Good day, everyone, and welcome to Smith & Wesson Brands, Inc. Second Quarter Fiscal 2021 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Rob Cicero, General Counsel, who will give us some information about today's call.

Thank you, and good afternoon. Our comments today may contain predictions, estimates, and other forward-looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify those forward-looking statements. Forward-looking statements also include statements regarding our product development, focus, objectives, strategies, strategic evolution, market share and demand for our products as well as inventory conditions related to our products, growth opportunities and trends and conditions in our industry in general. Our forward-looking statements represent our current judgment about the future and they are subject to various risks and uncertainties that could cause our actual results levels of activity, performance, or achievements to be materially different from those expressed or implied by our statements today. These risks and uncertainties are described in detail in our securities filings, including our periodic reports on Forms 8-K, 10-K, and 10-Q, which you can find in our website at smith-wesson.com along with a replay of today's call. Our actual results, levels of activity, performance and achievements could differ materially from those expressed or implied by our statements today and we expressly disclaim any obligation to update any forward-looking statements. I have a few important items to note about our comments on the call today. First, we reference certain non-GAAP financial results on this call. Our non-GAAP financial results exclude acquisition related amortization, one-time transition costs, COVID-19 expenses and the tax effect related to each of these exclusions. Reconciliations of GAAP financial measures to non-GAAP financial measures whether or not they are discussed on today's call can be found in our securities filings and also in today's earnings press release. Our securities filings and today's earnings press release can be found on our website. Also when we reference EPS, we are always referencing fully diluted EPS. Before I hand the call over to our speakers today, I want to remind everyone that we completed the spin-off of our outdoor products and accessories business on August 24th, 2020. As such we are now reporting all historical financial information for that business as discontinued operations. Unless otherwise indicated any reference to income statement items during this call refers to results from continuing operations. Joining us on today's call are Mark Smith, President and Chief Executive Officer; and Deana McPherson, Chief Financial Officer. With that I will turn the call over to Mark.

Thank you, Rob. Thanks everyone for joining us. Before I cover the results and highlights of our second quarter just a quick update regarding our response to the ongoing COVID-19 pandemic. The aggressive and decisive actions that we took at the start of the year to ensure the health and safety of our employees and that I detailed on our last call are all still in effect. Because of the hard work and dedication of our employees, who have been extremely diligent in following our safety protocols, we have been able to continue safely operating our business in this challenging environment. Turning now to our financial performance during the second quarter. Our quarterly revenue of $249 million more than doubled the prior year period, and marks the second consecutive record breaking quarter for our 168 year old company. Q2 net income of over $49 million drove $0.87 of GAAP EPS and $0.93 of non-GAAP EPS generated over $55 million in cash from operations and has allowed us to end the quarter with zero net debt. Our operations and logistics teams produced and shipped over 626,000 units during the three month period exceeding last quarter's record numbers by 43,000 units and demonstrating once again the power of our unique flexible manufacturing model and more importantly our dedicated teams ability to deliver strong performance in the face of any challenge. We are also proud to say that during these extremely difficult times when so many of our fellow Americans are out of work Smith & Wesson created and filled 287 new jobs just in our second quarter and along with our existing employees each of these new team members played a critical role in achieving our record breaking numbers. Our success in the quarter is a direct representation of the trust that…

Thanks Mark. The ongoing heightened consumer demand combined with our ability to increase our production capacity through use of our flexible manufacturing model resulted in a second consecutive quarter of record revenue totaling $248.7 million, a $135 million increase or more than double the prior year results. Once again these results are a testament to our operations team that increased firearms production output beyond our expectations, utilizing a combination of targeted headcount increases additional machine capacity, and continued activation of our flexible manufacturing model. All while keeping our employee safe during the pandemic. Gross margin of 40.6% well above the 28.2% realized in the prior year was due to increased unit shipments combined with a reduction in promotional activity slightly offset by recall related costs, increased depreciation on machinery purchases and compensation related costs associated with the increased headcount. Operating expenses were $8 million higher than the prior year due to $4.8 million of spin-off costs, $3.1 million of increased profit sharing expense and a $500,000 donation to the National Shooting Sports Foundation's Gun Vote campaign. Increased volume related customer allowances were more than offset by reduced travel lower advertising costs and lower employee medical costs likely due to the deferral of elective procedures resulting from the pandemic. The increase in revenue in gross margin led to a significant profit gain as compared to the prior-year comparable quarter including net income of $49.1 million, GAAP earnings per share of $0.87, non-GAAP earnings per share of $0.93 and adjusted EBITDA of $78.9 million. During the quarter, we generated $55.3 million in cash from operations and spent $8.7 million on capital equipment, leaving $46.6 million in free cash. We also see that the outdoor products and accessories business with $25 million and repaid the final $25 million on our revolving line of…

[Operator Instructions] Our first question comes from the line of Scott Stember from CL King. Your line is now open.

I know you guys aren't giving guidance of any sort but just looking at where you see the industry going forward. I know we have a new foundational layer of growth then it seems like things are a lot different this time around versus prior surges, but just give us your sense of could 2021 at least for the industry be a year of growth and how would supply issues play into preventing that from happening?

Yes. Scott this is Mark. Yes, I mean, obviously we're not giving guidance. So I'm not going to get too much into detail about whether it's a growth year or not, but what I will say is, as I said in the prepared remarks, it's - I mean there is obviously a lot of new firearms consumers in the industry now and all indications are that anywhere between a quarter to a third those are going to become long-term enthusiasts. And as we mentioned that tends to bode very well for us going forward as enthusiasts become collectors and move up in the ASP that their subsequent purchases are oftentimes a lot more than their initial purchase. Where the market is going and while we're not giving guidance I think you can kind of take from some of Deana's comments about the number of production days that the demand is very strong, remains very strong and the inventory in the channel is still very depleted. We expect this to continue at least through our Q3 and into our Q4 and we'll see where it goes from there. But as I said I mean we're really taking a long-term view of this. I think we've got it, as you said, we've kind of put a new layer on in terms of the consumer base.

And could you, Deana, just go back and talk about or recap what you mentioned about supplier issues? How that could potentially you know how serious is it and how could that - what kind of headwind could that be in the next couple of quarters?

Sure. We don't really expect any disruptions to our current plan. This is more a situation where we have to be flexible, things come up, COVID numbers are going up. There's a lots happening across the country right now. And at this point we are flexible enough to change things around and that we can react to them, but it is something that we're monitoring closely and I want to make sure that everybody considers that in how we look at the future- right now - and it is part of the reason that we don't want to be out there providing guidance. It's a situation where we manage and our operations team and our procurement teams have done a great job and our suppliers have been behind us, but it is something that we're actively managing.

Got it.

Scott, this is Mark. I don't think it's going to I mean I don't think it's going to have any impact in our quarter and, but I think it's more a factor of, I think, we're going to take a little bit of - we ramped obviously as you can see from the numbers we ramped really quickly. And we're going to take a little bit of a - we're going to pause here for a little bit and let them let the supply chain stabilize and then we'll see where the market goes from there. Obviously, we've got upside, but and we've proven we can manage through any kind of normalization that may come at some point in the future. But so we're just kind of pausing here to let the supply chain stabilize a little bit I think is kind of what you should take away from that.

And just lastly we have the first two quarters of fiscal '20 regarding adjusted EPS. I don't know if you guys are prepared to give anything on a quarterly basis, but could you give us for the full year at least for fiscal '20. So we could have a framework to judge fiscal '21 off of obviously '21 is a lot higher but…

Yes, we're not giving guidance, there's just too many variables and we want to manage for the long-term.

No. I'm not referring to guidance, but for 2020 we do not have what fiscal '20 what the…

You want to know what.

Yes.

I understand. You want to know what EPS is for continuing operations.

Yes. Just so we could have something to judge basically to base '21 off of. That's all. Yes.

Sure. One moment. It's about $0.50 for the full year fiscal '20.

You said 50?

50, yes.

Our next question comes from the line of Steve Dyer from Craig-Hallum. Your line is now open.

Congratulations on the excellent results. A couple of questions. One long gun performance was really exceptional in the quarter by almost any measure. I think it's by far the biggest quarter I've ever seen. You clearly don't have really much if any shotgun exposure. So I'm wondering if you could elaborate a little bit on what may have driven that whether it was ARs whether it was feel like there was more hunting rifles et cetera?

Yes, we don't - we typically have - we don't provide that kind of break down, Steve, unfortunately. I think every category in the firearms industry right now is very, very strong. Our Thompson/Center Arms was above expectations. But to be honest our Thompson/Center Arms is in terms of the brands out there is kind of one of the smaller brands in the industry. And so you can kind of draw your own conclusions from that and our - and on our MSR side that is one of our most volatile. It's just one of the most volatile categories in the portfolio just in general in the industry. Obviously it's very subject to political rhetoric and tends to have wild swings. We're very, very used to that. Our supply chain is very, very used to that and we've been through this before and we're able to ramp-up very quickly. We're also able to absorb any kind of normalization very well as well and we don't make a whole lot of those components, they are supplied from the outside. So from us from an absorption perspective it doesn't really affect us.

But just in general I think it's safe to say that was if you feel like there was more personal protection sale as opposed to hunting sale in the long gun category?

Yes, I think, the dynamics that happen I think as the years gone on, it was very, very heavy obviously as we came into the pandemic in March and April very heavily focused on personal protection and through the summer and then as we kind of came into as the election kind of heated up through September and October and obviously that gun control became a topic of discussion then the MSRs really kind of have heated up just in recent months.

Yes. You guys talked about expanded production capacity in the quarter. I'm wondering if you could tell us sort of how much of that added capacity was internal versus external?

We're not going to provide any kind of details on that, but as we've talked about many times before our main mode of operation when it comes to managing through surges and ups and downs as we have a base level of capacity, which we feel is largely rightsized internally, and then we manage these kind of the heavier demand periods through outsourcing with the outside. So I can kind of give you that direction, so.

And Steve you can take a look at cash flow statement and you can see our capital spending is not outsized. So that will kind of guide you in the direction.

Yes, yes very helpful. And then I guess lastly for me and I'll hop back in line. Your free cash flow is extraordinary and has turned the net debt situation around very, very quickly. You have a dividend although it's probably fairly I guess nominal in the big picture, but when you look at whether it's share buybacks, whether it's a special dividend I think any further sort of guidance as to especially given another couple of quarters of this kind of cash flow, how you might think about that in the future?

Yes, we've said before that and it is our intention to return our profits back to our shareholders. At this point, we do want to be a growth dividend company and we know that we started out at a relatively small level. What we don't want to do is grow the dividend so fast that it becomes unsustainable when there is a lot of volatility in the marketplace. So that is one piece of it. We are continuing to evaluate what to do. We recognize that the last two quarters of free cash have been very positive, but our goal is to manage for the long-term and we don't want to make rash decisions so stay tuned. We'll - when a decision gets made we'll let everyone know.

Our next question comes from the line of Mark Smith from Lake Street Capital. Your line is now open.

I wanted to talk a little bit about ASP going forward and just confirm you guys took a 3% price increase in the middle of November. Do you feel like that was as much as you could take, are you being conservative in that maybe talk about what's you're seeing in the environment as far as pricing?

Sure. So the ASP is up largely because just due to the fact that the promotional activity is non-existent right now. So and you know obviously there is some mix adjustments that we can make and so to maximize that ASP going forward. Just speaking real quickly about the 3% price increase. We again take a pretty long-term view to our pricing, could we have gone higher in this environment. Yes, of course, we could have, but we're taking a long-term view to the marketplace and maintaining credibility with the consumer and we want our products to be priced appropriately in the marketplace, not just in this environment, but in any environment, so versus our competition. So we took a hard look at that, there were some categories that we took some targeted increases beyond the 3% just to kind of bring those back in line. It's an opportunity right now and the demand is still strong. And so I think going forward at least through the rest of our fiscal year I think it's pretty safe to say that these ASPs are going to hold up.

The next opportunity be and kind of the next question is as we look at the calendar without SHOT Show really happening in person this year. How does the calendar change? And as we look at new products is there opportunity to maybe spread out release of new products and take price strategically in new products?

Yes, that's a great question. So we're continuing to push hard on new products. There are a couple that we've just strategically decided to kind of leave on waiting in the wings for now. There is also a couple of that we're going to be really excited to be talking about next time we speak. So we're continuing to remain very aggressive and I guess we're kind of taking the view of let's take this opportunity now to be pushing hard so that. So again, in any environment, we can continue to be successful and injecting life and excitement into our brands through new product launches. So I'm actually very excited about the new product pipeline that we have coming up here in the next 12 months to 18 months. So and yes, you're right, I mean, that's something we can definitely use to help offset any kind of pricing pressure is new product and it's something we spend a lot of time talking about and planning for.

And then, Mark, you talked a fair amount about kind of brand loyalty and awareness. As we look at these new and first time buyers. Any insight into kind of how the brand helped you maybe take share with these new buyers. And then additionally if we get a little more granular. Do you think the easy models within handgun really helped you drive sales to some of these first-time buyers?

The answer to both of those questions. The answer to your last question is absolutely. The easy is all feedback in the marketplace right now from all of our retailers, distributors, et cetera, is the number one product hands down in the marketplace right now and a lot of it is due to the fact that it just caters to those - to exactly what somebody who is new coming into the marketplace is looking for. In terms of the brand, yes, I think the brand really did help a lot. I think we in the industry are very familiar with all of the major players. I think people outside of the industry definitely no Smith & Wesson and then maybe know a few of the other larger players. So Smith & Wesson is just such a - such an iconic brand in American Heritage that when somebody is coming in new it's a trusted welcoming brand to see that under the - to see that brand and I think we've done a great job of keeping our product in stock maybe better than some others in the industry and that's really helped us as well to make sure that we're there and that consumer is making that first purchase and that brand association with Smith & Wesson.

And then just two more from me. As we look at gross profit margin that certainly looks solid. Are there any pressures that you guys see that could impact that's going forward primarily as we look at the labor market or commodities anything to call out?

Nothing on the commodity side. The labor market is frankly has been tough and we've - all credit to our operations and human resources teams that really haven't - hasn't - haven't had any issues with that. I don't expect it to have any material impact going forward on our gross margins. So but it is a challenge for us right now believe it or not because we are growing so quickly.

We did see our ability to hire improve after the additional unemployment benefits expired depending on whether there is a new agreement that could have an impact on hiring or quite frankly people who might not, might want to just be out, but at this point, we have a good flow of really great workers and so we're doing the best we can to keep up with that. As Mark noted in his call we hired 287 people during the quarter. That's a lot.

Absolutely. Last one from me is any insight you can give us on as far as kind of backlog of orders and where you're sitting that today?

Yes, we don't provide the backlog on a quarterly basis, but obviously given the fact that our results we just posted in fact that we're kind of indicating that we're going to be pretty constrained to our third quarter it's strong, it's very strong.

Our next question comes from the line of Rommel Dionisio from Aegis Capital. Your line is now open.

So a lot of moving parts in the supply chain obviously with the ramp in production new employees as you alluded to. And enough so I mentioned that COVID safety practices as well. I wonder if you could just address? What you guys are doing to ensure quality control and product quality and also just given I'm sure some of these factors are impacting some of your, the companies you outsource some of the production substitute are you seeing any deterioration in terms of product quality from components that you guys are having brought in? Thank you.

Sure. Thanks Rommel. No, we are not seeing any material changes. We run a very similar to the automotive industry. We've kind of copied some of - a lot of their quality control processes and got those implemented. It's extremely important for us to make sure that obviously it's a firearm and we want to make sure that it's safe as possible and quality and safety go hand in hand as far as that goes. We have a lot of pretty disciplined rigorous processes internally in terms of testing and making sure that all of the product that's going out the door is up to our very, very high standards. So, no, we have not seen any of that issue - any of those issues. We actually have a every one of the sales folks does a bi-weekly report where one of the main questions we ask is safety, sorry, is quality and any reports coming from the field. So we can watch trends and we watch a lot of our own internal metrics in terms of warranty returns and scrap rates had on the floor et cetera and we have not seen any kind of increase whatsoever.

Our next question comes from the line of Cai von Rumohr from Cowen. Your line is now open.

This is Scott McCrery on for Cai. I had two questions. First, have you seen firearm purchasing behavior change at all during the elections whether it'd be from a consumer standpoint. I know you also feel consumers directly, but have you heard of anything or have you seen anything with dealers and distributors?

Well, obviously, the elections are - any - the election year is a driver for us as the political landscape gets contentious and talk of gun control increases and therefore there's a fear of gun control regulation increased gun control regulation, which drives a lot of our consumers to go out and purchase firearms. So, yes, I mean there is a change in behavior as the election ramped up and as everybody knows this election was obviously one more contentious than maybe they have been in the past. And so I think as we've talked about before though this year was a little different in terms of we had that the personal protection kind of driver fear drivers coming at the beginning of the year and as we kind of went into the spring with the COVID pandemic and then continuing to the social unrest through the summer and that continues really still today yet. And then we layered on top of that I think some of the more typical if you want to call that election demand on top of that. So it - I think it just changed a little bit of the - I mean I don't think it changed at the base level of demand that came out of the personal protection and probably just layered on top of it with the gun control rhetoric.

Okay. And then for my second question I know that someone asked this previously but what are your I guess pretty definitely what are your relative priorities when you're thinking about returning cash or using cash you have the dividend now. Is there anything else you're thinking about I guess just trying to understand the hierarchy there?

Yes our hierarchy is, as I said, investing in the business is one of our main priorities and we continue to do that. With regard to returning profits back to shareholders, we do continue to evaluate it. We are having active discussions at this point regarding what to do. We are not trying to rush into something that will have a long-term negative impact in a business that is quite frankly very, very cyclical. So we will let you know it is not our intention to just store in a tremendous amount of cash that wouldn't do anybody, any good. So give us a little bit more time and we'll let everybody know.

Our next question comes from the line of James Hardiman from Wedbush Securities. Your line is now open.

So a couple from me. I'm interested in the commentary about the new gun owners that are getting into the market and you guys gave us some great stats. Any idea how quickly somebody that as a first time buyer typically takes to sort of get back into the market and get their second or third guy. It seems like that could be a significant driver at some point in the future just trying to think about how long that cycle takes?

Yes, James, I think I'd be giving you too much of a guess if I were to kind of answer that question.

That's fair.

So directionally is it two years, is it one year, is it six months. I think you're probably closer to the six month time frame.

Okay.

Whether that's one month or six. I don't know, I'd be a little too much guessing to give you an answer there.

That's fair. I think your guess is better than mine. So I appreciate that. So my second question, do you know, you gave us a lot of numbers in terms of the capacity increase. It seems like we can do the math, but I just want to make sure I'm thinking about this is the right way. Your capacity was 50% higher at the end of the quarter then at the beginning, but it was sort of phased in over the course of the quarter. Is that the way to think about it?

Yes more toward the front half of the quarter then the back half.

Yes.

That's what I was trying to get across is that the ramping did do - did come early and you got to remember too that quarter is a 12-week quarter for us because the first week is shutdown. So we did definitely ramp more toward the front end of the quarter. So that you just can't take that and assume that the next several quarters is going to be that much more additive.

Right. I get that. Okay and then just lastly and the answer maybe - we don't really know, but as I think about the substantial decrease in inventories. I think it was 208,000 units in aggregate between the two channels that you guys laid out. Anyway to put that in context of what the restocking opportunity now is. I guess part of the answer to that question is the year ago number sort of where you want it to be too high, too low. But I think what a lot of people are now going to try to figure out is how long does it take you to get back to "normal". I doubt you're going to answer that, but any sort of bread crumbs to help us figure out what that restocking looks like?

Yes, I can help a little bit. I mean I think we'll let you know that our inventory levels in the channel right now are right about one week worth of supply and really all that is the time it takes our partners to get the truck get backed in unloaded, picked and shipped back out again. We want that as we've talked about many times before kind of our target level inventory in the channel we want it to be about eight weeks. So as well I think so, yes, there is a significant opportunity there, eight weeks worth of supply. So I think that's - I think what's the little bit different even this time around as we - in addition to the layer - the additional layer of new consumers. We also - we got to refill the entire channel. So you're right. Just we're thinking about that there is a significant work to do just to get the channel back up to where we want it to be.

Got it. Much appreciate it. Thanks guys.

Thanks. One other point. If you're thinking about the way that the marketplace reacted after the 2016 election that was where inventory was in the channel and consumer start buying. In this case, there is no inventory in the channel and consumers are still buying. So as consumers potentially slow down in the future at some point, we will have the opportunity to see the inventory as it moves through the channel and work with the distributors and retailers. So it should be a softer slowdown not like it wasn't '16. This is a very different environment.

Our next question comes from the line of Mark Smith from Lake Street Capital. Your line is now open.

Just one quick follow-up on timing. This year it should look like we didn't really see any Smith & Wesson or Thompson/Center Arms out on Black Friday specials. Historically with the timing of shipments for those kind of specials would that go in the October quarter and be shipped and typically booked at quarter or would that fall under the January quarter?

We're just talking about Black Friday quickly. The feedback we've gotten unanimously from the retailers is there is a very few of them who felt the need to run promotions. And as a matter of fact, a lot of the feedback has been that Black Friday was not as big as at some previous years have been just frankly because they didn't have any inventory and they a lot of the feedback we got was Monday, Tuesday, and Wednesday of Thanksgiving week. We're very, very busy days and Thursday was actually sorry and then Friday was actually a little bit of a down-day and Saturday and Sunday picked up. And I don't know if that's because of the COVID fear of being out Black Friday shopping or whether that's just the inventory was depleted and people went shopping Monday through Wednesday or what the case close, but. So I think it's a bit of a different year and in terms of the promotional and again there really isn't any promotional activity in the channel right now and everything that we're making we're shipping.

All right. And generally the way that you would think about like how do we promote our products and the timing of when we promote our products. We don't generally promote products for Black Friday. So when the fact that we are not promoting and it's increased the ASPs wouldn't have fallen into any quarter as it relates to Black Friday if generally speaking as you know that our fourth quarter is generally the higher promotional period because of the different shows and the different distributor shows and buying group shows and whatnot. We generally would have promoted more in the summer timeframe as our distributors and dealers were stocking up for their later periods, but generally speaking within our financial statements, the back half of the second quarter and the front half of our third quarter didn't generally have a significant number of promotions, generally speaking.

And outside of promotions as far as kind of inventory that's on hand in a historical year it's not like you would build into and ship a bunch in the last week or so of October just to prepare for the holidays. There is nothing…

No.

Historically that's happened that way?

No, no that's not really how it operates generally speaking to that distribution would kind of take a little bit of time for it to get through to the retailer. So there is not a big push generally in October to get inventory onto the shelves for Black Friday.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Mark Smith for closing remarks.

Thank you and thanks everyone for joining us today. I just want to close by recognizing our devoted employees for making this record breaking quarter possible. Everybody stay safe, enjoy the holidays, and we look forward to speaking with you in 2021.

Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.