Smith & Wesson Brands Inc (SWBI) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Smith & Wesson Holdings Corporation earnings conference call. My name is Shawn, and I will be your coordinator for today. At this time, all participants are in a listen-only mode mode. We will be facilitating a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, 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 are about to say as well as any questions we may answer, could contain predictions, estimates, and other forward-looking statements, or 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, 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 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 will turn you over to Mike.

Thank you Liz. And thanks everyone for joining us. Let me give you the agenda for today's call. First I will share my thoughts with you regarding our performance in the quarter, as well as our strategy and outlook for the future, then John will review our financial results in more detail. After that we will open up the call for question our analysts. This is a change from our standard agenda, but given the changes that occurred within our second quarter, I think it is appropriate.

Today's press release clearly laid out the issues that impacted our results in the consumer channel during the second quarter, and how those issues are causing us to revise both our net sales and our earnings guidance for the balance of year. In summary, our environment changed abruptly late in the quarter due to a number of factors. We responded immediately in October by implementing new consumer focused promotional programs, reducing our costs, adjusting our expectations for the fiscal year, and communicating with you, our shareholders. While these promotional programs are meeting with some success, the environment has not improved to the degree that we had originally expected.

In addition, recently released market data, which I will cover in a moment, has indicated that the industrywide inventory overstock situation is much more extreme than we estimated three weeks ago. Today we are providing you with our updated expectations for the current fiscal year. We will continue to respond as needed until both the consumer environment and the industry-wide inventory overstock situation have corrected.

We believe that the current situation will not extend beyond our current fiscal year, which ends April 30th, 2008, but let me say up front that the inventory overstock issue is an industry situation, and we believe the inventory correction for Smith & Wesson is near its end.

What I would like to do now is walk you through or key sales channels, and share with you some of the outstanding progress that has been overshadowed by events in the consumer channel during the second quarter. I will also review with you our strategy for Smith & Wesson, and the reasons we believe this strategy is solidly on-track. We intend to continue to execute that strategy. In doing so, we will further diversify the revenue base of Smith & Wesson globally, across multiple channels, within Safety, Security, Protection and Sport.

Let's begin with our Consumer or Sporting Good channel. The second quarter was challenging for many companies in the Consumer space, including our own. Our challenges were compounded however, with a strong preseason industry-wide inventory buildup in the consumer sales channel, coupled with an unusually warm hunting season, which served to reduce hunting-related foot traffic at the consumer level. That in turn intensified the industry-wide inventory overstock situation.

As you might expect, our team has spent a lot of time over the past few weeks analyzing the current situation. There are two key data points that best illustrate the firearms inventory buildup that occurred in the middle of this year. Let me explain each one.

The first is the Federal Excise Tax data, or FET data. This information is issued quarterly by the Bureau of Alcohol, Tobacco and Firearms, and in mid-November the numbers for the second calendar quarter of 2007 became available to us. The FET number reflects the taxes charged on firearms sales into distribution, and therefore serve as an indicator of channel firearm purchases.

The second data is the mixed data where the Federal Background Check data. Each time the consumer purchases a firearm a Federal Background Check is run. The mixed data captures each of those background checks, and the number is published by the National Shooting Sports Foundation. Mixed data serves as an indicator of consumer firearms purchases.

Now for calendar 2006, that is last year, the FET and the mixed data points revealed that both the sell into distribution, as well as the sell-through at the consumer level were about even. This is an industry that historically grows at about GDP levels. It was a year in which there was no, last year was a year in which there was no great disconnect between channel inventory levels and consumer sales.

However, as we review the data for the first six months of 2007, a vastly different picture emerges. Federal Excise Tax data shows a year-over-year increase in sell-in by manufacturers to distribution of about 26.4%, while mixed data indicates that sell-through at the consumer level for the same six month period grew only about 5.2%. Clearly the industry was planning a robust year, while consumers were behaving otherwise.

Again, we just received the April through June FET data in November, and now are able to fully analyze the market. That information and analysis demonstrated to us that there is a significant buildup in the channel. That explains how current environment developed. So how did we respond? We have put plans in place to help drive greater demand at the consumer level, and pull some of the excess inventory through the channel. This pull method of stimulating demand is an approach we began to use three years ago, to successfully drive sales of Smith & Wesson product.

It is a more beneficial approach to addressing the current market environment, as opposed to simply discounting products to distributors, which only drives more product into an already crowded channel, and impacts future sales. We have created 15 consumer level programs, and multiple dealer distributor programs, that span Q3 and Q4. These programs provide either mail-in rebates or merchandise incentives across a variety of revolvers, pistols, rifles, and shotguns.

We believe that creating demand at the consumer level will help reduce distributor and dealer inventories, while creating demand at the distributor and dealer level will in turn help reduce Smith & Wesson inventories. We are not quite halfway through the third period yet.

While the initial feedback is positively, particularly with regard to handguns, it is also clear that the total industry-wide buildup in this channel over the course of the year has been substantial, and will take some time to clear out. Our estimates for fiscal 2008 revenues and earnings that we provided today, incorporate our estimation that the industry-wide overstock situation will be corrected over the next few months.

As John will explain in a few minutes, we expect our recovery to occur more quickly than that. As you know, the acquisition of Thompson/Center Arms in January of 2007 was a key piece of our long gun strategy. We continue to be very pleased with the overall performance at Thompson/Center, which exceeded our expectations during the second quarter.

Because the Thompson/Center Icon bolt-action rifle was initially launched at the SHOT Show in early calendar 2007, that product was available to dealers during the pre-season order cycle, and was therefore less impacted by the overstock situation. Moreover dealer and consumer feedback on the new Icon and Triumph Muzzleloader have been extremely positive. These products clearly live up to the Thompson/Center reputation for quality in hunting firearms, and we believe they will play a role in our ability to gain market share in the future.

Our new Smith & Wesson long gun, the i-Bolt bolt-action rifle, and a 1000 series and Elite Gold series of shotguns, began to arrive in the channel during our second quarter. While scheduled for a mid-season launch, the timing on these entries coincided with the unfavorable industry environment that evolved late in the quarter. As a result, dealers and distributors were reluctant to add to the already bloated firearms inventory, even with an exciting new product launch. This situation combined with the fact that these lines are still ramping up, means that these products are not yet out in the marketplace in volume.

As a result, it is still too early to report any substantial feedback. As the industry works through existing inventories, shelf space becomes available, and the 2008 hunting season approaches, we will update you on our progress, but as I stated earlier, our strategy has not changed. Our goal is to become a significant player in this $1.1 billion market.

Now let me take a minute and talk to you about our accomplishments in the Law Enforcement channel, where where our military police line of tactical rifles and pistols continues to hit the mark. Last year second quarter results contained a particularly large order from the California Highway Patrol. Excluding that single order Law Enforcement sales in the second quarter this year were up 28% on a year-over-year basis.

During the quarter we continued to win sizable agencies, such as the New Mexico State Police, Charlotte North Carolina Police, Syracuse New York Police Department. Among Law Enforcement agencies where the M&P is considered for selection, we are continuing to win T&Es at a win rate of over 80%. This is happening because we have designed the M&P line of products specifically for Law Enforcement and Military professionals.

That is the number of Law Enforcement agencies that have purchased or approved for carry our M&P pistol has now grown to 264. We will continue to expand on our M&P line at the upcoming SHOT Show, and look forward to sharing some exciting new additions with you then.

On the Federal Government front, we continue to closely monitor the landscape for signs of any RFP related to the military's stated desire to shift from a 9-millimeter pistol to a 40 or 45 caliber pistol for added stopping power. Recent information indicates that we will see a new RFI early in calendar 2008, followed by an RFP and evaluation process later in 2008. We will continue to monitor the situation and respond accordingly, but as we have stated we intend to vigorously compete for any Federal Government opportunity that may arise.

One extremely bright spot in the quarter was our performance on the international front, with sales growth of 122%. The international market is significant for several reasons. Among them the fact that most of our customers in this channel are Military and Law Enforcement agencies.

In addition to extending the Smith & Wesson brand reach into foreign countries, our international sales results deliver ongoing growth into the professional ranks, a reflection of our overall growth strategy for the future. We are seeing M&P tests and evaluations get completed, and business developing most recently in places like Mexico, Canada, and Thailand. The M&P pistol is now carried on-duty by over 5,000 Law Enforcement personnel in 13 countries outside the United States. That covers our major sales channels, and clearly we have got a lot going on in each.

While International, Law Enforcement and Federal channels are either meeting or exceeding all of our expectations, there is no overshadowing the astronomical growth, both organic and through acquisition, that we have consistently delivered over the past three years in our Sporting Good channel. It is precisely this situation that fuels our growth strategy, and that strategy is to continue to expand our business in the new areas of Safety, Security, Protection and Sport.

The impact of the consumer channel during the second quarter, simply underscores the fact that we must continue to seek out acquisition opportunities, that deliver global growth and diversification for Smith & Wesson into new non-consumer categories, and the professional Law Enforcement, Security and Defense arenas.

Today we filed an 8-K related to the expansion of our credit facility. Our cash flow forecast remains strong, and the credit line is intended to serve as a resource that will allow our growth and diversification to occur when opportunities arise. Our acquisition selection process will be rigorous, and as always, profitable growth and building shareholder value will be our key objectives.

With that I will turn the call over to John to discuss the details of our financial results.

Thanks, Mike. Sales for the three months ended October 31, 2007 were $70.8 million, a $20 million, or 39.4% increase, over sales of 50.8 million for the three months ended October 31, 2006. Firearms sales, our core business, increased by $18 million, or 37.8% over the comparable three-month period in the prior year. Net income of $2.9 million, or $0.07 per diluted share, for the three months ended October 31, 2007, was equal to net income and diluted earnings per share for the comparable period last year.

Net income for the second quarter of fiscal 2008 reflects a 54.5% year-over-year increase in operating expenses, combined with a $1.7 million increase in interest expense, both attributable to the acquisition of Thompson/Center Arms in January 2007. The increase in firearms sales in the quarter was attributable to the addition of Thompson/Center Arms which we acquired in January 2007. Smith & Wesson firearms sales were down 10% for the second quarter of fiscal 2008.

Fiscal sales for the three months ended October 31, 2007, were $4.9 million lower than the comparable period in the prior year. The decrease is attributable to $6.2 million in shipments to Afghanistan and the California Highway Patrol in the second quarter of last year, which did not recur in the second quarter of fiscal 2008.

Sales in the M&P pistol grew at a rate of 54.2% for the second quarter of fiscal 2008, while revolver sales declined by approximately 18% for the same period, reflecting the soft domestic consumer market. Sales of shotguns and i-Bolts were below expectations, largely because shipments of these products commenced in late September, when market conditions were deteriorating, and because distributors were reluctant to take on new products, given their already inflated inventory levels.

Thompson/Center Arms product sales exceeded our expectations, primarily due to the pre-season launch of the Icon and Triumph rifles, and the benefit of a full season order cycle for those products. While the pistol products also enjoyed a strong quarter, with sales increasing 13% over the same period last year.

Gross profit for the three months ended October 31, 2007, increased by approximately $7 million over the comparable period last year. Gross margin as a percentage of sales and licensing was 32.3%, compared with 31.2% for the three months ended October 31, 2006. We experienced a typical sequential decline in gross margin in the second quarter of 2008, due to the impact of our annual two week shutdown in August, and the resulting unabsorbed fixed costs.

Cost of goods sold for the three months ended October 31, 2007 included $394,000 in costs for promotional programs launched in the quarter, as well as $302,000 in depreciation expense, related to the significant capital expenditures we incurred in fiscal 2007. Operating expenses for the three months ended October 31, 2007 were $16.5 million, a 54.5% increase, over expenses of $10.7 million for the comparable period last year.

The increase in operating expenses includes $5.2 million for Thompson/Center Arms which was acquired in January 2007. The remaining increase is attributable to higher stock-based compensation expense, partially offset by a reduction in compensation and profit sharing expense. Operating expenses as a percentage of sales and licensing was 23.2% for the three months ended October 31, 2007, compared with 20.8% for the comparable period last year. Operating income for the quarter was $6.5 million, or 9.2% of sales and licensing, compared with $5.3 million, or 10.4% of sales and licensing, for the comparable period last year.

Now let's look at the six month results. Sales for the six months ended October 31, 2007, were $145.2 million, a $46.8 million, or 47.6%, increase over sales of $98.4 million for the comparable period last year. Firearm sales, our core business, increased by $43 million, 46.2% over the comparable six months ended the previous year.

Net income of $7.6 million, or $0.18 per diluted share, for the six months ended October 31, 2007, was $1.4 million, or $0.03 per diluted share, higher than the $6.2 million, $0.15 per diluted share, for the six months ended October 31, 2006. Gross profit for the six months ended October 31, 2007 of $50.3 million, increased by approximately 17.6 million over the six months ended October 31, 2006.

Gross margin as a percentage of sales and licensing was 34.4%, compared with 32.9% for the six months ended October 31, 2006. The increase in gross margin percentage is attributable to higher standard margins on new products, and improved operating efficiency. Depreciation expense in the first half of fiscal 2008 was $554,000 higher, than depreciation expense for the comparable six month period last year. Operating expenses for the six months ended October 31, 2007, were $33.9 million, a $12.4 million, or 57.8% increase, over expenses of $21.5 million for the six months ended October 31, 2006.

Increased operating expenses includes $10.1 million in operating expenses for Thompson/Center Arms, which we acquired in January 2007. the remaining increase in operating expenses is attributable to $1.7 million in higher stock-based compensation expense, and $642,000 in higher advertising and promotion expense.

Operating expenses as a percentage of sales and licensing was 23.2% for the six months ended October 31, 2007, compared with 21.6% for the comparable six month period last year. Operating income for the six months ended October 31, 2007, was $16.3 million, or 11.2% of sales and licensing, compared with $11.2 million, or 11.3% of sales and licensing for the six months ended October 31, 2006.

Capital expenditures for the six months ended October 31, 2007 totaled $8.7 million, a $2.8 million increase when compared with capital expenditures for the comparable six month period last year. Capital expenditures related to the expansion of firearms production and new product tooling.

Net cash outflow for the six months ended October 31, 2007, was approximately $15 million, compared with a cash outflow of $4.5 million for the six months ended October 31, 2006. There was $11.5 million in short term borrowings as of October 31, 2007, compared with $4.5 million on October 31, 2006. Our current borrowings reflect a higher inventory level.

Now for our outlook for fiscal 2008. Please note that our guidance 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 product sales for fiscal 2008 are now expected to be approximately $300 million, an increase of 28% over fiscal 2007.

Based upon mixed data, we believe that the firearms market will grow at approximately a 5% rate in calendar 2007 and 2008, in-line with historical trends. We have seen in the FET data that firearms shipments into the channel in the first half of calendar 2007, were 26% higher than the previous year.

We believe that an approximate 20% inventory correction began late in the third quarter of calendar 2007, will start to bring industry-wide inventory levels back into line with market demand. Smith & Wesson handgun orders have improved, and retail point of sale information leads us to believe, that the correction for Smith & Wesson is nearing its end. Net income for the year-ended April 30th, 2008, is now expected to be approximately $17 million, or $0.40 per diluted share, a 33% increase in net income over fiscal 2007.

This is a decrease of approximately $6.5 million, or $0.13 per diluted share, from our previous forecast. Selecting our expected lower sales volumes, as well as the costs associated with a three-week manufacturing shutdown we have scheduled for our Springfield facility this month. Planned capital expenditures of $15.9 million, represents a $1.8 million decrease from our previous projections, and it reflects adjustment to spending based on our current profit projections. None of the delayed projects will impact fiscal 2009 volume.

Depreciation and amortization expense is expected to be approximately $12.5 million. Net cash flow is expected to be approximately $13 million. We expect net sales for the third quarter of fiscal 2008 to increase by approximately 5 to 10%, over net sales for the third quarter of fiscal 2007.

We anticipate the gross margin as a percentage of sales and licensing in the third quarter, fiscal 2008 will be approximately 26%, due to costs associated with the three-week production shutdown at our Springfield facility in December, as well as increased costs for consumer focused promotions, as well as reductions in operating production levels.

We have scheduled a full three-week production shutdown this month, rather than our typical one-week holiday shutdown, in order to help us bring inventory in-line with desired levels. As a result, we anticipate net income for the third quarter of fiscal 2008 will be breakeven.

We expect the industry-wide inventory overstock situation to improve in the fourth quarter of fiscal 2008, and therefore expect net sales for the quarter of 10 to 15% over net sales of the fourth quarter fiscal 2007. We anticipate the gross margin as a percentage of sales and licensing in the fourth quarter of fiscal 2008 to improve to approximately 33%. We expect net income for the fourth quarter of fiscal 2008 of approximately $10 million, or $0.22 per diluted share. That concludes my financial discussion.

I will turn the call back over to Mike.

Thank you, John. While the current environment has presented us with some short term challenges, I want to emphasize today that this in no way changes our long term strategy. We will continue to respond aggressively to create demand at every level, and reduce costs in every corner, until the consumer market is a healthier environment for us, and we will continue to stay focused on the diversification and growth efforts that will grow our presence in Safety, Security, Protection and Sport.

With that, Operator, I would like to open the call for questions from our analysts.

Thank you. Ladies and gentlemen, (OPERATOR INSTRUCTIONS) Ladies and gentlemen, please stand by for your first question. Your first question comes from the line of Eric Wold. Please proceed.

Hi, good afternoon. A couple of questions. I know you talked about how you are starting to see some improvement in your trends, and you are optimistic that you kind of get through this before the end of the fiscal year, or by the end of the fiscal year, so it won't kind of linger into next year. Talk about what you are hearing from the distributors and retailers during the situation, in terms of what their thinking is for next year.

I mean obviously everyone is having issues right now, but you know, if the other manufacturers are having more issues, and maybe don't come out of this as unscathed as you do, does this put you into a better situation going in next year with the distributor, that they don't want to kind of repeat the same mistakes, you know, that happened this year?

Well, let me try to answer that a couple ways, Eric. What we are hearing is that our promotion, specifically our handgun promotions are working fairly well, and we have some experience at that, which is helping to take inventory down, because there was a lot of Smith & Wesson inventory out there at the beginning of the second half also, and we are also seeing from a number of our distributors double-digit increases out the door year-on-year of Smith & Wesson products.

The dealers are pulling product out, which is another good indication that things are coming down, and the third thing is what John said, is we are seeing that reflected in our order rates in the first eight days of this month, this fiscal month, has been significantly better than the last couple months.

So many encouraging signs that we are seeing out there. We don't believe that the inventory that is out in the channel will carry on, a whole lot of that will carry into next season, because of just the nature of dealer base, and the distribution base that we have out there. We think that there will be, you know, some promoting of the product to move product out, to clear, you know, it probably won't all go away, but to clear it going into next year.

What we are hearing, though, from all of our customers is the promotions that were put in place, that Smith & Wesson is really certainly on the forefront, and the only manufacturer that is reacting to the situation, which certainly will put us in good stead, as we go into next year, and you know, we are selling programs into next year. The entire hunting program, but also on regular handguns, so we think the signs are looking pretty good.

Eric, just to give a little more color on that, the network of dealers and distributors has a, you know, is not heavily capitalized and has liquidity concerns. They can't afford to carry inventory for too long of period, and the distributors work typically on a margin of 5 to 7%. So, you know, carrying costs of inventory become pretty critical in their profitability. So I think you are going to see that come out, and I think it is going to be a situation where it is more been in the buying patterns.

You know, we look at our two top distributors and the out the door, for example, in October with them, was in the double-digits, and on our side were down substantially. You know, one was down 44% in October in terms of the year-over-year purchases, and the other was down 61%, yet their out the door were up 37 and 18%. So they are correcting their inventories as we go here, and so it is going to be a situation where it doesn't necessarily all have to be discounted. It is going to be reduced purchases which is what we saw in October, and significantly in November, too.

One other thing on that, Eric, it is a really good question, is, you know, the SHOT Show is the first weekend of February this year. At the SHOT Show, Smith & Wesson will launch 62 new items into the world, expanding our line of hunting rifles and shotguns, handguns, Thompson product. There is a lot of stuff going on that is going to fuel calendar year 2008.

Okay. Then last question, then, you kind of played devil's advocate a little bit. If some of these other manufacturers are, you know, is ever noticed to have a little capital constrained, not in the best financial situation, you know, relative to Smith & Wesson, is there a chance that they kind of get spooked and really need to move inventory and generate any cash they can, and start discounting even heavier in the months to come, and the situation maybe gets a little bit worse before it gets better?

Well, if you take a look, you know, as we said, we have already solved some of that stuff going on, and you know, we have taken that into account as we build our estimate going forward, we think that we are close to end of our adjustment, but we are not reflecting that over the next couple months you are going to see growth levels like we had been seeing prior to that, until the stuff gets through the channel.

I apologize, Mike. Less so on your side, more so than other manufacturers start getting even more aggressive rebates at those channels that they, you know, attract consumer away from your product, and your term, because they are discounting it even more heavily?

Eric, we kind of anticipated that into our forecast in that as I think Mike alluded to, we have scheduled promotions well into the fourth quarter as well. So we are not just building promotions, or have not built into our forecast promotions to move the inventory, we have dialed in some promotions along the lines that there is going to be some competitive activity that we need to respond to.

Okay. That is perfect. Thank you, guys.

Thanks, Eric.

Your next question comes from the the line of Rommel Dionisio, please proceed.

Yes. Good morning. Or good afternoon, sorry. I just want to spend a little time talking about the inventory, how they got bloated in the first place. As I look across categories, whether it is Sporting Goods, or Fitness equipment, or Recreational Vehicles, retails have been pretty conservative all year long. Do you get the sense that there was channel stuffing on the part of those competitors, or it is tough to believe that, you know, retails were that aggressive thinking this would be this a phenomenal holiday season, or hunting season.

I think 2006 for the industry was a good year. They enjoyed strong levels, and I think going into the year, people anticipated 2007 was going to be another good year for them, and when you look at the numbers, you know, it expanded handguns had a very good year last year, and the sales into the channel were up 38% in the first half of this year, and then what I think, and long guns were up 20%.

And I think what happens is, we will look at the mixed data and you look at what happens in the third calendar quarter, there was an uptick in retail activity, where we started approaching the high single digits, low double digits in terms of increases in retail activity, and I think that kind of encouraged them, that they were going to see this kind of year, and then when they ran up against the soft hunting season, it kind of, you know, started to come apart.

Thanks very much.

Your next question comes from the line of Chris Krueger. Please proceed.

Just a couple of quick questions. You indicated some more success on your efforts with domestic law enforcement continuing you went over 80% of the T&Es that are out there. Can you remind us again just what the size of this market is, as in number of departments that are out there?

Yes, Chris. In the United States, there are 17,000 police departments in the United States, Law Enforcement agencies in the United States. You know, a lot of them are small, but we have a long way to go. Things like the State Police, like we just said the New Mexico State Police, the New Hampshire State Police that we announced just recently, State Police we think are a big deal, because a lot of tiny departments in a state will do whatever the State Police do.

So they will buy whatever the state, they will follow their lead. So that is, you know, when we win a State Police Department, we are pretty excited about that, and also other big cities, you know, like Hartford, like Charlotte, like Syracuse, but there are about 800,000 law enforcement officers in the United States, and we believe that if you add all the officers that are part of these 246 departments, it is somewhere around 50,000 police officers. So a long runway in front of us there.

Okay. For as far as the State Department wins, how many of those have you had? Is it just New Mexico so far, or is it more than that?

No. New Hampshire, that was a big one for us, because it was a competitor up there, and they manufactured a competitor's guns in New Hampshire. Iowa State police comes to mind to me right now.

Okay. Other question, your M&P pistols have been growing nicely. I can't remember if you provide this, but do you provide a percent of what the M&P product lineup is as a percent of your total sales?

No, we don't provide that.

Okay.

Obviously a growing part of our sales, though.

Right. All right. That is all I have got. Thank you.

Okay. Thank you, Chris.

Your next question comes from the line of Reed Anderson. Please proceed.

Good afternoon.

Hey, Reed.

Hi. I guess, you know, Mike, I think we all get the why, you know, kind of the buildup of inventory, and what has happened. I think that is understandable, but what I think is a struggle at least for me, and I think other people would share this, is the timing of it.

You reported your first quarter in early September, and then all of a sudden a couple weeks later it seems like the wheels started coming off, and I guess my question is can you just remind us or talk to us about kind of the timing of your orders, et cetera, because my recollection is you have a handful of distributors that are maybe upwards of 30% of your revenue. So it is hard for me to understand how you wouldn't know sooner from them, but until the end of October say, that things were slowing. Can you help us connect those dots a little bit?

Yes. You know, the formal data, the FET data, doesn't come out until, we got it just a short time ago, mid-November which kind of told us what was going on, okay?

As we were going through, we had an event, the sales guys had a promotion last year for distributors and dealers, where the winner, you had to sell so much in one of those things, but the award was a trip to Hawaii, and that was in middle of September.

Of this year, September '07?

Yes. Just past and our guys came back from that, you know, with arguably 50 of our largest and most growing dealers, combination dealers and distributors, and there was no indication that the slowdown in retail was being felt. You know, people just kind of thought it was a little bit of a blip. So it wasn't until when we start to see it reflected in our order level was really in October, you know, as we got into it it was like, whoa, we got a lot of stuff here.

So it really was not something that the industry recognized at the dealer level back through the distributors, and you know, that was kind of part of the problem. Our Sporting Good sales in September were up 29% versus the year before. So really that is how it kind of caught us a little bit off guard, and that is why we reacted quickly to it.

Okay. And then in terms of the retailers, that sort of thing, I mean at what point are we going to start to see a much more prominent assortment or representation of your newer product, particularly on the long gun side? In some of these larger category killer names, like a Cabela's or a or Gander Mountain? When are we going to walk in to there, and see a much better, more of a sort of a jump off the page assortment of those new products?

Well, a couple things. The short answer is as we get into next year's hunting season, and this year as we explained we kind of caught it. We launched it at a time that was unfortunate, but also the offering that we have at this stage of the game under the Smith & Wesson brand is fairly limited. You are going to see more SKUs added to that, to broaden that line at the SHOT Show, which will start to give it more of a presence, plus we are going to catch the full season.

Okay. And then I guess last question, in terms of SHOT Show, I mean give us a sense of what kind of order writing, or order indication you typically get there, and how we might think about that as we look at your backlog coming out of April?

Yes. You won't see people writing orders at the show. I mean they just don't do that, but after the SHOT Show, you know, we try to have products shown at the SHOT Show that we will ship, begin to ship this fiscal year.

In other words, not outside that window. So you will start to see orders generate after we come out of the SHOT Show, so that is February, March, April timeframe, you will start to see that.

Okay.

The other point, too, the big boxes, just to explain why you haven't seen presence of Smith & Wesson stuff, is we did not have the products available at the beginning of the year when they placed their orders with the manufacturers.

In other words, everybody goes before the big boxes, makes their presentation of what they have. They decide what they are going to carry for the year. We didn't introduce our rifle until April or May at the NRA show. So that effectively took us out of that game with all the big boxes.

That makes sense. I just want to make sure I am clear, and then lastly, I guess John, is it possible for you to give the revenue breakdown by product that you typically do in your Q at this point?

What are you looking for exactly, Reed?

Well, I would just like to get the detail. We will obviously get that out of the Q when it comes out in another week and a half. It is always nice to get the detail by product category if you are willing to do it.

The Q is going to come out on Monday, Reed.

Okay.

But let me also add to what John was saying, or really answer your question. Many of our distributors have their shows where dealers come to them, where they do write orders in the month of January and the month of February, and the timing of that and the SHOT Show, and the launching of our new products, is really actually pretty good to kind of get this whole thing kicked off.

Okay. But is it still the case though, that I mean if we look at backlog which I know isn't a great indicator all the time, but it should be something that coming into a new fiscal year that is essentially where it peaks, and it runs off from there throughout the year? Is that correct?

That will be probably the case there because the long gun booking orders happen in February, March, April time period. So you are right, Reed. The backlog if I had to tell you when the peak period is, it is probably the end of the fiscal year.

Okay. All right. Thanks.

Thanks, Reed.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Amit Dayal. Please proceed.

Thank you.

Hey, Amit.

Hey, guys, how are you?

Very good.

Just one question in terms of the guidance for fiscal third quarter.

Yes.

Does it come, I hope I am reading it correctly, but it would come to roughly 57 to $60 million in terms of what was given in the press release?

You are talking about top line?

Yes.

The third quarter?

Yes.

Approximately.

Yes. Like in that range, right?

Yes. Approximately in 60, 57 to 60, yes.

Right. So, my question to that is I mean given that the fourth quarter is usually the slowest for you guys --

No.

It is usually the strongest, Amit.

Right, sorry. So we are still confident about making that 85 to 95 range in fourth quarter?

Yes.

Alright. Perfect.

Yes. I mean it is basically, Amit, just to take you through it, what we said is that what is happening is we expect our projections for the international law enforcement markets, are that they are going to grow strongly in that fourth quarter, based on information we have on contracts and things coming out, and what we did was we said we are just going to grow at mixed rate which is about 5%.

Right.

So we believe we then, we are forecasting we are growing at market in the fourth quarter, and then that there is going to be some good growth in the International, what we see on horizon or is in-house for International for Q4.

Right. So the international growth, is it coming from pistols, revolvers? Could you just --

Yes, pistols, a lot of M&P.

The M&P, Amit, has really provided us with a significant boost to our international business. Prior to the M&P we did not have a pistol that could compete in the Law Enforcement and Military market worldwide, and now that we have that the numbers are shown, you know, as Mike had said by over 5,000 officers around the world, and basically that is in a little over a year, because that is primarily 9-millimeter caliber with those. So that is, you know, in about 15 months time that is a pretty strong performance.

You haven't provided this in your press release, and I don't know if you can give it to us or not. The EBITDA range that you expect for fiscal 2008? Or if you could give us the depreciation numbers for the next quarter?

We gave you the depreciation and amortization I think was 12.5. I think it is probably in the, let me just think for a second, Amit.

All right.

Probably in about the 50 to 55 range, Amit.

Thank you. Just one final question. I may have asked you this earlier as well, when I spoke to you a couple of weeks ago, but are distributors and dealers allowed to send unsold stock back to the factory? How does that work for you guys?

No, they are not allowed to.

Okay. So it is their responsibility once it is shipped out of your factories?

Right.

And as we said, our product is moving through the channel very nicely so, that is not even a concern.

The issue doesn't appear to be on the dealer level as much as it is the distributors, really. From what we are seeing on the feedback from our distributors is their out the door is up significantly for Smith & Wesson.

Right.

The October data is the last we have, and our two largest guys were showing up 37 and up 18% out the door. What they are doing is they are reducing their inventories as I said before. They were 44 and 61% lower in what they purchased from us. So that is how inventory correction is taking place really at this point for us.

Could you give us a sense of what the inventory mix is like for you right now? Is it more pistols, or more rifles?

You know, given the nature of what happens in the marketplace it is across the board. We are comfortable that it isn't in any one particular area. It is pretty broad based. So as the business picks up we don't anticipate any problems in any particular category where we are more severe than others.

Great. That is all I have. Thank you so much.

Thanks, Amit.

Your next question comes from the line of James Maher. Please proceed.

Good afternoon, guys.

Hey, James.

Hi, Jim.

Most of my questions have already been addressed, although let me ask just a couple of housekeeping items, then. In terms of the share count given the convertible, should we still be anticipating 48 million for the next several quarters?

That is the way is still is calculated, James. It is based on the if-converted, and the more dilutive impact is to add back the interest costs on that, of approximately 2 million of the net income number, and divide it by approximately 48.5 million shares, and it doesn't carry into effect, whether the strike prices is in the money or not.

Okay.

Okay?

Okay. And then secondly, unless I am doing my math incorrectly here, it looks like at about 2.94 million in net income over 48 million shares. I am getting $0.06, not $0.07. Am I just not able to do math today?

What you would have to do there to add back approximately $0.5 million of after tax impact of the interest on the converts.

Okay. That is the interest again, okay.

Yes.

Okay. Again I think most of my other questions have been addressed. Thank you.

Okay. Thank you.

Great. Thanks, James.

Ladies and gentlemen, this will conclude the Q&A session. I would like to turn the call back over to Mr. Golden for closing remarks.

Thank you, Operator. I want to let you all know that we will be presenting at the Wedbush Morgan Investor Conference next week on December 12th in Los Angeles. I look forward to seeing some of you there. Thank you everyone for joining us.

Happy Holidays to all of you! I look forward to speaking with you again in the new year!

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.