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Smith & Wesson Holding Corporation (NASDAQ:SWHC)

F2Q08 (Qtr End 10/31/07) Earnings Call

December 06, 2007 5:00 am ET

Executives

Liz Sharp - VP of IR

Mike Golden - President and CEO

John Kelly - CFO and Treasurer

Analysts

Eric Wold - Merriman Curhan Ford & Company

Rommel Dionisio - Wedbush Morgan Securities

Chris Krueger - Northland Securities

Reed Anderson - DA Davidson

Amit Dayal - Rodman & Renshaw

James Maher - ThinkEquity Partners

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Smith & Wesson Holdings Corporation Earnings Call. (Operator Instructions)

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

Liz Sharp

Thank you and good afternoon.

Before we begin the formal part of our presentation, let me tell you that what we're about to say, as well as any questions we may answer, could contain predictions, estimates and other forward-looking statements. Our use of words like project, estimate, forecast and other similar expressions is intended to identify those forward-looking statements. Any forward-looking statements that we might make represent our current judgment on what the future holds. As such, such statements are subject to a variety of risks and uncertainties. Important risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings, including our Forms F-3, 10-K, and 10-Q. I encourage you to review those documents.

A replay of this call can be found on our website later today at www.smith-wesson.com. This conference contains time sensitive information that is accurate only as of the time hereof. If any portion of this presentation is rebroadcast, retransmitted or redistributed at a later date, we will not be reviewing or updating the material content herein. Our actual results could differ materially from these statements.

Our speakers on today's call are Mike Golden, President and CEO; and John Kelly, Chief Financial Officer. With that, I'll turn it over to Mike.

Mike Golden

Thank you, Liz, and thanks everyone for joining us.

Let me give you the agenda for today's call. First, I will share my thoughts with you regarding our performance in the quarter, as well as our strategy and outlook for the future. Then, John will review our financial results in more detail. After that, we will open up the call for questions from our analysts. This is a change from our standard agenda. But, given the changes that occur within our second quarter, I think it's appropriate.

Today's press release clearly laid out the issues that impacted our results in the consumer channel during the second quarter, and how those issues are closing us to revise both our net sales and our earnings guidance for the balance of the year.

In summary, our environment changed abruptly late in a quarter, due to a number of factors. We responded immediately in October, by implementing new consumer focus promotional programs, reducing our costs, adjusting our expectations for the fiscal year, and communicating with you, our shareholders.

While these promotional programs are meeting with some success, the environment has not improved to the degree that we had originally expected. In addition, recently released market data, which I will cover in a moment, has indicated that the industry-wide inventory overstock situation is much more extreme than we estimated three weeks ago.

Today, we are providing you with our updated expectations for the current fiscal year. We will continue to respond as needed, until both the consumer environment, and the industry-wide inventory overstock situation, have corrected. We believe that the current situation will not extend beyond our current fiscal year, which ends April 30th, 2008. Let me say upfront, that the inventory overstock issue is an industry situation, and we believe the inventory correction for Smith & Wesson is near its end.

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

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

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

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

The second data is the Mix data, or the federal background check data. Each time a consumer purchases a firearm, a federal background check is run. The Mix data captures each of those background checks, and the number is published by the National Shooting Sports Foundation. Mix data serves as an indicator of consumer firearms purchases.

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

However, as we review the data for the first six months of 2007, a vastly different picture emerges. Federal Excise Tax data shows a year-over-year increase in sell-in by manufacturers to distribution of about 26.4%, while Mix data indicate that sell-through at the consumer level for the same six months period grew only about 5.2%.

Clearly, the industry was planning a robust year, while consumers were behaving otherwise. Again, we just received the April through June FET data in November. And now, we are able to fully analyze the market. That information and analysis demonstrated to us that there is a significant build-up in the channel. That explains how the current environment developed.

So, how do we respond? We have put plans in place to help try greater demand at the consumer level, and pull some of the excess inventory through the channel. This whole method of stimulating demand is an approach we began to use three years ago, to successfully drive sales of Smith & Wesson products.

It is a more beneficial approach to addressing the current market environment, as opposed to simply discounting products to distributors, which only drives more products into an already crowded channel, and impacts future sales.

We have created 15 consumer-level programs, and multiple dealer and distributor programs, that span Q3 and Q4. These programs provide either mail-in rebates, or merchandized incentives, across a variety of the revolvers, pistols, rifles and shotguns.

We believe that creating demand at the consumer level will help reduce distributor and dealer inventories, while creating demand at the distributor and dealer level will in return help reduce Smith & Wesson inventories.

We are not quite halfway through the third period yet. While the initial feedback is positive, particularly with regard to handguns, it is also clear the total industry-wide build-up in this channel over the course of the year has been substantial, and will take some time to clear out.

Our estimates for fiscal 2008 revenues and earnings that we provided today, incorporate our estimation that the industry-wide overstock situation will be corrected over the next few months. As John will explain in a few minutes, we expect our recovery to occur more quickly than that.

As you know, the acquisition of Thompson/Center Arms, in January of 2007, was a key piece of our long-gun strategy. We continue to be very pleased with the overall performance of Thompson/Center, which exceeded our expectations during the second quarter.

Because of Thompson/Center, the ICON bolt-action rifle was initially launched at the SHOT show in early calendar 2007, that product was available to dealers during the pre-season order cycle, and was, therefore, less impacted by the overstock situation.

Moreover, dealer and consumer feedback on the new ICON and Triumph muzzleloader have been extremely positive. These products clearly live up to the Thompson/Center reputation for quality in hunting firearms, and we believe they will play a role in our ability to gain market share in the future.

Our new Smith & Wesson long-gun--the i-Bolt bolt-action rifle--and the 1000 series, and Elite Gold series of shotguns, began to arrive in the channel during our second quarter. While scheduled for a mid-season launch, the timing on these entries coincided with the unfavorable industry environment that evolved late in the quarter. As a result, dealers and distributors were reluctant to add to the already bloated firearms inventory, even with an exciting new product launch.

This situation, combined with the fact that these lines are still ramping up, means that these products are not yet out in the marketplace in volume. As a result, it is still too early to report any substantial feedback. As the industry works through existing inventories, shelf space becomes available and the 2008 hunting season approaches, we will update you on our progress.

But as I stated earlier, our strategy has not changed. Our goal is to become a significant player in this $1.1 billion market.

Now, let me take a minute and talk to you about our accomplishments in the law enforcement channel, where our military and police line of tactical rifles and pistols continues to hit the mark.

Last year's second quarter results contained a particularly large order from the California Highway Patrol. Excluding that single order, law enforcement sales in the second quarter this year were up 28% on a year-over-year basis.

During the quarter, we continued to win sizable agencies, such as the New Mexico State Police, the Charlotte, North Carolina Police; and the Syracuse, New York Police Department. Among law enforcement agencies where the M&P is considered for selection, we're continuing the win T&Es at a win rate of over 80%.

This is happening because we have designed the M&P line of products specifically for law enforcement and military professionals. The number of law enforcement agencies that have purchased, or approved for carry, our M&P pistol has now grown to 264. We will continue to expand on our M&P line at the upcoming SHOT Show, and look forward to sharing some exciting new editions with you, then.

On the federal government front, we continue to closely monitor the landscape for signs of any RFP related to the military's stated desire to shift from a 9 millimeter pistol to a 40-caliber or a 45-caliber pistol, for added stopping power.

Recent information indicates that we will see a new RFI early in calendar 2008, followed by an RFP and evaluation process, later in 2008. We will continue to monitor this situation and respond accordingly, but as we have stated, we intend to vigorously compete for any federal government opportunity that may arrive.

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

In addition to extending the Smith & Wesson brand reach into foreign countries, our international sales results deliver ongoing growth into the professional ranks, a reflection of our overall growth strategy for the future.

We are seeing M&P test evaluations get completed, and business developing most recently in places like Mexico, Canada and Thailand. The M&P pistol is now carried on duty by over 5,000 law enforcement personnel, in 13 countries outside the United States.

So that covers our major sales channel, and clearly, we've got a lot going on in each. While international law enforcement and federal channels are either meeting, or exceeding all of our expectations, there is no overshadowing the astronomical growth, both organic and through acquisition, that we have consistently delivered over the past three years in our sporting good channel. It is precisely this situation that fuels our growth strategy, and that strategy is to continue to expand our business in the new areas of safely, security, protection and sport.

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

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

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

John Kelly

Thanks, Mike. Sales for the three months ended October 31, 2007 were $70.8 million, a $20 million, or 39.4% increase, over sales of $50.8 million for the three months ended October 31, 2006. Firearm sales, our core business, increased by $18 million, or 37.8% over the comparable three months period in the prior year.

Net income of $2.9 million, or $0.07 per diluted share, for the three months ended October 31, 2007 was equal to net income and diluted earnings per share for the comparable period last year. Net income for the second quarter of fiscal 2008 reflects a 54.5% year-over-year increase in operating expenses, combined with $1.7 million increase in interest expense, both attributable to the acquisition of Thompson/Center Arms in January 2007.

The increase in firearm sales in the quarter was attributable to the addition of Thompson/Center Arms, which we acquired in January 2007. Smith & Wesson firearm sales were down 10% for the second quarter of fiscal 2008.

Pistol sales for the three months ended October 31, 2007 were $4.9 million lower to the comparable period in the prior year. The decrease is attributable to $6.2 million in shipments to Afghanistan and the California Highway Patrol in the second quarter of last year, which did not recur in the second quarter of fiscal 2008. Sales in the M&P pistol grew at a rate of 54.2% for the second quarter of fiscal 2008, while revolver sales declined by approximately 18% for the same period, reflecting the soft domestic consumer market.

Sales of short guns and i-Bolts were below expectations, largely because shipments of these products commenced in late September, when market conditions were deteriorating and because distributors were reluctant to take on new products given their already inflated inventory levels.

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

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

Cost of goods sold for the three months ended October 31, 2007 included $394,000 in costs for promotional programs launched in the quarter, as well as $302,000 in depreciation expense related to the significant capital expenditures we incurred in fiscal 2007.

Operating expenses for the three months ended October 31, 2007 were $16.5 million, a 54.5% increase over expenses of $10.7 million for the comparable period last year. The increase in operating expenses includes $5.2 million for Thompson/Center Arms, which was acquired in January 2007. The remaining increase is attributable to higher stock-based compensation expense, partially offset by a reduction in compensation and profit sharing expense.

Operating expenses as a percentage of sales and licensing was 23.2% for the three months ended October 31 2007, compared with 20.8% for the comparable period last year. Operating income for the quarter was $6.5 million, or 9.2% of sales and licensing, compared with $5.3 million, or 10.4% of sales and licensing, for the comparable period last year.

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

Net income of $7.6 million or $0.18 per diluted share, for the six months ended October 31, 2007, was $1.4 million, or $0.03 per diluted share, higher than the $6.2 million, or $0.15 per diluted share, for the six months ended October 31, 2006.

Gross profit for the six months ended October 31, 2007, of $50.3 million, increased by approximately $17.6 million over the six months ended October 31, 2006. Gross margin as a percentage of sales and licensing was 34.4%, compared with 32.9% for the six months ended October 31, 2006.

The increase in gross margin percentage is attributable to higher standard margins on new products, and improved operating efficiency. Depreciation expense in the first half of fiscal 2008 was $554,000 higher than depreciation expense for the comparable six months period last year.

Operating expenses for the six months ended October 31, 2007, were $33.9 million, a $12.4 million, or 57.8%, increase over expenses of $21.5 million for the six months ended October 31, 2006. The increase in operating expenses includes $10.1 million in operating expenses for Thompson/Center Arms, which we acquired in January 2007.

The remaining operating expenses is attributable to $1.7 million in higher stock-based compensation expense, and $642,000 of higher advertising and promotion expense.

Operating expenses as a percentage of sales and licensing was 23.2% for the six months ended October 31, 2007, compared with 21.6% for the comparable six-month period last year.

Operating income for the six months ended October 31, 2007, was $16.3 million, or 11.2%, of sales and licensing ,compared with $11.2 million or 11.3%, of sales and licensing for the six months ended October 31, 2006.

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

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

Now, for our outlook for fiscal 2008. Please note that our guidance is based upon the results form the existing business. It does not include any additional revenue or profits from potential business ventures we may pursue.

Net product sales for fiscal 2008 are now expected to be approximately $300 million, an increase of 28% over fiscal 2007. Based upon on Mix data, we believe that the firearms market will grow at approximately 5% rate in calendar 2007and 2008, in line with historical trends.

We have seen in the FET data that firearms shipments into the channel in the first half of calendar 2007 were 26% higher than the previous year. We believe that an approximate 20% inventory correction began late in the third quarter of calendar 2007, and will start to bring industry-wide inventory levels back into line with market demand.

Smith & Wesson handgun orders have improved, and retail point-of-sale information leads us to believe that the correction for Smith & Wesson is nearing its end.

Net income for the year ended April 30, 2008 is now expected to be approximately $17 million, or $0.40 per diluted share, a 33% increase in net income over fiscal 2007. This is a decrease of approximately $6.5 million or $0.13 per diluted share, from pervious forecast, reflecting our expected lower sales volume, as well as the cost associated with a three-week manufacturing shutdown we have scheduled for our Springfield facility this month.

Planned capital expenditure of $15.9 million represents a $1.8 million decrease from our previous projections, and reflects adjustments to spending based on our current profit projection. None of the delayed projects will impact fiscal 2009 volumes.

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

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

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

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

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

Mike Golden

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

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

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Eric Wold. Please proceed.

Eric Wold - Merriman Curhan Ford & Company

Hi, good afternoon.

Mike Golden

Hi, Eric. How are you doing?

Eric Wold - Merriman Curhan Ford & Company

Good. A couple of questions. I know you talked about how you are starting to see some improvements in your trends and you are optimistic that you'll kind of get through this before the end of the fiscal year or by the end of fiscal year, and so kind of will linger to next year.

Talk a little bit about what you're hearing from the distributors and retailers during the situation in terms of what their thinking is for next year. I mean, obviously, everyone is having issues right now. But if the other manufactures are having more issues maybe don't come out as unscathed as you do, does this put you in a better situation going into next year with the distributor if they don't want to kind of repeat the same mistakes that happened this year?

Mike Golden

Well, let me try to answer in a couple of ways, Eric. What we're hearing is that our promotions, specifically our handgun promotions are working fairly well. And we have some experience of that, which is helping to take inventory down because there was a lot of Smith & Wesson inventory out there at the beginning of the second half also.

And we're also seeing from a number of our distributors double-digit increases out the door year-on-year of Smith & Wesson products, so dealers are pulling product out, which is another good indication that things are coming down. And the third thing is what John said is we're seeing that reflected in our order rates in the first eight days of this month. This fiscal month has been significantly better than the last couple of months. So, many encouraging signs that we're seeing out there.

We don't believe that the inventory that is out in the channel will carry on. A whole lot of that will carry into next season because of just the nature of the dealer base and the distribution base that we have out there. We think that there will be some promoting of the product to move the product out. It probably won't all go away, but they're clearly gone into next year.

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

John Kelly

Eric, just to give a little more color on that, the network of dealers and distributors is not heavily capitalized and has liquidity concerns. They can't afford to carry inventory for too long a period. The distributors were typically in a margin of 5% to 7%. So, carrying costs of inventory become pretty critical on their profitability.

So I think you're going to see that come out, and I think it's going to be a situation where it's more been in the buying patterns. We look at our top two distributors in the out of the door. For example, in October with them it was in the double-digits, and then our side, we're down substantially, one was down 44% in October in terms of year-over-year purchases and the other was down 61%. If they're out of the door we're up 37% and 18%.

So they are correcting their inventories as we go here. And so, it's going to be a situation where it doesn't necessarily whole have to be discounted. It's going to be reduced purchases, which is what we saw in October and significantly in November too.

Mike Golden

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

Eric Wold - Merriman Curhan Ford & Company

Okay. And then just last question then. You kind of played devil's advocate a little bit. If some of these other manufacturers are, as everyone knows, kind of have a little capital constraint, not in the best financial situation relative to Smith & Wesson, is there a chance that they kind of get spooked and really need to move inventory and generate any cash they can and start discounting even heavier in the months to come and the situation maybe gets a little bit worse or gets better?

Mike Golden

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

Eric Wold - Merriman Curhan Ford & Company

I apologize, Mike. I mean less so on your side, more sort of other manufacturers start giving even more aggressive rebates happening in channels such that they attract consumers away from your products near term, because they are discounting it even more heavily?

John Kelly

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

Eric Wold - Merriman Curhan Ford & Company

Okay. That's perfect. Thank you, guys.

Mike Golden

Thanks, Eric.

Operator

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

Rommel Dionisio - Wedbush Morgan Securities

Yes, good morning. Good afternoon, sir. Hi. I just want to spend a little time talking about the inventory, how big up was in the first place. As I look across categories, whether it's sporting goods or fitness equipment or recreational vehicles, retails have been pretty conservative all year long.

Did you get the sense if there was channel stocking on the part of some competitors? It just is tough to believe that retails were that aggressive in thinking this would be phenomenal holiday season or hunting season?

Mike Golden

I think 2006 for the industry was a good year. They enjoyed strong levels. And I think going into the year, people anticipated 2007 was going to be another good year for them. Extended handguns had a very good year last year and the sales into the channel were up 38% in the first half of this year, and long-guns were up 20%.

And I think what happened is when you look at the mix data and you look at what happened in the third calendar quarter, there was an uptick in retail activity, where we started approaching the high single digits, low double digits in terms of increases in retail activity.

And I think that kind of encouraged them that they were going to see this kind of year. And then when they ran up against the soft hunting season, it kind of started to come apart.

Rommel Dionisio - Wedbush Morgan Securities

Okay. Thanks very much.

Mike Golden

Thanks, Rommel.

Operator

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

Chris Krueger - Northland Securities

Hi. Good afternoon, guys.

Mike Golden

Hi, Chris, how are you doing?

Chris Krueger - Northland Securities

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

Mike Golden

Yes, Chris. In United States, there are 17,000 police departments in United States, law enforcement agency in United States. A lot of them are small, but we have a long way to go, things like the state police like we just said the New Mexico State Police, the New Hampshire State Police that we announced just recently.

State police, we think are a big deal, because a lot of tiny departments in a state will do whatever the state police do. So they'll buy whatever the state will follow their lead. So that is when we win a state police department, we are pretty excited about that, and also other big cities like Hartford, like Charlotte, like Syracuse.

But there are about 800,000 law enforcement officers in the United States. And we believe that all these officers that are part of these 246 departments, it's somewhere around 50,000 police officers. So a long runway in front of us there.

Chris Krueger - Northland Securities

Okay. Further state department wins, how many of those have you had, just the New Mexico so far or is it more than that?

Mike Golden

New Hampshire, that was a big one for us because there was a competitor up there and they manufactured competitors' guns in New Hampshire.

Chris Krueger - Northland Securities

Okay.

Mike Golden

Iowa State Police that comes to mind right now

Chris Krueger -Northland Securities

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

Mike Golden

No we don’t provide that.

Chris Krueger - Northland Securities

It’s okay.

Mike Golden

It's obviously a growing part of our sales, though.

Chris Krueger - Northland Securities

Right. All right. That’s all I've got. Thank you.

Mike Golden

Okay. Thanks, Chris.

Operator

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

Reed Anderson - DA Davidson

Good afternoon.

Mike Golden

Hi, Reed.

Reed Anderson - DA Davidson

Hi. I guess, Mike, we all get the why kind of (inaudible) inventory and what’s happening. And I think that's understandable. But what I think is a struggle, at least for me and I think other people would share this, is the timing of it. I mean you reported your first quarter in early September, and then all of sudden, a couple of weeks later, it seems like the wheels have started coming off.

And I guess my question is can you just remind us or talk to us about kind of the timing of your orders, et cetera? Because what my recollection is you have a handful of distributors that are may be upwards of 30% in revenue. So, it's hard for me to understand how wouldn't know sooner from them until the end of October, say, that things were slowing. Can you help us connect those dots a little bit?

Mike Golden

Yeah. The formal data, the FET data doesn't come out until -- we got it just a short time ago, mid-November, which kind of told us what was going on, okay. As we were going through, we had an event. The sales guys had a promotion last year for our distributors and dealers where the winner, you know, you had to sell so much in one of those things, but the award was a trip to Hawaii. And that was in the middle of September.

Reed Anderson - DA Davidson

Of this year, September '07?

Mike Golden

Yeah, just passed. And our guys came back from that with arguably 50 of our largest and most growing combination dealers and distributors, and there was no indication that the slowdown at retail was being felt. People kind of just thought it was a little bit of a blip. So, it wasn't until when we started to see it reflected in our order level, it was really in October. As we got into it, it was like, whoa, we got a lot of stuff here.

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

Reed Anderson - DA Davidson

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

Mike Golden

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

Reed Anderson - DA Davidson

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

Mike Golden

Yeah. You won't see people writing orders at the show. I mean they just don't do that. But after the SHOT Show, we try to have products shown at the SHOT Show that we will begin to shift this fiscal year, in other words, not outside that window. So, you'll start to see orders graded after we come out of the SHOT Show. So that's a February, March, April timeframe you'll start to see that.

Reed Anderson - DA Davidson

Okay.

Mike Golden

The other point to the big boxes just explain why you haven't seen the presence of Smith & Wesson stuff, is we did not have the products available at the beginning of the year when they placed their orders with the manufacturers. In other words, everybody goes before the big boxes, makes the presentation of what they have, and they decide what they're going to carry for the year. We then introduce our rifle until April or May at the NRA Show. So that effectively took us out of that game with all the big boxes.

Reed Anderson - DA Davidson

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

John Kelly

What are you looking for exactly, Reed?

Reed Anderson - DA Davidson

Well, I'd just like to get the detail. I mean, we'll obviously get it out of the Q when that comes out in other week and a half, but it's always nice to get the detail by product categories, if you're willing to do it.

John Kelly

Well, the Q is going to come out on Monday, Reed.

Reed Anderson - DA Davidson

Okay.

John Kelly

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

Reed Anderson - DA Davidson

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

John Kelly

That will be probably the case there because the longer booking orders happen in February, March, April time period. So you're right, Reed. There is a backlog. If I had to tell you when the peak period is, it's probably the end of the fiscal year.

Reed Anderson - DA Davidson

Okay. All right. Thanks.

Mike Golden

Okay. Thanks, Reed.

Operator

(Operator Instructions)

Your next question comes from the line of Amit Dayal. Please proceed.

Amit Dayal - Rodman & Renshaw

Thank you.

John Kelly

Hi, Amit.

Amit Dayal - Rodman & Renshaw

Hi, guys. How are you?

John Kelly

Good. Very good.

Amit Dayal - Rodman & Renshaw

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

Mike Golden

Yes.

Amit Dayal - Rodman & Renshaw

Does it come, I hope I'm reading it correctly, but it would come to roughly $57 million to $60 million in terms of what's given in your press release?

John Kelly

You're talking about topline?

Amit Dayal - Rodman & Renshaw

Yes.

John Kelly

For the third quarter?

Amit Dayal - Rodman & Renshaw

Yes.

John Kelly

Approximately?

Amit Dayal - Rodman & Renshaw

Yeah. Like in that range, right.

John Kelly

Yes, approximately in $60 million.

Amit Dayal - Rodman & Renshaw

Right.

John Kelly

$57 million to $60 million, yes.

Amit Dayal - Rodman & Renshaw

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

John Kelly

No. It's usually the strongest, Amit.

Amit Dayal - Rodman & Renshaw

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

Mike Golden

Yes.

Amit Dayal - Rodman & Renshaw

Right. Perfect.

Mike Golden

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

Amit Dayal - Rodman & Renshaw

Right

Mike Golden

We're forecasting we're growing at the market in the fourth quarter. And then there is going to be some good growth in the international what we see is on the horizon or is in-house for international for Q4.

Amit Dayal - Rodman & Renshaw

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

Mike Golden

Yes, pistols.

John Kelly

Primarily, the --.

Mike Golden

M&P.

John Kelly

The M&P has really provided us with a significant boost to our international business. Prior to the M&P, we did not have pistol that could compete in the law enforcement or military market worldwide.

And now that we have that, the numbers are shown, as Mike had said, by over 5,000 officers around the world. And basically that's in a little over year, because that's primarily 9 millimeter caliber. In about 15 months time, that's a pretty strong performance.

Amit Dayal - Rodman & Renshaw

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

John Kelly

We gave you the depreciation and amortization. I think it was 12.5.

Amit Dayal - Rodman & Renshaw

Okay

John Kelly

Let me just think for a second, Amit?

Amit Dayal - Rodman & Renshaw

Right.

John Kelly

Probably about 50 to 55 range, Amit.

Amit Dayal - Rodman & Renshaw

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

Mike Golden

No, they are not allow to.

Amit Dayal - Rodman & Renshaw

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

John Kelly

Right.

Mike Golden

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

John Kelly

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

Amit Dayal - Rodman & Renshaw

Right.

John Kelly

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

Amit Dayal - Rodman & Renshaw

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

John Kelly

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

Amit Dayal - Rodman & Renshaw

Right. That's all I have guys. Thank you so much.

John Kelly

Thanks, Amit.

Mike Golden

Thanks, Amit.

Operator

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

James Maher - ThinkEquity Partners

Good afternoon, guys.

Mike Golden

Hi, James.

John Kelly

Hi, Jim.

James Maher - ThinkEquity Partners

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

John Kelly

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

James Maher - ThinkEquity Partners

Okay.

John Kelly

Okay.

James Maher - ThinkEquity Partners

Okay. And then secondly, I wasn’t doing my math incorrectly here. It looks like about $2.94 million net income over 48 million shares, I am getting $0.06, not $0.07. Am I just not able to do math today or is --?

John Kelly

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

James Maher - ThinkEquity Partners

Okay. That's the interest again. Okay.

John Kelly

Yes.

James Maher - ThinkEquity Partners

Okay. Again, I think most of my other questions have been addressed. So thank you.

Mike Golden

Okay. Thank you.

John Kelly

Great. Thanks, James.

Operator

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

Mike Golden

Thank you, operator. I want to let you all know that we will be presenting at the Wedbush Morgan Investor Conference next week on December 12 in Los Angles. I look forward to seeing some of you there.

Thank you everyone for joining us. Happy holidays to all of you, and I look forward to speaking with you again in the New Year.

Operator

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

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Source: Smith & Wesson Holding F2Q08 (Qtr End 10/31/07) Earnings Call Transcript
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