Smith & Wesson Brands Inc (SWBI) 2005 Q4 法說會逐字稿

Good day, Ladies and Gentlemen. Thank you for your patience. And welcome to the Smith & Wesson's Fourth Quarter and Full Year 2005 financial results conference call. As a quick reminder, this call is being recorded. I would like to turn the call over to our host before the presentation Ms. Liz Sharp, VP of Investor Relations. Please proceed Ma'am.

Thank you and good afternoon. Before we begin the former part of our presentation, let me tell you that what we're about to say as well as any questions we may answer could contain predictions, estimates and other forward looking statements. Our use of words like project, estimate, forecast and other similar expression is intended to identify those forward looking statements.

Any forward-looking statements that we might make represent our current judgment on what the future holds. As such those statements are subject to a variety of risks and uncertainties. Important risk factors and other considerations that could cause our actual results to be materially different are described in our security filings including our Forms S-3, 10-K and 10-Q. I encourage you to review those documents.

A replay of this call can be found on our web site later today at www.smith-wesson.com. This conference contains time sensitive information that is accurate only at of the time hereof. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, we'll not be reviewing or updating any material content herein. Our actual results could differ materially from these statements.

Our speakers on today's call are Mike Golden, President and CEO and John Kelly, CFO.

With that I turn over to Mike.

Thank you Liz. Let me began by laying out the agenda for today's call. First, John will review our financial results for the quarter and the year. Then I'll share my thoughts with you regarding our performance, our strategy and our outlook for the future.

After our prepared remarks, I'll open up the call for questions from our analysts. I will now turn the call over to John for review of our financial performance. Please go ahead John.

Thanks Mike. Sales for the year ended April 30th 2005 were 124 million, a 6.1 million or 5.2% increase over sales of a 117.9 million for the year ended April 30th 2004. Firearm sales, our core business increased by 11.3 million or 11% over the previous year. Net income of 5.2 million or $0.14 per diluted share for the year ended April 30th 2005 was 4.4 million for $0.12 per diluted share higher than the 832,000 or $0.2 per diluted share, fiscal 2004.

As we announced in June, we decide to early adopt statement of Financial Accounting Standards # 123(R), "Share-based Payment" utilizing the modified retrospective application method. Consequently, prior periods have been restated to reflect the adoption of FAS 123(R).

We incurred approximately 626,000 in compensation expenses result of FAS 123(R) for the year ended April 30th 2005 compared to approximately 820,000 for the year ended April 30th 2004.

Sales for the 3 months ended April 30th 2005 were 36 million, a 3.2 million or 9.8% increase over the 3 months ended April 30th 2004. Net income of 1.8 million or $0.4 per diluted share is higher than net income of 1.6 million or $0.4 per diluted share for the 3 months ended April 30th 2004.

FAS 123 (R) compensation expense was approximately $210000 for the quarter ended April 30th 2005 compared to approximately 329,000 for the quarter ended April 30th 2004.

The increase in firearm sales for 2005 was primarily attributable to the continued success of our Model 500 revolver. Revolver sales increased by 6.4 million or 13.4% in fiscal 2005. We also experienced steady growth in our pistol products, which grew by 7.5% for the year.

The Walter product line which includes Walter Pistols and Rifles saw modest increase during the year in spite pricing pressures brought about by the strength of the Euro.

For the year ended April 30th 2005 sales in our Custom Gun Engraving business increased by 2.5 million or 32.9%. Continuing to expand this high margin part of our business is the key objective of our growth plan.

As planned, Non Firearms sales decreased by 5.2 million or 33.3% to 10.4 million for the year ended April 30th 2005. This decrease was expected in and was due partially to our decision in 2004 to exit certain non-core product lines such as Optics and Third Party Machining. The decline is also due to a drop in demand for handcuff sales which were down 1.3 million or 23% for the preceding year.

The 4.4 million improvement in the net income for the year ended April 30th 2005 was a result of several factors, including increased sales, reduced spending and the benefit of a pay and order received for one of our insurance carriers.

Our gross margin remained relatively flat despite higher sales volumes and the insurance recovery. Primarily because we were negatively impacted in the proceeding quarter by changes to our manufacturing process which included over 800,000 in consulting expense. We also incurred additional cost from the start up 7 day work reschedule, which was undertaken to address customer demands.

In addition we incurred approximately 1 million in additional depreciation expense. Operating expenses including excluding the impact of FAS 123 (R) decreased by 4.3 million in 2005 as a result of cost reductions. Including the consolidation of our corporate offices in Arizona into our main manufacturing facility in Massachusetts.

It is important to note also, that the preceding year's expenses reflected unusually high professional fees and legal fees.

Gross margin for the 3 months ended April 30th 2005 improved significantly compared with the comparable quarter and fiscal 2004. Gross margin is a percentage of sales licensing increased from 24.5% for the 3 months ended January 31, 2005 to 31.2% for the 3 months ended April 30th, 2005. The sequential increase in the gross margins was due to the improvements in production efficiency as a result of the switch to a 7 day work weekend January 2005.

Capital expenditures for the fiscal 2005 totaled 8.4 million compared with 5.7 million for fiscal 2004. Capital expenditures were related to the expansion of Handgun production as well as manufacturing process improvements. And all were internally financed. Net cash all through out for the year was 1.4 million compared with the cash outflow 6.7 million for the year ended April 30th, 2004. The cash outflow for the fiscal 2005 included both increased capital spending and 1.6 million repayment of long term debt.

Now for outlook. Please note that our guidance for the fiscal year ended April 30th 2006 is based upon the results from the existing business and does not include any additional revenue or profits from potential business ventures we may pursue.

Net core product sales for fiscal 2006 are expected to increase by 10 to 12% over fiscal 2005. The increase in revenue was anticipated from a number of factors. First we expect to increase sales penetration in the sporting goods channels we currently serve. We expect to generate sales in underdeveloped segments including Law Enforcement, Federal and International Trade Channel. And new product introduction including initial shipments for Model 460 Revolver, which began in July of this year. And the launch of our new Military and Police Pistol, designed specially for Law Enforcement and Military market. And which is scheduled for later this fall.

These efforts will be supported with a heightened focus at the retail level and our stepped up efforts in event marketing are expected to increase pull through.

Net income for fiscal 2006 is expected to increase to between 6.3 million and 6.9 million, or between 0.17 and $0.18 per diluted share. Note that this level of performance will represent a nearly doubling of net income achieve in fiscal 2005 exclusive of our insurance recovery. Gross margin would have been 29.1% in fiscal 2005 excluding the impact of the insurance recovery. We expect gross margin to increase to approximately 32% in fiscal 2006. This increase will be driven by improved efficiency in manufacturing operations are set by increased depreciation expense related to new capital expenditures.

Gross margins for the first quarter of fiscal 2006 are expected to be slightly above 29%. The improvement is expected to occur over subsequent quarters for both of the improvements coming in the second half of the year.

Operating expenses for 2006 are expected to remain relatively flat as a percentage of sales compared to fiscal 2005. We'll expand our marketing activities and move from a force of independent multi line reps to a team of direct, dedicated Smith & Wesson sales force.

Depreciation expense for fiscal 2006 is expected to be about $4 million. And we expect our interest rates will be about 6%. Total interest expense for fiscal 2006 should be approximately 1.3 million. Substantially lower than fiscal 2005 levels, as a result of our refinancing activities in January 2005. We expect our tax rate for fiscal 2006 to be approximately 38%.

That concludes my financial discussion. And I'll now turn the call over to Mike.

Thank you John for the recap. First of all, I want thank all of you for taking the time to join us on our First Earnings Call conference call.

We're doing some exciting things at Smith & Wesson and I look forward to sharing with you.

I joined Smith & Wesson 18 months ago because of the growth potential I believe exists within our products, our ability to innovate, the dedication and talent of our people and the amazing strength of our brand.

While these elements were all up here when I arrived, I sensed we could find new ways to use them to generate more value. Let me just say that in the past few very busy months I could not be more pleased with my decision to join the company.

We hired a number of key leaders and together we're well on our way to tapping into that value. This outstanding team lends John Kelly's tremendous experience at Smith & Wesson with folks who have worked with some of the biggest companies out there.

Tom Taylor, our Vice President of Marketing was formerly with Frito-Lay and Coca Cola. Leland Nichols, our VP of Sales comes from Stanley and Black & Becker. Bobby Honeycutt brings us licensing experience from Harley Davidson. And Ken Chandler, who heads up our operations is build a career on creating and leading efficient, flexible manufacturing environments.

This incredibly strong team has proven experience in what they do. And they're leading some of the most dedicated employees I've ever seen. While we still have very much to accomplish, they are already beginning to deliver results.

Now let's talk for a minute about the Smith & Wesson brand, our most valuable asset. The Smith & Wesson brand has an unaided awareness level of 87%. That is a very high score. But what is really exciting is the fact that regardless of age, race, gender or political affiliation, the perception of our brand is overwhelming positive. We have a 153 year old legacy brand that everyone knows and everyone likes. What a great asset.

In the past, we defined ourselves as a company in the handgun market and sporting goods channel in the United States. Our company and our brand are really much more than that. Today, we've redefined our mission as a company in the global business of safety, security, protection and support. We've earned that right to be into these broader businesses and that's where we're going.

Our growth strategy has 2 legs. The first is to get deeper into handguns in the United States and abroad. That's the business that got us tickets to the dance. The second leg is to investigate broader global market outside the handguns space in order to diversify our company. Remember, we're in the business of safety, security, protection and sport.

With these 2 components in place, we have identified growth opportunities in new and existing markets. Let's start with the market for handguns. Today we own just 16% of the 605 million, non-government domestic handgun market in the United States. Our first objective is to drive growth within the sporting goods channel. That's where we play today with new and existing products.

Our current product line is strong. We simply need to increase our penetration in the market. To that end, we have restructured our sales force. We're moving away from selling through independent manufacturers reps to sell multiple lines to selling through with Smith & Wesson's dedicated sales force across the country.

This will provide us a much stronger presence in our sporting this channel and ensure we'll have a team focusing 100% of their efforts on Smith & Wesson. This shift is important since historically, our direct sales folks generate more than twice the sales volume than a typical independent rep delivers.

This is not a function of poor rep performance, but a function of the time that the rep can dedicate to our products. This transition is already underway and we expect to be fully direct by September of this year.

Our next objective is to expand our reach beyond the sporting good channels to include the sale of handguns into the Military, Federal Government and Law Enforcement markets. This expansion will be supported with our existing products and several new planned products, one of which ill talk about in a minute.

We are already making great progress here. In the military space we brought Ernest Langdon on board to head up our efforts. Ernest is a former marine who lives in Washington and brings us vast experience and government sales. He also holds a number of awards for his skill in national and international shooting competitions.

We announced this spring our government order in quite sometime. The size and potential of this market is a bit tough to quantify, since much of the data is not public. But we do know that it's quite large and any sales we generate represent new revenue for Smith & Wesson.

We have also hired a lobbying firm to help us drive the legislative change in Washington. Our intent there is to remove some of the barriers we face in international sales to help us secure a more competitive position in the global market, and to be the first company that comes to mind for those who are running government procurement programmes.

Now let me talk about law enforcement a very high potential space. We have recently hired a new law enforcement leadership. A couple of strong experienced gentlemen from our competitor block. And we are also on the eve of new, very new exciting product introduction. This fall we will launch the Smith & Wesson Military and Police pistol series.

The M&P series was developed by our own craftsmen and was designed especially to address the specific needs of law enforcement officials. The first product in this series is the M&P 40. While I can't share with you the details just yet, the M&P 40's safety, durability and versatility features are impressive. And we believe they will place us far ahead of the competition. We've taken the M&P 40 samples on the road for demonstration and shooting with 12 police departments. And the response has been overwhelmingly 100% positive. In fact we know that some of those departments have held off on new pistol orders, until they can buy the new M&P.

I sound excited about the M&P launch because this product is significant. In fact I believe it will help us take sizeable market share in important segment namely law enforcement, central government and military, where we been absent for far too long. I look forward to sharing our product with you as we conduct a new launch.

The international handgun market is another important part of our growth strategy. Currently, we sell into Europe, Asia, and Latin America and we are in the process of expanding our sales presence in every one of those markets. Our sale infrastructure is already in place and we're poised to grow.

One of the barriers we face in the export market is U.S. Legislation, which currently requires Congressional approval for export orders of over $1 million. The time delay this causes often kicks us out of the running, particularly when other 9 U.S. manufacturers can deliver the product almost immediately. We need to change the situation, so we can be more competitive and we are working hard to change the $1million approval threshold to a higher limit. As I mentioned we've hired a lobbyist to represent our efforts and help us with both the legislative and procurement activities. And I personally visit Washington several times each quarter. We will continue to push in an effort to better penetrate the vast international marketplace.

So the first leg of our strategy is to get much deeper in the handgun, in the sporting good channels and expand our position in law enforcement, federal government and international markets.

The second leg of our strategy is to diversify our business for the pursuit of new markets. So let's talk about possibilities in those new markets. I said earlier that the Smith & Wesson brand is our key. Its value can unlock substantial growth opportunities for us in new markets, should we decide to enter them. Examples might include less lethal weapons, hunting rifles, shotguns, ammunitions, security systems, criminal investigation products, homeland defense products and services and training and shooting ranges.

We may choose to decline some of these possibilities after we explore them. And I expect to also continue to expand the list with new opportunities. I'm confident though that we will actively participate in many of these areas. In fact we have taken the first important steps in the Long Gun market by recently hiring Steve Skrubis, a seasoned pro from Benelli, a division of Berretta to head the development of our Long Gun strategy.

For this and all new markets whether we manufacture our products, outsource them, license them or acquire them will depend on each individual opportunity. Our object or objective is to assess each possibility as it relates to our process on safety, security, protection and sport and enter those markets where the Smith & Wesson name, or our market position can deliver profitable growth.

Licensing is another area where we are targeting for growth. Since the brand is our key we will leverage that brand in its own right, for licensing opportunities. Bobby Honeycutt, our VP of Licensing is a world class licensing pro with a wealth of experience in this area from Stanley Works and Harley Davidson. Harley Davidson, now there is a role model.

Bobby has already identified opportunities to create new licensing partnerships that not only generate revenue, but that actually add to our brand value over time. In fiscal 2005 we generated just under $2 million in licensing revenue from the sale of products to include body armor, knives and safes. We believe we can grow that number by 3 to 5 times over the next 3 years by exploring licensing opportunities in new areas, such as monitored security systems, ammunitions, truck and hunting accessories et cetera. And as you know licensing is extremely profitable.

As we grow our top line, we will continue to drive and improve those markets. So we can deliver more to the bottom line. Ken Chandler heads up this area and his experience in building high volume flexible manufacturing operations will be important as we grow. The opportunity to drive gross margins higher are numerous and already underway. Ken has begun improving efficiency throughout are primary factory. From reorganizing our manufacturing process to narrowing our sourcing approach for components and materials to driving a lean manufacturing philosophy throughout the process we are making some incredible headway here.

In fact Ken's group, which now has a couple of good strong leaders in both revolver and pistol productions has already delivered some great results in terms of their ability to flex volumes, to meet customer demands and lower cost on a variety of products. This type of change gives us a largest opportunity in the short term to deliver high gross margins.

Lastly I want to cover the legislative environment, which I view is very positive right now for our industry. On the legislative front, many of you know that the Protection of Lawful Commerce in Arms Act which greatly limits manufacturers liability in arms litigation was recently passed by the Senate. While we cannot predict the future we are optimistic that this important bill will be approved by the House and signed by the President in September of this year.

Once signed, it would eliminate the predatory lawsuits that attempt to hold us responsible for the actions of people that misuse our products. Its passage would allow us to spend more of our resources in the form of both time and money on activities that are intended to generate profit for our shareholders.

Let me wrap it up here with a couple of key points. In many ways, I view Smith & Wesson as a 153-year-old brand new company. We have a strong new team in place and we have identified some very exciting growth opportunities. We plan to leverage the incredible value that resides in our Smith & Wesson brand, combine it with a solid existing product line and exciting new products, and deliver on those growth opportunities.

Our main focus will be sales into law enforcement, Federal Government and military, all under-represented markets for Smith & Wesson. And at the same time we will team our brand value with our focus on safety, security, protection and sport to drive diversification within our company.

From our financial perspective we are strong. On a regular basis we are -- and on a regular basis we are finding opportunities to improve our gross margins and taking even more to the bottom line.

Now, one last comment before we open it up for questions. Because of our adoption of 123R we are obviously reporting a fourth quarter full year results later than usual. Because of this, we have now already completed our third quarter of the new 2006 fiscal year. I can't provide you with any details on that quarter yet, but I can tell you that revenue for the quarter is right on track and gives us an increased confidence in our double-digit revenue growth projections for fiscal 2006. I look forward to sharing those details with you next month.

So with that I will open up the call for questions from our analysts. Operator.

Thank you very much sir.

(Operator Instructions).

And our first question comes from the line of Mr. Eric Wold, Merriman Curhan Ford. Please proceed.

Hi, good afternoon.

Hi Eric.

A couple of kind of, larger questions. Looking at the Long Gun market, if that is a market that you decide to go into. Obviously with the recent high there, what's the (inaudible) the decision on that, could be made if you decide to manufacture in-house? Would there be any major significant start-up costs associated with that? And then how quickly you think you guys can actually get a meaningful market share in that area?

Okay, thanks for the question, Eric. The Long Gun market is really interesting to us. We have some research for everyone's information that shows us that when you ask people, if you are going to buy a shotgun or you are going to buy a hunting rifle, what are you going to buy, the number 3 brand they mentioned in both categories, is Smith & Wesson, which gets us pretty excited that we already have a predisposed market out there.

We brought Steve Skrubis on board to head up the initiative. He's an expert in the category. And we are looking at all different opportunities, to how we get in there. Whether we manufacture here in our Springfield, Massachusetts facility or somewhere else around the world, whether we source the product from someone with our brand on it and go to market or whether we acquire a company that's in the business.

So depending on where we end up, Eric, it will really depend on the -- will define the time-line as to when we would get into that business. Certainly some options are quicker than the other. And we're heavy into trying to understand the different options that are out there for us.

But in answer to your question, we are not looking to get into any business and not be a big player. So, we would look that if we get into that business that we would put a major effort behind it and become a major player.

Okay, fair enough. And then 2 quick questions on the military and law enforcement, obviously new areas you are looking to tackle pretty heavily, in the next year. So on the law enforcement side, with new gun and the dozen or so agencies you've talked to in the department you've worked with, what is the typical sales cycle for one of those? Or just law enforcement in general, what is the typical size of an order you could see from a law enforcement department?

It would, there's really a couple of variables there. The buying cycle on the law enforcement department's side of it, it depends on budgetary dollars and when they are available and how they are available, whether it's -- they have 500 police officers, are they spread over time or they don't want to or are what have you. Typically the police departments, when they start their investigation, or analysis looking for a new weapon, they will do some technical evaluation on the product and that will vary with the police departments, as to whether -- but at different stages they are all at different places in that cycle.

So it really varies by department, by budget in the town and where they are at as far as replacing the guns of the officers.

Okay, and then last question is on the military side, with the hiring of Ernie. Obviously the contract you have with the -- the contracts you guys got back in April was the first from the wild, maybe give a sense on the level or number of RFPs that you are involved or bidding on now, versus obviously where it was and kind of, how that increased focus by him, that got you guys into the game?

The -- Ernest is a terrific guy. Let me answer it this way, Eric, because I don't know off the top of my head the number of RFPs we're involved in right now. I can tell you this, prior to Ernest being down there, we had on one from sales in Washington heading up our effort. So, we really weren't a player down there at all. Ernest is in up to his eyeballs along with our lobbying firm down there to make sure we are talking, we are involved in all the contracts that are being led and that we are actively bidding and we are talking to the people who are making this decisions, so they understand the performance and quality of our product. I don't know the number, but I can tell you, we weren't there before.

Perfect, thanks guys.

Okay, thanks, Eric.

(Operator Instructions)

Our next question comes from the line of Mr. Ed Ching (ph) of Rodman and Renshaw. Please proceed.

Good afternoon, guys.

Hey, Eddie.

Hey, Ed.

On the non-firearms sales is it safe to say here that maybe every thing is shaken out, and sort of, this is the bottom where you start going forward as you add new products to improve handgun -- the mix in the handgun sales?

I think you are asking are we out of all of the business we are getting out of it?

Yes.

Yes, we are. That's the end. And now we are building a company here. We are not trying to tear a company down; we are trying to build one.

So handcuffs are the only thing that's not firearm related right now?

Yes, other than tee shirts and things like that, but the focus is on handcuffs right?

Right.

And to be honest, we are pretty excited about handcuffs because of the new teams we have on law enforcement in Federal Government. That's a big opportunity.

Okay, what's the size of that opportunity, you think?

Well we have about half the market today, in the United States. So we -- and we don't play outside the country in handcuffs. So we are going to go after that in Ernest and Brian James who is heading up our law enforcement sales team.

Okay. And what's I guess the CapEx, going forward here, for the next fiscal year? What do you think you are going to spend? And what would it be on, like plant improvement, manufacturing equipment?

Our capital plan of our 2006 is $12 million. And that is primarily on capacity increases and process improvement. And new products, excuse me -- new products capacity increase and process improvements.

Okay, great. All right, I'll get back in the queue.

Okay, thanks, Ed.

Thanks very much sir. (Operator Instructions). And our next question goes, comes I'm sorry, comes from the line of Bogden Cosmetech(ph) of Settlemen Partners, please proceed.

Hi guys, quick question. What kind of length would your sales cycles in the military or police initiatives do you envision. When should we expect to hear something on that front?

What is the length of the sales cycle?

Yes.

Again, it varies by -- it really varies by on the police side on the department and where they are on it, budgetary wise. On the military it varies with the size of the contract and what they are looking for. For example, right now, the Federal Government, for the Military are in the process of preparing a RFP for future handgun systems. And I'm sure they are testing on that and evaluation will be a year, a year and a half long. That's a major, major contract you. On contracts like the, for Afghanistan, or Iraqi, Military Police the Federal Government is buying, it's much, much shorter.

Police Departments, it could vary by the number of guns they are looking to buy and just the evaluation that they want to go through, if they are not happy with their current product. So there's not an easy answer to that question. We get asked all the time. It really varies by the circumstances.

Got it. Thanks.

Thanks very much sir. Ladies and gentlemen your next question comes from the line of Harry Sass (ph) from MD Sass. Please proceed.

Thank you. According to last year's 10-K, Smith & Wesson had accrued about 30.5 million of their product liabilities, consistent with how they are expecting legal costs. And the actual cash expenses in '04 and '03 were somewhere around 1.5 million and 2.2 million respectively. Given the legislation shielding gun makers from lawsuits, can you discuss what the impact will be going forward on legal expenses for the company?

The legal side of the matter is that, at this point we are still waiting for that law to pass see what happens within the courts on the existing cases. What that will transpire is that we've reserved for the cases that have been on the books, there is insurance coverage offsetting some of those cases, what you are looking at is the potential savings going forward, if there were additional cases. That's primarily the benefit that we see from this legislation. And then perhaps the greatest benefit is that it takes that particular cloud out of the picture.

On the Lawful Commerce in Arms Act, from my view the real benefit here, one, is the right thing to do. It's absolutely the right thing for the Federal Government to do. But the second thing is that it takes the umbrella of litigation from a -- from somewhat from a judge that this kind of, makes a (ph) point for the gun industry and just takes it away. So, the removal of that cloud is the real plus from where I sit.

If I understand correctly, you have 4 municipal and 2 product liability cases that are either pending or on appeal. Would this new legislation eliminate these pending cases?

Yes, sure.

Okay, thank you very much.

Okay, thank you.

Thank you very much, sir. Ladies and gentlemen your next question comes as a follow up from Mr. Ed Ching of Rodman and Renshaw. Please proceed.

Hi guys. On the Afghanistan military contract, were any of those pistol sales recognized in fiscal 2005?

Yes, there was some -- I don't remember the numbers.

About half of it, Ed, is in the first cloud.

So call it, 2500 pistols.

2,500, which is half?

About half of that order.

And is that for the whole entire Afghanistan army, or do you have follow-on orders coming along?

There are RFPs out there.

Okay, so I guess the initial contract is going to be Afghanistani army or what part actually of the branch of the armed forces was it? Was it the Afghanistani defense force, was it the Police Force or ...

You know what, I don't know the answer to that off the top of my head but I believe it was the military.

Okay, so there is still possibility of other branches of the military in Afghanistan that you could have?

Yes.

And you said half of it was recognized. Okay great, the new MP products series coming out, will that be available for consumers to buy the exact weapons that you are giving to the military or law enforcement?

Yes, we're not giving any of them, they got to buy them.

Pardon me, yes.

But yes, it is the same product that will be available for consumers, yes.

Okay, great. And I guess my last question is, when we can look at the operations or what is coming down and you guys have made a lot of changes to the systems side of it (ph) by actually doing new processes for manufacturing. What else is the plan that's I guess going to go forward here, throughout fiscal year, 2006. I mean more improvements you have to the existing systems that you have now.

You are talking about the manufacturing process?

Yes.

We are just getting started Ed, to be honest with you. The Smith and Wesson manufacturing is very vertically integrated. And that leaves us a lot -- a piece of steel comes in the back door and a 44 goes out the front door. And that leaves us a lot of opportunities for process improvement and for cost reduction in our manufacturing facility. I mean, Ken has only been on board, he started 2 weeks before I did. So he has been here about 8 months also. And so we will continue, we will always be improving our manufacturing, but we're just getting started.

And I guess you guys talked OpEx being relatively the same for 2006. But if you're putting these systems in, how much of the ROI you think you will be able to see in the near term, in terms of savings?

I didn't catch the first part of your question, Ed.

Well, I think you guys came out -- gave some guidance for OpEx, I guess for this upcoming year?

Yes.

I was just wondering, how much of that is baked into the changes that you have ongoing right now or plan to do?

In terms of savings, are you talking?

Right. In terms of savings, I mean, on the cash expenses there?

We anticipate that the benefits, as I mentioned on the operations side, the bulk of those are going to be seen in the second half of the year. We are looking at some things within the manufacturing process. We are going to be making some changes and they are targeted to come in, right around mid-year, in terms of some efficiency changing and some realignment of our operations. So we are looking at a timeline for some significant savings there. And we have that are, in terms of supply chain management that are going to yield us benefits. We've already started to see some of those in Q1. And will be factoring further in as we go through the year.

So it's phased in and again, it tends to be little more towards the back half because our major change in terms of realignment of our work shifts in our operations that are scheduled for around October 31st.

Okay, great. And I guess one last question, and I'll leave you guys alone. Do you think there is going to be any reprisals from the Long Gun market, if you entered the Long Gun market like say somebody else coming in with, say changing and adding handguns to their product portfolio?

I'm not sure. The Long Gun market is a terrific opportunity. And we have got one foot in the door, as we've got a brand that people already think, we are in that business. So, do we anticipate Long Gun companies getting into handguns? Not really, not at all. Could happen, I guess anything could happen. But because of the tremendous brand that we've built up over years, and we used to be in the Long Gun business back in the '70s. And the number of times I talk to people, you talk to crowds and talk about our strategy somebody pulls me aside and says, "I've got a Smith & Wesson shotgun." I mean it's -- we think we are -- we've got an advantage going in. But I don't anticipate anybody coming from the Long Guns into Handguns.

Great, thanks guys.

Okay, thanks Ed.

Thank you very much sir. Ladies and gentlemen your next question comes from the line of Jonathan Moorland(ph) from Insider Asset Management. Please proceed.

Hi guys.

Hi Jonathan.

Gross margin guidance, 32%. You're about there in Q4. You are talking about improvements, more improvements, and process, more licensing, high margin licensing. You guys being a big conservative there or should we expect a bit more. You are not willing to give a bit higher guidance on gross margin?

Jonathan, when you look at the margins for the year, it has a number of benefits there from the insurance, and our margin for the year was probably around 29%. We're going really from 29 for the year to 32. And then we do have some substantial depreciation expense coming in supply (ph) in fiscal '06, that we have the cover as well. So we are looking at probably, 3% margin as probably 4 million, $4 million, and we are picking up about another $1.5 million, in depreciation expense. So really moving about 4 to 5% improvement in gross margin. So I think from that standpoint that's really where we are looking -- where we're coming from.

Fair enough, last question. The $1 million sales barrier for going abroad, that is something that I hoped that you guys would be targeting. I know it's difficult to talk about timeframes. Can you speak to any internal expectations of when a decision of increasing or not, of such a cap would be a disappointment for you? Or would you expect some movement within a year, within 2 years?

Without giving a time frame, let me just tell you a couple of pieces on this. It used to be 14.5 million, and its dropped to $1 million right after 9/11. But I got to tell you, as I've talked to a lot of Senators and Congressmen down in Washington, and when I tell them this story they all look at me as if I'm crazy, like you got to be kidding. So, we are trying to get some momentum. It affects not just us but other American companies. And we are in a process of -- Leland Nichols is in the process of talking to other companies to help put some focus on the same issue. That is an industry wide issue.

So I would be misleading you if I said, it's going to happen by September, because I don't know, how things work in Washington. But I got to tell you, we haven't found anyone because we are talking about jobs. At the end of the day that's a creation of jobs and making U.S. industry uncompetitive. I've not met anywhere in Washington, on either side of the aisle that has disagreed that we got to get this changed. It's just not getting it on the docket and getting it through.

All right, that's it for me,

Okay, thanks Jonathan,

Thank you very much, sir. And our next question comes as a follow-up from Mr. Harry Sass from MD Sass. Please proceed.

Thanks a lot. Just on the licensing side, you've discussed the goal of increasing licensing revenue 3 to 5 times, over the next several years. Now given how high the margins are on licensing, as you know, doing some back of the envelope computations, it looks like you can actually this 3 to 5 times would be somewhere around 50 to 75% of current net income that you can increase just with the licensing. Is that your expectation as well?

Well, licensing is, as we have said all along, we've got a brand we think -- we know, has got tremendous resilience in the marketplace and we can -- we think we have a Harley Davidson type brand. Bobby has been on board for a couple of months, so we are starting and those things don't happen, you don't change those you don't get any licensing partners overnight. So we doubt it's going to be a bill. But we think it can be a significantly higher sales level and a proper level than it is today, yes.

What types of margins would you expect from licensing?

We don't break them up separately, but I can tell you it's significantly higher than the normal margins in the business.

Okay, thank you.

Okay thanks.

Thank you very much sir. And ladies and gentlemen, the next question cones from the line of Mr. Edward Holt (ph) of Lorraine Capital, please proceed.

Hi guys, nice quarter.

Hey, thanks,

I have a quick question on the Model 500 revolver line. Can you talk about the gross margins on that particular model and that kind of mix that we should expect, in the next several revolvers, by the end of the year?

Are you talking about 460 or 500, Ed?

I'm sorry the 460 and the 500 actually.

I'm not going to give out individual gross margins on products. But I can tell you that the 460 -- the 500 as I think you guys know, last year was the handgun of the year. This year the 460 has been voted the handgun of the year. We have just started shipping 460s. And we are looking at new products that we will not launch new products, that are not going to be incremental to our budget, or run rate to the margin. So new products are good things for us. As we get products that sell well like the 500, and like the 460 is showing early indication of, you can only have products -- the more that fits into our mix, like the M&P 50 or 40, the more, the better our gross margins become.

Great. So are you so you are saying that the yields are lower, than your existing lines, and then less gross margins?

What I'm saying are the new products have a higher gross margins than the existing line.

Right, okay, and I have a follow-on, the MP series gross margins there. Is that going to -- are we expecting that to be a higher gross margin gun in general, than your overall corporate average?

Yes.

Okay, thank you.

Okay.

Thank you very much sir, ladies and gentlemen your next question comes from the line of Marty Albaum (ph) of Horizon Networks, please proceed.

Nice quarter guys.

Thanks, Marty.

Listen there was some talk a while back that you are looking into something in the Tazer type gun. Is that realistic, is there any further discussion about that?

Yes we -- it's an interesting, a very interesting category to us, and it certainly fits within our space, if you think about it. Today, there is only one player in that category, that's Tazer. And they have been successful, in making their name synonymous with the category. So we think someone going into that category that fits into the space will have to have a brand to go against them. We are looking into the category, there are a number of companies that we are talking to that have products and we are trying to just understand the category. As you know, it's not, it's a controversial category, but certainly has a lot of upside potential we believe on a global basis and everything from law enforcement, to homeland security, we think there is a lot of professional-based uses for that product. And we are trying to also understand the technology, whether, what's the next phase of technology in that category, the -- we are always sure that it will be different than it is today. So it's a lot to understand in it, but it's certainly a category that we have an interest in.

That's great. So can I assume that we will be in that business next year?

No, I didn't say that, I didn't say that. I said we have a very, very keen interest in trying to understand it.

Okay, that's very exciting I think its wonderful, keep up the good work.

Great, thanks very much.

Thank you very much, sir.

(Operator Instructions)

Our next question comes from the line of Kevin Fole (ph) of Magneta. Please proceed.

Hi guys, nice quarter, just getting up the street on the story here. But I wanted to get an idea on the sensitivity of your business to steel prices and kind of what you are looking for, that's important for your guidance for the year?

Okay, John.

We have analyzed the steel situation. We've also been doing some work on our supply chain, as well as looking at alternative source of looking offshore for sources, and we have been able to mitigate some that increase, that has been common in the -- that's been seen throughout various industries.

It's, the steel component of our product is not as expensive as one would think, it's a very small percentage. So the increase is not one that would have a material impact on our cost or on force us to great prices dramatically. It's not been significant. And if you look at what the competitor's done we haven't seen anybody translate into increased prices because of that. It's more of a labor value-added process, than it is a material process.

Okay, I just -I remember I went on a store visit once and they were kind of complaining that the manufacturers were squeezing them on margins because of the high price of steel. But I guess that was just an excuse.

Okay, no comment.

Okay, thanks.

Thank you.

Thank you very much, sir. And that concludes our Q&A Session for today. Ladies and gentlemen let me turn the call back over to our management team, for any final remarks they may have.

Thank you, Operator. I want to thank everyone again for joining us on our first earnings call. Before we sign off, note that we will be presenting at the upcoming Merriman Curhan Ford Second Annual Investor Summit in San Francisco on September 19. Please join us if you can. Thank you again for your extended support and I look forward to speaking with you again soon.

Thank you very much sir. And thank you ladies and gentlemen for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a good day