Outdoor Holding Co (POWW) Q1 2023 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the AMMO Inc. Fiscal First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. I would now like to turn the call over to Matt Blazei of CORE IR, the company’s Investor Relations firm. Please go ahead, sir.

Good morning, and thank you for participating in today’s conference call. Joining me from AMMO’s leadership team are Fred Wagenhals, Chairman and Chief Executive Officer; Rob Wiley, Chief Financial Officer; and Rob Goodmanson, President. During this call, management will be making forward-looking statements, including statements that address AMMO’s expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the Risk Factors described in AMMO’s most recently filed periodic reports on Form 10-K and Form 10-Q, the Form 8-K filed with the SEC today, and the company’s press releases that accompany this call, particularly the cautionary statements in them. Today's conference call includes non-GAAP financial measures that AMMO believes can be useful in evaluating its performance. You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of this non-GAAP financial measure to net loss, its most directly comparable GAAP financial measure, please see the reconciliation table located in the company’s earnings press release. The content of this call contains time-sensitive information that is accurate only as of today, August 15, 2022. Except as required by law, AMMO disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. With that, it is now my pleasure to turn the call over to AMMO’s CEO, Fred Wagenhals.

Thank you, Matt, and good afternoon to everyone on this call. Since our IPO in 2017, our primary goal has been to create shareholder value and enhance the overall experience for the outdoor sporting and shooting enthusiasts through innovation, best-in-class products, and superior execution. This strategy has driven AMMO from $2 million in revenue in 2018 to an estimated $300 million in revenue for fiscal 2023. The acquisition and integration of the GunBroker.com marketplace platform in fiscal 2022 is an excellent example of how our management team and Board of Directors have identified and executed unique opportunities to expand the AMMO brand and create new platforms for growth. Along with the recent completion of our new state-of-the-art manufacturing facility in Manitowoc, Wisconsin, we believe that both the ammunition and the marketplace divisions are key to our continued growth. Accordingly, the Board and management team have determined that the best option for unlocking the most shareholder value is by splitting the divisions into two separately traded public companies. Our online marketplace business will soon be called Outdoor Online, Incorporated and will comprise GunBroker.com and related online businesses. The second entity, Action Outdoor, Incorporated, will support our current ammunition business, including STREAK, Blackline, Stelth, Blue Line, AMMO bras, and hunt ammunition. We believe this separation will allow investors to better evaluate the business model of each division and create greater shareholder value. As we continue to pursue unique and distinct growth opportunities, the creation of Action Outdoor Sports is well-timed as we officially opened our 185,000 square foot manufacturing facility last month. This state-of-the-art facility will increase our production capacity to approximately 1 billion loaded rounds of ammunition and support the manufacturing and sales of the company’s patented visual ammunition, subsonic munitions, and specialty rounds for the military and law enforcement. I will remain Chairman of the Board and will be naming a new CEO soon who will lead Action Outdoor Sports as it leverages its increased capacity and continues to be an active acquirer in the outdoor recreational marketplace. After the spinoff, I will continue as Chairman and CEO of Outdoor Online and retain and operate the GunBroker.com marketplace and related high margins and asset-light operations within AMMO. This will give investors the opportunity to participate directly in the growth of the leading online outdoor and shooting sport auction marketplace. I mentioned on our last call that we believe there are significant opportunities to grow this platform when we begin the rollout of several initiatives to capture a greater percentage of the transactional volume from that platform, including credit card processing, credit products, gift cards, and loyalty programs for both buyers and sellers. We are confident the decision to separate AMMO into two independent public companies will further unlock the shareholder value we have worked hard to create. With both businesses now having management teams and resources focused exclusively on future growth opportunities, I am confident both companies will continue to grow revenues, enhance margins, and drive even greater shareholder value. I will continue to update shareholders on the progress of these initiatives and anticipate this transaction will be completed in the 2023 calendar year. I would now like to turn the call over to President Rob Goodmanson to provide more detail about the transaction and our operational performance this quarter.

Thanks, Fred, and welcome everyone to our quarterly earnings call. The question that I’m asked on a regular basis is: what is the state of our industry? This industry has significant legs, and listening to Vista, Olin, and Clarus’ earnings calls, they’re all saying exactly what we are seeing. The growth of this industry is still vibrant and shows no sign of slowing down. This trend can be seen not only through AMMO’s growth but also in our marketplace. We’ve grown traffic approximately 40% annually since 2019. We fully expect these tailwinds to last a minimum of 24 months. What started as COVID has morphed into civil unrest, not just in the U.S., but globally. As you can see, we had a temporary decrease in our margins for the quarter; sales continued to be strong, and our production is just beginning to ramp up. We had identified the compression and have addressed the issues. Most have been resolved; the rest are being addressed through changes in our operations. The run-up in commodity prices was high during the quarter. Consequently, our cost of goods increased. The good news is that we’ve worked through much of that inventory and are replacing it with the same commodities at significantly lower prices. Shipping costs have also increased dramatically, which has been an issue for every company. The new facility has 12 loading docks, and shipping alone took two points off our margins. We were hiring significantly during the quarter and determined it best to hire and train new employees before opening the building. We lost one point in hiring and one point in training, which takes three to six months, depending on the position, but we would make that same decision all over again. Some of our production came offline during the first quarter while preparing some of the equipment for the move. All the equipment will be installed in the new state-of-the-art facility at the end of August, and our production capabilities will significantly increase. We fully believe that the economies of scale, the synergies of having the components and equipment in one spot, along with packing, coding, and shipping engineering all together will significantly drive our margins. Currently, we drive back and forth between three different facilities. This new facility also offers us the ability to put ourselves in the best position to support our military program partners while enhancing support for our growing international customer base, both commercial and governmental. Moreover, our marketplace has been extremely busy. We hired five people for our marketing team, more customer service representatives, three additional engineers, and two software engineers. We continue to build out the back end of our technology to get where we need to be. This is an absolute necessity. Things are progressing nicely. The financial services, credit cards, ACH, loyalty programs, and gift cards will be coming online in October, with carting capabilities right behind. I’d like to add that our objective with GunBroker was never to move away from our hugely successful auction business, but to expand our offerings to manufacturers, dealers, FFLs, and distributors to become a complete marketplace. We’re achieving more than half a million sessions on GunBroker per day with 7.4 million registered users and still adding 55,000 new users a month. We see this as a huge home run with enormous potential shortly. You’ll soon see a refreshed website that is significantly easier to navigate and more accommodating for both buyers and sellers. As Fred mentioned, we announced our plan to separate into two companies. The Board of Directors voted unanimously to split the ammunition and marketplace businesses into two independent publicly traded companies, which will trade on the NASDAQ market. AMMO’s management team and Board of Directors completed a detailed analysis and assessment of our operations, business units, and growth opportunities and determined that this would achieve the goal of unlocking and enhancing shareholder value. We are changing our names, and we have been advised to soften our brands, similar to Vista, which is Federal Arms, Olin, which is Winchester, and Clarus, which is Sierra and Barnes. AMMO shareholders will retain ownership in Action Outdoor Sports while obtaining ownership in Outdoor Online at no additional cost, and we anticipate that this transaction will be in the form of a dividend distribution to its shareholders of 100% of the stock in Action Outdoor Sports, which will become a new independently publicly traded company. This distribution is intended to be tax-free for both companies and shareholders through U.S. federal income tax purposes. Concurrently, AMMO will change its name to Outdoor Online and will operate under a new ticker symbol. Action Outdoor will also obtain a symbol on NASDAQ once we complete the approval process. This transaction will allow us to prioritize and refine capital allocation. With separate business models, short and long-term goals, each company will be in a better position to refine and focus capital allocation strategies moving forward and to expand strategic opportunities. Both companies will be better positioned to focus on continuing the work designed to leverage their leading marketplace while Action Outdoors can continue its well-established track record of M&A and securing the best-in-class partnerships with other manufacturers and reinforcing and amplifying its ability to attract and retain top market talent. This has been an exciting time, and we look forward to completing the spinoff and finally moving into our new facility. With that, let me turn this over to Rob Wiley, our CFO.

Thank you, Rob. Welcome everyone. Let me now review our first-quarter financials in more detail. Total net revenues for our quarter ending June 30 increased 36.6% or approximately $16.3 million over the comparable prior year period. This increase was a result of approximately $11.2 million of increased sales in bulk pistol and rifle ammunition, an increase of approximately $1.8 million of sales in Proprietary Ammunition, a decrease of approximately $0.6 million of sales from our casing operations, and an increase of approximately $4.2 million of revenue generated from our marketplace GunBroker.com, which includes auction revenue, payment processing revenue, and shipping income. We expect the sales growth rate of Proprietary Ammunition to continue to outpace the sales of our Standard Ammunition. We are focused on continuing to grow top line revenue as we further expand distribution in the commercial markets, introduce new product lines, and continue to initiate sales to U.S. law enforcement, military, and international markets. Our gross margin percentage temporarily decreased to 29.8% in the current quarter. This was primarily attributable to near-term cost of material increases, as well as additional labor and overhead costs in preparation for our new manufacturing facility, which are temporary until we are fully operational. We expect to be fully operational by the end of our second fiscal quarter. We believe that as we add efficiencies through our new production facilities scheduled to come online this fiscal year and continue to grow sales through new markets and expand our distribution, our gross margins will also increase in the second half of this fiscal year. Our goal in the next 12 to 24 months is to continue to improve our gross margins. This will be accomplished through increased product sales, specifically proprietary lines of ammunition like the STREAK VISUAL AMMUNITION, Stelth, and the ammunition we have developed in support of our military and government programs. We plan to introduce new lines of ammunition that historically carry higher margins in both consumer and government sectors. We aim to reduce component costs by improving operations in our ammunition segment and expanding strategic relationships with component providers. We will also expand our use of automation equipment, reducing the total labor required to assemble finished products and better leverage our fixed costs through expanded production to support sales objectives. Overall, our operating expenses increased by approximately $3.8 million over the prior year period or 140 basis points as a percentage of sales. This is mainly due to a full quarter of GunBroker.com operations compared to a partial quarter in the prior year period due to the timing of the GunBroker acquisition. We expect to see administrative expenditures decrease as a percentage of sales in the 2023 fiscal year as we leverage our workforce and expand our sales opportunities. Operating expenses include non-cash depreciation and amortization of approximately $3.4 million for the period and also consist of commissions related to our sales increases, and stock compensation expense associated with the issuance of common stock in lieu of cash compensation for employees and board members during the period. Operating expenses included non-cash expenses of approximately $4.6 million. Operating income was $5.1 million for the quarter compared to operating income of $9.7 million in the same period a year earlier. As a percentage of net revenues, operating income was 8.4%. We ended the quarter with net income of approximately $3.2 million, compared with a net income of approximately $9.5 million in the prior year period. The decrease was mostly attributable to our decrease in margin and the addition of a tax provision in the current period compared to the prior year period, in which we had a full valuation allowance. As we increase our margin in the coming quarters, we expect our net income to increase in comparison to the prior year. Our goal is to continue to improve our operating results as we focus on increasing sales and controlling our operating expenses. Adjusted EBITDA was $14.3 million compared to adjusted EBITDA of $16.3 million in the year earlier period. The decline in adjusted EBITDA was mostly due to the temporary decrease in the gross margin of our ammunition segment as discussed earlier. Please note that adjusted EBITDA is a non-GAAP measure, and you should refer to the reconciliation of our GAAP to non-GAAP results in today’s press release for additional details. Adjusted net income for diluted share was $0.09 versus adjusted net income per share of $0.13 in the prior year period. Our net cash provided by operations totaled $4.6 million. This is primarily the result of net income of approximately $3.2 million, which was offset by increases in our inventories of approximately $5.6 million, decreases in our accounts receivable of approximately $4.2 million, and decreases in our accounts payable of approximately $3.0 million. Non-cash expenses for depreciation and amortization totaled $4.3 million, and non-cash expenses for employee stock awards totaled $1.2 million. The critical takeaway for the market from today’s earnings report is that we are reiterating our guidance for our 2023 fiscal year, expecting revenues in the range of $300 million to $310 million, EBITDA in the range of $82 million to $85 million, and adjusted EBITDA in the range of $108 million to $111 million. More specifically, given our recent announcement of the transformational spinoff transaction, our guidance for our ammunition segment expects revenues in the range of $230 million to $240 million, EBITDA in the range of $35 million to $38 million, and adjusted EBITDA in the range of $57 million to $60 million. For our marketplace segment, we expect revenues of $70 million, EBITDA of $47 million, and adjusted EBITDA of $51 million. With that, I will turn it back to Fred.

Thank you, Rob. I will now turn the call over to the operator for questions. Thank you.

Our first question is from Michael Dwyer with Raymond James. Please go ahead.

Hi, everyone. Congratulations on your spinoff. Just a few questions come to mind here. For the average AMMO, Inc. shareholder, why is the spinoff a good thing?

Thank you for your question, Mike. This is Rob Wiley. We believe the spinoff is good for the shareholders because ultimately, you will end up with shares in two separately traded companies: one being our manufacturing company, which will be Action Outdoor Sports, and the other being GunBroker.com, which will be known in the future as Outdoor Online. We believe this will put our shareholders in the best position to increase their long-term value with these companies. The past 16 months of data indicated to our management team, the Board of Directors, and our advisors that the market has not been valuing the two companies together appropriately.

What are your advisors, your investment bankers telling you about the timing of the spinoff, in terms of this year or next year? When do you think it will occur?

Thanks, Mike. In the release this morning, we mentioned that we expect the spinoff to be complete in calendar year 2023. We’re hearing from advisors that this process can take, subject to regulatory approvals, anywhere from 90 to 120 days to complete.

So this is a really big deal for you guys. A very large tax-free dividend to existing shareholders. Why should shareholders feel comfortable that you can handle this type of transaction?

Mike, this is Fred Wagenhals. Going back 20 years ago, you followed me when I had Action Performance. I started with a card table and three employees for the company, growing it to $200 million or $407 million a year in sales. It was about people. I hired the right people for the right jobs to build the company. That’s what I’ve done here. If you look at five short years, we've gone from $2 million to $240 million, completing three key acquisitions: SWK, Jagemann, and GunBroker, and we did all of this while uplisting to NASDAQ and adding to the Russell 2000. We opened a 185,000 square foot world-class facility in record time and budget, and that was all because of people. I have been looking for the CEO who would handle the new Action Outdoor company for the last eight months. I’ve found that person, and he will be under contract by the time we spin the companies off. Am I looking for a few other key people? Yes. But it’s all about people. We’ve done it with people, and I’m proud to say we have no debt and over $221 million in cash in the bank today. That’s an impressive accomplishment, in my opinion.

This is exciting, Fred. Congratulations.

The next question is from Matt Koranda with ROTH Capital. Please go ahead.

Hey guys. I’ve got a few here, so just bear with me. On the spinoff, I think the key question is: why now? Why not wait until Manitowoc has ramped? Can you provide a little bit of detail on why now is the right timing?

Thanks for your question, Matt. The reason for now instead of waiting for the ramp is that as we ramp up production, we have an opportunity to spin it currently at a level where the shareholders will view and receive significant value just in general. There are numerous opportunities we see, and we need to take advantage of them. By splitting up these two companies, we can start to focus on the short and long-term goals of each business, and it makes more sense now than ever.

Okay, got it. Moving on to the ammunition business and the revenue run rate: what’s holding back production? Revenue has declined significantly from the fourth quarter by about $8 million. Did we see a degradation in pricing at all, or is that all just volume that came out of the facility? Can you help us understand the production offline in the first quarter? Are we back online right now?

Sure, let's go to that first part of your question. The production – we produced what we could produce. We did have some equipment that needed more care and had to be taken offline for some time, so we had to shut down some of our equipment. As we've discussed, the existing facility only had one door for shipping and receiving, and that became a huge issue. We expect to be fully operational by the end of this month. This will give us the ability to move into higher margin products. Right now, we have seen softening in pricing for 9mm or .223 rounds, but the demand is still outweighing the supply currently and the specialty unique rounds are still in high demand.

Okay, that makes sense. How should we be thinking about blended pricing at the wholesale level? Is there any impact from the current pricing given retail stocking levels? Also, when will production be back to full capacity? Should we expect this by the end of the month?

I would say that for full production, we won’t start off at 1 billion rounds initially. Just as we ramp up the production, I estimate we will start at about 550 million rounds and that will continue to increase as we bring in more machines and hook them up. For now, we expect noticeable improvements in daily production with our new facility that has multiple shipping docks.

Okay, and when Manitowoc is fully ramped, should we expect to hit the billion by the latter half of fiscal 2023?

I would say yes, the latter half of 2023.

Just one more question: on the gross margins in the core AMMO business, I’m seeing some numbers suggesting a decrease, but perhaps we can bridge back to normalized levels as production ramps. Can you help indicate how we get back to a more typical margin range?

Yes, we saw a decrease in our ammunition segment for the quarter related to margins. That was primarily due to increased labor costs and material costs as we transitioned into our new facility. However, as we become fully operational and work through these temporary costs, we expect to return to the mid-20% range. Improvements will be driven by enhanced efficiencies and by the growth of sales.

Fair enough. I appreciate the insight.

The next question is from Mark Smith with Lake Street. Please go ahead.

Hi guys. First, can you just talk broadly about the consumer environment and buying trends, especially as they apply to GunBroker? Did you see any pullback in spending here in the June quarter?

No, we haven’t actually. Our average ticket size has increased from the previous quarter and the previous year. So we’re not seeing any signs of a pullback.

As we look at kind of sequential sales down year-over-year, is some of that just seasonality that we just haven’t had a year yet to see kind of the seasonality in GunBroker being a little lower in these summer months?

Well, there is some seasonality, and you’re correct. This is a quieter time, typically picking up starting in September moving into the hunting season, which also affects ammunition sales.

Can you talk about capacity additions as we think about brass? We’ve heard from peers and others in the industry that brass is hard to find right now, which puts you in a good place. Are there plans to ramp the production of brass casings significantly?

Our plan for brass is to use as much of it internally as we can rather than sell it to competitors. We do have agreements with some manufacturers to ensure a steady supply, but we aim to increase production for our own needs.

Regarding the June quarter, can you quantify any one-time impacts on revenue due to the transition? How might that impact revenues in the current quarter?

Yes, we were preparing our facilities for the move, and that impacted revenue that we could ship in the June quarter. We anticipate similar revenue levels for the September quarter, but it shouldn’t impact our overall revenue guidance.

Great, thank you.

Thank you, Mark.

The next question is from Edward Riley with EF Hutton. Please go ahead.

For Outdoor Online, you mentioned it’s going to be comprised of GunBroker.com and related online businesses. Is the SpinCo going to be pursuing an acquisition strategy, and if so, what type of outdoor recreational brands are you targeting?

As you may have noticed from our history, M&A is not out of the question for us. We view Outdoor Online as a vehicle to become, which it already is, the destination for outdoor sporting goods. With the ability to cart coming online and additional financial service products, we expect to see increased margins as customers will be able to purchase from multiple sellers at once. There is nothing specific on the surface that I would say I want to buy; it’s broader and more focused on becoming a marketplace to facilitate sales rather than holding inventory.

There may also be some acquisition opportunities for Action Outdoor Sports, given our new manufacturing facility. We are always looking for something that aligns with what we can uniquely produce.

Will it be focused on firearms or recreational outdoor activity, or are you guys branching into something else potentially?

It could be something else, something that fits our new facility, which is well-equipped with a great engineering department. We’ll look for unique opportunities that have patents or distinctive features.

On housekeeping regarding revenue guidance, is this growth revenue or net revenue after excise tax?

This would be the revenue as reported on our statement of operations, or net revenue.

Great. Thank you.

The next question is from JD Abouchar with Glass Creek Partners. Please go ahead.

Congratulations guys on both the successful opening of Manitowoc and also the exciting news about the spinout. Regarding the capacity constraint issues that are now going away, how difícil is it to shift the production equipment from doing 2 to 3 bulk rounds to something more higher-margin like .308 or .300 Win mag? What’s your capability for flexibility there?

We’re small enough that we can accomplish that. The timing is perfect as we’re bringing all the machines in, allowing us to retool and adjust our production to focus on specific markets. We don’t want to get into a commodity race to the bottom, and we can benefit from a margin standpoint on specialty rounds.

I understand you’ve touched on margin enhancement from the shipping and operational flexibility. Can you provide an update on projectile production, specifically if there are any patents or barriers that would keep you out of more in-demand variants?

We might have capabilities to start making our own projectiles, but we’re still assessing if that’s the best route. We might consider acquiring or joint venturing with companies to achieve those capabilities.

You’ve talked about military and government sales as a meaningful percentage of revenues. Is that still on track? Any updates?

Yes, we are on track. We have contracts in place with two products specifically requested by U.S. special forces. We have designed and are moving into the latter phases of those programs. Although it may not always be visible, we are making significant progress and expect meaningful revenue flow soon.

On the marketplace side, do you envision Outdoor Online as a platform similar to eBay for outdoor items, or will it have more of an Amazon, or Shopify approach?

Both—similar to eBay and Amazon.

The next question is from Brandon Beylo with Foundation Capital Management. Please go ahead.

The thought process behind the spinoff didn’t sound too convincing. Last year, when you announced the GunBroker acquisition, the reasons for it were your plans to integrate and enhance shareholder value. Now a year later, with all the costs of integrating this business, why do you believe that spinning it off is what’s best for shareholders?

One way to view it is that for the last 16 months, we haven’t seen the valuation we believe exists. The market is valuing the ammunition business at 8 times EBITDA, and the marketplace at 15 times. Together, this can lead to a $1 billion market cap. Separation allows us each to trade closer to their intrinsic values. With more focus, we can potentially get better coverage and complementary resources. Our shareholder base will benefit from more focused management and investment opportunities.

But with the recent quarter, AMMO generated $44 million in revenue but only around $95,000 in operating income from the AMMO business. What value should shareholders expect from this, considering the marketplace yields much higher margins? How will they perceive the value of the ammunition business post-spin?

The ammunition business will have additional costs ultimately, but we will also continue to grow revenue. We anticipate that the market will valuate each business separately based on its strengths. We're confident that the ammunition business will command an appropriate valuation as it delivers on its guidance.

Ultimately, shareholders will have the option to keep the ammunition business. We believe that separating gives investors the choice of holding, or they can decide to sell based on their future expectations.

This concludes our question-and-answer session. I would like to turn the conference back over to Fred Wagenhals for any closing remarks.

Thank you very much for participating with our company, and we look forward to the future. I think within the next four to six months, you’ll see a lot of activity around here. Have a good evening.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.