Smith & Wesson Brands Inc (SWBI) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2009 Smith & Wesson Holding Corporation Earnings Conference Call. I will be your coordinator today. (Operator instructions). I'd now like to turn the presentation over to the host for today's call, Ms. Liz Sharp, Vice President, 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, project, estimate, forecast, 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 S-3, 10K and 10Q. I encourage you to review those documents. A replay of the call can be found on the website later today at www.smith-wesson.com. This conference contains time-sensitive information that is accurate only at this time. 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 may differ materially from these statements. Our speakers on today's call are Mike Golden, President and CEO, and Bill Spengler, Executive Vice President and Chief Financial Officer. With that I'll turn you over to Mike.

Thank you, Liz, and thanks, everyone, for joining us. Today I'm pleased to report very positive results for the third fiscal quarter. Despite ongoing weaknesses in the overall economy, we maintain solid focus on our strategy to grow our business in the sporting goods and professional channels. And we launched some significant new products. At the same time, we capitalized on recent, very strong demand for our pistols, revolvers and tactical rifles. We delivered solid profits and made significant progress toward bolstering our balance sheet by reducing our inventories and strengthening our cash position.

There's a lot to cover so let me take you through some of the details of our progress. Our handgun and tactical rifle categories continued to deliver increasingly positive results across the board in the third quarter. We're benefiting from the current increased demand for these products in the sporting good marketplace. But I also want to point out that even without the recent demand strength, these product lines have, in fact, been delivering growth consistently over the past several quarters. Overall, handgun sales increased 45% on a year-over-year basis. That growth reflects not just the recent hike in demand that we are seeing in the sporting good market, but it also reflects continued demand for our M&P pistols in the law enforcement sales count.

Let's talk about each of those for a minute. In law enforcement, the M&P continues to win at a rate of over 80% in agencies where we compete. To date, our M&P pistols have been selected or approved for carry by 489 law enforcement agencies. Among wins in this category during the third quarter was the Raleigh, North Carolina, Police Department, which selected the M&P and placed an order for over 900 pistols. An important point I want to make here is that wins in law enforcement are valuable not only in their own right, but they are also strategically important. This is because the sporting goods market often follows the law enforcement market and wins in law enforcement enhance our credibility with the Defense Department.

With that, let me address the sporting goods market. As I explained before, background check data or NICS data from the FBI is one of the data points that we monitor each month to track consumer purchasing trends. The reported number of background checks remains strong throughout our third quarter. In January, background checks showed 32% growth year-over-year. In addition, I know you've all seen the numerous media reports over the past several weeks that highlight the exceptionally strong purchases of handguns and tactical rifles that retailers are experiencing. This strength in consumer purchases certainly fueled the strong performance in the quarter. Smith & Wesson branded pistols were up 47% led by sales of M&P pistols which were up 77% in the quarter.

In addition, Walther pistols grew nearly 50%, revolvers were up 45% and tactical rifles grew over 111%. Moveover, our backlog increased dramatically by the end of the third quarter. In fact, total backlog reached $123 million by the end of the quarter. Which is $95 million higher than the same quarter a year ago. I want to point out this extraordinary increase in backlog is directly related to the increase in consumer demand that we have experienced in the past several months. Our backlog numbers always represent product that has been order but not yet shipped. So those orders can still be canceled. Therefore, it is possible that portions of this $123 million in backlog could be canceled if demand should suddenly drop.

This is an especially important point to make given the very recent strength in the consumer demand that we are seeing. As I indicated, favorable sales results in the third quarter were not confined to pistols and revolvers, but also occurred in the tactical rifle categories. Our M&P tactical rifles continue to gain popularity both with law enforcement and with consumers. To date, over 213 domestic law enforcement agencies have either selected or approved for duty our M&P 15 tactical rifle. Consumer demand remains extremely strong and that demand fueled the bulk of our sales growth in tactical rifles during the quarter.

In addition, we received a very favorable response to the launch of our new M&P 15-22 semi-automatic sport rifle at the January Shot Show. This new product has been designed along the exacting lines of our standard M&P 15, and offers all of the preferred features of the M&P 15 family, but it uses a much more economical 22 caliber ammunition. Distributors and retailers at the Shot Show were very enthusiastic and we believe consumers will find this to be a much more affordable option for their shooting sports. We also received positive feedback on this product from law enforcement personnel that indicated that they will use it for training, again because of the lower cost of ammunition. The M&P 15-22 will begin shipping later this year. Also, at Shot, we introduced our M&P 4. This is our first fully automatic, capable, tactical rifle, and has been designed exclusively for purchases by law enforcement and military organizations. In addition to its availability for law enforcement, by this summer, the M&P 4 serves as the platform we will use to address future military rifle opportunities.

Let me switch gears and move to the hunting side of our business. When we talk about hunting products, I am addressing primarily the hunting rifles that are made in the Rochester facility along with sales of hunting-related accessories. This portion of our business consists largely of what we consider to be high-end, consumer discretionary products and, it therefore, continues to suffer in the current economic environment. Sales of hunting firearms were down nearly 46% in the third quarter year-over-year. Despite the situation, we believe the hunting rifle business holds exciting potential and we took steps this quarter designed to bolster both our short and long term position in that market.

First, we continued to focus on removing costs from this side of the our business, including a workforce reduction, and a furlough in the quarter. Second, in January, we introduced the Thompson Center Venture Bold Action Rifle. This is a new hunting rifle that carries the well-regarded Thompson Center brand name and product quality, but does so at a lower price point that will reach an entirely new higher volume portion of the hunting market compared to the traditional Thompson Center rifles. Our success with the Icon rifle demonstrated that the Thompson Center brand is uniquely positioned to deliver a broader portfolio of high quality hunting products at various price points.

New products and introductions like the venture will effectively expand our addressable market. Moreover we believe that we can perform with acceptable profit margins. We are excited about the Thompson Center Venture and I'm sure you'll be reading more about it in the months to come. As I outlined for you last quarter, our decision to maintain the Rochester, New Hampshire, facility is important for several reasons. First, despite short-term economic concerns, the market for hunting rifles in a healthy economy is a sizeable one. And we are well-positioned to address it. Second, our Rochester facility produces barrels for our tactical rifles, which are clearly in very high consumer and law enforcement demand right now. Lastly, our Rochester facility provides expertise that helps to define Smith & Wesson as a firearms manufacturing with a full portfolio of products and capabilities. That is an important distinction as we compete for future potential business with the U.S. military and the Federal Government.

Now, lastly, let me give you a brief update on opportunities with the U.S. military. On the small arms front, U.S. Army contract for the M- 4 carbine, which they currently purchase exclusively from Colt expires in June 2009. We have been told that the army has decided to update the requirement for that rifle and at some point in the future, they plan to pursue an open competition. We were one of several companies invited to attend the Army Industry Day in November 2008. An event held to insure the new requirement takes into account state-of-the-art carbine technology. We demonstrated a prototype of our M&P 4 and we were pleased with the level of interest and response it received.

Note that the Army can continue to purchase their existing M4 from Colt beyond the expiration of exclusivity in June. While we expect the competition to begin later this calendar year, this is only our estimate. We're fully prepared no matter what the timing, to submit our new M&P 4 platform in a competition when it arises. With that, I'll turn the call over to Bill Spengler who will provide a financial overview for the quarter, Bill?

Thank you, Mike. Total company sales for the third quarter were $83.2 million. A $17.1 million or approximately 26% increase over the three months ended January 31, 2008. Within that, sales of all firearms totaled $78.5 million, an increase of $16.9 million or approximately 28% over the third quarter of last year. The balance of revenue largely handcuffs and non-firearms accessories totaled $4.7 million and grew by $182,000 or about 4%.

Results in our sales of firearms reflected significant strength in our pistol, revolver, and tactical rifle categories offset by continued weakness in our hunting related categories. Handgun sales totaled $61.9 million an increase of 45% over the year ago quarter. Tactical rifle sales of $8.8 million, represented an increase of 111% year-over-year. While hunting firearm revenue totaled $6.7 million, a decrease of 46% on a year-over-year basis as Mike indicated. One way to break down our performance in firearms is to look of sales of hunting related products as a single and separate category.

In Q3 sales of all hunting related products which represented only 9.9% of our total firearms revenue in the quarter, were $7.8 million a decline of $6.8 million or 47% versus Q3 in fiscal year '08. Sales of all other firearms, specifically handguns and tactical rifles, were $70.7 million, a $23.8 million or 51% increase over the same quarter last fiscal year. Gross profit for the third quarter $21.6 million or 25.8% of revenue as compared to $16. 6 million or 25% of revenue for the third quarter of fiscal '08. This represents an improvement of 0.8% in gross margin percentage from the year ago quarter. And there were a number of different factors contributing to this net improvement.

Gross profit on our non-hunting firearms was up, approximately $10.9 million and corresponding margins on those products improved significantly. Providing, approximately a 6% lift to the gross margin percentage for the total company. Offsetting these gains in gross margin percentage was the $2 million charge for the PPK recall, which eroded total company gross profit margin by approximately 2.5 percentage points. In addition, lower sales demand in the hunting market led to significantly lower production levels and caused lower, fixed overhead absorption at our Rochester facility. This reduced total company gross margin year-on-year by approximately $3.3 million and eroded the total company gross margin percentage by close to 3%.

I'll now move on to operating expense. Total operating expenses increased over the prior year by $699,000 or 4.3% in this third quarter. Over 60% of this net increase was related to costs associated with the Shot Show an event, which occurred during the third fiscal quarter this year versus the fourth fiscal quarter last year. The remainder of the increase was driven by a combination of factors to include an increase in our profit sharing provision, a broad based program deployed throughout most of the organization. Growth in these portions of our operating expense base was offset the by lower professional fees, as well as the lower level of intangible amortization that resulted from the impairment charge which we took in October 2008. As a result of the many elements discussed above, operating income was $4.6 million for the third quarter an increase of $4.3 million over the essentially break-even point of one year ago.

Other income, totaled $308,000 in the third quarter as opposed to other expense of $729,000 last year. This current year amount is comprised almost entirely of a favorable, non-cash, market-to-market adjustment related to Euro Ford Exchange contracts, which we used to protect our purchases of inventory from Walther. It represents a reversal of a portion of the loss in other income that we recorded related to these same contracts in the second quarter. Interest expense $1.2 million decreased by $1.1 million compared to with the year ago quarter. The payoff and retirement of our acquisition line of credit in the first quarter of fiscal '09 is now fully reading through in reduced interest expense.

In addition, cash flow from operating activities has enabled us to pay down our short-term revolving line of credit during the quarter. At the same time the interest rate on revolver decreased 275 basis points versus the comparable period last year. And total debt outstanding at the end of the third quarter $87.6 million, compared to $141.3 million in the same quarter a year ago. For reference, both of these numbers incorporate our $80 million worth of convertible debt. Income tax expense in the third quarter increased $2.3 million over the income tax benefit of $952,000 in the year ago quarter, this is due to the increase in operating profit in the current period and the fact that during the prior year, we incurred a loss. Net income for the third quarter of fiscal '09 was $2.4 million or $0.05 per fully diluted share compared to net loss $1.8 million or a loss of $0.04 per share in the prior year.

Now let me turn to the balance sheet. Accounts receivable decreased to $42 million versus $54 million at year-end fiscal '08 and versus $51 billion in the preceding sequential quarter. This occurred despite the increase we discussed in revenue and results largely from a reduced need to provide dating terms. Particularly in our hunting business. Inventories were $46 million at the end of the third quarter, a $1.1 million improvement over last fiscal year end, and a $7.8 million improvement over the second quarter of this fiscal year.

This was clearly aided by the increased level of demand, but it was also helped by temporary shutdowns at Rochester during the quarter and better inventory management in general. Year-to-date capital expenditures at the end of the third quarter were $4.3 million compared to $10.8 million at the same point last year. We continue to anticipate spending a total of approximately $8 million on capital expenditures in fiscal '09 versus the $14 million spent in fiscal '08. Major CapEx in this fiscal year remains focused on improving production facilities, new product offerings and various projects to selectively increase capacity and upgrade manufacturing technology.

Now turning to a look at cash flow and liquidity. One of the metrics we now track is adjusted EBIDTA or earnings before interest, taxes, depreciation and amortization and stock-based compensation expense. This measure eliminates non-cash and selected one-time charges, such as impairments or market-to-market adjustments on currency. It also provides a basis for evaluating our cash generating capacity and the general liquidity or borrowing capacity of our business in the context of our bank covenants. With that said, adjusted EBIDTA in the third quarter $9.2 million compared to $3.7 million in the third quarter of fiscal '08. On a year-to-date basis, adjusted EBIDTA was $26 million versus $28.5 million in the first nine months of the prior year.

The presentation we've included in our earnings release shows in detail how this information has been developed. We ended the third quarter with approximately $21 million cash on our balance sheet without accessing our revolving line of credit. In addition, we recently obtained from TD Bank an amendment to the revolver that expands the leverage ratio covenant from 3.0 to 3.5, beginning April 30, 2009, and throughout 2010 fiscal year and it then amends the leverage ratio from 3.0 to 3.25 for fiscal year 2011. Again, we did not draw on this line in the third quarter, but the important effect of the amendment is to provide us with incremental borrowing capacity in the future if we should choose to access it.

Now let me conclude by spending a few moments on our near-term outlook. As you know, our fiscal year ends on April 30, so we're about six weeks away from the conclusion of our fiscal 2009. At this point, we feel confident that for fiscal '09, we will deliver full year revenue growth between 9% and 10% on a total company basis. In the non-hunting portion of our business, we expect to continue to produce and ship at our full capacity throughout the balance of the fiscal year. Conversely, we are not experiencing any improvement in the weak demand for hunting products. As the economy continues to struggle, the discretionary dollars typically spent by consumers in this category tend to be spent on more essential items and, in addition, much of our Thompson Center business is focused on black powder rifles, a particularly discretionary spending category.

Looking forward in our gross profit margin percentage, we expect the final quarter of our fiscal year in the non-hunting, majority of our business, will look pretty similar to the third quarter information just discussed, absent the cost of the PPK recall. Looking at the hunting portion of our Company, although there have been significant headcount reductions in Rochester, this facility remains in transmission and therefore the full benefit of actions taken will not read through until fiscal year 2010 as we indicated to you on our last call. Operating expenses should not vary materially through the end of this fiscal year, although there will appropriately be some growth in the profit sharing accounts. Finally, as we (inaudible) to cash flow we will continue our focus to assure any draw on our revolving line of credit is minimal.

Last, let me move to a slight change in the way we will be reporting our backlog to you. Traditionally we have reported our backlog balance on both a total basis and, then, broken down for each of the major product categories. Effective with today's filing of the Q, we will continue to report a total backlog number for the Company, but we will no longer report backlog levels for the individual product categories. Backlog numbers for individual categories may well contain duplicated orders for distributors who may cancel those orders once any manufacturer fills their need. A potentiality, which may be particularly true under our current market conditions.

In addition, we believe that our disclosure of this information may also put us at a disadvantage as we compete with privately-held companies. That concludes my comments so I will now turn the call back over to Mike. Mike?

Thanks, Bill. Before I wrap up, I want to leave with you a few key points. This is a very exciting and dynamic time to be part of the firearms history. The sporting good market is generating a demand level that is remarkable. And that has allowed us to achieve very positive results. We'll continue to serve this market and capitalize on those opportunities as they arise. At the same time, we will do so with a realization that the sharp upswing in consumer demand has an unpredictable duration.

We intend to make every effort to address the demand to the fullest extent possible. As we do so, we will remain focused on executing our long-term strategy, one that has continued to deliver consistent, profitable growth over the years and the one that will carry us successfully into the future. We will plan our investments carefully, balancing near-term opportunities with the need to build an infrastructure that is sustainable far beyond short-term movement in the markets. We have a robust portfolio of products that addresses all of our key sales counts, sporting goods, law enforcement, federal government, military and international, and we continue to expand that portfolio to address broader portions of the markets we serve. At the same time, we continue to seek out opportunities to diversify the Company in both firearms and non-firearm categories. And in all efforts we plan to continue to grow in the markets of safety, security, protection, and sport.

Finally, I want to thank our employees for their contributions toward the great quarter. With that, operator, I'd like to open up the call for questions from our analysts.

(Operator instructions). Your first question comes from the line of Eric Wold with Merriman Curhan Ford & Company, please proceed.

Good afternoon.

Hey Eric, how you doing?

Good.

Good.

I was thinking on these numbers. Question on the inventory, can you get a sense of the inventory you've got in hands now relative to where you see the strength coming from? Retail channel, distributors? What consumers are buying and where the demand is? What you still got stocked in inventory? Or are they totally different?

Well, it kind of varies by category, Eric. But you know certainly like in tactical rifles, we're, all of the way through the channel we're handing them out. Us manufacturing, selling to distributors and them selling them right out to retailers, so I'm sure you see that when you guys do your channel checks. Similar position on some categories within revolved, without giving specifics, but within revolvers and within pistols.

Okay. And then, your conversations with the distributors and dealers out there, how much more visibility are you getting in terms of demand? I know they're kind of ordering as fast as they can and things sell through. Are they trying to order further out? Are they kind of trying to predict further out and get maybe a larger amount of orders? The question is kind of getting around the backlog number. Obviously, huge increase versus last year and sequentially you think a lot of that is -- how much of that would you think demand versus maybe ordering, trying to order further in advance, kind of get themselves in line?

Let me try to answer this way, Eric. We get from our top 10 distributors on a weekly basis, statistics by SCU on what their inventory is and what they sold the previous -- actually comes in on Monday and get it for the week before. So, we can see what they're sitting on as far as inventory and we also can see what is selling. We can keep a pulse on the volume that is moving through the distributors out to retailers and you know if you've been in the same store or similar stores that I have and it's gone right out the door. So you know we can keep a pretty close pulse on what is happening at retail sales through the weekly data that we get. And again it's by SKU. I'm not sure I answered your question?

No, no. That definitely helps. I'll get back in the queue for more questions, thank you, Mike.

Thank you, Eric.

Your next question comes from the line of Reed Anderson, D.A. Davidson. Please proceed.

Good afternoon. Thanks for taking my question and let me also add my congratulations on a very nice quarter.

Thank you.

Thank you, REED, good to talk to you.

A number of questions. Just kind of drilling through things and kind of looking at the product category, various products, revolvers is one of those things that kind of, sort of surprises us each time regardless of which direction. Why would that be up so much in the third quarter? What was -- was there something going on? Was there something related to timing? Just any color on that category. Curious.

Yes, sure. In fact, I just read an article somewhere yesterday that people are buying firearms in many cases for personal protection. Crime is on the increase. The economy is certainly - - people losing jobs. So, a lot of it, I think, Reed, and this is Mike Golden's speculation on it, but I think that it is tied to the overall, quite honestly, global situation on terrorism and the economy. Small frame revolvers are hot for personal protection.

So really it was not any timing of products or anything different you did. You've just seen just really good demand there, really across the board.

Yes, right.

Okay. Then, just looking down on --

Reed, hey Reed.

Yes.

Another piece on that. In fact, I talked to a dealer today, anecdotal there's a feel that there's a fair amount of first time gun purchasers that are coming in. Again tied to concerns about the overall personal protection and the economy.

I think you're right. I could share a lot of anecdotes with the same sort of conclusions. I believe that. That's good to hear in your business. And then in terms of tactical great year-over-year growth and kind of looked like dollar-wise what you did in 2K. Wondering, Bill, you talked about, you'll do at your capacity. Are we at capacity with tactical. Is that an issue why we don't see the number jump up even more because demand is just insatiable for that product or is that something that can go higher and it just didn't in this quarter.

No, it's capacity constrained.

Okay.

We're making some prudent investments to increase our capacity as quick as we can because quite honestly I think the entire industry is in the same position. On tactical rifles.

Okay. And so, but the implementation of those, we're going to be at this sort level I would think for at least the next few quarters. Does that make sense or can you do it quicker than that.

It will take a little bit of time.

Okay. That's fine. Then, few more here and keep going. Bill, gross margins, basically, then, if you stripped out the recall piece, the $2 million, basically you had a gross margin north of 28%, more or less.

That's exactly right.

And so my question would be, as we think about that going forward, particularly the quarter we're in now, is that, you know, a reasonable level relative to where your business might be in the fourth quarter or is there something else because it sounds like from your comments, you know, not a lot is going to change. If we strip that out, really we're kind of in that neighborhood for gross margins over the near-term, does that make sense.

You know Reed, that's almost verbatim what I was saying. I talked a little bit about Rochester still being in transition and not reading through some of the eruptions and discounts because we're switching people's roles around and that kind of stuff. That reads through in 2010, not the fourth quarter. But, that's essentially what I was saying. You can pretty much look at it absent the PPK recall cost in it.

Okay, good. That makes sense. And then Bill, what was the dollar benefit you got by not having intangible amortization because of the write down, what was that in the third quarter?

It is right in the -- I think it is exactly 850.

Okay.

In the quarter.

That's perfect. Then, another question I have, Mike, you know thinking about the Thompson Center venture you've got coming out and, obviously, new tactical rifle too, but speaking about, like, Thompson Center, that piece, particularly as it pertains to hunting. You know I think back to where there some difficulties in the last couple of years, as it revolved around bringing out new hunting product, some of that I think was timing. You had a lot of new products in the pipeline and didn't quite get out if front of maybe the season, etc., to the extent you believe that is true, what are you doing as you roll out a new Thompson Center more hunting or (inaudible) products to make sure you know you're in front with that? Make sure the these key retailers stock the product? As opposed to last time maybe did or didn't?

Yes. Well, actually, you know, certain products did fairly well for us. One I know you helped with buying one on your own.

I did.

It was an Icon. The first year, the segment that it competes, a fairly narrow segment, $900 bolt action rifle, we believe we picked up about 11% market share in the first year.

Okay.

Products like the Venture, Thompson Center is an aspirational brand and you know with the people, not everybody can afford $900 for a hunting rifle -- for bolt action rifle. But the Venture, for example, will sell just under $500 retail we believe. And it's off the same platform as the Icon, but it appeals to a very broad, more high volume, higher volume segment of the marketplace. It just makes the market bigger for us.

And can you make a similar margin at that $500, $600 price point as you write that in the higher price point.

We have respectable margins with the product and the one thing, you will relate to this Reed cause you are a hunter, that is has a guaranteed MOA. I believe I'm right when I say there is not another rifle that claims that and retails in $500 range.

That's good. Tell what you I'll stop and get back in the queue, thanks very much.

Okay, thanks, Reed.

Your next question from the line of Chris Krueger, Northland Securities. Please proceed.

Good afternoon. Nice quarter.

Hey, Chris, thanks a lot. Good to hear from you.

Yes. First question, I'm sorry to make do you this, but can you repeat the backlog figures? I know I understand that those things can change depending on cancellations and stuff. What was the total backlog at the end of the quarter?

Backlog was $123 million.

And then the most sequentially, what was the most recent quarter.

Up $22 million, I think? $20 million, $22 million, something like that.

That's what I thought. All right,.

Same quarter around $22 million, I think. The third quarter last year.

Okay. You mentioned the military M4, what your outlook is there at the moment. Anything to talk about on the new pistol potential for a pistol change?

Nothing really new. There's an awful lot of talk in the Pentagon on small arms. Small arms in total, handguns and rifles. But the situation with the -- we're still working that. And there still appears to be a fairly strong desire so see it from a 9 to a 45. The rifle, because of the exclusivity expiring on the M4, kind of moved that to the forefront, which is an interesting opportunity and we're pretty interested in.

Okay. And last, all of the new products you guys introduced at Shot Show and talked about in the call, the bone collector, tactical, the new economy priced tactical rifle and the others, have any of those hit stores yet? Is that yet to come in the next couple of months?

Some of them are, like the M&P 15-22, that the .22 caliber I spoke of in the prepared remarks, that's going to ship later in the year. The Bone collector, is shipping now. Venture will start to ship in April, May. So they are kind of spread through the year. I think it is fair to say that none of the products that we showed at the end of January at the Shot Show had an effect on this quarter that we're reporting.

Okay. That's all I got. Thank you.

Okay, Chris, thanks.

Your next question comes from the line of Grant [Gobertson] with Deutsche Bank. Please proceed.

Hey guys. Thanks for taking my call.

Hey Grant, how you doing?

Well, thank you. Going back to the Venture here for a minute, obviously we're two months post Shot Show and just about a month or so before the releases to the public. Can you kind of share with us some of the color you received from your customers? On this? In other words, are you feeling even better about this than you were when we last spoke?

I think the last time we spoke when we showed it to you at the Shot Show and I was feeling pretty good about it then. You know, what we've seen is with our customers, meaning dealers, and when we saw that at the dealer shows, and with consumers, that the fact that it is a Thompson Center product, that will retail in that price range, and have the guaranteed MOA has really caught people's attention. So, you know, I mean, we're just starting to see orders roll in. You know people are starting to wrap their mind around the fall hunting season. But we're going to have a marketing plan behind it, some advertising behind it. We're optimistic on that product.

Okay. Great. I've got a follow-up for Bill. On your comments on OpEx looking flat sequentially fourth quarter on absolute basis or more percentage of revenues basis? Actually saw a little over 20% of revenues for OpEx quarter which is the lowest we've seen in a couple of years. Is that how you are looking to push forward?

I was in that case not talking about a percent of revenue basis, I was talking about an absolute basis.

Okay. Got it.

And I essentially outlined you know relatively flat, but I pointed to you know we have a very broadly-based profit sharing provision that touches essentially every employee or most all employees. And that will go up because of the improving profitability, but otherwise we don't see major variation quarter-on-quarter and that's on a dollar basis.

Terrific. Great, that's all for me, guys.

Thanks, Grant.

Thank you.

Your next question comes from the line of [Romel Dimascio] from Wedbush Morgan. Please proceed.

Good afternoon everyone. Just a question on long-term gross margins. I remember a day not -- about a year and a half ago where guidance for gross margins used to be 35% to 36% range. And granted hunting is not as profitable given the economic environment. But when you talk about 32% gross margin in the rest of the core business, is that hypothetically as good as it's ever going to get? I mean these industry conditions are obviously very solid for those categories. Is there more that can be done longer term to get that number up closer to the 34%, 35%, 36% level?

You know I think what we did in our investor pitch was something that I would reference. And we really were trying to look there at the longer term. You know as we think about our margins and we think about the productivity gains we see out there for us, and we think about the new product launches that are in our future, we did indicate in that pitch that we think our gross profit margin ought to reach in the outer years about a 35% level.

Well, ultimately, theoretically. How do you get there? Higher margin? New products? Seems like industry environment is pretty solid and is that the case then, is there more that you can take out of the cost structure? Just better cost absorption as the sales grows? Combination of all of that?

I think one of the things we've spoken about on the last two calls, is the drag that we've experienced on an interim basis in our hunting business. And you know as we indicated here we've made some significant reduction in the headcount at that facility. We've indicated it hasn't read through yet in its entirety and won't. But we see that having -- beginning to have a real affect in 2010. I think that, and I do point to the new products, and I would point to the fact that we have some very, very strong people in the manufacturing part of our organization, we have a lot of experience, in taking costs out of our facilities. And bringing in a higher degree of efficiency in the way we operate the plants.

Okay. Very good, thanks very much.

Okay, thanks, Romel.

(Operator instructions) Your next question comes from the line of Cai von Rumohr, Cowen & Company. Please proceed.

Hey guys, it's Mark [Hoxin] in for Cai. How are you?

Good, how are you?

Just to circle back on the capacity a little bit, can you talk about some of the other product lines like pistols and revolvers. Pretty impressive numbers in the quarter. Where do you see, not specific guidance, but, are those business lines, are they at capacity right now? That's the number we're going to see going forward?

Some cases, yes, they are.

Okay. And what about with suppliers? Are suppliers any constraint in this market right now? With, the demand you've seen?

Yes, they are, specifically on tactical rifles.

And then --

They're just seeing the same demand as we're seeing so it does put a strain on the system.

Okay. And, then, for some more color on the market, can you break out international, military, how it was year-over-year and, also, Federal Government?

You know, what, Mark, that's all in the Q that went out this afternoon.

Okay. Well, I'll check it out.

All broken out by channel.

Then, how has credit impacted your distributors? Are they still running pretty lean inventories? Or has this market growth allowed them to get a little bit more credit and build up with inventories and all? What's your visibility on what they're holding?

They are running pretty lean inventories on handguns and tactical rifles because of the momentum in the marketplace. You know so not a conscience decision on their part to slim down the inventories. It is selling through.

So credit hasn't really had any type of restraint at all?

Actually, think about it this way. You're a dealer, your business is pretty good and you got cash.

Yes.

You're buying from distributors, so you've got the cash to pay. Kind of flowing right through the system.

Okay. Thanks a lot.

Your next question comes from the line of Eric Wold, Merriman Curhan Ford & Company please proceed.

A follow-up question for you guys. I guess thinking forward, I guess two things. One on the Obama Stimulus Plan, where do you think you're positioned with Smith & Wesson to benefit, from that in terms of if the money's going towards the (inaudible) the $1 billion there, as well as maybe $2.8 billion for other items. If those funds start coming through in terms of more firearms purchases for law enforcement, and the demand, the funds have to be basically spent in a very short amount of time would you have the capacity to fill those orders or could it take away possibly from orders going into the consumer channel?

Well, I think there is a couple of things going on in the stimulus package. Certainly, in (inaudible) there's several billion dollars that are put right to (inaudible) which will keep jobs and also give the departments money to spend on equipment. Keep jobs for law enforcement. And in many cases add law enforcement officers to the street. All of that means opportunities for business for us. The other side of it, I think, Eric, is, if the stimulus package does what it's supposed to do, it's going to create several million jobs and that puts income back in people's pockets, which is good for our business, certainly, but quite honestly all consumer businesses. That's the whole idea. So, yes, it is like Mike Golden's opinion on it, I think that there are a couple of angles here that could impact our business.

Okay. And just the second part, to any degree you think would not have the capacity or do you think you have enough capacity going into next year to satisfy everything? I guess assuming optimistically you guys get a fair amount of that.

I mean, we'll have to see what happens with it, really when it comes down to it and react accordingly.

Perfect, thanks, guys.

Okay, thanks, Eric.

(Operator instructions) Your next question is a follow-up from Reed Anderson with D.A. Davidson & Company. Please proceed.

Hi, following up on a couple of things. I'm going to guess the answer is probably no to both of these. Is there any planned reductions or hours or people over the near-term that would hit the capacity utilization? Similarly, any planned promotions out there. I'm suspecting both answers are no, but if you could just elaborate, please?

The Smith & Wesson side, you can see what our backlog looks like, so that probably gives you the answer to the first question. On the promotions side, we always do promotions. We heavied them up in the last quarters ago because of some of the inventory that was built up in the channel. You'll see us promoting our product, but you're not going to see us --

Not $50 rebate or something like that?

You'll see different things similar to two years ago, Reed? And also be promoting hunting products as we go into the hunting season.

Okay. But it sounds like, though, even in the hunting space, even though the demand isn't there, the channel inventories you feel very comfortable with where those are today?

I didn't say I feel very comfortable. What I will say is they're in much better shape than they were last year.

Perfect, thanks, Mike.

Okay.

(Operator instructions).

Thank you, operator. Thanks all of you for joining us today. We'll see you and talk to you next quarter.

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