give you an estimate, you don't know all of the pieces, but if we closed the BTI transaction today and we got to use their EBITDA and our EBITDA, I am looking backwards; the ratio would be about 2.2. Okay? We have a fixed charge coverage ratio; I think you know what that is. It is 1.5, so we are right now at like 5.5. Once we do the deal, we will be at like almost 4, like 3.8, so we got lots of headroom there. Then we have an extremely easy covenant with the senior notes coverage ratio, which is basically EBITDA divided by your interest expense and that is 2. Right now it is 19. I think if we close the transaction it would be 12 or something like that, so not even a close a concern on any of these. Remember, once we close the transaction, we will still have a lot of cash. Then we are entering the biggest period of cash generation for the company, so it is possible with the amount of cash that we have that we will like pay down the loan. This is assuming that we keep the line of credit out at 100, which is probably not a realistic assumption.

Okay. That is helpful. Jeff, just on the $125 million in last quarter, you said you are going to have at the end of the year obviously that change with the acquisition. Do you have kind of an updated apples-to-apples number there?

Well, we are only using the $25 million on the acquisition and we specify exactly what we are going to doing acquisition.

Right, but their business came a little bit…

Excuse me, $30 million, because we are going to borrow $100 million.

Then the business kind of deteriorated a little bit over the last 90 days too. I mean, I guess it took down CapEx, so is that kind of what is maybe making.

It hasn't impacted in a material way that the cash that we expected. When I gave you that number that was a least number, that wasn't the estimate.

Okay. Thank you.

Thank you.

This concludes today's question and answer session. I will now turn the call over to Mr. Debney for any closing remarks. Please proceed.

Thank you. I want to again thank the entire Smith & Wesson team for maintaining their focus on delivering results. Thank you all for joining us this evening and we look forward to speaking with you next quarter.