The ammunition shortage that's plagued the firearms industry for the last two years shows no sign of letting up. It may, in fact, intensify in the weeks and months to come, which should provide manufacturers with additional profits.
Olin (OLN 0.21%) is one of two companies that control most of the ammunition made in the U.S. (the other being Vista Outdoor). Ostensibly a specialty chemicals manufacturer, Olin's Winchester brand of ammo is one of the most popular on the market, and sales and profits are soaring.
While there's a long tail of growth ahead of the company because of outsized demand, supply constraints and the war in Ukraine will exacerbate the situation.
The best quarter ever
Olin said first-quarter ammo sales jumped almost 10% for the period, a significant increase, considering sales in the year-ago quarter had doubled from 2020. The gains this year are almost entirely due to price increases in the commercial market as demand still far outstrips supply, where 60 million recreational shooters vie for ammo that now routinely costs $1 or more per round.
That enabled the Winchester segment to deliver to Olin its highest quarterly earnings before interest, taxes, depreciation, and amortization (EBITDA) in the company's history. It's the smallest business Olin has, with revenue of $426.7 million in the first quarter, or about 17% of the $2.4 billion total, but it's growing quickly, as are profits.
Net income surged 61% to $393 million, or $2.48 per share, compared to $243.6 million, or $1.51 per share last year. Adjusted EBITDA was $710.9 million, a record for Olin.
Ready to shoot higher
Supply chain issues for key raw materials have caused prices to rise, but with consumer demand so high -- there were some 13.8 million first-time gun buyers over the course of the pandemic, according to the National Shooting Sports Foundation (NSSF) -- that pricing has been able to remain higher than expenses.
After its recent round of price hikes on ammo and primers that are expected to offset the higher commodity and other materials costs Olin is experiencing, management expects Winchester's second-quarter results to be similar to the first quarter. Olin's Winchester segment reported a 40% surge in segment earnings to $119 million from last year, and Russia's invasion of Ukraine will make a tight market even tighter.
According to Olin, Russian ammo imports account for about 12% of the total U.S. market (the NSSF pegs it around 4% to 8%). It was already becoming scarce after the State Dept. imposed a ban on Russian ammo and firearm imports last September in response to the Russian Federation's suspected poisoning of opposition figure Aleksey Navalny.
No end in sight
While U.S. Customs was still allowing imports already agreed upon to enter the country up until that point, Russia's late-February incursion into Ukraine all but assures the ban won't be lifted. Moreover, companies that make ammo, like Vista and AMMO, along with regular Americans, began donating millions of rounds of ammunition to help the country's defense, making already scarce rounds even scarcer.
Olin president and CEO Scott Sutton acknowledged the war is "just one more item that enhances the demand profile looking forward for Winchester".
With robust consumer demand at home, production capacity running at full tilt, supply chain issues creating scarcity, input costs going up, and import restrictions that will further inflame inventory problems, the ammo market is suddenly a high-profit center for manufacturers, and Olin stands to be a key beneficiary.