Good day, ladies and gentlemen, and welcome to the Smith & Wesson Holding Corporation's Q3 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. And as a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Liz Sharp, Vice President of Investor Relations. Ma'am, you may begin.

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, tax rate and capital expenditures for future periods, our product development, focus, initiative, objectives and strategies, our market share and market demand for our products, market and inventory conditions related to our products and in our industry in general, and growth opportunities and trends. 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 certain non-GAAP financial measures on this call. The reconciliations of GAAP financial measures to non-GAAP financial measures can be found in today's 8-K filing, as well as today's earnings press release, which are posted to our website or will be discussed on the call. Also, when we reference EPS, we're always referencing diluted EPS. For detailed information on our results, please refer to our 10-Q for the period ended January 31, 2016, which filed this afternoon. I will now turn the call over to James…

Thanks, James. Revenue for the quarter was $210.8 million, significantly above the top-end of our revised guidance range and 61.5% over the prior year. Revenue from our firearms division was $194.7 million, an increase of 56.4% over the prior year with handgun revenue of $147.2 million and long gun revenue of $37.9 million. Revenue from our accessories division was $16.1 million as compared with $6.1 million in the prior year, a period in which we acquired BTI and, therefore, only reported six weeks of accessories revenue. Gross margin for the quarter was 41.1% compared to 33.6% in the prior year, a 7.5 percentage point increase, and a result that came in a bit ahead of our targeted gross margin range of 37% to 41%. The strong gross margin in our firearms division was driven by increased production volume and favorable manufacturing fixed cost absorption, both of which were partially offset by higher manufacturing spending relative to sales volumes and additional expense recorded as a result of promotional product discounts. The accessories division gross margin was also strong, favorably impacting overall gross margin by 90 basis points. Operating expenses in the quarter were $36.5 million or 17.3% of revenue compared to $28.2 million or 21.6% of revenue in the prior year. Total third quarter operating expenses included $7.5 million in the accessories division, as compared with $3.3 million in the third quarter of last year, which, as I noted above, was a partial quarter for the accessories division. In the firearms division, operating expenses increased 16.3% mainly due to increased expenses for the co-op advertising and salaries, as well as increased accruals for incentive compensation and profit sharing. On a non-GAAP basis, which excludes BTI amortization, operating expenses were $33.8 million or 16.0% of revenue as compared to $25.2 million or…

Thanks, James. So, for full fiscal 2016, we are increasing our guidance and now estimate revenue to be between $712 million and $717 million and non-GAAP EPS to be between $1.68 and $1.70. At the midpoint, this is a $59 million increase over our prior guidance. Non-GAAP EPS excludes BTI amortization, debt extinguishment costs, bonds premium paid, insurance recovery costs, and tax effects, all of which are expected to have an impact of approximately $0.15 per share in fiscal 2016. For the fourth quarter of fiscal 2016, we estimate revenue to be between $210 million and $215 million. And I would note that our low level of internal inventory will make it difficult to exceed that range. Although Q4 is forecasted to have revenue similar to Q3, the non-GAAP EPS estimate is expected to be a bit lower for Q4. This is a result of promotional activities impacting the gross margin by about 1 percentage point, slightly higher OpEx, and a higher tax rate of 36%. Thus, we estimate non-GAAP EPS for Q4 to be between $0.51 and $0.53. Non-GAAP EPS excludes BTI amortization and its tax effect, which is expected to have an impact of approximately $0.03 per share on Q4. Our estimate for the Q4 is based on a current fully diluted share count of 56 million shares. James? P. James Debney - President, Chief Executive Officer & Director: Thank you, Jeff. I want to thank everyone at Smith & Wesson for delivering an exceptional quarter across the business. With that, operator, please open up the call for questions from our analysts.

Thank you. And our first question comes from the line of Cai von Rumohr of Cowen & Co. Your line is now open. Please go ahead. Cai von Rumohr - Cowen & Co. LLC: Terrific results, guys. Great performance. P. James Debney - President, Chief Executive Officer & Director: Thanks, Cai. Cai von Rumohr - Cowen & Co. LLC: Excellent cash flow and, just kind of doing back of the envelope, it looks like you'll generate about $100 million for the year, something like that. Maybe talk to use a little bit if you could about cash deployment. I know M&A is a major focus. I know you want to be disciplined, but where would you let the cash go? Just some general thoughts there.

Okay, Cai. I mean in the past we've talked about the cash, our deployment being a combination, or the choices being the combination of buying back stock, buying back debt, or internal investments. So I guess we would add now to that external inorganic acquisitions, and based on listening to James discussion this afternoon, we're focused heavily on the rugged outdoor space and looking at possible acquisitions in that space as well as investing in ourselves and in CapEx. And, again, when we do the acquisitions, there's a variety of – there's vertical acquisitions that we can do to improve our gross margins and make our supply chain safer. There's small tuck-in acquisitions that BTI is able to do like PowerTech deal that they just did, small deal, $1.5 million. It was a licensee of our flashlights, the Smith & Wesson and M&P flashlights. Bought that and tucked that into BTI. And then there's bigger things that could be like the BTI acquisition in which a new division is created. Cai von Rumohr - Cowen & Co. LLC: Okay. Terrific. And then, a last one – you mentioned that the inventories obviously are lower than they normally would be going into the fourth quarter. Can you give us any color on, like, if the demand was there, where could you go? Obviously, you have much less upside than you normally would – but just some kind of color in terms of, what can you do to get the numbers higher if the demand is there?

Well, without commenting specifically on what we can do, I just would point out that our inventory has dropped like $25 million in the last couple of quarters – actually, in the last quarter from $100 million down to $75 million. And our finished goods went down from $42 million to $17 million, which – so, I mean, that's approximately, like, $22 million to $25 million use of inventory that we probably would be able to sell if we were starting at $100 million. But – and James, do you want to add? P. James Debney - President, Chief Executive Officer & Director: Yeah, Cai, I mean, I'd just reinforce that we're obviously doing everything we can to capitalize on the strong market that we experienced in Q3. So I think it's important to recognize that. And the remarks that I made about the operations teams working very hard to ramp-up available capacity that we outsource at the moment, so with our strategic vendors who have the same technology as we have and are producing components for us very busily right now. So a lot of work going on, obviously, sales team working very hard, looking at incoming orders to make sure we're optimizing the match with our available capacity in terms of product so that we can also capture those sales as well. So there's a lot of activity going on, it's very dynamic at the moment obviously. But all I would say is that there is some very talented people working very hard on it right now and doing their best.

Right, but – and, Cai, I'd like to follow along with what James said. We sold down $25 million of inventory this quarter, so we're not going to sell down our inventory again another $25 million. So the fact that we're giving the same guidance is basically what James is talking about, in other words, ramping the outsourcing in order to bring the revenue up into that $210 million and $215 million range that we're doing. Cai von Rumohr - Cowen & Co. LLC: Thank you. And the last one, Battenfeld, $16.1 million, it's down a little over $2 million sequentially. Maybe remind us of the seasonality there and what we should expect normally in the fourth quarter from Battenfeld? P. James Debney - President, Chief Executive Officer & Director: You're absolutely right, Cai, it is seasonality. So really one of the busiest periods for Battenfeld for our accessories division, obviously, at retail, commences with going in – approaching the fall hunting season, then you're past fall hunting into holiday season. A lot of gift buying going on by the consumer, a busy period as we all know for retail foot traffic. So you would expect what you're seeing, what you're observing there for sure. As you think about the timing of those shipments, that they have to make it to our customers in time for that fall hunting holiday season. Cai von Rumohr - Cowen & Co. LLC: Terrific.

Yeah. And, Cai, I would point out, though, that this Q3 was a large increase, like nearly like 50% over... P. James Debney - President, Chief Executive Officer & Director: 33.5%.

...over the quarter that it had like a year ago when you count the revenue that occurred, like, prior to our acquisition. So it was a very good quarter for BTI. P. James Debney - President, Chief Executive Officer & Director: Yeah. It's a very strong result. And just to emphasize, we're very pleased with that acquisition of BTI, the formation of our accessories division, very talented team. They've worked extremely hard in their first year, so I have to congratulate them for the results they've delivered. Cai von Rumohr - Cowen & Co. LLC: Terrific. Thanks so much. P. James Debney - President, Chief Executive Officer & Director: Thanks, Cai.

Thank you. And our next question comes from the line of Scott Stember of C.L. King. Your line is now open. Please go ahead. Scott L. Stember - C.L. King & Associates, Inc.: I'll say as well, great quarter and good evening, guys. P. James Debney - President, Chief Executive Officer & Director: Thanks, Scott. Scott L. Stember - C.L. King & Associates, Inc.: Question on – again, on the capacity or the inventory that you have right now and your ability to deliver for the fourth quarter. If I'm not – it sounds as if you're saying once again that if you were – if you had the inventory in hand that the numbers would be better in the fourth quarter, correct? And that your guidance might be higher? P. James Debney - President, Chief Executive Officer & Director: Yeah, I think it's a fair assumption to make. Scott L. Stember - C.L. King & Associates, Inc.: Okay. So, just go through one more time just the – maybe talk about some of the outsourcing that you can use, some of that methodology just to give us some comfort that you could get for the levels just to get to that $210 million to $215 million? And whether it's outsourcing more or just – can you just talk about what some of the puts and takes are? And just so – how seamlessly that can get done? P. James Debney - President, Chief Executive Officer & Director: Sure. So just taking a step back and describing outsourcing, what we're doing here is we have outsourced the production of certain components, such as slides and barrels. These are components that historically were only ever made in-house here at the – in a Smith & Wesson facility. So we went out…

Thank you. And our next question comes from the line of Rommel Dionisio of Wunderlich. Your line is now open. Please go ahead.

Thanks very much. I just wanted to drill down a little bit on the handgun business, which obviously a core business which had done so well in the quarter. Given the recent surge in the industry demand for handguns, could you just characterize that in terms of the mix shift between small-frame and full-size? Obviously, small-frame has been doing well these last several years, and wanted to just see if that trend continues to be the same. And just a quick follow-up. You guys launched or introduced a number of Ported pistols in the last several quarters. Just wanted to see how those are doing in the marketplace. Thank you. P. James Debney - President, Chief Executive Officer & Director: Hi, Rommel. Yeah, smaller handguns designed for concealed carry and personal protection are still very, very popular with the consumer here in the U.S. Very much that trend of personal protection that started some time ago, now really talking close to 10 years, has continued to strengthen over that period. And certainly in the last 12 months, we've seen that as we break down NICS background checks between handguns and long guns. But handguns have certainly been growing a lot faster than long guns. And we see that when we think about the growth in SHIELD, the M&P SHIELD. We very recently declared that we had sold the one-millionth SHIELD, so that was very exciting for a product that we only launched, at that point, about 3.5 years ago. So I think that reinforces what I just said about the trend for personal protection and thus concealed carry remains very, very strong. BODYGUARD 380 doing very well, whether it's laser or non-laser. Small-frame revolvers extremely popular as ever because of their simplicity, especially for the new shooter. So lots of good things going on there in terms of sales. And then I think – sorry, your follow-on Rommel, was?

Well, I was just asking about the Ported pistols that you'd introduced last year. P. James Debney - President, Chief Executive Officer & Director: Oh, okay. So, yes, one of the most exciting ones was one for the SHIELD itself that we recently introduced, Performance Center version, very excited about that, because it stirred up a lot of excitement with the consumer. I was actually pleasantly surprised at the strength of that excitement as well. And, certainly, it's good to bring new things to our M&P SHIELD family. I think it's important that we continue to refresh our product offering, and continue to stimulate the consumer and excite them in terms of what they want, what they're looking for from our products and our brands.

Great. Thanks, James, and congratulations on the quarter. P. James Debney - President, Chief Executive Officer & Director: Thanks, Rommel.

Thank you. And our next question comes from the line of Andrea James of Dougherty & Company. Your line is now open. Please go ahead. Andrea Susan James - Dougherty & Company: Hi. Thanks for taking my questions. P. James Debney - President, Chief Executive Officer & Director: Hi, Andrea. Andrea Susan James - Dougherty & Company: Hello. When you guys give us the number of new product SKUs that you put out in firearms and accessories, can you give me some context on what that represents, I guess, as a percentage of your total SKUs? P. James Debney - President, Chief Executive Officer & Director: That's not actually something we've ever called out in the past. I don't have that information at hand and Jeff is shaking his head at me as well, so.

I think on a relative basis, it's really like triple what they did last year, I think. P. James Debney - President, Chief Executive Officer & Director: Yeah, in terms of new product introductions.

Right. P. James Debney - President, Chief Executive Officer & Director: But as to what's that number of SKUs versus the total SKUs that we currently we have in the business, I don't know off the top of my head. Andrea Susan James - Dougherty & Company: I appreciate that. That's fair. And one of my observations at SHOT Show was definitely that younger people are getting into shooting, different demographic groups, different minorities. I'm curious what you think about that trend, and also if you feel like you've got good brand awareness with some of these new groups getting into shooting. P. James Debney - President, Chief Executive Officer & Director: Yes. I would completely agree with your statement. I mean, we're very strong on doing our own research, as you know, so very common for us to do A&U studies, our execute and usage, that allows us to do consumer segmentation and identify who is in those consumer groups, and therefore we tailor our messaging appropriately to make sure that we're reaching them, raising our brand awareness with them. By doing that, we're raising our product awareness with them, communicating about the features and benefits of our products as well at the same time. So that's absolutely a key part for our success. We really started that probably about five years ago when we decided to really transition from being more of what we were then, an operations-led business to being way more of a consumer-centric marketing led business as we do now. I think some of our ads – you noticed the M&P experience, for example, which is really through the eyes of the consumer, what is it like to experience shooting an M&P polymer pistol or a SHIELD, to our latest ads for Thompson/Center for COMPASS,…

Right. And, Andrea, I would say that as we look inorganically for other companies, brands are very important. I would say the strategy before was doing acquisitions and rebranding them to Smith & Wesson and that is not the strategy now. The strategy now is to buy brands that are the top brands in their niche, whatever it is, and use those brands, add those brands into the product portfolio. Andrea Susan James - Dougherty & Company: Super helpful. I appreciate it. Congrats, guys. Thanks. P. James Debney - President, Chief Executive Officer & Director: Bye.

Thank you. And our next question comes from the line of James Hardiman of Wedbush. Your line is now open. Please go ahead.

Good evening. Thanks for taking my call. So to circle back to sort of the inventory situation and how it might limit your sales here in the fourth quarter, do you think the net result of that is going to be lost market share in the quarter? Or do you think other manufacturers are in a similar position in terms of inventories at the various levels such that industry sales may be constrained over the course of the next few months? P. James Debney - President, Chief Executive Officer & Director: There's no doubt that there are certain other manufacturers who may be experiencing what we're experiencing. I really can't comment in great detail. But what I will say, is exactly what we said before, when you hit very, very strong periods of consumer demand, more periods that we would classify as surges that have been even stronger than what we're experiencing now – there is no doubt, because we can only make so much of our products that we can experience share loss in the short-term. But as the market normalizes – and we've described that process many times, and have experienced it together – there is no doubt that we will take that share back, and probably gain share in addition.

Got it.

And, James, I would also say that the consumer buying right now is more intelligent, let's say, than it was several years ago, in which the shelves at firearms dealers were cleared, and a consumer would walk in and just buy whatever they could because they were afraid of regulation. A lot of the buying now – or we'll call it maybe excess buying, now – is probably occurring because of more personal safety issues. So the buying is a bit more focused. They have something in mind that they want to buy. So we certainly did not lose market share in Q3. In fact, as compared to NICS, it was greatly in excess of the sales. So we seem to be managing that right now.

Very helpful. And then sort of staying on this topic of just the nature of the surge – obviously, the million-dollar question, it's always difficult to quantify, is how much if any of the demand is being pulled forward? I think a lot of investors are looking at fiscal 2017 as a little bit of a black box. But, obviously you're not going to give us guidance at this point. But what's your level of confidence that sales and earnings will, at least, grow next year? And maybe help us think about the components of that, right, the industry – do we think the industry from a NICS perspective grows, do we think that you guys are going to continue to gain share versus your competitors? And then, do we think that, for an extended period of time, you're going to be playing sort of catch-up, in terms of inventory, such that you're going to outperform even your retail numbers? P. James Debney - President, Chief Executive Officer & Director: Okay, James. As you said, we can't give any color early on next year. We just can't, so. But I think there's two important points that we can talk about. One, the period we're in now – is it a surge, isn't it a surge – I mean, you look at it, it's very different. Jeff touched on it, way more handguns than long guns. We didn't see that in the prior one. And I think that's an important takeaway. Much more of an emphasis on personal protection driving sale of firearms designed for concealed carry. What you see in terms of the NICS is interesting as well. As you look at prior surges, you would see heightened NICS for an extended period of time. Well, you don't see that…

That's all very helpful. And then maybe last one from me. Just talk about the timing of results in the quarter, obviously you've sort of updated your outlook in early January with just the month left. You blew away those numbers. How much of that was a function of just not having all the data as you sat there in early January? And how much of it is a function of January just being the quarter that really blew away your expectations? P. James Debney - President, Chief Executive Officer & Director: Yeah. I mean when we gave that update, we were still pre-SHOT Show. We're very early in the year. We really didn't have any of the shows under our belt, so we didn't know how the distributor shows were going to go. Those are the shows where they invite independent retailers in to solicit orders from them. So we attend those shows, if we come with our show specials, that's our annual promotional period that we do every year regardless of the market we find ourselves in. So it was still really early and there were some big things still to happen. So – and, of course, what we had just experienced, we had experienced in a very, very short period of time, so there really wasn't enough data overall to be that smart about what we were trying to do, but we felt it was our duty to do something.

Right. And we were basically came back from Christmas break, and December was really strong, and it appeared that January would also be strong. But as James said, we hadn't really had any of the distributor shows. So we did, like, the best we could on giving a directional update that things were pretty good in the quarter.

Got it. Very helpful. Thanks, guys. P. James Debney - President, Chief Executive Officer & Director: Thanks, James.

Thanks. And our next question comes from the line of Brian Ruttenbur of BB&T. Your line is now open. Please go ahead. Brian William Ruttenbur - BB&T Securities LLC: Yes. Thank you very much. I just had a question about outsourcing. What percentage of your revenue is being outsourced right now? And what kind of margins can you generate higher or lower than company level when you outsource? P. James Debney - President, Chief Executive Officer & Director: Hi, Brian. Yeah, on outsourcing, all we've said is that it's a meaningful level. We've never defined it clearly in any way what percent of our overall volume in terms of slides, barrels, or any other outsourced component that we have what percent is of our total capacity. But again, what we've said is it's a meaningful size because for us it's a great tool to ramp-up when the market is strong, but it's also great protection when the market is soft in terms we can dial it down, keep our internal assets fully utilized so we don't have an overhead absorption issue. In terms of relative cost and what that may do to margin, well, as you know, it's always more expensive to buy on the outside to make on the inside. Brian William Ruttenbur - BB&T Securities LLC: So how much capacity can you get from outsourcing? I wanted to know how much more... P. James Debney - President, Chief Executive Officer & Director: Yeah, we don't... Brian William Ruttenbur - BB&T Securities LLC: Oh, go ahead. P. James Debney - President, Chief Executive Officer & Director: We're limited, I would say, by the amount of CNC technology that's out there with vendors that's the same as ours. So that's a lot of technology out there. Some of those vendors we're aware of but we don't currently utilize them. If we had to in the future, we could seek them out, build a relationship with them and qualify them. Brian William Ruttenbur - BB&T Securities LLC: Okay. Very good. And then I had a follow-up question on the accessories business on a year-over-year basis in third quarter. Can you give me some kind, or give us a pro forma basis on Battenfeld, what it was for third fiscal quarter last year so we can have a real apples-to-apples comparison? Obviously it was only in for partial last fiscal quarter and obviously full fiscal quarter this year.

Yeah. Brian William Ruttenbur - BB&T Securities LLC: Just wanted to get some kind of perspective.

Well, I mean, are you asking for the full fiscal quarter of Battenfeld a year ago? Brian William Ruttenbur - BB&T Securities LLC: That is correct.

Right. Yeah, they did about 12 points, like $1 million in sales, and the bottom line income on a non-GAAP basis, which excludes the amortization, was about $2.5 million. Brian William Ruttenbur - BB&T Securities LLC: Okay. And then last question is just on the accessories. Are you giving any kind of guidance on – within, embedded in your $700 million-plus in revenue for this fiscal year, of how much of that is going to be the accessories business?

No, we're not breaking down our segments on our guidance. Brian William Ruttenbur - BB&T Securities LLC: Okay. Thank you very much. P. James Debney - President, Chief Executive Officer & Director: Thanks, Brian.

Thank you. And I'm showing no further questions. At this time, I would now like to turn the call over to Mr. James Debney for closing remarks. P. James Debney - President, Chief Executive Officer & Director: Thank you, operator. Please note that Jeff and I will be presenting at the UBS Global Consumer Conference on Thursday, March 10, in Boston. And you can access the webcast of that presentation on our IR website. Thank you all for joining us on the call today. We look forward to speaking with you next quarter.