AMMO, Inc. (NASDAQ:POWW) Q3 2023 Earnings Call Transcript

AMMO, Inc. (NASDAQ:POWW) Q3 2023 Earnings Call Transcript February 14, 2023

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

Scott Arnold: Good morning and thank you for participating in today’s conference call. Joining me from AMMO’s leadership team are Fred Wagenhals, Chairman and Chief Executive Officer; Rob Wiley, Chief Financial Officer; and Jared Smith, President and Chief Operating Officer. During this call, management will be making forward-looking statements, including statements that address AMMO’s expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the Risk Factors described in AMMO’s most recently filed periodic reports on Form 10-K and Form 10-Q, the Form 8-K filed with the SEC today and the company’s press releases that accompanies this call, particularly the cautionary statements in it.

Today’s conference call includes non-GAAP financial measures that AMMO believes can be useful in evaluating its performance. You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of this non-GAAP financial measure to net loss, its most directly comparable GAAP financial measure please see the reconciliation table located in the company’s earnings press release. The content of this call contains time sensitive information that is accurate only as of today, February 14, 2023. Except as required by law AMMO disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It is now my pleasure to turn the call over to Fred Wagenhals.

Fred Wagenhals: Thanks and I appreciate everyone joining us for our fiscal third quarter 2023 earnings call. I would like to start the call by saying how excited I am to introduce our newest management team member President and COO, Jared Smith to our shareholders. The management team spent a lot of focused time over the past year searching for the right person to join us to help us refine our operations as we moved into our new manufacturing facility at Manitowoc. Jared is the one. And from what I’ve seen in just the past months since he’s came aboard, the board and our management team did a great job in finding someone who will be an integral piece to take this company to the next level of growth. Jared and Rob Wiley, our CFO, will discuss the market environment and our performance in detail across both the manufacturing and marketplace segment of our business, but I did want to comment on a few items before I hand the floor over to my colleagues.

We started this company in 2016 with the vision and the mission to innovate and capture a meaningful share of the ammunition market, picking our spots for acquisitions, staying focused on always improving manufacturing operations. All while working to bring our customers the product they desire. We have grown by leaps and bounds in these short seven plus years and I am proud of what we’ve accomplished, but there is much work left to do, and we now have the team assembled to meet these challenges and are excited about the opportunities that lie before us. Regardless of the political spin we all hear coming out of Washington, the U.S. is already in the throes of a recession, and the inflationary drivers are hitting consumers hard in their pocketbooks.

Those pressures are being felt across the market both by AMMO and its peers alike. However, we are responding to those challenge. And Jared will outline what we are doing to best position our company within the environment and will highlight a number of the positive changes we have already made and will continue to make in the face of these headwinds as we continue to increase capacity and operational efficiencies. I have spoken on a few occasions about the development at GunBroker.com and we are excited that these enhancements are going to start rolling off this spring so that marketplace users, both buyers and sellers can take advantage of these new opportunities. This enhanced platform will significantly leverage the amazing GunBroker.com platform, driving greater revenues and profitability to the AMMO’s bottom line.

We are continuing to explore the market for additional best-in-class folks to join our team. Jared is a prime example of the new leadership we are adding to the mix, bringing 17 years of very strategic and focus the experience to the table. We have already spent a lot of time together speaking with both industry and marketplace about our plans going forward. At this time and without further ado, I would like to turn the call over to Jared Smith, AMMO’s new President and COO. He will walk you through the current state of our operations and what we believe the future has in-store for AMMO, its team and our shareholders.

Jared Smith: Thank you, Fred. Good morning, everyone. First, I want to thank the AMMO team for the opportunity to be here as President and COO. I joined the company on January 6 of this year, so I’ve been in the saddle for a mere 39 days. So, bear with me because we’ve got quite a bit of ground to cover. I’ve spent the last 17 years in the firearm and ammunition sector and I’ve always seen AMMO Inc.’s ammunition and marketplace businesses following the acquisition of GunBroker.com, as best-in-class for their space and potential. What Fred and the team accomplished over the last seven years is truly remarkable. The transformative addition of the GunBroker.com marketplace to the AMMO portfolio certainly made the entire market stand-up and take notice.

I ultimately joined this team because of the huge potential of the operations, opportunities to innovate, the ability to bring transformative change, and continue the growth trajectory of this company. I’m excited to share my vision for the company with you, but before we begin, one must understand the current state of the ammunition market, as well as AMMO Inc.’s position in it. For the last two quarters, the industry has seen serious headwinds from its record highs in 2021 and early 2022. Consumer confidence and increased inflations cause an erosion of the customer’s wallet for other items such as gas, milk, and bread. While our cost for copper zinc, lead and labor are all up. And ammunition prices on the shelf are down in comparison. We’ve seen margin compression in almost every sector.

The non-vertically integrated manufacturers such as AMMO gets squeezed in the middle. AMMO produces cases, loads, and manufacturers some, but few of its projectiles and none of the primary component. The supply chain for GunBroker and is more difficult than ever and the team has been sourcing European primers and powders at high prices at unpredictable volumes to sustain their production. All these issues lead to high cost in the time of a normalizing market, especially for 9 and . Our factories do not pivot overnight and we will continue to see an adverse effect in this last quarter as we continue to sell-off higher priced components, flushing out slower moving inventory and sell-off commodities will have a negative impact on margins. However, our sales and operations are pivoting, but no large manufacturing operation is capable of pivoting at the rate Wall Street or our shareholders would like to see.

To be blunt, as our earnings and forecasts for this quarter reflect, we were not fully prepared as a manufacturer for this shift. AMMO spent 2021 and 2022 manufacturing commodity products to meet consumer demand. We manufactured commodity products because they were easier and higher throughputs with less cost than their counterparts. We manufactured commodity products as a larger percentage of sales because it simplified planning and logistics. Our purchasing and sourcing opportunities were based on this trend. Sales teams were oriented towards top line revenues like most growing companies and we weren’t sufficiently focused on our brand and margin maintenance during this time, which leaves us where we are today. I share this with you so everyone is aware of how we got here, so you can see the trajectory of where we are going.

Photo by Jay Rembert on Unsplash

It is important to note AMMO’S rifle and pistol brass manufacturing capability is truly unmatched for its open capacity and potential. And previous roles as an industrial buyer, supplier, and consumer of AMMO’s products, I’ve always greatly appreciated the quality of the pistol and rifle brass that came off the lines, especially the uniqueness of the that they brought to market. Behind the scenes, the AMMO team was not stagnant and knew they must pivot. They were very busy constructing a manufacturing facility to produce a completely different offering while attending to never before seen consumer demand. In August of 2022, we moved into a new 185,000 square foot brass manufacturing, loading, and testing facility that can produce calipers that range from 25 auto up to 50 BMG and everything in between.

This is where we refine and enhance the operations at all levels to position the company for a bright and profitable future. It is here where our skill set and core competencies are ready for the real demand that will thrive in strong markets and execute profitably and normalize markets. It is here where we will be positioned to react in a nimbler fashion to the market’s macro trends. What are those trends and why do they matter? On the last two years, 16 million new consumers purchased a firearm for the first time. Secondly, the shooting sports captured the fastest growing high school sport in the U.S. trapshooting. The third macro trend is conflict in Europe and €“ on the European continent have resulted in an environment where those countries will be restocking their inventories for the next 10 years to 15 years.

This is important. The fourth macro trend that we’re following is, consumers are looking for longer range, flatter, heavier payloads with greater energy delivered to their targets than ever before across both pistol and rifle. That’s both commercially and militarily. And the last trend is and the military are looking for lead-free alternatives. So, how do we take these macro trends and adjust our business model. Our consumers and industrial partners are wanting to shift their production to higher performance products, that meet the needs of these macro trends. Our company is one of the only manufacturers with the open capacity and skill set to meet this demand today. Our state of the art plant came online at an opportune time to position our organization to better meet those challenges.

We will brand around and deliver new technology to this target market. And we will enable our industrial partners to meet those needs both domestically and internationally. This shift to brass manufacturing is a larger percentage of our business and loading high performance rifle ammunition manufacturing requires less working capital, enables higher margins, and better cash flow. We will continue to leverage our relationship ships to diversify our supply chain, allowing us to better plan, price, and maintain margin in our loaded ammunition operations. We’ll be freeing up cash currently stuck in inventory and streamlining our purchasing around new domestic supply lines. I’d report on the guidance for the next year, but we are knee deep into the reforecasting and budgeting process.

We are preparing a budget and a forecast around a new set of execution principles for this enhanced footprint. While I pause on our guidance, everyone should know that in the last 40 days, we’ve sold out of our entire current capacity for long action rifle brass. In the last 40 days, we’ve secured domestic gunpowder sources, which will free up cash flow, enabling us to sell-off our high inventories of European powders and primers. AMMO, Inc. will finally compete in the high performance, high margin categories that it hasn’t effectively participated in due to a lack of premium powers. We are in a better position to execute and our outlook is healthier today than it’s ever been. We are in a better position because we have a tool that we’ve not leveraged in the past.

With the company’s purchase of GunBroker, we have solidified a way aggregate data and cultivate a wealth of opportunity. For example, the diverse group of participants from hunters to sportsman’s to long range shooting enthusiasts all flock to the website and every search, purchase, or bid they initiate is captured for us. This priceless cultivation of data does not exist in this form for anyone else in the market. This allows us to make data driven, market oriented decisions that will fuel our investments. This will enable us to find the areas of real performance and demand on a real time basis. This is the new trend line for the ammunition division. I’ve told the story a 100 times over the last 40 days and I will continue to tell the story every day for the next 180 days.

For the investors on the phone listening or watching for the first time, GunBroker facilitates a legally compliant and thoroughly documented exchange between a buyer and a seller either through an auction or the buy it now capability. One item, one transaction at a time, and this is incredibly important to understand one item, one transaction at a time. GunBroker does all this while meeting every federal and state regulation for the exchange of firearms. It has no inventory and does not receive or ship anything. It merely facilitates the transaction. We are in the top 500 websites for traffic in the U.S. and over 5 million unique users come to our site in any given month. Under any objective metric, we are the 600 pound in the space and we have been and remain in that position, notwithstanding the fact that GunBroker has not developed the ability to cart the product.

Process credit card fees internally or capture advertising revenue in any meaningful way. This all changes in 2023, 2024 calendar year. This 600 pound gorilla becomes the 900 pound gorilla that it was meant to be. GunBroker is transitioning from a one-item per transaction platform to a cart-based platform. The GunBroker team has been working around the Clarkson’s acquisition, testing developing and building relationships with the banking community, as well as the distribution dealer network across the country to make this next step a reality. When we go live this summer, we will be positioned to not only facilitate the sale or directly sell a firearm to consumer, but also support and leverage that foundational transaction with the sale of the scopes, , scope and leverage that foundational transaction with the sale of the scope, , scope mounts, ammunition, camouflage, boots, water bottles, batteries, you get the picture.

For any new hunting/shooting consumer, the gun is most likely the least expensive purchase you make. Certainly, when you view and value the total aggregated transaction of all complementary accessories required by the market to enjoy the shooting sports hunting experience. Hunting and shooting sports participants will have a user friendly marketplace where the consumer can interact with new and used equipment dealers, distributors, and other enthusiasts reselling their equipment to get out their next endeavor. In 2022, GunBroker facilitated 1.2 billion in exchange on our marketplace website based on singular transactions between a buyer and seller with no ability to carve product. In the past, GunBroker has only received revenue based on a fee for processing that singular transaction.

Going forward, we will have an incredibly robust and user friendly platform before the market that presents GunBroker with multiple revenue sources. GunBroker operates in a federal and state regulated environment. GunBroker is roughly 6% of the entire firearm trade in the U.S. You got to think about that, 6%. We shift to multiple locations managing different state sales tax implications, all while managing different buyers and sellers. Our customers value data privacy, value in real terms, and efficiency. We managed this value offering all while maintaining the largest auction and marketplace of its kind for this industry. This is the moat that protects us. The more complicated and intricate space we operate in, the higher the cost of entry is for our competition.

We are the largest player in this space and the security and the tech to make the operational efficiencies flow seamlessly keep us in this space. One might ask, why has this not already been done or communicated before now? The real answer is that this takes time and dedicated teams to execute at this scale. Many software houses don’t want to have anything to do with this firearm centric marketplace. Banking relationships had to be forged, transactional volumes secured, tested, and accounted for. Why have we not done a better job of communicating the story? Well, we failed to communicate the fundamentals of how buyers and sellers transact today versus the future. Secondly, our messaging is confusing. We are AMMO Inc. our ticker is POWW, and when you hear the historic message, we’ve been focused on ammunition with ammunition themes based in an ammunition market that made front pages.

GunBroker’s messaging got lost. The buyer, seller experience, and the new user experience was not articulated until now. Within our portfolio, our messaging going forward must change. The look and feel of how we go to market must change. I hope you can tell how excited I am about the future of this company. I couldn’t be more bullish about our future and that is why I joined the team. While the industry is currently facing headwinds, we have been busy creating our own tailwinds. I can’t express the energy and passion this team brings to the table every single day. We are constantly on boarding top talent to facilitate this new growth and we’re seeking talented engineers accountants, analysts, and leaders to see how they can fit into the larger ecosystem that we are creating here.

Thank you for taking the time, allowing me to come onboard this team, and listen to my thoughts today. At this time, I would like to turn it over to Rob Wiley to walk us through the financials.

Rob Wiley: Thank you, Jared. Welcome everyone. Let me now review our third quarter financials in more detail. We are facing headwinds in the market today along with the rest of the industry, but remain excited about the new direction of our two segments in upcoming quarters with our marketplace enhancements coming online in the first half of our next fiscal year and the shift in our manufacturing strategy, which will drive profitability. As is observed by the peers within our space, we continue to see margin compression on our ammunition segment. U.S. commercial ammunition market continues to slow from the inflationary impact in global recessionary drivers being felt across most industries. The reduction in sales, higher commodity, and freight costs, along with the increased operating expenses such as the remainder of the one-time legal expenses related to the proxy contention, stock compensation, corporate insurance, and payroll have increased our cost of revenues and operating expenses, resulting in a net loss for the period.

To address these increases and as discussed earlier in the call, we plan to recoup cash tied up in our inventory in our quarter ending in March. And the direction of our manufacturing operations and toward the direction of our manufacturing operations the opportunities that provide enhanced profitability opportunities such as premium rights of brass, including our expanded offerings of large caliber brass. Additionally, we continue to push forward on the improvement to our GunBroker.com marketplace, which represent great leveraging opportunities that spring from this incredibly robust site. In this regard, we are currently tracking for the payment suite and cart platform to launch in the first half of our next fiscal year, which we remain reasonably confident will drive growth and profitability to the site.

We ended our third quarter with total revenues of approximately 38.7 million in comparison to approximately 64.7 million in the prior year period. This was a decrease of 40% from the prior year quarter. The decrease in revenue was mainly attributable for ammunition segment and the inflationary impacts that are currently affecting the market. These market conditions also impacted the revenue of our marketplace segment affecting a 12% decrease from the prior year period. However, operating performance of our marketplace GunBroker.com still remains strong and although our top line revenues wavered, our margins are still comparable to historical performance. Our cost of revenues were approximately 26.2 million for the quarter, compared to 42.2 million in the comparable prior year quarter.

This decrease was related to reduced sales volume and increased commodity costs. Accordingly, this resulted in a gross margin of 12.5 million, compared to 22.5 million. As our sales volume fell in the reported quarter, we anticipate another quarter of margin compression to do these increased costs, but expect to swiftly transition to more profitable sales activity starting in the first quarter of our next fiscal year by shifting our focus to more sales of our premium brass and large caliber ammunition rounds. Our balance sheet remains strong with our total current liabilities decreasing by 21% since our year-end and our total current assets virtually unchanged. We are revising our adjusted EBITDA and adjusted net income per share calculations moving forward, which we believe will provide the market with a more accurate representation of our operations.

To transition to our new calculations, we are providing our historical adjusted EBITDA and adjusted net income per share calculations, as well as the calculations you can expect to see moving forward and incorporated into our updated guidance. For the quarter, using our historical adjusted EBITDA, and adjusted net income per share calculation, we recorded adjusted EBITDA of approximately 7.9 million, compared to the prior year quarter adjusted EBITDA of 20.1 million. Using our moving forward adjusted EBITDA calculation, we recorded 4.8 million in adjusted EBITDA for the period, compared to 10.7 million in the prior year period. This resulted in a loss per share of $0.04 or historical adjusted net income per share of $0.05 in comparison to $0.14 in the prior year period.

Using our updated calculation, adjusted net income per share was $0.05 in comparison to adjusted net income per share of $0.08 in the prior year period. Due to the decline in sales activity as a result of the market shift, we are reducing our guidance for our 2023 fiscal year. We are updating guidance to revenues of 185 million adjusted EBITDA using our new calculation of 22 million and EBITDA of 17 million. Looking forward to our next fiscal year, we expect the new direction of our company to increase profitability through increased sales of our brass casings and a performance rifle ammunition that will increase the gross margins of our ammunition segment. Additionally, the launch of the payment processing suite, platform, and analytics offerings are anticipated to position our GunBroker.com marketplace to allow for increases in our gross merchandise volume and as a result, increasing revenue and profitability.

That concludes our opening remarks. I will now turn the call over to the operator for questions. Thank you.

See also 20 Largest FMCG Companies in the World and 13 Most Profitable Large Cap Stocks.

Q&A Session

Operator: Thank you. And the first question is from Matt Koranda with Roth Capital. Please go ahead.

Matt Koranda: Hey, guys. Good afternoon. Just want to start out with the AMMO business. Can you just disentangle for us, sort of the embedded price declines versus volume in that segment in the third quarter? Just curious like, you mentioned demand seems to be an issue, but just also curious sort of, how to think about production at the facility during the quarter? And was there any supply disruption or was it all a demand issue that you’re experiencing currently in terms of the decline?

Jared Smith: Hey, Matt, this is Jared Smith. First of all, thank you for your question. And I’m going to repeat the question back to make sure I heard it correctly. You’re asking about in this past quarter the lack of demand or the lack of volume in sales, was that related to production issues or just pure market issues? Is that correct assumption of your question?

Matt Koranda: Yes, that’s the crux of it. Thanks, Jared.

Jared Smith: Fantastic. So, the reality is, it’s a mix of both. When you move into any new facility like this new 185,000 square foot facility, there’s walls that have to go up. There is racking that has to go in place. Machines have to be set, laid, and turned back on. So, is there an impact from the move? Absolutely. Was there an impact from the market? Absolutely. And sheer demand on 9 and as I said in the prior recordings, the volumes of 9 and in relation to our total capacity was affected by the market, but the real reality is that we didn’t have the primers, we didn’t have the powder, and we didn’t have the fundamentals to shift to these other higher margin plays that we will be tuning our factory too over the next 3 months to 6 months.

Matt Koranda: Okay, got it. That’s helpful, Jared. Curious also if you could just maybe speak to the changeover that you’ve alluded to in terms of capacity? It sounds like you’re going to be going after more center fire rifle rounds, more casings in the mix on a go forward basis. Maybe just draw us a path if you could for the next couple of quarters in terms of how the capacity cuts over, what to expect as we kind of, obviously you’ve embedded this into the fourth quarter, but I’m just curious over the next, call it, two to three quarters, how we should expect capacity and production to trend within the AMMO business as you cut over to the, sort of more differentiated rounds and some of the more casing mix that you’ve alluded to?

Jared Smith: You can’t compare historic AMMO production in its existing factory to what we have going forward. The other very interesting fact about this factory is that we have the ability to change over from 9 millimeter to 300 blackout on almost every one of our lines. That is a unique capability that does not exist in this market. So, our ability to draw off of and sell premium rifle cases in both short, long action is truly unique. And as I alluded to earlier, we already in the first 30 days sold out of our entire low rifle action capacity. So, what you’ll see in the course of April, May, I’m sorry, February, March, April is that we will be moving off of our inventories that we have a heavy commodities products that have already been built and are in the process of being loaded and then we’ll shift that production capacity to selling brass.

So, instead of losing 5%, 10% margins, we’ll be gaining 30% margins. You will see a reduction in the top line, but you’ll see a growth in the bottom line and that’s where the focus is.