Smith & Wesson Brands Inc (SWBI) 2008 Q1 法說會逐字稿

Thank you very much, ladies and gentlemen, for your patience, and welcome to the first quarter 2008 Smith & Wesson Holdings Corporation earnings conference call.

My name is Bill, and I'll be your conference coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session towards the end of today's presentation. (OPERATOR INSTRUCTIONS) As a reminder today's conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today's conference, Ms. Liz Sharp, Vice President of Investor Relations. Please proceed.

Thank you and good afternoon.

Before we begin the formal 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 expressions 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, such 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 securities filings including our Forms F-3, 10-K, and 10-Q, I encourage you to review those documents.

A replay of this call can be found on our website later today at www.smith-wesson.com. This conference contains time sensitive information that is accurate only as of the time hereof. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date we will not be reviewing or updating the 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, Chief Financial Officer. With that, I'll turn it over to Mike.

Thank you, Liz, and thanks to the entire Smith & Wesson team for delivering another great quarter.

Let me give you the agenda for today's call. First, John will review our financial results, then I will share my thoughts with you regarding our performance for the quarter as well as our strategy and outlook for the future. After that, I will open the call up for questions from our analysts.

Now I'll turn the call over to John to review our financial performance. Please go ahead, John.

Thanks, Mike.

Sales for the quarter ended July 31, 2007 were $74.4 million, a 26.8%--$26.8 million or a 56.3% increase over sales of $47.6 million for the quarter ended July 31, 2006. Fire arm sales, our core business increased by $24.9 million or 55.2% over the comparable quarter last year. Net income of $4.7 million or $0.11 per diluted share for the quarter ended July 31, 2007, was $1.3 million or $0.03 per diluted share higher than the $3.4 million or $0.08 per diluted share for the quarter ended July 31, 2006.

The increase in sales for the quarter ended July 31, 2007 was partially driven by $18.5 million in revenue from Thompson/Center Arms, a hunting rifle manufacturer that we acquired in January 2007. Thompson/Center revenue increased by approximately 22% over the comparable quarter last year. Excluding the impact of Thompson/Center, our revenue increased by 17.8% driven by a 38.8% increase in revolver sales and an increase of approximately 108% in tactical rifle sales.

Our pistol sales increased by 1.2% compared with the first quarter of last year and it should be noted last year's first quarter results included approximately $5 million in shipments for the Afghanistan National Police. There were no shipments for Afghanistan in the first quarter of this fiscal year. If we exclude the Afghan shipment from last year's first quarter results, the remaining fiscal sales grew by 38% year-over-year, and (inaudible) pistol sales were exceptionally strong growing at a rate of 63%.

Gross profit for the quarter ended July 31, 2007, increased by approximately $10.5 million over the comparable quarter ended July 31, 2006. Gross margin as a percentage of sales and licensing was 36.4% compared with 34.7% for the quarter ended July 31, 2006.

The increase in gross margin is attributable to a higher sales volume as well as the acquisition of Thompson/Center whose gross margins are higher than Smith & Wesson's historical gross margin. In addition we continue to realize benefits as we leverage our fixed manufacturing costs. Cost of goods sold for the quarter ended July 31, 2007, included an additional $252,000 in depreciation expense due to the significant capital expenditures in the previous year.

Utility costs have stabilized, actually decreasing by $23,000 for the quarter when compared to the first quarter of last year. Operating expenses for the quarter increased by $6.6 million over the comparable quarter last year. Operating expenses as a percentage of sales and licensing were 23.2% for the quarter ended July 31, 2007 compared with 22.5% for the quarter ended July 31, 2006. Thompson/Center accounted for approximately $4.8 million of this increase. Included in the Thompson/Center operating expenses was $1 million of amortization of acquisition related intangible assets, without which operating expense would have been 21.9% of sales and licensing.

Capital expenditures for the quarter totaled $6.1 million, a $2.7 million increase when compared with capital expenditures for the first quarter of last year. The capital expenditures were related to the capacity expansion of pistol and rifle production and new product tooling for long guns. As expected net cash outflow for the quarter was $3.1 million compared with a cash inflow of $528,000 for the quarter ended July 31, 2006. Cash outflow is attribute to the increased capital expenditures as well as the seasonal nature of the hunting business, which generates increased accounts receivable and higher inventories in support of the Fall hunting season. There were $9.1 million in short-term borrowings as of July 31, 2007 compared with $3 million at July 31, 2006.

Now for our outlook, please note that our guidance for the fiscal year ending April 30, 2008 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. This guidance also does not include any revenue from shipments to Afghanistan or Iraq or any future business with the U.S. Military. Net product sales for fiscal 2008 are still expected to be $330 million, a 40% increase over fiscal 2007. Sales for the first quarter were slightly ahead of our projections and mostly attributable to higher sales of hunting rifles.

Based upon feedback from distributors when we acquired Thompson/Center we increased production to improve fill rates. Their belief was that Thompson/Center was losing sales because they were unable to fill orders during the hunting season. Any orders unfilled at the end of the season were effectively lost. With the increased production, sales of Thompson/Center products were ahead of projections in the first quarter. We will need to wait until the end of the hunting season to see whether this increase in volume was a timing issue or was it a strategy to increase productions did yield additional revenue. Consequently we are not changing our sales projections until we see the results from the Fall hunting season.

We are increasing our expectations for net income for fiscal 2008 to approximately $28.5 million or $0.63 per diluted share. This increase in our annual earnings projection from our previously announced guidance reflects the stronger than anticipated first quarter performance. Depreciation expense for the quarter was lower than anticipated due to the timing of capital expenditures and we expect that the favorable variance will reverse in the second half of fiscal 2008. Consequently we are not increasing our annual guidance to the full extent of the favorable first part of performance.

We continue to expect gross margin as a percentage of sales and licensing to be approximately 35% to 36% for the fiscal year with second quarter margins of approximately 33%. This sequential quarterly decrease in gross margins is typical, and reflects the impact of the traditional plant shut down at our Springfield and Houlton facilities which occurs for two weeks in August of each year. The seasonal nature of our new hunting business will be reflected in higher market expenditures in the second quarter as a result of our increased advertising efforts during this peak buying period.

Operating expenses for fiscal 2008 are still expected to be between 20% and 21% of sales and licensing. Operating expenses in the first quarter were slightly higher than this average in line with our projection. Our business typically delivers stronger revenues in the second half of the fiscal year, which will enable us to achieve operating expenses in the 20% to 21% range for the full fiscal year. We continue to expect free cash flow of $41 million, projected capital expenditures of $17.7 million for fiscal 2008 also remain unchanged and will result in net cash flow of $23 million after the $17.7 million of capital expenditures.

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

Thank you, John.

Our results for the first quarter are a great way to start the new fiscal year. To recap, we continue to deliver double digit growth in year-over-year quarterly revenue, supported by strong sales into the retail channel and our ongoing penetration in law enforcement.

We delivered double digit growth in our operating income and our net income as well, and we are raising our expectations for the full year net income. We continue to be extremely pleased with our integration of Thompson/Center Arms which again delivered tremendous growth, and we commence production this quarter of our two new bolt action hunting rifles and shipment of our new shotguns. This long list of accomplishments demonstrates great progress across many initiatives, so now, let me break it down and get into some detail.

The results we delivered this quarter in the retail channel reflect growth in our core handgun business as well as the addition of and growth in our newly established long gun business. The results also demonstrated the success of our all compassing retail strategy which incorporates a direct salesforce backed up with solid marketing and merchandising programs. Smith & Wesson firearms sales into the retail channel, not counting the positive impact of Thompson, increased by 41% for the quarter.

I want to point that our sales growth was particularly strong during the first quarter given that it compares to some major events that occurred in the comparable quarter in the prior year. On the Federal Government front, last year's first quarter results included approximately $5 million in shipments for Afghanistan that did not recur in the current quarter. While we have won all major new orders issued by the Federal Government in the last two years, no new major orders have been issued recently.

Second, last year's first quarter results included a large department win from the North Carolina Department of Corrections, all of which they wanted delivered within the quarter last year. Even with those large shipments in last year's first quarter revenue, we still grew firearms more than 55% in the current quarter.

To support growth in law enforcement and to support potential new business from the Federal Government, we expanded our Military and Police, M&P polymer pistol series in April of this year to include a 45 caliber model. That addition was designed to expand our offering to law enforcement agencies and also to be prepared for any potential Federal Government orders that may be issued.

The M&P 45 began to gain traction immediately and during the first quarter we announced that both the Hartford Connecticut Police Department as well as the New Hampshire State Police Department have selected the M&P 45 as their primary duty weapon. Today I'm pleased to announce that we have added the Brinks Company to our growing list of M&P customers. Brinks has selected our M&P 40 to equip its security officers in 50 locations across the U.S. and Canada. Brinks is standardizing to the M&P 40, we are shipping orders as they are placed, and to date we have shipped over 1,000 units.

The M&P pistol series is currently under test and evaluation by a number of additional law enforcement agencies. We have a cumulative win rate of over 80% in all test and evaluation practices where the M&P has competed. The number of law enforcement agencies that have purchased or approved (inaudible) the M&P pistol has now grown to 231.

Now let me update you on the military opportunity. Over the past two years the military has discussed replacing its current 9 millimeter pistol with a 45 caliber side arm. We understand this change is being driven by concern about the stopping power of the 9 millimeter.

In the fiscal 2007 Defense Supplemental Appropriations Bill, Congress provided $5 million to support a study and evaluate the replacement of the 9 millimeter. Within the past six months, the Air Force issued a request for information and has worked closely with industry to determine commercial off the shelf options for replacing the 9 millimeter. We expect the military to continue refining the requirements and issue additional information to the industry early next year. We look forward to the eventual reissuance or issuance of an RFP possibly in calendar 2008.

We believe that the M&P 45 polymer pistol offers significant safety, ergonomic and ballistic performance improvements over all other competing 45's and over the current 9 millimeter. We look forward to competing for the contract and hopefully once again seeing American servicemen and women carrying a pistol from an American company.

Long gun, a category we entered in late fiscal 2006 accounted for over 25% of our revenue in the first quarter of 2008. This diversification in growth strategy continued to yield results during the quarter on several fronts. First, our M&P 15 tactical rifle continued to gain traction. Our revenue during the first quarter from the sale of tactical rifles into both the retail and law enforcement channels grew over 108%.

As we indicated last quarter, to address the demand for this product, we began to supplement our external source and manufacture tactical rifles in our Springfield facility. I'm pleased to report that during the first quarter we successfully shifted all production on our M&P tactical rifles away from the external suppliers and we are now fulfilling 100% of our demand internally. The result is that we have nearly tripled our production rates and we have improved the gross margin for this product as planned.

Another key piece of long gun strategy was the acquisition of Thompson/Center Arms, which occurred in early January 2007. This marks the second full quarter for which we are reporting results that contain a full quarter performance of Thompson/Center. We could not be more pleased with this strategic acquisition in terms of performance, synergies, and process improvements. For example, our manufacturing team has been able to increase barrel production by over 50% since the first of the year.

For the second quarter in a row, Thompson/Center has delivered 22% sales growth and that growth was achieved without the benefit of the new icon bolt action rifle which just began shipping last month. We have now commenced production of our new bolt action rifles. The Thompson/Center ICON and the Smith & Wesson i-Bolt. Both of these new category entries are just beginning to arrive in retail locations.

We have also commenced shipment of our Smith & Wesson shotguns. They are beginning to arrive in retail locations as well. It's still too early to report any meaningful sales results in the rifle and shotgun categories as these lines are just ramping up, however, we continue to receive accolades from our dealers, distributors and the media.

This year alone, Smith & Wesson shotguns, the i-Bolt and the ICON have appeared on covers of 11 major industry magazines, including Outdoor Life, American Rifleman and Guns & Ammo as well as a variety of other print and television media outlets. We are looking forward to a great customer response as well. As we stated, our goal is to become a significant player in a $1.1 billion market.

As we progress through fiscal 2008 we will continue to look for opportunities to supplement our organic growth and diversify our business with acquisitions. The opportunities that we focus on may include firearms categories that help to round out our product portfolio and provide strategic expertise, but we will maintain a wide scope and also seek out non-firearms opportunities for acquisitions that help build our presence in safety, security, protection, and sport. Our process will be rigorous, and highly selective. As always, profitable growth and building shareholder value will be our objectives.

Now I want to wrap up my remarks on the quarter by mentioning that we recently received top awards in two categories from the shooting industry Academy of Excellence. Smith & Wesson was named Manufacturer of the Year for the second year in a row and our M&P 45 polymer pistol was named Handgun of the Year. For those of you who don't know the Academy of Excellence Building Group consists of 500 industry executives, firearms retailers and outdoor writers. I want to read you the list of reasons the Academy provided for naming Smith & Wesson as Manufacturer of the Year.

As you listen to the long list, I think you'll be impressed with what this team has been able to accomplish in the eyes of our peers. Smith & Wesson was nominated as Manufacturer of the Year for introducing 70 new products including the M&P 45 polymer pistol, the Elite series and 1,000 series shotguns, the new i-Bolt rifle and a classic series of revolvers, for the acquisition of Thomson/Center Arms, for the company's work in supporting and expanding shooting sports by working closely with the National Shooting Sports Foundation, the NRA, USA Shooting and other associations and sponsorships, for selection by the U.S. Government of 73,000 Sigma pistols and 15,000 handcuff and restraints for allied forces in Afghanistan and Iraq, and for its continued leadership in the industry and protection of the second amendment.

Well that's quite a list and I want to thank each of our employees for making it happen and giving us another great quarter of performance. With that, I'd like to open up the call for questions.

Thank you very much, sir. (OPERATOR INSTRUCTIONS)

Our first question will come from the line of Chris Krueger of Northland Securities. Please proceed.

Hi. Good afternoon, guys.

Hey, Chris. How you doing?

Good. Starting off with a couple of math questions. First on the actual results for the quarter, I know you had net income of $4.69 million and using the diluted share count that you provide of 48.056 million, I come up with an EPS of $0.10 and I'm just trying to figure out how it gets to $0.11. I don't know if you have a quick answer for that or not.

Yes, Chris, what you have to do there is that would be the shares involved in the convertible debt.

Yes.

There's approximately $500,000 in after-tax income or after-tax expense that you have to add back to the 4.690 million.

Okay.

Okay?

And then if I'm looking at guidance, is that a similar quarterly goal to go with?

Yes, and that's another way we've done the annual guidance is if you're trying to work that, it's the 28.5 plus in an annual basis it would be 3.2 million pre-tax, 2 million after-tax, so you'd add that out and divide by the 48 million shares.

Okay, or maybe just pick 45 million shares, or whatever the number is that makes it come out.

Different ways to do it, but that's the--

Okay, just making sure I understood that because I knew there had to be a good answer for it. All right. If I was looking ahead to second quarter expenses, for your sales and marketing I know it moves up for the hunting season, can you give us a little more detail there, is it a 300,000, 400,000 higher than the first quarter or is it a bigger jump up?

It's a bigger jump up than that. It's over $1 million.

Okay, and then getting into the third quarter, what kind of level does it come back to in the fourth quarter for that matter? Just a little different when we're looking at this acquisition that wasn't there before.

Probably, it's up a little or it's lower than the second quarter, but yes, it would be lower--it would probably be back to like first quarter levels.

Okay.

And Chris, for the SG&A for the full year will be in the 20% to 21% range when you string it all out.

Operating expenses you mean?

Yes.

Yes, okay.

Another one on expense, interest expense, a little higher than I had modeled. What's a good rate to use going forward for this year?

What you're going to have is you're going to have higher in the first half because you'll have the short-term borrowings bringing that interest expense up.

Okay.

And the rate on the short-term is about 8%, 8.25% and then that will go away starting in--you won't see that in Q3. You might have a little bit of expense but the borrowings should be done by the time we're out of the end of Q3.

Okay, and back to the big picture, you talked a little bit about the military. Can you indicate any visibility into other federal opportunities? I know they are a lot smaller than the military ones, but--?

There are a number of T&E's going on within federal agencies, law enforcement agencies, Chris, that are active right now, that we are participating in. They're going to take a little longer typically than your local state and municipal police, but there are a number of them going on at any give--right now, and going back on the same note on the state and municipal police, there's about 150 T&E's going on in state and local police right now actually, at any given time.

Right, okay. How about on the international front, anything to talk about there?

Nothing new as far as the change down in Washington where we're still trying to get that export limitation bill raised from a million back up to the 14 million and there's so much nonsense going on in Washington right now, it's hard to get people focused on that. I'll actually be in Washington for a couple days next week, but nothing really new.

Okay. That's it for me. Thanks a lot, guys.

Okay, Chris, thanks much.

Thank you very much, sir.

Ladies and gentlemen your next question comes from the line of Eric Wold of Merriman, Curhan, Ford. Please proceed.

Hey, good afternoon, everybody.

Hey, Eric, how you doing?

Quick question to make sure I heard things correctly. Were revolver sales up 38.8% in the quarter?

That's correct.

What particularly drove that strength in the quarter, versus kind of what we obviously, the way we've always have been in the past few quarters?

We have increased capacity on revolvers at the end of last year going into this quarter.

Okay, so would that be kind of a sense of Q1 kind of a makeup of fulfilling demand that's been there you couldn't get before or do you think the strength will continue?

What we're seeing is small frame revolvers are pretty hot right now, and there's more states are increasing their concealed carry ability, so small frame revolvers are really driving a lot of that growth, Chris, and we don't really see that slowing down.

And switching to the long gun side, on the Thompson/Center, revenues up 22%, you guys have increased the barrel (inaudible) direction by 50% since the start of the year. Can you give us a sense of kind of what gross margins were on Thompson in the quarter versus where they were last year?

We're not breaking out individual gross margins on that, Chris, or Eric, but we are seeing, as we felt when we bought the Company, we are seeing that we have the ability by doing some things that make a lot of sense in manufacturing to relatively quickly ramp up the barrel production. The i-Bolt barrel, which the i-Bolt will be manufactured down here in Springfield but that will use a Thompson barrel as will the ICON and we need that capacity for those products, so increasing that is important. We are also--I'm pretty excited about this, is we're also in the process of putting a Thompson barrel on our M&P 15, the tactical rifles so that's what's--that production is speeding us that way.

Okay, and then kind of a bigger picture, if we look back to the tactical rifle last year, and in its first year out of the gate gained kind of low double digits market share of the tactical rifle market. Given the sense of now that you're getting into your own shotguns and your own bolt action hunting rifles, what are the differences between gaining share in those markets versus what you saw in tactical? Are there more entrenched competitors out there, are there better quality competitors in those two segments versus what there is in tactical?

I don't want to say you're going to get--guaranteed you're going to get 10% share in these segments versus in tactical, but what are the main differences that could impede you or help you get to that level?

Well, that's a good question, Eric. In tactical rifles in the first nine months to a year, if you remember, our demand was about 10% of the market. In shotguns, in the categories that we're participating in, like we're not in pump shotguns yet which is a big part of the shotgun market but in the categories that we're in, we think we'll get in the first 12 months of being in business about 10% of those markets, so are there more, I guess entrenched is the right word, brands in the shotgun market in the hunting rifle market than tactical market? Yes, there are, but we think we have significantly better products, and as we get the product into the marketplace, we kind of think that around 10% level for the first year kind of makes sense.

And then the last question, to make sure I have the number right, correct me, John, you're going up against $5.2 million in military sales in Q1. Is the year thought [progressing] for Q2 like 5.5?

Q2, yes, it's about 5.5, yes.

Okay, perfect. That's all for me. Thanks, guys.

Thanks a lot.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Spencer Ferrara of Cowen & Co. Please proceed.

Hey, how is it going, Michael and John?

Doing good.

Good quarter. I'd like to delve a little bit again into the hunting market and in July I'm sure you read the report, the preliminary report rather by the U.S. Fish and Wildlife Service talking about the hunting trends in the last five years, and according to the report, there's a 4% drop in hunters nationwide from '01 to '06, which is about 500,000 person decrease, and they attribute it to the decrease of land and other recreational activities

So given the trend that hunting is going down and the bolt action hunting market is such a big critical part of your future, how do you characterize how you're going to break into this seemingly decreasing market area, and then on a related note, there's reports that the price of copper and lead is causing an ammunition shortage, especially for 223 ball rounds, so is this going to have an impact upon long gun sales in the next quarter and I think there's about a 15% price hike beginning this month for those types of ammunition, so I guess big picture, how do you reconcile all the conflicts that you're facing in the hunting market and the rifle space with your growth strategy?

Yes, we knew when we got into the long gun business, it's a $1.1 billion business but if you look back over the last couple years it's flat and we knew that. The opportunity for Smith & Wesson is our share a year ago was zero, so we had just take bolt--you were talking about bolt action, take bolt action hunting rifles, I don't have the exact number but it's like of the $1.1 billion, that's $550 million of it, and today, we have 0 share, and we just started because we're just starting to ship product, so we think there's a lot of opportunity for us to run in that category.

The other side, Spencer, we really believe if we've proven anything over the last three years is we're a pretty good marketing company, and we think by bringing innovative product which there hasn't been an innovative bolt action rifle in the United States in 20 years, but we're coming with the ICON and the i-Bolt so bringing new innovative products to the market will help to maybe get that business back on a growth there, and hopefully get more people out hunting, but we saw that report a week or so ago and that was not in my mind any new news, but we think we bring something to the party and even with the news that was out there, we got nothing but up side for us.

Okay, and back to the ammo shortage allegations, any negative impact that you foresee on the M&P 15's or any other--?

Not really. Ammo has been going up, that's not new either, ammo's been going up--some of the ammo companies took three or four price increases last year.

Yes.

So the new price increase is not really--almost people almost kind of expect it.

And the funny thing the tactical rifle market has been the growing segment.

Yes, that's a good point.

So while the market has been flat, tactical rifles have been growing.

Fair enough. I'll get back in the queue.

Thanks, Spence.

Okay, thanks, Spence.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from Reed Anderson of D.A. Davidson. Please proceed.

Good afternoon and congratulations on a real nice start to the year.

Thanks, Reed, good to hear from you.

Thank you, real quick, before I do a couple questions, John, could you just repeat what were pistol sales up year-over-year, what was that growth rate?

1.2% with that before you take into account the $5 million that went out that was Afghanistan last year, and excluding that, I believe it was 38% was the growth.

Got it and out of curiosity as you dig into that growth you're seeing in pistols and just handguns in general, is a lot of that still the newer models driving that or are you still seeing the stuff you'd introduced a year or two ago actually growing year-over-year as well?

Well, the M&P was up 63%.

Okay.

So certainly the M&P is driving, and has been driving our growth in pistols.

And what about if you looked at the various per mutations of the M&P, is the latest core year, is it more of the stuff that just came out in the last six months or is it also go back even before that?

Oh, no, no, it's really just back--a lot of it is tied to the calibers that the police departments use, the 45 we just launched, as I said that's important for the U.S. Government because there are a number of departments that only use 45 so like Hartford would not and New Hampshire with the 45, they would not even do T&E's and look at it until we have it in the 45, but we're not seeing and kind of slow down on the 40's or the 9's.

Perfect that's what I was getting at and also relative to just kind of the growth you're seeing in what I would call your retail channel or sporting goods, however you want to look at it, is that just--would we look at that as kind of a same-store sort of number or are you also adding a lot of doors and a lot of additional retailers that's pushing that number up as well?

I would not say that we're adding a lot of additional doors, I mean, some of the big box guys are adding stores but they aren't adding hundreds of stores. What we've done is we've taken our sales organization and we've focus them on the top dealers in the country and on the big box locations. In other words, it's the 80/20 rule.

Sure.

So that's really where we're focusing our efforts and we've been doing that for the last year and a half, John, something like that, so it's not brand new, so I wouldn't say we're adding a lot of new doors. What we're doing is penetrating deeper into the larger more successful firearms dealers.

Makes a lot of sense, and then on Thomson, I was real intrigued what you said about that basically all the growth you've seen in the last couple quarters really didn't include any new product. Is that more of a function of just being able to actually meet the demand that was out there or are you doing something different there as well on the sales side that's helping to drive that?

That's a good question. We're really sighted about what we're seeing out of Thompson. If you go back and you look at Thompson over the last couple years before the acquisition they were growing at 2% to 4% a year, somewhere in that ballpark range.

Our fourth quarter which was the first quarter we had them and the quarter we just had, both quarters we grew by 22% and we've done a couple things. Certainly the availability of product as John said is a key deal, and we heard that from dealers, we heard that from the folks at Thompson as we were doing our due diligence.

We also shifted their sales structure. They were using independent reps and in the middle, I think it was the middle of the fourth quarter for us so about the end of March, we transitioned that to direct Smith & Wesson salespeople and we've added some salespeople into the Smith & Wesson organization, but that shift that we saw in Smith & Wesson a year and a half ago, a little more than that when we shifted from the independent reps to our own salespeople we're seeing the same kind of effect on Thompson's business and Greg Rich who was the CEO there and is now the president of our hunting business as he's looked at it, he can see the in season, call it in season, during the Summer demand picked up that they're seeing on orders coming in that in the past Greg has been there for 15 years, they just didn't see, so the effect of our salespeople at retail is having an impact on the business.

That's great. That's very helpful, thank you.

Okay, thanks, Reed.

Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Eric Goldstein of Bear, Stearns & Co. Please proceed.

Hi, guys, nice quarter.

Hey, Eric, how are you doing?

I'm pretty good.

Just a quick question, wondering if you could give us an update on any licensing that's been going on or anything we should look forward to and also on anything less than lethal we haven't heard much on and would love to hear more about that?

Okay. On licensing, our licensing revenue for the quarter was up 8%, so we're continuing to see growth there. What we're starting to see is as we establish ourselves as a hunting company, because if we're really honest up until now, we really weren't a hunting company, what we're seeing is an interest on hunting apparel and accessories. In the last, it was just outside the quarter, but in August, we signed our first deal with a company that makes a jacket or a vest that's used by hunters, kind of a unique sort of product, and we're starting to see more and more interest from companies on that kind of product as our brand starts to get established. So we're continuing to see progress with it on that side, and we're looking at some fairly sizable categories there trying to understand them.

On the, what was the second part of the question?

Less lethal.

On less lethal, my position on that really hasn't changed. We like the category, we haven't been able to find a better mouse trap, so we're certainly not going to get into it with a (inaudible) product and so we're keeping our eyes open and that's kind of where we're at on that, Eric.

Okay, and, Mike, one last question, could you guys quantify at all if there's anybody out there who is waiting for the 45 on the M&P side to do a T&E because I think there was some guys that didn't want the 9 or the 40 and talked about a specific number?

Oh, yes, that was the case with Hartford and New Hampshire State Police.

Yes, is anyone else?

We don't sell--for competitive reasons, we don't talk about agencies that are doing T&E's or are planning to do T&E's, I'm not going to tip my hand to competitors that may not know about them, but certainly there are departments that they didn't really want to talk to us until we had a 45 in the M&P.

Okay, great. Thanks, guys, great quarter.

Okay, Eric, thanks, buddy.

Thank you very much, sir.

Ladies and Gentlemen your next question comes as a follow-up from Spencer Ferrara of Cowen & Co. Please proceed.

Hey John, a quick follow-up here on the law enforcement sales, I was wondering if you could tell us what the rough or actual percent total firearms sales for LE?

Percentage of LE? Total business for LE. LE's percent is probably a little--it's close to flat this quarter versus last, Spencer. Last year we had a large order for North Carolina, Department of Corrections, I think Mike mentioned it earlier.

He's looking for percent of the total which would be representing our total business.

In the quarter?

About a percent roughly?

A little under 10.

Under 10%?

Yes.

Okay, and any backlog data that you can share with us specifically for tactical and hunting rifles?

That will all be in the Q.

Okay.

And that will be filed shortly.

Got it. Okay, thank you.

Thank you very much, sir. (OPERATOR INSTRUCTIONS)

Our next question comes from the line of Amit Dayal of Rodman & Renshaw. Please proceed.

Thanks and congratulations guys on the quarter.

Thank you, Amit.

Just one question on the M&P sales to the law enforcement agencies. Are you being able to hold prices on those sales?

Are we able to hold prices on law enforcement?

Yes, exactly.

Yes, there's really been no change in that, Amit. It's a big business, as you know, when you're dealing with police departments, but there's relatively no change versus a year ago. It's been pretty consistent.

Right and just a follow-up to that. I mean, has that started to translate into sales for tactical rifles yet or should we expect something on that front to happen in the future?

Yes, good question. We have--now that we have the capacity in house, we can begin and we're just beginning to release our sales guys to go--to encourage T&E's just like we do with the pistol. In many cases, our sales guys are in showing the pistols and showing the differences to try to encourage departments to do test and evaluation.

We haven't done that up until now with tactical rifles because we had such a backlog we couldn't fill the orders. With our capacity expansion we have inside that's in place now, we are beginning to encourage them. Even without encouraging T&E's though, there is still a number of departments that were doing T&E's--police departments that were doing T&E's and went out and bought one of our tactical rifles and included it in the test.

Of the ones that--there are 91 departments that have chosen the M&P tactical rifle for their officers and that's without us pushing them. Of the departments that actually test our rifle, 96% of them pick the M&P 15 tactical rifle so we're getting our sales guys out now to begin to start to get in the T&E's when they're going on and get them started when they aren't happening.

All right, thanks.

There's about--not about, there are 91 departments that have chosen our tactical rifle.

Great, and just one final follow-up. I don't know if you'll provide this or not, but what was the split between consumer retail sales and law enforcement sales for this quarter?

Well, John just said ballpark, the law enforcement sales were about--just a little less than 10% of our sales. Federal Government was very little, nothing Federal Government, so the international was another 10% of our sales and then the rest was retail.

Yes, so probably--

And that's counting Thompson in that number.

--75% to 80%, Amit (inaudible.

You're going to see that drive up because of the addition of hunting and that's all retail business for us.

Right. Thank you so much.

Okay, thanks, Amit.

Thank you very much, sir. (OPERATOR INSTRUCTIONS)

And at this time, we have no further questions in queue.

Thank you, Operator. I want you all to know that we will present--we will be presenting at several upcoming conferences. We'll be at the Merriman, Curran and Ford Investor Summit in San Francisco on September 18th, the ThinkEquity Fifth Annual Growth Conference in San Francisco on September 19th, and Thomas Weisel Partners Consumer Conference in New York City on September 25th, and of course, our annual shareholders meeting occurs on September 17th in Phoenix, Arizona.

Again, thank you all for joining us, I hope to see you at one of the conferences and look forward to talking to you again next quarter.

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