Smith & Wesson Brands, Inc. (SWBI) Earnings Call Transcript & Summary

Good day, everyone. Welcome to the conference call for Smith & Wesson Brands, Inc. This call is being recorded. At this time, I would like to turn the call over to Chris Scott, Acting General Counsel, who will give us some information about today's call.

Thank you, and good morning. Our comments today may contain predictions, estimates and other forward-looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe and other similar expressions are intended to identify those forward-looking statements. Forward-looking statements also include statements regarding the impact of our strategic initiative announced today, the timing thereof and the related impact on our business, employees and financials. Our forward-looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties that could cause our actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by our statements today. These risks and uncertainties are described in detail in our securities filings, including our reports on Forms 8-K, 10-K and 10-Q, which you can find on our website at smith-wesson.com, along with a replay of today's call. The actual impact of our actions could differ materially from those expressed or implied by our statements today, and we expressly disclaim any obligation to update any forward-looking statements. Joining us on today's call are Mark Smith, President and Chief Executive Officer; and Deana McPherson, Chief Financial Officer. With that, I will turn the call over to Mark.

Thank you, everyone, for joining us today. Earlier today, we announced Smith & Wesson's intentions to relocate our headquarters from Springfield, Massachusetts to Maryville, Tennessee in 2023. This has been an extremely difficult and emotional decision for us. But after an exhaustive and thorough analysis for the continued health and strength of our iconic company, we feel that we have been left with no other alternative. The primary catalyst for this move was legislation recently proposed in Massachusetts that, if enacted, would prohibit the company from manufacturing certain firearms in the state. These bills would prevent Smith & Wesson from manufacturing firearms that are legal in almost every state in America and that are safely used by tens of millions of law-abiding citizens every day exercising their Constitutional 2nd Amendment rights, protecting themselves and their families and enjoying the shooting sports. While we are certainly hopeful that this arbitrary and damaging legislation will be defeated in this session, these products made up over 60% of our revenue last year, and the unfortunate likelihood that such restrictions would be raised again led to a review of the best path forward for Smith & Wesson. As part of this move, we will be consolidating operations in Tennessee, and this will further lead us to close our operations in Connecticut and Missouri. Our loyal employees are the reason for our success and are always our #1 priority. We are deeply saddened by the impact that this difficult decision will have on so many of our dedicated employees. But in order to preserve future jobs and for the viability of our business long term, we are left with no choice but to relocate these functions to a state that does not propose burdensome restrictions on our company. While the move will not begin until 2023, we are making this announcement now to ensure that each employee has the time to make the decision that is best for them and their families. We are firmly committed to working on an individual level with each and every one of those who will be affected, and we will assist any affected employee who is willing and able to move with financial and logistical relocation assistance. However, we also fully realize that this is simply not feasible for some. Therefore, for any affected employee who cannot move with us, we will offer enhanced severance and job placement services. We understand that this announcement will be very difficult for our employees, and we will do everything we can to assist them during this transition. With that, before we take questions, Deana will go over some of the financials.

Thanks, Mark. Our current time line has us fully moved in year 3 of the project. Over that time, we expect cash outlay of approximately $138 million, the majority of which consists of capital investment for buildings, machinery and equipment and IT investment. In addition, we will have onetime costs such as relocation and severance costs for our employees, consulting fees, temporary office costs and travel. In addition to the cash outlay, we are likely to have some impairment of machinery and equipment expenses that we will record as a result of the closure of Missouri and Connecticut facilities. We intend to market our portion of the Missouri facility for sublease, and we'll begin that process in the coming months. As we noted in our press release, it is our hope that we will be able to sell the non-firearm related plastic injection molding business, thereby saving jobs and reducing our exposure to impairment of certain of those assets. We currently expect the impact to the fiscal year 2022 P&L will be $12 million to $15 million, with approximately $7 million being recorded in our second quarter. We will track these expenses and report them as non-GAAP adjustments to net income and earnings per share. Finally, once we are fully moved, we expect this move to be accretive to annual earnings per share by $0.10 to $0.12 per year with savings coming from the reduced number of locations, slightly lower head count and lower employment-related costs. With that, operator, I'd like to turn the call over for questions from our analysts.

[Operator Instructions] Our first question comes from Mark Smith with Lake Street Capital.

Deana, just curious if you can walk through just that second quarter impact again kind of what we're seeing in the near term?

Yes. It will be about $7 million of expense that would hit the P&L.

$7 million in P&L, and this will all be viewed as kind of onetime and called out?

Yes, it will.

Perfect. And then I just wanted to ask about the distribution. You've got a pretty new facility there. Why move out of that Missouri facility? What's kind of the long-term benefits out of that shift?

Sure. Good question. So we did evaluate staying in the Missouri facility and expanding there. The reality is, as you may know, we share that building. And just that space just wasn't frankly suited for us. We love doing business in the State of Missouri. They are great. They've been tremendous with us. Unfortunately, it just -- if we're going to talk about moving headquarters and consolidating operations that that footprint just didn't work. So then that kind of led to a full -- if we're not going to stay there, let's do a full analysis of what other options, what other states, what other areas and obviously landed in Tennessee. So if we were to stay in Missouri, it probably would have been a new building in any case. So just because that facility doesn't suit our needs.

Okay. And the last one for me is, just as we look at capacity opportunities long term, does this give you an opportunity to expand capacity? Or do you feel like you stay within kind of your flexible manufacturing capacity that you guys have done?

That's a good question. I think it does enable us to realize a lot of efficiencies. And so obviously, as Deana covered, we're expecting between $0.10 and $0.12 of accretion on EPS once we're fully operational. And that -- a lot of that is coming from just the ability to have plastic injection molding in line with the assembly operations and the assembly operations feed directly into the warehouse as opposed to into a truck that ships across the country, et cetera. So I think -- can we -- I think it will have an impact on our efficiency and our ability to push more through existing assets. So in that regard, yes, it should help on our capacity flexibility.

Okay. And maybe I'll sneak in one more. Just as we look at the Connecticut facility and kind of selling off some of the outside business, is that really going to impact more so kind of the other products and services line and revenue? Or walk us through kind of maybe potential impacts there?

Sure. The other products and services revenue that comes out of that facility is pretty small. It's usually about $10 million a year and just not as profitable, let's just say, as our -- obviously as our firearms business. So it's not going to have really, frankly, Mark, a meaningful impact on our financials.

Our next question comes from Rommel Dionisio with Aegis Capital.

As you guys -- I've been to your Massachusetts facility many times. It's an older facility, I know you guys have focused on continuous improvement over the years and done a great job on the supply chain and all that. But with the opportunity for now a clean sheet design, I know it's still a couple of years away, but I wonder, Mark, if you could just share with us some of your initial thoughts in terms of the opportunities that that can bring, whether it's speed to market for new products, improved product quality? Just maybe you could talk through some of the targets and goals that this new facility might be able to bring to bear.

Yes, sure, Rommel. Yes, we're very excited. The engineers have already started to think through all of the opportunities. And you're right, when we come out of a facility that we've been operating in since 19 -- mid-1940s and move into a brand-new manufacturing facility that opens up a lot of opportunity for us to realize enhanced state-of-the-art quality monitoring system, state-of-the-art -- continuing to expand on our state-of-the-art distribution facility and really being able to integrate that with the assembly operations now where, for example, one of the things we're looking at is, if a product comes off the line and it's already sold, it just goes straight to a truck, we don't put it away. So things like that that are -- that we really, frankly, don't have the opportunity to do here just given the restrictions of our footprint. Ton of opportunity as we kind of look at our new facility. So yes, definitely, for sure.

Our next question comes from Cai von Rumohr with Cowen.

Yes. So from your release, you say you're going to keep 1,000 jobs in Springfield and 750 move to Tennessee. Is that correct?

Yes.

And so Springfield will essentially do what? They'll do assembly of pistols plus castings and forgings?

So Springfield look -- so we don't do any castings. So we do forgings though. So Springfield will be continuing to machine all of the components. So Cai you've walked through so all of the kind of monument assets. So we've got upwards of 500 CNC machines and precision machining is really kind of what we do. So all of those -- that skill, those assets, that's all going to stay here as well as most of the design engineering because what the design engineers do is -- the vast majority of what they do is make sure that those parts that are being machined for new products are up to standard and the programs are all written, et cetera. So all of the metalworking is going to stay here, and then revolver assembly will also stay here because -- and frankly, that revolver assembly is very integrated with the machining. There's a lot of back and forth with the revolver assembly and machining operations. So we -- to move that -- to not co-locate that would be disruptive to us operationally. So that will all stay, and then all of the associated jobs there would stay with that. So it's -- those 1,000 jobs are going to be a whole lot of operational machine operators and...

Right. So the 750 people who move to Tennessee, what are they going to do?

So the operations in Tennessee will then be -- the components will be coming in from -- so you can kind of think of Springfield will end up kind of being a component supplier to the headquarter major operational center as well as all of our suppliers. So all of the components will be coming into Maryville for final assembly. They'll be -- and then they will also be doing the plastic injection molding there, so they'll marry that up, all those components with the plastic injection molded frames and all the plastic injection molded parts, so [indiscernible] plates and the boxes and that they go into, et cetera, will all be made there on site. They'll put the final product. They'll do that final assembly, all the final quality checks and then it will flow right into the warehouse where we'll be doing all the distribution, basically a carbon copy with some improvements of the state-of-the-art facility we have in Columbia, Missouri. And then in addition, we'll have all of our headquarter functions there as well.

Got it. And so initially, when you set up the distribution in Tennessee you'll sublease? Or how is that -- the sublease in Missouri is what you're going to sublease it to your ex AO -- what is it, AOUT?

Yes. Maybe, maybe not. So the facility there, if you remember, we -- that is shared with currently with AOUT. So we currently sublease. We have an existing sublease with AOUT. We will be subletting our portion of the product. So we're going to market it. Obviously, AOUT is -- they decide they want to take that facility and expand into it. That's great. If they don't, we'll just kind of sublet it to another third-party.

Got it. Got it. And then...

Currently, Cai. I was just going to say, currently, they lease the majority of the building. They lease 59%. We use 41%. So they're already in a situation where they have more of the footprint than we have. And so if they want to increase it, that would be great. But if not, it's prime real estate.

And then maybe walk us through, so you start to construct a facility, when toward the end of this year. And it start -- takes 3 years to get done. Maybe walk us through kind of the timing of that, when you move people in...

We'll break ground sometime -- officially break ground and start earth-moving probably sometime in Q4 -- calendar Q4 of this year. And then the construction will kick off in earnest through first calendar quarter of '20 -- of next year '22. We expect that we'll be in a position where we'll be able to begin -- bringing in equipment about this time next year. We'll start bringing equipment and kind of get that all up to speed. And then operationally, we'll start with distribution probably sometime in early -- in Q1 of 2023. We'll start with the distribution. And then all of the other functions start to kind of roll in after that for the -- and then all of that will be kind of complete by summer of '23 -- by early summer -- spring, early summer of '23, which is when the front-office folks will be moving.

Got it. Okay. That's very helpful. And then you mentioned $138 million of cash outlays. How do those split between kind of operations and the numbers you talked about and CapEx? And maybe give us some rough sense of how that $138 million gets split between this year and coming years?

Yes. I would say a big portion of it relates to the building and the actual distribution center machinery. Plastic injection molding machinery will be a little bit later. So in the -- let's not -- we can't really talk fiscal year versus the next, say, 12 months is how we're looking at it. As in the first 12 months, we'll probably spend about half of that because we're working on building the building. And the vast majority of it really is capital. We're investing $120 million to $125 million worth of capital in Tennessee. So the vast majority of that $138 million is actual capital investment into the Tennessee facility. And so we won't be relocating probably until our fiscal 2023 time frame. So relocation costs will happen in the second year and year 3 as we move forward. So I would say, front-load the capital part of it and then backload the expense part of it. Of course, GAAP requires you to accrue severance and relocation over the time it is earned. So the difference between cash and what you see in the P&L will be that we will be starting to accrue severance and relocation from the time that we made the announcement today through the time when people actually do announce.

But from a cash outlay of $138 million, what I'm hearing you say is in the first 12 months, roundly $70 million and the other $70 million gets split into years 2 and 3. Is that essentially the way you think about it?

That's right. Yes, that's right.

Our next question comes from Scott Stember with CL King.

Just a question about the operational setup and the mindset in the new facility. Will it be the same having a certain footprint and being able to be flexible via -- just putting in the same type of machinery? Will you be shipping machinery from Springfield down? I mean will there be a different mindset that we have to think about during the ups and the downcycles and the impact on leverage in the future?

No. I think we'll -- I just talked about it a little earlier. I think if anything, it's going to help with the flexible manufacturing. So we'll be more able to move with the ebbs and flows of the demand. So I think -- and in terms of machinery, we will be moving some machinery from our Deep River, Connecticut facility, but that's plastic injection molding presses and tools. There really won't be much machinery moving from Springfield because, again, all the metal cutting and precision machining is staying here in Springfield.

Okay. Got it. And starting in the -- I guess, in the quarter coming up, you talked about $7 million coming through in non-GAAP adjustments. Can you walk -- is that the beginning of the accrual for relocation costs and severance?

Yes. There's some consulting costs in there. It takes a lot to go through the process that we've just gone through. So consulting costs and relocation, severance accruals, some travel costs, things like that.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Mark Smith for any further remarks.

Thank you, operator, and thanks, everyone, for joining us today.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.