Outdoor Holding - Q1 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the AMMO, Inc. First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Participants of this call are advised that the audio of this conference call is being broadcast live over the internet and is also being recorded for playback purposes. I would now like to turn the call over to , the company's investor relations firm. Please go ahead, sir.

Matt Blazei (SVP of Investor Relations)

Good afternoon, and thank you for participating in today's conference call. Joining me from AMMO's leadership team are Fred Wagenhals, Executive Chairman, Jared Smith, Chief Executive Officer, and Rob Wiley, Chief Financial Officer. During this call, management will be making forward-looking statements, including statements that address AMMO's expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the risk factors described in AMMO's most recently filed periodic reports on Form 10-K and Form 10-Q, the Form 8-K filed with the SEC today, and the company's press releases that accompany this call, particularly the cautionary statements in it. Today's conference call includes non-GAAP financial measures that AMMO believes can be useful in evaluating its performance.

You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of this non-GAAP financial measure to net loss, its most directly comparable GAAP financial measure, please see the reconciliation table located in the company's earnings press release. The content of this call contains time-sensitive information that is accurate only as of today, August 9th, 2023. Except as required by law, AMMO disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It is now my pleasure to turn the call over to AMMO's Executive Chairman, Fred Wagenhals.

Fred Wagenhals (Executive Chairman)

Thank you. Good afternoon. I appreciate everyone joining us for our First Quarter 2024 Earnings Call. I would like to begin this call by welcoming Jared Smith as the new Chief Executive Officer of AMMO, Inc. The board, executive management team, and I believe that Jared's background and success in the ammunition industry, combined with his strategic vision for our next phase of growth, will be instrumental to build greater shareholder value. We look forward to working with him and are confident and energized he will guide AMMO to future successes. As the company's original founder, I will continue to be engaged on a daily basis as the Executive Chairman of the Board and will work very closely with Jared to assist in this transition.

As many of you on this call are aware, Jared has been with AMMO since January 2023 as President and Chief Operating Officer. Until his recent appointment as CEO, I look forward to remaining a strong voice in the execution of our strategic plan and will stay until the job is finished. I believe the markets are significantly undervaluing the opportunities in front of us. I am proud of what we've built since I founded this company just seven years ago, and will continue to make sure our stakeholders understand exactly what the vision of Ammo is and what we are working towards. I am optimistic our value has nowhere but to go but up. Our board, executive management team, and I are completely committed to making that happen. At this time, I would like to turn the call over to Jared Smith, AMMO's new Chief Executive Officer.

He will discuss our first quarter in more detail, review the current state of operations, and what we believe the future has in store for AMMO, its team, and its shareholders.

Jared Smith (CEO)

Thank you, Fred. Good afternoon, everyone. This is my first earnings call as CEO, and I couldn't be more excited to be here. The last six months, we've been rolling up our sleeves and making tremendous strides in creating real operational lift inside and outside the four walls. As I laid out in my letter to shareholders on July 31st, we are driving the business through three major categories. First category, we're expanding GunBroker.com's platform and reach through centralized payment processing, carting, and the addition of services to complement the products relevant to our community. The second category is we're focusing the ammunition division on enhancing margins through expansion of our rifle brass lines, continuous improvement measures, and vertical integration into projectile manufacturing. Finally, and most importantly, we're aligning the goals, compensation, and incentives of the management team with shareholder interest.

Our work and our strategic directions are starting to pay off, as we have already begun to see the positive effects here in the first quarter.

Our gross margins were 40.9%, compared to 27.3% in the prior quarter, with an adjusted EBITDA of $6.6 million, up from $3.8 million in Q4. Cash generated from operations was $13 million, up from $5.2 million in the same quarter last year. As we transition the business away from low-margin commodity ammunition sales to higher-margin OEM brass sales, we gave up top-line revenue and focused on bottom-line profitability. This was reflected in our sales for the quarter being down $34.3 million from $43.7 million in the prior quarter due to this transition in the business and overall market conditions. We had a total increase in cash of $8.4 million and repurchased 739,000 shares this last quarter through our buyback program.

We will continue to focus on strengthening our balance sheet through capital allocation with strategic buybacks and accretive purchases as we see opportunity in the quarters ahead. I'd now like to speak specifically on GunBroker.com. We moved $238.8 million in product on the platform this quarter, down from $281.2 million in the prior quarter. This follows industry seasonality and was only slightly lower than our internal projections for GunBroker.com. While revenues decreased, our margins remained strong, 87%, compared to 85.5% in the prior quarter. We also expect a lift on the platform starting in Q3, Q4, as we roll out our centralized payment processing and multi-item cart.

As we start the multi-item cart, we will be able to increase accessory sales and over time, increase our final value fee across the higher-margin products and services. We believe high single digits are achievable compared to the 5%-6% we currently earn today. We are rolling out beta testing the payment processing and will continue to onboard new sellers through Q4. Our cart capabilities are in development, and we anticipate that platform coming online by the end of our fiscal year. Now I'd like to transition to the ammunition division. The ammunition division of AMMO, Inc. created positive margins for the first time since June 2022. We reported $20.3 million in revenue, with a 9.5% gross margin, up from -8.6% in the previous quarter.

While this is a major win, we anticipate strong headwinds for loaded ammunition sales for the next two quarters. We continue to refocus the ammunition company on the most profitable segments of the market and will continue to monitor our margins during this very tough economic time. The OEM market for casings, brass casings, the revenue increased to $6.2 million, up from $3.5 million in the previous quarter. This is a great result considering we started this transition in January. I'd like to thank everybody for joining the call today, and I look forward to continued and robust communication with you as the year progresses. At this time, I would now like to turn it over to Rob Wiley to walk us through the financials.

Rob Wiley (CFO)

Thank you, Jared. Welcome, everyone. Let me now review the financials of the first quarter of our 2024 fiscal year in more detail. Margins on our marketplace segment remain strong. Our gross margins have increased on our ammunition segment as we begin to see the benefits of the transition to our leaner operating model with a higher focus on brass sales. We remain confident with the progress we have made to date, but still face headwinds as we continue to see softening in the U.S. commercial ammunition markets. We have, however, continued to increase our cash position with $13 million in cash from operations generated in the quarter. We ended the first quarter with total revenues of approximately $34.3 million, in comparison to $60.8 million in the prior year quarter.

The decrease in revenue was primarily related to the decrease in sales activity from our ammunition segment, as the U.S. commercial ammunition markets continued to soften. Our casing sales, however, which afford us higher gross margins, increased to $6.2 million, up from $3.3 million in the prior year period. Our marketplace revenue was $13.9 million for the reported quarter. Cost of goods sold was approximately $20.2 million for the quarter, compared to $42.6 million in the comparable prior year quarter. The decrease in cost of goods sold was related to the decrease in sales volume, but was also related to higher gross margins from our two segments. Our gross margin for the quarter was $14 million, or 40.9%, compared to $18.1 million, or 29.8% in the prior year period.

The increase in gross profit margin is related to the shift in our sales mix. There are approximately $2.8 million of non-recurring legal expenses incurred in our first fiscal quarter, which we have included as an add-back to adjusted EBITDA. Without the non-recurring legal expenses, we would have generated a profit for the quarter. For the quarter, we recorded adjusted EBITDA of approximately $6.6 million, compared to the prior year quarter adjusted EBITDA of $10.6 million. This resulted in a net loss per share of $0.02 or an adjusted net income per share of $0.05, compared to the prior year period of net income of $0.02 per share, or adjusted net income per share of $0.07. We continue to push forward on the improvements to our marketplace, GunBroker.com.

We are currently in the process of rolling out beta testing for our payment platform, with formal launch expected to begin by the end of this quarter.

Our current platform for the GunBroker.com marketplace is on pace, and is expected to launch by the end of this fiscal year. We feel confident in our financial position, as we have reported $130.6 million in current assets, including $47.5 million of cash and cash equivalents, in comparison to $23.9 million in current liabilities. We repurchased approximately 739,000 shares of common stock under our repurchase plan in the reported quarter, bringing us to over 1 million shares repurchased in total under the plan. We continue to look for opportunities to bolster our impressive balance sheet. That concludes our opening remarks. I will now turn the call over to the operator for questions. Thank you.

Operator (participant)

Ladies and gentlemen, if you wish to ask a question on today's call, you will need to press star, then the number one on your telephone. If your question has been answered and you wish to withdraw your request, you may do so by pressing the pound key. If you're using a speakerphone, please pick up your handset before entering your request and speaking on the call. one moment please, for the first question. Our first question comes from Matt Koranda with ROTH. Please go ahead.

Mike Zabran (Equity Research Analyst)

Hey, guys, Mike Zabran in for Matt. Maybe just start on the casings side of the business. I guess, just what percentage of casings production are we currently selling to OEMs? At some point in the past, it talked about it being 10%-15%, but obviously, it's a different business nowadays. Just where do we stand there, and where does that need to go over time as we continue to scale the casings side of the business?

Jared Smith (CEO)

This is Jared Smith. Thanks for joining the call. I see our business taking a turn for the positive over the next two quarters. The casings business is easily going to be 25%-35% of our business going forward. It is a growing business. There's demand out there. There's strong margins to be captured there, certainly in this very, very tough economic time, as ammunition sales continue to decline and margin compresses across the board for the rest of the non-vertically integrated players.

Mike Zabran (Equity Research Analyst)

Got it. You know, given that loaded ammo demand is still relatively soft across the entire industry, how should we think about pricing for shell casings? Are, are we having to compete on price here to add OEMs, or is price relatively stable for casings?

Jared Smith (CEO)

You know, prices, you know, we reentered into this market in a declining market, so I would say right now, and for the foreseeable future, price is very stable. You know, our capacities are increasing. More capacity comes online with the new factory that we brought online back in August, every day. I, I see this, I mean, this is a huge win for us, and I, I, I see this continuing, and I do not see any further price erosion related to the market on the casing demand.

Mike Zabran (Equity Research Analyst)

Got it. It makes sense. Maybe switching to the loaded ammo side, good to see loaded ammo margins kind of sequentially improve pretty meaningfully. Just wondering, do we have any remaining bulk loaded ammo inventory to clear through, or are we kind of, done on that end?

Jared Smith (CEO)

For the most part, we're done. We will always have to manufacture some amount of range ammo to be relevant in this market, but it will play a much, much smaller role going forward than it has in the past.

Mike Zabran (Equity Research Analyst)

That makes sense.

Jared Smith (CEO)

In terms of clearing out, our inventory, I think our inventory is healthy. There, there are still some items, slow-moving inventory that, that sit there, but, it, it, it's not a, a major factor. Not a going concern for us.

Mike Zabran (Equity Research Analyst)

Yep, got it. That makes sense. Last one for me. You know, aside from any unforeseen discounting, if the demand environment gets worse, how should we think about, you know, the progression and timing of getting loaded ammo gross margins back to the 20% range? Do you think we can get there by year-end? Just how are we thinking about how that, maybe just scales over time?

Jared Smith (CEO)

Yeah, I, I think for our business margins improve. We have more rifle brass capacity coming on in the two quarters ahead. That's clearly where we can make margin. We can defer kind of the, the, the non-vertically integrated piece of our production over a larger dollar value, and margins increase. Once again, it, it really, our focus is rifle ammunition and playing a much, much larger role in that rifle space, both domestically and internationally.

Mike Zabran (Equity Research Analyst)

Okay. I'll take the rest offline. Thanks, guys.

Jared Smith (CEO)

Thank you, sir.

Operator (participant)

Again, if you have a question, please press star, then one to be joined into the queue. The next question comes from Mark Smith with Lake Street. Please go ahead.

Mark Smith (Senior Research Analyst)

Hi, guys. First question for me, kind of broadly within AMMO. Jared, can you give us any updates just as, you know, you, you talked about continued headwinds kind of coming here? Maybe talk about kind of high demand calibers, 9mm, .223, 5.56, kind of what you're seeing there. You know, any changes that you're seeing in demand or pricing or kind of channel inventory in kind of everything else, primarily centerfire rifle.

Jared Smith (CEO)

Yeah, I think what's happened, Mark, is that a lot of the ammunition manufacturers have been holding on to inventory, waiting for little shifts in the market for things to pop. I see 9mm and .223. I really don't see any further price erosion out there from what's currently on the shelf. There will be some specials coming out for Black Friday, but I think for all intents and purposes, the market's fairly stable and we bottomed out, and we can stay at this for the next two quarters. Going forward, there are still fantastic pockets that we can play in, in revolver. There's still inventory out there that is lower than pre-pandemic inventory levels in those areas, and that's where we plan to play.

Mark Smith (Senior Research Analyst)

Okay. Then maybe talk as much as you can, it might be tough competitively, but walk us through kind of the margin on, you know, brass casing sales versus on loaded ammo.

Jared Smith (CEO)

Yeah, I mean, today, our cost to produce ball ammo is somewhere between $220-$240 per thousand, and the price at retail is $205. We just can't play there. Whereas I can sell a brass casing, I can still make 10% margins. I sell brass casings anywhere between $75 a thousand up to $85 a thousand, and there's, there's space and there's demand there. We can help out the international market, we can help out our domestic players, and we can help out new brands that are wanting to enter this space. The rifle ammunition, if we looked at, like, .223, .223 at retail right now is going anywhere between $375 and $425 for ball ammo. We're just.

The primer is too much of a factor of our cost for us to play in volume against larger, vertically integrated players, but we can sell the brass casing for a 20%-35% margin. It's where we're gonna stay, and it's where we're gonna play until this market, you know, returns, and we're going into an election year next year. We're quite excited, and there's not a lack of international demand out there for brass casings, brass rifle casings.

Mark Smith (Senior Research Analyst)

Okay. Yeah. As we think broadly about, you know, you guys getting back more heavily into brass casing sales to OEMs, can you talk at all about, maybe how much of this is on contract versus just kind of open-to-buy orders, from OEMs?

Jared Smith (CEO)

Great question, Mark. Yes, we are signing large contracts today. I would say our contractual sales are now making up somewhere between 15%-25% of our total capacity of that plant. All new contracts signed within the last six months.

Mark Smith (Senior Research Analyst)

Okay. Then I think the last one from me, you know, broadly speak to I know it's a seasonally weaker quarter here for, for GunBroker and just kind of demand for some of these products. But talk about, you know, where you guys see the consumer, primarily, you know, specific to GunBroker, where is this consumer? What's it gonna take to kind of maybe spur some more, you know, buying activity from these consumers? Maybe your outlook as, as we move into more important hunting and holiday season?

Jared Smith (CEO)

Sure. Great question, first of all. You know, GunBroker is a perfect reflection of the market, and what we're seeing for new guns is that new guns are in the retail locations, and they're not having to go to GunBroker to find, you know, that ubiquitous Glock 17 or the Remington 870. What they are going to GunBroker for are those unique items, and we're actually seeing our marginality improve on the platform because we're doing sales, a higher mix of sales of used guns. What's really gonna drive GunBroker users back to the GunBroker platform is streamlining the checkout process, internalizing and providing credit card services, and it's a cart item, and it's really just the ease of use of that platform that we'll be delivering in Q3 or Q4 of this year.

Mark Smith (Senior Research Analyst)

Excellent. Thank you, guys.

Jared Smith (CEO)

Excellent. Thank you, Mark.

Operator (participant)

This concludes our question and answer session. I will turn the call over to Jared Smith for any closing comments.

Jared Smith (CEO)

I just want to say thank you for everybody for tuning in today. We are extremely bullish about the future. We're heading into the fall season. We've had this factory now for a year, there in Manitowoc, Wisconsin. Things are really starting to click for us as brass sales are taking on. From the GunBroker side, the developments that we're doing on the platform are exciting. You're gonna be hearing more from us in the future, and stay tuned, and thank you for joining the call.