Outdoor Holding Co Q2 FY2024 earnings call

• The company is transitioning to a leaner and more profitable operating model and addressing operational inefficiencies. - Incurred $3.9 million of non-recurring expenses due to legal and professional fees, etc. - Lowered working inventory by $1.3 million, created $9.9 million in cash, and reduced working capital by $8.9 million since year-end. - GunBroker.com launched centralized payment processing gateway and onboarded 2,826 sellers. - Ammunition division took margin losses on slow-moving inventory and had additional expenses due to press failures, but brass sales expanded by 47% compared to the previous year. - Q3 sales showing lift with 14.7% sequential increase in volume in October versus September.

In the ammunition segment, casing sales increased to $6.4 million in the second quarter of 2024, up from $4.3 million in the prior year period. Marketplace revenue for the reported quarter was $12.5 million, compared to $14.6 million in the prior year quarter. Casing sales, which afford higher gross margins, saw an increase, while marketplace revenue decreased due to the macroeconomic environment impacting the industry.

• Anticipated sequential decline in Q2 sales was seen, but Q3 sales starting to lift with 14.7% sequential increase in volume in October. - Enthusiastic about progress and outlook for GunBroker.com, expecting to capitalize on positive trends with strong financial position.

• Operational issues with ammunition division's presses leading to additional expenses. - Market changes and macroeconomic environment impacting revenue in the marketplace segment.

Q: Maybe just starting on the ammo segment, how sustainable is the uptick and demand that we saw in October? Has demand sustained at that same level since then? And I guess, just as a result, have we seen wholesale pricing change much?

A: Matt, great question. We’re seeing wholesale pricing because the event happened just before the NASGW event, we’re seeing wholesale pricing increase slightly. There’s a lot of optimism out in the market out there that this price is going to hold going into the election year. We’re certainly optimistic for the trends that we’re seeing. And we continue to see opportunistic buys out there that says that price continues to escalate. So, do we think it will -- that this is a long-term hold? We think there is a strategic repricing that’s happening going into the 2024 year.

Q: And any calibers in specific were noticing pricing changing much or just kind of across the board?

A: Yes. So I mean, the stuff that everybody’s running for is 5.56 and 223, 7.62 by 39, all your larger rifle calibers, anything related to military calibers, because of the news between Israeli and Hamas. But I would say across the board we’re getting increased demand and increased inquiries on bringing on new customers.

Q: Core ammo margins flipped back negative in 2Q. I know we talked about and referenced the rifle casings, press are going down, but is the sequentially worse gross margin coming entirely from lack of cost absorption on the casing side? Just trying to gauge, did both loaded ammo and casings have sequentially worse gross margins or was that just from the casings side of the business?

A: We only really took a gross margin hit in some slow moving products that we really were sitting on too much of leftover from ‘22. We flushed all that inventory out. We’ve not seen any price erosion on brass casings, and we’ve not seen any price erosion on 9 and 223. It was flushing out inventory. And back in June, when our press didn’t come online the first time, we had made strategic purchases of contact tooling bunters, another tooling that we expense upon receiving. And month after month that press did not come online. And so that contact tooling and those expenses continue to flow in. And that’s really the major hit to our profitability in the ammunition division.

Q: Last one for me. Maybe it’s on GunBroker. Good to see the payment processing finalized. Maybe just remind us on how to think about the magnitude of the benefit to take rate and how we should expect to see take rate climb in the coming quarters as a result?

A: Well, the take rate we see climbing somewhere between 1% to 3% as we capture credit card fees. You’re also going to see an uptick just due to the sheer seasonality that we see over GunBroker, but that doesn’t really affect the take rate. We’re also seeing our take rate -- what’s the word I’m looking for? Well, the main effect is that you’re going to see somewhere between a 1% to 3% in our take rate over the next, 3.5 to 4 months as we onboard these new sellers.

Q: And last quick one. Is carting live? I thought I heard you reference benefits from it on the prepared remarks.

A: We are not carting yet. What’s happening right now is we’re onboarding those sellers through our payment gateway and centralized processing, and carting will not come on until we finish onboarding all our sellers.

Q: A bunch of things to walk through here. First, this may be hit a little deeper on the demand environment that we saw in October. Can you just talk a little bit about maybe the consumer demand first? How much you saw that uptick. And did you see that -- maybe what the impact was within your GunBroker business? I think that you said that -- you quantified was at 14.7% sequentially, but that was the typical seasonality. Walk us through kind of what you’re seeing on the ground with consumers.

A: So we would expect anywhere between a 5% to 6% increase and a gentle trend coming from September into October. This was a pretty sharp trend in that 14.7%. And that’s really because these events happened in the second half of October, it was really sharp incline after the events in Israel and Hamas that we saw the uptick. I think I answered only one of two of your two-part question. So, please repeat.

Q: Yes. Maybe just elaborate on that. Are you seeing demand -- that demand, is that primarily on firearms or is that spread across firearms, ammunition and kind of other accessories?

A: It’s spread across firearms and ammunition. And we’re certainly seeing an increase in ammunition sales on the platform, in those calendars. [Ph] Q: Okay. And then the other piece of increased demand, maybe walk us through what you’re seeing from OEM customers for brass casings. So you’re seeing that demand uptick significantly in October as well? And I don’t know if there’s anything you can quantify around that.

A: The issue being is that we’ve been sold out for quite a while, Mark. And until these presses come online, we’re not really wanting to take any new orders because we need to make sure that we’re getting the orders that we have on our books and that we are supplying our customers that placed orders back in March, April, and May, when we forecasted that this new press was coming online. So that’s our biggest issue. We could go out and take on 200 million, 300 million more brass case capacity, but the demand today that exceeds our output is really in a rifle case capacity, and that’s where我们’ve had a shortfall in operational efficiencies.

Q: And then on that, as we think about these gun rifle process, these equipment issues that you had, where are we at today versus maybe where we were at the end of the quarter or mid quarter?

A: Yes. Great question. So back in April, when we started to do the walkthrough of the new plant, we recognized that we didn’t have the redundancy that we needed. So, we bought additional presses, but those presses won’t come online until December. The press that went down, the parts showed up last week, we’re running and testing off this week. Once again, it’s not from a lack of demand, it’s not from a lack of everybody pulling together, trying to get this press up and running, this press was bought during COVID. Some of the parts were made during COVID. And the parts that are being made today are being made by the original equipment manufacturer versus when they outsource the parts for these. And so, we think we have a press that we can count on going forward. But the last three to four months of sending the parts back and forth and trying to get the parts to work has been a very frustrating experience for everybody on the team.

Q: The last piece here maybe for me, and I can go back into… A: One of the things that’ll help explain this press, this press is part of our pre form process and it feeds about six other presses downstream. So it’s not like a single press goes down and you just work around that press. It is the feeder press for our entire medium action line, which we have somewhere in 90 million to 120 million piece capacity on. So, it’s a big deal for us and has been.

Q: The last piece here maybe for me, and I can jump back and if any other, is as we think about the profitability that was impacted by kind of clearing out, we’ll call it, aged or not as current of inventory. I don’t know if you can quantify anything else there around how big of an impact that had in the quarter. And then, also do you feel like you got through that process during the quarter, or is there still some remaining loaded ammo that may go out at lower margin or maybe even loss as we roll into Q3?

A: No. At this point going forward, we’ve cleared out our old inventory. Part of our push to get that older inventory out is that our overheads are calculated on goods sold. So because we had such a hit on our overhead from not running the rifle presses, we pushed really hard at margins that we didn’t even want to take, but the bleeding should be over now and we’re off to a better footing.

Q: Maybe, Jared, I don’t know if you still got me, but you said taking price up. Was that kind of post quarter end?

A: I mean, what we’re seeing, yes. That’s post quarter end. We’re seeing demand in 2024 that allows us at least a little bit of breathing room. You’re not seeing as much price margin compression as you’ve seen in the past.