Earnings Call Transcript - POWW Q3 2022

Operator, Operator

Good day ladies and gentlemen. Thank you for standing by. Welcome to today’s Conference Call to discuss AMMO, Inc.’s Financial Results for the Third Fiscal Quarter of 2022. At this time, all participants are in a listen-only mode. Following the formal remarks, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up. Hosting today’s conference will be Reed Anderson with ICR. As a reminder, today’s conference is being recorded. And now I would like to turn the conference over to Mr. Anderson. Please go ahead, sir.

Reed Anderson, Host

Thank you. Good afternoon and welcome to AMMO, Inc.’s conference call to discuss results for the third quarter of fiscal 2022. On the call today from AMMO, Inc. with prepared remarks are Fred Wagenhals, Chairman and Chief Executive Officer; Rob Goodmanson, President; and Rob Wiley, Chief Financial Officer. By now, everyone should have access to the earnings release, which went out this afternoon at approximately 4:05 P.M. Eastern Time. If you have not received the release, it is available on the Investor Relations portion of AMMO, Inc.’s website at www.ammoinc.com. This call is being webcast and a replay will be available on the company’s website as well. Before we begin, we would like to remind everyone that our prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore, undue reliance should not be placed upon them. These statements are based on current expectations of the company’s management and involve inherent risks and uncertainties, including those identified in the Risk Factors section of AMMO Inc.’s most recently filed Forms 10-K and 10-Q. Please note that during today’s call, we will discuss non-GAAP financial measures, including results on an adjusted basis. Management believes these financial measures can facilitate a more complete analysis and greater transparency into AMMO Inc.’s ongoing results of operations, particularly when comparing underlying operating results from period to period. We have included a reconciliation of these non-GAAP measures with today’s release. This call also contains time-sensitive information that is accurate only as of the date of this live broadcast, February 14, 2022. AMMO Inc. assumes no obligation to update any forward-looking projections that may be made in today’s release or call. Now, I will turn the call over to Fred Wagenhals, Chairman and Chief Executive Officer of AMMO Inc.

Fred Wagenhals, CEO

Thanks, Reed. Good afternoon and thank you all for joining us today. Q3 was another record-setting quarter for our company and our strategy, and our amazing team's work ethic is driving record results. We have again reached another record-breaking quarter sales and set new records for EBITDA, making our ninth straight quarter of record financial performance. AMMO's year-to-date revenues growth rate of 344% was driven from a revenue base that grew by approximately 287% in comparison to a year-over-year quarterly comparison. These results were fueled by continuing high demand for our key products across our portfolio, coupled with organic growth as a result of our new innovation and continued scaling and efficiencies of operation at the Ammunition and GunBroker.com marketplace operational levels. As we continue to integrate and leverage the GunBroker.com marketplace, it posted an impressive quarter of performance, especially when you consider the post-COVID market the industry has been operating in since April 2020. These impressive results are truly a testament to our team effort. I would like to bring you up to date and answer most of the questions I get hit with daily from investors. Stock repurchase. The Board of Directors recently authorized a share repurchase program for up to $30 million of its outstanding common stock. This repurchase of up to $30 million of stock represents our commitment to increasing shareholder value and gives us the flexibility to deploy some of our cash flow into our future. With our strong balance sheet and rapidly growing revenues, we believe it is appropriate to have the option to repurchase stock if it makes sense as the best investment at that time. Capacity, as we noted in our recent revenue guidance for a full year of fiscal 2022 of $250 million, we see no slowdown in demand for our ammunition. At our current production levels, our entire production is completely sold out for 2022. We are increasing production monthly and look forward to the completion of our new state-of-the-art manufacturing facility. This facility will allow us to ramp up capacity quickly to meet customer demand. We continue to invest in people and manufacturing equipment as we prepare to launch our new facility. We are well-positioned to execute and drive shareholder value at this time. GunBroker.com. Growth in our GunBroker.com marketplace continues at double-digit rates. We continue to work diligently to meet the growth demand for all our products and services on this site. We are bringing new products to sell on GunBroker.com as well as improving the overall customer experience in 2022. New facility. As shareholders know, we are building a new 160,000 square foot state-of-the-art facility. It is on time and currently expected to open in the summer of 2022 with capacity approaching 1 billion rounds annually. This will allow us to keep up with the strong demand we continue to see in the ammunition market. With that, I will turn it over to Rob Goodmanson, our President.

Rob Goodmanson, President

Thank you, Fred, and welcome everyone. It's a pleasure to speak with you today. We are proud of the incredible team that Fred has put together and grateful for everyone's ongoing efforts that have led to another strong quarterly sales and earnings growth. The 289% increase in total revenues to a record $64.7 million continues to reflect broad-based growth across our business. Gross margins improved to 34.8% in the third quarter compared to 20.1% a year ago, driven by this powerful dynamic of our marketplace platform. We also delivered significant operating expenses leverage, reflecting the benefits of our growing scale. However, we did have a slight decrease in margins versus last quarter, due primarily to the additional hiring in Manitowoc for many of these positions which require three to six months of training; we felt it was prudent to get a jumpstart on the staffing prior to our facility opening. As Fred mentioned, the underlying demand for ammunition remains very strong and we expect this to continue well beyond 2022. Moreover, AMMO has many unique products incorporating proprietary technologies that put us in an even stronger position to capitalize on industry tailwinds and continue gaining market share. Our marketplace business is the other key point of differentiation for AMMO that is driving our significant growth and profitability. Let me share some details about this business to give you a better understanding of the results and significant long-term potential. We've shown that we're a superior manufacturing entity, and our sales growth and earnings prove that out. With a new facility coming online this summer, we've turned our focus to GunBroker.com. Having acquired the largest marketplace business in the industry gives us the opportunity to grow and leverage this incredible business. We are adding significant value-added services to the platform, such as credit cards, loyalty programs for both buyers and sellers, gift cards, and letters of credit to our 6.8 million registered users at the same time. We're updating our technology on the platform to give our customers a great experience that is seamless and easy to navigate. Finally, here are some stats for GunBroker for the third quarter. We averaged 55,000 new users per month. We had a 33.4% increase in the average number of auctions. Our average take rate was 5.4% for the quarter versus 4.6% a year ago. Our loyalty program increased 8.8% from the prior year. Before turning the call over to Rob Wiley, I want to add that we have come a long way in a relatively short period of time, building a solid foundation for driving profitability and focused growth. We're proud of our accomplishments in the third quarter and remain well-positioned for significant growth in the future. Our unique proprietary ammunition business continues benefiting from strong industry demand, coupled with our efforts to aggressively expand capacity. Our marketplace business remains a transformational factor that is in the very early innings, amplifying revenue growth and dramatically reshaping our profitability profile. With that, I'd like to turn this over to our CFO, Rob Wiley. Rob?

Rob Wiley, CFO

Thank you, Rob. Welcome everyone. Let me walk you through our third quarter financials in more detail. Total net revenues for our third fiscal quarter of 2022 were $64.7 million, up 289% from $16.6 million in the year earlier period. Ammunition sales increased 243% to $44.1 million, and our marketplace segment had revenue of $17.5 million versus nothing a year earlier, reflecting the acquisition of GunBroker.com at the end of April 2021. Gross profit of $22.5 million in the third quarter compared to $3.3 million in the year earlier period reflected the significant growth in total revenue. We delivered another quarter of significant gross margin improvement due to the addition of marketplace revenue. For the third quarter, gross margin was 34.8% compared to 20.1% a year earlier. As we prepare for our new facility and planned capacity increases coming online in the second quarter of our next fiscal year, we've added additional labor and overhead expenses in this reporting quarter to facilitate a safe transition. This contributed to a temporary compression in our ammunition segment margin from our previous quarter, which we expect to benefit from in our next fiscal year. Third quarter operating expenses totaled $11.9 million, up $3.8 million from a year ago. The year-over-year increase in operating expenses was largely driven by the addition of GunBroker.com, including $3.3 million incremental non-cash depreciation and amortization. As a percentage of net sales, operating expenses declined by 18.8% year-over-year to 18.4% in the third quarter of fiscal 2022 from 22.7% in the year earlier period, due to the mix of higher margin marketplace revenues plus operating efficiencies related to our increased scale. Operating income was $10.6 million in the third quarter compared to an operating loss of $0.4 million in the year earlier period. As a percentage of net revenues, operating income was 16.4% compared to a negative 2.6% a year earlier, a 731% increase. Net income available to common shareholders for the third quarter of fiscal 2022 was $8.3 million or $0.07 per diluted share compared to a net loss of $1.9 million or $0.04 per diluted share in the third quarter of fiscal 2021. Adjusted net income per diluted share was $0.14 versus adjusted net income per share of $0.02 in the year earlier period. Adjusted EBITDA was $20.1 million compared to adjusted EBITDA of $2.4 million in the year earlier period. The significant improvement in adjusted EBITDA was due to increased sales and improved gross margins, reflecting growth in our core ammunition segments, plus the addition of a higher margin marketplace segment. 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. Our balance sheet remains strong with $27 million of cash equivalents and essentially no outstanding debt. 100% of our production for 2022 has been sold until our new facility comes online in the summer of 2022, which will add significant capacity increases. As Fred mentioned in his remarks, our Board of Directors recently authorized the purchase of up to $30 million of stock. We are maintaining fiscal 2022 guidance and continue to expect net revenues of approximately $250 million, adjusted EBITDA of at least $80 million for the year ending March 31st, 2022. This concludes our prepared remarks. We're now ready to take questions. So, I'll pass it back to our moderator. Thank you.

Operator, Operator

Thank you. We are now ready to begin the question-and-answer session. Our first question comes from Matthew Koranda of ROTH Capital. Please go ahead with your question.

Matthew Koranda, Analyst

Good afternoon, everyone. I want to begin by discussing the guidance for fiscal 2022 and the forecast for the fourth quarter. I feel confident that we can reach the $80 million needed to achieve the $250 million target for the full year. Could you help break down the revenue expectations for the fourth quarter, particularly between the marketplace segments and the core ammo business? Based on my calculations, if GunBroker maintains its current run rate of $17 million, it seems that the core ammo segment will need to significantly increase its revenue in the fourth quarter. Is that an accurate way to assess the trends for that quarter? Additionally, could you clarify what you mean when you say the ammo segment is sold out for the rest of the year? What does that imply about production capacity and where do we currently stand in terms of utilization? Thank you.

Rob Wiley, CFO

Hey, Matt, this is Rob Wiley, thank you for the question. I believe your analysis of our guidance for the final fiscal quarter is accurate. We expect the division between our ammunition segment and our marketplace segment to be approximately 70% for ammunition and around 20% for the marketplace.

Matthew Koranda, Analyst

Okay, great. Can you provide any insights regarding capacity? It seems that in the third quarter, we may have faced some capacity constraints. Could you help us understand the current status of equipment installation and labor that will enable us to increase production in the fourth quarter for the core ammo segment?

Rob Wiley, CFO

Yes, we'll continue to add capacity heading into the end of this year until we move into our new facility. But the bulk of the capacity increase that you'll see later on down the road is when we do move onto the new facility and are able to bring on even more equipment online to increase our production capacity.

Matthew Koranda, Analyst

Okay, great. You didn't provide backlog information, but you mentioned being sold out for the remainder of the year. Could you clarify what that means regarding our production capacity for the fourth quarter? Also, I assume you are referring to being sold out for the rest of this fiscal year, so any additional insights on that would be very helpful.

Fred Wagenhals, CEO

We are sold out for the fiscal year.

Rob Goodmanson, President

But I think what we're trying to say is that, as we mentioned, our backlog is sold out for the remainder of the fiscal year. So, we're trying to give confidence in the guidance that we set in our ability to meet it.

Matthew Koranda, Analyst

Got you. Okay, fair enough. And then just two quick other ones for me. So, on the gross margin side, if I sort of strip out GunBroker, which is a relatively high margin business, just trying to get at sort of what we saw in the core ammo segment in terms of gross margins. I know you guys alluded to sort of wanting to be ready to produce and that's a lot when that opens up, so you're willing to incur a little bit of extra labor in the near-term to sort of make sure that that ramps smoothly. But anyway, you could just kind of help us understand the movement in gross margin on a quarter-over-quarter basis. Was it all just the labor, the incremental labor that they hired, any other kind of puts and takes that you can provide around sort of the movements and maybe raw costs and other elements that drove gross margin in the third quarter relative to the second?

Rob Wiley, CFO

Yes, I think the primary factor affecting our margin from one quarter to the next is the investment we're currently making in our future through hiring more employees and increasing overhead costs. As a result, our margin has decreased slightly compared to the previous quarter, but we anticipate that we will see benefits as we move into our next fiscal year once our new facility becomes operational.

Matthew Koranda, Analyst

Okay, great. And then just last one on the marketplace business. I mean, the take rate looks phenomenally good. Just curious, if you could maybe speak to the GMP at GunBroker and sort of the trends you're seeing there. It sounds like volume is up quite a bit on a year-over-year basis; the take rate is up nicely, on a year-over-year basis. Anything you could say on AOVs or other elements to the GunBroker business that would help us kind of get a little bit more clarity on that?

Rob Wiley, CFO

I think if you look, revenues were $17.6 million. You're correct, we're up just under 20% on our auction fees. If you look at the number of auctions, that increased by over 33%, loyalty program was up, and we're still pulling in 55,000 new users on a monthly basis. Would we anticipate the GMP to increase? Yes. And with the other additional things that are just coming online, I think we can maintain and continue to grow at this fairly healthy pace.

Matthew Koranda, Analyst

Excellent. I'll turn it over to others here. Thanks for all the clarity, guys. Appreciate it.

Fred Wagenhals, CEO

Thank you, Matt.

Operator, Operator

Our next question is from Mark Smith of Lake Street Capital Markets. Please proceed with your question.

Mark Smith, Analyst

Good afternoon, guys. A couple from the first high level is we've got a couple quarters of GunBroker behind us now talking about kind of where that business is relative to your expectations, and maybe where you are in the rollout of new initiatives within GunBroker? And what else there is still to do.

Rob Wiley, CFO

We still have a bit to accomplish with GunBroker. We have been rolling out various programs, credit cards, financials, and loyalty options, which means we are adding more products to the program. It's taken a bit longer than we expected due to the system changes needed to streamline things and make them more beneficial. However, this aspect of our business is growing well. We have a strong team in place that is making significant progress. We have only been working on this for about a month and a half, and we have already set aside the capital we promised for this venture. Although not all of it will be used at once, several products are already in progress, and a few more will be coming online soon, which should further enhance growth.

Mark Smith, Analyst

Perfect. And if we look through just another question on the gross profit margin, within kind of the Ammo and case-in sales business, can you walk through what you're seeing on the commodity and input costs, any headwinds that you're seeing and maybe any update on supply chain costs as well?

Rob Wiley, CFO

I don't think there have been any significant changes in costs or materials. We've mentioned this in almost every call and noted in the last earnings call that we are continuing to pass on any cost increases to our customers, so things remain relatively stable overall.

Mark Smith, Analyst

Okay, perfect. As we consider ammunition pricing, do you believe you are still in a strong position to implement incremental price increases, or do you feel that after the past year of price hikes, you are approaching a limit?

Fred Wagenhals, CEO

Well, every time you think you're getting closer to a ceiling, we always seem to have just raised prices again, which they just did, I believe today. And then we're going to continue to pass it on. There are a few SKUs that have come backward a little bit, still trading at a relatively high price. But not a ridiculous amount, like the 9 million, $3.3 million commodity type round. We answer that by retooling our machines, going more to the higher profitability rounds that are really not being produced by many others today. So, it'll allow us to gain some more shelf space as well. That's part of our plan.

Mark Smith, Analyst

Excellent. Thank you guys.

Operator, Operator

Our next question is from Eddie Reilly of EF Hutton. Please proceed with your question.

Eddie Reilly, Analyst

Hey guys, looks like you're really beginning to hit your stride here. Wondering if you can talk about the industry landscape a little bit. Are you seeing any meaningful expansion of industry-wide capacity at many of your competitors?

Fred Wagenhals, CEO

I believe the industry is increasing capacity, but it still isn't keeping up with the consistently high demand. This trend is not diminishing, even with the influx of new shooters in recent years. While some reports may indicate that companies like Smith & Wesson have higher inventories, we are focused on the ammunition sector and have yet to observe any significant slowdown.

Eddie Reilly, Analyst

Could you walk us through the timeline of how quickly you will ramp up production once the new Manitowoc facility is operational?

Fred Wagenhals, CEO

I think the ramp will not be as long as people will anticipate because we'll start moving machines and possibly won't be hooked up exactly right away. The new building is about two blocks from the previous building, very short. And we anticipate we've got two other warehouses, Eddie, that have our holding machines that we have no space for. So, those can go in right away. We're not losing production. And so as we move some of the stuff over, we'll start producing there and keep producing in our existing facility until everything's over. By that time, we should be running at significantly higher rates. And another note, I don't think anybody understands what we've went through to make the numbers that we just posted. I mean, we're a company right now that's running three different buildings, traveling 10 miles from one building to the other. We've got two shipping docks versus eight when we get into our new building. We've got trucks lined up to receive merchandise, we got trucks waiting to take merchandise out. Our people have done an incredible job in accomplishing this goal under the circumstances that we now work under. So, if you went to our plant now, there are people standing on top of people making product. So, we can't wait to get in this new building. We've got machinery and equipment that's going to cut costs. We've got automation equipment that we've built that will cut costs, and we've got space, space that we don't have today. On top of that, during this quarter, we had 14 people in our Scottsdale office out with COVID. We got people in Manitowoc with COVID. You go to hire 100 people, you better take 300 or 400 applications to get 100. So, our HR department has done an exceptional job. So, I give our people a lot of credit for doing what they've done under the circumstances we worked under this quarter.

Eddie Reilly, Analyst

Really appreciate the color there. And just as we head into summer 2022, what type of utilization rates would you expect from the new facility, just in that first quarter?

Rob Goodmanson, President

I think that's going to be something that we look to gear up to. And we'll have a better idea the closer we get there and as far as when, as far as mapping out the move, and kind of the strategy in place of how we move the pieces of equipment and when we move it to maximize our capacity. So, that's something that we're currently working on to this day.

Eddie Reilly, Analyst

Okay. Fine. Thanks guys. That's all for me.

Operator, Operator

Our next question is from Andy Johnson of Royal Capital. Please proceed with your question.

Andy Johnson, Analyst

Good afternoon. Last quarter, I believe Fred mentioned that in the new facility, with already purchased equipment, there could be a cost saving of one cent per bullet on street ammunition. I wanted to get more details on how much of the current ammunition production consists of street ammunition. Is that expected to increase as a percentage in the new facility? My final question is do you...

Fred Wagenhals, CEO

Yes. The annealing machine I mentioned earlier will allow us to save between $0.01 and $0.015 based on the caliber of our brass casings. We will no longer need to send the product out for annealing. We have owned this equipment for about a year and a half, but it has been in storage as we lack the space to install it until we move into our new building. Therefore, it will likely not be operational until August or September, which will enable us to realize those savings. Regarding the military project, John Flynn has been working on it for approximately three years, and I just received an update today from Mark Hanish, his co-partner. John, would you like to provide any updates on that?

John Flynn, Team Member

Sure. Thanks, Fred. From a capacity and capability standpoint, the plan all along is to continue servicing the commercial needs while tooling up with the lines of machinery required to support the military programs that we're working under. We have two contracts in place right now on the developmental side that are going well. We have the capacity to satisfy those contracts now and in the future with the CapEx that we expended over the past couple of years to make sure we were prepared to perform.

Operator, Operator

Andy, are you still there?

Andy Johnson, Analyst

Yes, I guess my last part of the question was, what percentage of the ammunition that is manufactured is street ammunition? And again, do you anticipate that staying the same or going up?

Fred Wagenhals, CEO

We anticipate it going up, and it's probably about 30% right now. We've just put some new systems in place that will increase that production.

Operator, Operator

Our next question is from Brandon Beylo of Macro Ops. Please proceed with your question.

Brandon Beylo, Analyst

Hey, everyone. We had another great quarter. I'd like to share some thoughts on the share buyback program. I believe it was significant for shareholders to observe this, particularly as the stock has dropped about 60% this year, making it a favorable time for such actions. I want to understand your perspective on the share repurchase program, especially since the business is expanding in both your core ammunition and marketplace sectors. There are numerous areas where you could invest capital for high returns. The decision to allocate $30 million to a share buyback suggests that you view the shares as undervalued. Could you walk us through your internal discussions regarding how much to allocate for the buyback versus reinvesting in the business? This would help us understand your approach to capital allocation.

Rob Wiley, CFO

Through the discussions that we've had, I think you're spot on that the stock is undervalued and should be purchased at this point. We have a very strong balance sheet, which will not stop us from increasing additional products, machinery, with the ammunition, or putting in the changes we're implementing for the GunBroker.com division. But when it's down like this, I think it was the best move for the shareholders. I think it's one of the best moves for us.

Brandon Beylo, Analyst

Understood. I would like to add that over the past few years, you have issued quite a bit of stock, which has largely been justified, whether to fund your growth or to acquire GunBroker.com, which was a beneficial acquisition. Looking ahead, how do you view share issuance in the next three to five years? Considering your balance sheet and the fact that you are now profitable on both an adjusted and GAAP basis, it seems there shouldn't be a necessity for issuing more shares. Can we expect that there will be minimal dilution going forward, unless there is a unique acquisition where it makes sense to use stock for part of the payment?

Rob Wiley, CFO

At this point, we have no plans to issue any more stock. That doesn't mean it couldn't happen for another acquisition, something similar to GunBroker. But this is also one of the reasons why we do the share buyback, to reduce the number of shares out there and create more value. We think that was a solid decision to make, just because of where it was trading, and what we think the actual value of the shares are.

Brandon Beylo, Analyst

Got it. And then I've got one more for Fred and Rob. A lot has gone right from your guys' business; the growth is pretty incredible. But I want to know is for both Fred and Rob, what are some things that kind of keep you guys up at night about the business? It might be things that are improving, but not at the rate that you want? Or just maybe competitive dynamics and pressures that you guys are kind of trying to battle? So, I know that there's so much that's gone right, but what are some things that do keep you up at night, if anything?

Fred Wagenhals, CEO

Getting people to come to work every day is a priority for me. Additionally, at my age, I would like to see the stock price improve. However, I've learned to focus on our business and continue generating earnings while avoiding unnecessary risks. If we need to make acquisitions, they should add value, and eventually, the stock price will align with what it should be.

Rob Wiley, CFO

That was very well said, Fred. I don't know if I have much to add on to that. My response would be very similar, so I'll leave it at that.

Brandon Beylo, Analyst

There's got to be something, Rob, come on. There's got to be something different than Fred's.

Rob Wiley, CFO

People can be a challenging issue, but we have effectively managed it. Our team in the Scottsdale office and in Manitowoc, Wisconsin, has done an excellent job. It's a common challenge for any company, but we are handling it well with our strong team.

Fred Wagenhals, CEO

I want to highlight that John and Mark have put in significant effort on the military orders we are currently pursuing. As you may know, dealing with the United States government can be quite challenging, and things don't come quickly or easily. I have signs around the building reminding me that I struggle with patience, which often keeps me awake at night. I tend to want things done faster than the pace our plant manager in Manitowoc or the military team might prefer. However, we have an excellent group of people who meet every morning at 8 o'clock to focus on our numbers and the growth of this company. The progress we've made, going from $2 million to $250 million in just five years, is quite impressive. There's still much to accomplish, but we are optimistic about reaching a $400 million to $500 million valuation.

Brandon Beylo, Analyst

I remember when you were involved with Vista or that show business that acquired ammo a few years back. I've been around for a while, and I hope you continue to execute. With prices at attractive levels now, it would be great to see the company engage in some open market purchasing, as well as some insider buying, if possible. Overall, it was a great quarter. I'm going to step back and listen in, but keep up the good work.

Fred Wagenhals, CEO

Thank you very much.

Rob Wiley, CFO

Thank you very much.

Operator, Operator

We have reached the end of the question-and-answer session. I will now turn the call back over to Fred Wagenhals for closing remarks.

Fred Wagenhals, CEO

I just want to thank all the shareholders that have stuck with us and have watched us grow from $2 million to going over $200 million right now. So, just stick in there with us and watch us grow to a $0.5 billion company.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.