Q3 2020 Earnings Call
Please standby.
Good day and welcome to the fish.
The outdoor third quarter fiscal year 2020 earnings call today's conference is being recorded.
I'd like turn the conference or to Kelly Reisdorf. Please go ahead.
Thank you and good morning, Thank you for joining us sorry third quarter fiscal year 2020 earnings call.
With me this morning, our Christmas.
The outdoor Chief Executive Officer, and Mick Lopez, Senior Vice President and Chief Financial Officer before we begin I'd like to remind everyone that during today's call will be making several forward looking statements and we make these statements under the safe Harbor provisions of the.
Securities Litigation Reform Act.
These forward looking statements reflect our best estimates and assumptions based on our understanding of information known to us today.
These forward looking statements are subject to the risks and uncertainties faced with Vista outdoor and the industries in which we operate.
We encourage you to.
Today's press release and Vista outdoors, FCC filing for more information on these risk factors and uncertainties.
Also note that we have posted presentation materials on our website at Vista outdoor dot com what to supplement our comments. This morning and include a reconciliation of non-GAAP financial.
Sure.
With that said they'll turn the call over to Ukraine.
Good morning, and thank you Kelly will begin the call by telling you what I told my leadership team.
This was a good quarter for us and I'm proud of our team for delivering excellent results in a continuing challenging environment. This outdoors been a turnaround mode since I began more than.
Two years ago.
She gonna have to spend meticulously leaning out our overhead structure and reconstituting our brands, while laying out new repeatable process are used for future success.
After six months, we've accelerated pace and the results of our third quarter provide a glimpse into our future holds well I'm pleased with our Q3.
Results and we still have much more to do to accomplish their goals. We set produced outdoor that's part of our accelerated transformation plan.
While we continue to make steady progress, we're not satisfied and we'll continue to relentlessly push for better results sooner.
I will cover our financial performance by Congress report on accelerated transformation.
Land and give color on some external factors that impact our business I will start with an overview our financial performance for the third quarter fiscal year 2020, our CFO Mick Lopez well go deeper into the numbers. During his presentation later this morning.
Third quarter, we delivered on several key financial metrics. Our team has worked hard.
That is encouraging to see some of the hard work and starts pay off specifically in the third quarter for the first time since our turnaround began vista outdoor recorded positive organic revenue growth within shooting sports both sales and gross profit were up one on organic basis compared to the prior year quarter. These are encouraging results is that.
First time at 11 quarters, there ammunition business has seen year over year growth.
That's a product segment delivered on profitability improvement with continued expansion on the gross profit line, we saw positive year over year sales growth and better outdoor recreation and Bell General business units and as we had done each of the past quarters.
Let's focus on cost controls enabled us to continue to invest in new products and our centers of excellence, while taking our total as teenage spend down year over year.
As many of you know one of our two annual bonus measurements for myself and my team is free cash flow generation. This past quarter, we continued to see improvements in.
Which was down 20%, while our service levels increased the combination of inventory management tight cost controls and strong collections enabled us to generate 70 million in free cash flow.
This free cash flow allowed us to pay down 55 million towards our long term debt balance, bringing it from a high eat up a.
Like some of the 1.2 billion to current levels of just under 500 million and further reducing our leverage.
As we move into the fourth quarter and beyond our focus remains on accelerated transformation plan. This plan is our roadmap in a report card. It drives what we do but also gives US a platform and what we can report progress on.
Well go through each pillar of the plan and the latest updates from each the first areas optimizing our organizational structure. This is about putting the right talent in the right places and organizing our brands and business units won't most effectively while organize incorporate into a lean but affected team to drive accountability and brand support.
Sure.
As we've shared in the past we have reconstituted our brands to be more autonomous have more of a founders mentality and enabling them to promote in go to market as most authentic way possible as we begin to place more of an emphasis on organic growth you will see our brands continue to place increased emphasis on product innovation and digital.
Marketing in E Commerce.
At the corporate level, we've completed the significant DNA restructuring, which has resulted in not only a leaner more efficient team, but also better position corporate for internal and external needs. We continue to look at ways to be more efficient with our corporate overhead structure and we'll continue to do so.
Our second key area of focus is our centers of excellence for those of you did a followed our company an accelerated transformation plan you understand how these centers bring deep knowledge and expertise and the organization in practice. These centers advance our goals to drive growth and profitability become more consumer minded and all but we do and leverage our.
Our scale and diversity for the benefit of the brands and the business units. Thus far we've established two major disciplines operational excellence and digital E Commerce.
Oh Operation Center of Excellence has been resource to bring best practices and proven tools to our business units in areas that enable them to reduce complexity.
Within their business and improve their profitability indoor facilitate more profitable growth.
At our Investor Day last fall, we gave a few examples illustrating the types of efforts we've undertaken programs such as our vendor procurement initiative SKU rationalization that manufacturing efficiency initiatives are delivering real results. It is a few weeks.
We want our gross profit rates are improving as we are absorbing increase constant cares and other headwinds.
Yes have continually certainly been a drag on profitability for many of our businesses and we continue to work tirelessly to find ways to mitigate the impact of tariffs to date, we've been largely successful deploying our scale.
While we continue to explore non Chinese manufacturing alternatives, where feasible sharing cost with vendors and working closely with our customers.
In our digital ecommerce discipline I mentioned on our last call. It we've got 16, new web sites online in calendar year 2019.
In calendar year 2020, we will continue to migrate the.
Rest of the brands to our leading edge salesforce platform and position ourselves to begin to leverage the benefits of a single share digital E Commerce platform.
In the third quarter, we began to see real progress from our ecommerce investments for example, and Camelbak, we had a strong holiday season, delivering significant year over year.
Research and traffic conversions and net sales within E. Commerce. This was a leading contributor to camelbak delivering a strong overall quarter three with both sales and profits up nicely year over year.
Another example of the momentum ecommerce program brings is within hunt shoot, which now Primo syntactical direct.
To consumer web sites, all experienced record setting year over year revenue growth during the holiday season, as well as site and conversion increases well over 1000 basis points for each we're pleased with the initial success of our E commerce initiatives and look forward to continuing to transform the way, we engage with our customers and consumers.
Our third key area of focus is reducing our leverage.
We remain intensely focused on reducing our leverage by improving profitability and free cash flow and taking our debt down in the third quarter, we paid down over 55 billion of debt and have meaningfully reduced our leverage Nick will provide more details on this and his update on business performance.
Our current key area of focus is returning our brands to organic growth. This has become one of the top themes across the entire company as we begin calendar year 2020, and head into fiscal year 2021, we realize that with an improved foundation. The next phase of our transformation must include meaningful organic growth.
You've heard me say many times that our new products, the lifelines company, our ability to innovate and connect with our end consumer is central to driving a culture of organic growth.
Recently attended the shot show in a meeting with our customers the positive sentiment and confidence expression industry. It's frankly, the best I've seen since I've been with.
The company, our new product innovation pipeline is excellent and has received a significant number of accolades with the media, we're well positioned to many categories are profitably grow share and capitalize on trends with our end consumers.
Then ammunition federal is leading the field with its new products. This year it back we'll be introducing.
Morning products in calendar year 2020 than any previous year, our premium tremont ascent hunting bullet lens match accuracy with outstanding performance. It's simply the best hunting board available is getting great attention in the outdoor media.
Another Great example of game changing innovation coming out of our.
It's a business inspire stick the fire stick meza loading system is the most innovative product in this category in decades, providing muscle loaders with a safer more convenient experience. Its launch has created great guys in the market and is sure to change the way people hunt with muscle orders.
Guns are classic and very popular.
Hi arm for hunters and shooters Federals, new hammer down line of ammunition makes them run better than ever before the first full line of ammo made specifically for leather guidance was launched in partnership with Henry firearms. The product features a bonded hunting bullet for use on targets in game.
This spring camelback.
And we'll be introducing the new horizon collection, which is a brand new line a vacuum stainless steel drinkware. The result of thoughtful and strategic consumer research. This new riot Drinkware is uniquely positioned to sort of demand with our core active outdoor lifestyle consumer in a growing category.
In the range finder lineup.
Good question now our new Nitrile 1800 with its built in ballistic solving engine with Bluetooth connectivity from apply ballistics is it agreed to our bush now bullets to gap. This new product with connected capabilities is long range shooters, a simple digital solution for more accurate shop placements in the same theme.
Team around connected products, our new when man GPS speaker from Bush now golf created a significant amount of buzz with customers and media at the PGN show.
The innovation behind the wedding band is a story that starts with sound our product teams that truly come up with a first to market product that combines practical.
On the course features such as GPS course map distances with a high quality sound system. The rivals the top names in the speaker market.
Also introduced it Pgas show, we received positive customer feedback and strong demand around the new V. Five laser range finder. The reception of the five affirms that Bush now Bob.
It's still the choice drives a premium and is well positioned to outsell every laser range find a combined in the market, maybe five and wing man along with all the other industry, leading products and the Bush drop off portfolio resulted in orders written at the Pgas show hitting historic highs.
In the outdoor cooking space we've.
At least a Wi Fi enabled pellet growth from camp Chef. This feature allows our consumers to take control of their grill directly from their phone whether they are at home or on the go.
Well in slow cooking has never been easier with Wi Fi enabled monitoring and control you cannot only see the exact temperature that meet a real or that you can adjust.
Sure and slug levels Accordingly late from your mobile device.
Yes, Joe how many goggles continue to be a favorite choice from entry level options. The best in class Technology Zero provides snow helmets in goggles for every level of rider. Your has found a clear formula for six success with the right team.
Dedicated employees, creating market leading products paired with thoughtful innovation as we remain the first choice for consumers.
Referred to a strong and industry, leading innovation pipeline within our bells your family of brands.
And lastly, many of you are aware that we face some challenges Wedbush now liner optics.
And in response to those challenges we've undertaken consumer research.
In response to the insights we have gleaned, we've developed a repositioning strategy, which focuses lead targets innovation around our core consumer.
Lastly, although our top capital allocation priority continues to be reducing our debt.
We hope to increase our efforts to explore a tuck in acquisition as conditions improve and we progress into the latter phases of our transformation.
While our internal efforts are bearing fruit, we face external uncertainties and market conditions that are less predictable. We believe our organization is stronger and better equipped to manage and address these.
Certainties, but in the face of the ongoing trade war shifts in retail and other outside factors. There are elements on the horizon, we're sharing in greater detail.
On the tenants on the United States government finalized at Phase one trade agreement with China on January 15.
We're pleased to see the two countries progressing towards a conclusion.
For Vista outdoor the phase one agreement mitigated against future potential terrorists, but did not remove terrace currently in place on many of our products.
The helmets outdoor cooking and other products continue to be subjected to import tariffs. These types of posed a hug shipped to our business and we'll continue to challenge our brands in an environment where.
Mitigation options are decreasing.
The phase one agreement also created a false expectation that tariffs will soon be completely eliminated that expectation has created a new obstacle for our business is to overcome.
Hey, suppliers are pushing back against efforts to reduce our cost of finished goods and many customers have resisted.
The price increases as the perception from both groups is that the trade wars over or nearing completion.
Our largest customers have reduced or delayed post holiday ordering in anticipation of further carefully.
Our team is working directly with the United States government to have a products removed from the various tariffs lists.
For safety helmets, which is our most impacted category. We have testified before the government submitted petitions organized industry coalition to support our efforts and lobby Congress for support.
Right. These efforts how much continue to be subjected to list for a terrorists.
And remember how much were successfully adjudicated and.
From the list three tariffs we've deployed successful lobbying campaigns only to have them on done for reasons that we still do not fully understand however, we will continue to push for government relief and take other measures to ensure we can mitigate the impact of our financial results.
Yes to the ammunition market the ammunition.
Industry is still settling it after major retailers announced their exit from certain ammunition categories. While this decision was made just last September and their exit is complete as at the end of December the full impact is just beginning to be felt.
As we have been impacted by disruption in the channel over the last several years, we acknowledge that it.
Take up to a year or more in some cases to establish a new equilibrium.
Our ammunition team has been laser focused on mitigating this headwind predominantly by working with our other customers to pick up these products in volume we view this as a near term headwinds and does not change our long term growth strategy as the market share.
Innovation leader.
While we certainly see stabilization in the ammunition market, there's still some headwinds we are facing the rupiah market remains very soft the small rightful Lake city business remains very challenging.
Last quarter, despite the retailer exit activity overall, we saw less discounting and continue to see.
Stabilization in pricing.
We also were seeing continued to increase consumer demand in a pistol ammunition category, which is reflective of the trend with our end consumer towards a personal protection.
In summary, why we see signs of stabilization in ammunition market. We're cognizant of these headwinds and working diligently to.
Q2, adjusted react to the changing market dynamics.
The Corona virus has spread throughout many regions of China and across the globe first and foremost retracting the virus and taking precautions that protect our employees and their families.
The State Department has issued travel advisories and many global health organizations.
Have restricted travel and other activities in the region second we are working with our regional partners understand working conditions and impacts to production and overall commerce, China is a hub for many products in our outdoor product segment, and we're diligently tracking the situation to assess the impact on our operations.
This point it is too early.
Fully understand the ongoing impacts to our businesses.
Overall I'm excited for the future Vista outdoor while outside uncertainties exist and May present short term challenges. Our team has worked diligently to build the platform for success with the right people. The right processes that are products and brands are meaningful and resonate with.
Consumers in the marketplace combined with our leadership team improved profitability strong cash generation and reduce debt. We're certainly poised for future success I'll now turn over to mix to share more detail, our financial performance and outlook Nick.
Got you credits and good morning, everyone. We're very pleased with our performance in the third quarter.
Okay, which is traditionally our best seasonal quarter as Chris stated, we believe the virtues of the accelerated transformation plan, having any immediate impact on performance morale and overall operations. We have a roadmap we know what we want to go and this quarter is another important step on this journey, specifically within the financing or specialty.
These were the teams focus commitment and delivering on our inventory management plant profitability improvement initiatives and operational excellence.
Now, let's review our third quarter consolidated results, we have provided EBITDA with both as reported.
And adjusted results on organic basis in our press release to assist you in your understanding.
But the underlying numbers in comparison to prior periods.
My comments today are going to focus on the adjusted organic results turning to slide five.
Any reported second quarter sales of 425 million down 9% from the prior year quarter and on an organic basis, what's up positive zero point too.
Percent. This is the first time in our transformation, we have experienced positive organic growth as a company.
This performance reflects 2% growth in ammunition, 3% growth in action sports and 4% growth in outdoor recreation offset by weakness with 800 shoot accessories as Chris mentioned in his remarks regarding.
In the stabilization of ammunition market. We are pleased to see organic growth in ammunition. After 11 quarters are challenging market conditions on a GAAP basis gross margin was 89 million for the quarter down from 94 million in the prior year quarter on an adjusted organic basis gross profit was $89 million up 3 million.
From 85 million in the prior year quarter.
Overall gross profit rate improved by roughly 75 basis points over the prior year quarter on both a GAAP and adjusted organic based.
On a GAAP basis operating expenses were $70 million down significantly from the prior year, where we had a major asset impairment.
Adjusted operating expenses third quarter were 70 million down 13% from the prior year quarter. After adjusting for the sale of firearms operating expenses decreased by 7%.
Mary driver in the decline of operating expenses as a result cost reduction actions taken within our business and the effect of.
Fotis adjustments in the third quarter.
Adjusted interest expense for the current quarter was 7.5 million compared with 12.9 million in the prior year quarter. The average borrowing rate in third quarter was 5.1% compared with 5.5% in the prior year quarter.
Total net debt balance at the end of the third quarter was 400.
$98 million on a GAAP basis, our tax benefit was positive 4.4 million.
Adjusted tax benefit was positive 1 million adjusted tax rate is not meaningful as it was primarily driven by accounting releases fix them out for our uncertain tax position, partially offset by continued.
On favorable expense items.
GAAP net income for the quarter was $14.6 million, resulting in a GAAP EPS of 25 cents compared with negative $8.84 enterprise your quarter and again driven by major asset.
Adjusted net income was.
Million dollars, resulting in adjusted earnings per share of 21 cents compared with thanks in the prior year quarter adjusted earnings per share for the quarter was the result of improved gross margins in both segments and greater than anticipated savings from the results of operational excellence cost savings back.
The major differences between GAAP and.
Adjusted EPS is the result of tax valuation allowance this adjustment against our deferred tax assets reflects the total deferred tax that would be more likely realized in the future.
We had a very strong quarter for cash flow generation in the third quarter, we had a total of positive $70 million in.
Free cash flow, we now have reported year to date free cash flow positive $46 million. This increase in operating cash flow performance is driven by our focus on working capital discipline or inventory in capital expenditures.
In keeping up with previous quarters, let's give an update on debt Paydown progress.
Turning to page six of the presentation at the end of our third quarter, we had around $498 million net debt.
Leverage ratio was approximately 4.7 times.
I have repaid over 55 million towards our long debt balance in the quarter.
Since we now every day.
Terminals, we have triggered loosening the financial covenants and a reduction of interest spread and the remaining.
Ill facility for the quarter excess availability was well over $100 million and our fixed charge coverage ratio was 2.1 times, which is substantially above one times requirement.
Turning to slide seven we will now review operating segment results.
Shooting sports recorded third quarter sales of 202 million about 16% from the prior year quarter. Excluding the results for the prior terms, however revenue increased by 2% over the prior year quarter.
We saw continued increased.
Ed and disciplined rifle.
Well as a relatively strong fall hunting season, with a benefit of higher margin new products in the marketplace. This growth was somewhat offset by the continued softness we're seeing the two to three pipex six markets.
Third quarter adjusted organic gross profit in shooting sports was $33 million up 13%.
From 29 million in the prior year quarter adjusted gross profit rate. This quarter was 16%, which is a 150 basis point increase over the prior year quarter sequentially. This was 240 basis point increase over the second quarter.
The gross profit rate as a result, the favorable commodity pricing.
Manufacturing group inefficiencies and a focus on higher quality sales overall lower discounting.
Turning to slide.
Third quarter sales in outdoor products were $222 million down, 2% when compared to the prior year quarter.
Segment continues to be impacted by bears however, belge Roes.
Organic growth stems from the stronger snow season, and our outdoor recreation brands, both had a great overall E commerce holiday season.
Within our hunting shooting accessories business unit, we continue to see weaker demand.
Organic adjusted gross profit was $56 million, which is essentially flat from the prior.
Third quarter adjusted gross profit rate increased slightly by roughly 25 basis point.
The result of profitability improvement initiatives as this business unit continues to deliver a disciplined focus towards higher quality sales and continues to streamline operations.
Turning to slide nine.
As we posted another quarter.
Meaningful and tangible improvements where performance and as we look to fourth quarter execution.
We would like to provide a brief update or a few items in our seven point plan, we outlined at Investor day for profitability images first.
DNA cost reduction, although our sales are down 14% last year, which is mostly driven by the loss of.
We are in firearms businesses, we have decreased expenses commensurately.
We'd like lets focus on expense controls and this quarter's adjustment to our flexible bonus structure allows us to maintain our approximately 18% best DNA as a percentage of revenue.
Commodity and currency Tailwinds we.
It's experienced favorability in terms of our commodity pricing.
We following market activity as a result of the Corona buyers for that.
Great.
Military and law enforcement contracts, while we have won a number of contracts, we could experienced potential timing delay in either the partial or full shipment of large international order from our.
Fourth quarter due to summer months for overall season.
Discounting, although key retailer exited certain ammunition categories. We've only seen a short term increase in promotional activity in the marketplace five on a year to date basis, we have improved outdoor products gross margin performance by roughly 150 basis points.
Compared to year to date in the prior year.
Thanks reduced interest expense, we were able to pay off the junior term loan. It may not tober, which has resulted in 1.5 million dollar reduction interest expense compared to the prior quarter and a 5.4 billion dollar reduction 42% versus the prior year.
Looking put.
Third quarter, we anticipate you opportunities with new product introductions, but also see several challenges. The first house relates to competitive activity within mission as a result of key retailer exiting certain having mission categories. Secondly, we continue to closely monitor Harris and they are impacting our business as.
As mentioned the phase one agreement was positive for the overall trajectory of trade relations between the two countries, but the phase one agreement that middle to alleviate existing thousand Debbie Downer business. It also created some new challenges by creating an expectation on the part of our suppliers to customers that Paris may soon be eliminated.
Turning to slide.
Yes.
I will first start with an update to our revenue guidance for the full year. In addition could have previously communicated $40 million risk as a result of a key retailer exit from certain ammunition category. Today, we are updating guidance in revenue to reflect potential risk on the timing of a large international orders.
We also anticipate.
We continue risk you do have potential impacts as a result of the Corona virus outbreak.
And then lower cost capital structure and to reflect the savings are paying off the junior term loan earlier than expected, we are able to reduce our expected full year adjusted interest expense guidance.
We are holding our full year adjusted earnings.
Sure guidance and narrowing the range as we look to the fourth quarter. This guidance reflects both the strong performance in the third quarter and greater than anticipated.
In our fourth quarter.
Reductions to full year expected capital expenditures are the result of continued focus on improving your capital discipline and improving payback periods.
Given our strong is a free cash flow performance, we're able to increase our full year expectations for cash generation.
For our fiscal 2020 guidance is as follows sales in a range of $1.75 billion to $1.80 billion adjusted interest expense of approximately $35 million adjusted.
Earnings per share in the range of 15 cents to 20 cents.
Capital expenditures of approximately $35 million free cash flow in the range or $40 million to $50 million also we anticipate slightly reduced full year research and development spending to be approximately 25 million though.
We expect full year EBITDA margins of roughly 6% as a reference to provide additional transparency as requested by many of you. We haven't put it in additional slide as reference on our adjusted EBITDA in the appendix.
For the fourth quarter, you expect shooting sports gross margins to be in the mid to high teens and after products gross.
Our genes in the Midpoints implied fourth quarter free cash flow is basically plus or minus $5 million. Please note that this is affected by the large international shipment that has been delayed since we purchased the inventory.
Fourth quarter, but at this stage cash being in the summer months.
In conclusion, we.
Got the best quarter during our transformation with positive revenue growth over 20 cents earnings per share.
While we have made much progress theres built much more to do external headwinds in market softness remain but we're better positioned than ever we will remain diligent in controlling our costs focusing on profitability improvement.
Free cash flow and reducing our leverage.
As they focused on delivering sustained returns for our shareholders. Thank you everyone. Now we will open the line and take your questions.
Well. Thank you if you would like to signal with questions. Please press star one you touched on telephone if you're joining.
Thank you Jay Speakerphone. Please make sure you mute function is turned off till now your signal to reach our equipment.
Yes Star one if you would like to ask questions, we'll pause for a moment.
And our first question will come from gotten.
Canada.
With Cowen and company.
Yes, thanks, good morning.
With that weren't I'm wondering if you could frame how.
Hi, guys I was wondering if you could give us more framework around the Walmart transition.
How do you expect us to.
One of.
Fully kind of out of the numbers and.
When do you think the other channels will.
The at run rate, if you will absorbing.
Yes, the lack of the Walmart.
Demand.
Yes is out and that's a.
It's a very good question as you can imagine we.
Our discussing all the time and so.
We've done a lotta research on the outside to understand historical precedence in other industries and what has happened in similar circumstances and it's hard to draw bead on what's happening precisely in other industries because there's a.
Different stories, if you will but here's what we're seeing is it's transitioned as we expected.
Walmart honored all of their.
Agreements with all of their suppliers they were terrific upon exit.
Completely exited by the end of December but as soon as they announced.
Our sales team went out in full force to try to replace all the listings all the products in all the neighborhoods in ZIP codes. If you will that we're exiting those products, we feel like we've been largely successful in getting those placements and frankly, our Q3 results.
Reflect some of that where we had some.
On load ins to customers what have you to support that so if you walk some of our key customers you see strong presence from all of our federal federal Premier administering brands.
We expect as I've said previously the two there to be some turbulence over the next 12 months as that.
Demand fines other retail other dealer homes, we expect though this to the.
Short term issue over the next handful of quarters, and then demand will be would it is and it will have found the home and we think the mid to long term there should be no issue.
Okay. Thank you to talk for men just a quick follow up you know do you anticipate any change in the competitive landscape.
So kind of what given the L.D.C.
A break up.
Potentially more focus.
But their respective units, how does that change environment or what you're thinking about.
Yeah, I I honestly I don't anticipate into that particular factor in L.D.C. to change anything.
I mean, I think they'd run their businesses with with folkish, regardless of the of the break up and so you take the gun side of their business <unk>, that's not a category. We're in obviously, we we support their efforts there any M.B. the hunt shoot accessory there's some categories we overlap there.
Frankly, something that we don't.
We're honestly a large present was probably the biggest presence in total with our hunts shoot brands and we're going to continue to run the place that we've been running as it relates to developing innovative new product supporting it with our centers of excellence really driving E. commerce, starting with b. could be and drop shifted movies would be to see.
So we feel very very good about where we're at we also thing goes the industry consolidates and recovers, we think the stronger gonna get stronger and I think you kind of see that particularly in ammunition category, where the best or I I believe are gonna get better. We we know that we continue to do invest over the past.
A couple of years, realizing that there was going to be a turn at some point it wasn't no matter their foods only a matter of win so we didn't pull off the throttle at all and that's why you see so much new product coming out from us in the middle category Franklin around for products as we're as we're gaining traction with new management teams and what have you. So.
We feel good about it.
Thanks, guys.
Thanks again.
And next still be air cooled, which be Riley.
[laughter].
Thank you know the morning couple question I guess, one when do you think you'll have something to share around Lake city and kind of how you walk around that and then I mean to you in all the outdoor product segment, where are you want to excuse account reduction goals any any weird marriage are going to.
The impact on sales today as well as a a margin.
Sure.
Handle Forsee, a lake city and so we'll we'll be sharing more color on my next earnings call as it relates to our 2021 guidance and just to remind everybody the contracts with Lake City runs up to the end of our this school second quarter, which is the end of September.
So we've got a full six months business as usual and what we're doing now and and frankly since the announcement what we've been doing is trying to find waves to replace that volume yeah. We've got multiple avenues in which we can replace that volume one of those being partnering with the.
The winter of that that Lake city contract and determining how we can leverage our strengths across the globe.
With their production that capacity.
But there's other options as well that that we can go too. So we we feel like when a good position to take the volume and Lake City and make sure that we were places a profitable elements of Lake City, because that Lake City volume has been a a real deterioration not only for us but for the into.
<unk> as as the categories that softened as they've demand has come down it's been a bit of a a price war in in a race to the bottom so.
<unk> will be happy to anniversary the minimum quantities that we had to buy and be in a position to work closely support the volume that we think we can drive profitably. So we'll share more color as we look into 2021 and on an X. earnings call. Now May also products question, you mentioned skew rationalization it's.
Really starting to bear fruit, so we've gone systematically with our tool box coming out of our operational X., One center of excellence and we'd gone into the Bell Gerald business unit, we'd run into the Campbell that kind of business unit and do our hunt shoot accessories business unit in were pulling excuse back.
We the first area that we see this really benefiting us frankly is in our cat backs and you've seen us take our cap x. down while introducing more new products than we've ever done our history were able to do this by frankly discontinuing low margin no margin money, losing using.
Roddick families. So we no longer have to feed those with cap x. and you to reach into it or racing three if you will really focusing our our expenditures on high volume hi opportunity products. So we're going to see a person calf actually receive secondly, her gross margin, which you start to see expanding and then you'll start to.
See it moved through into sales as we go into the next you borders.
<unk>.
Yep, Thanks [laughter] garden.
Our next question will come from Scott Stember with <unk>.
The morning affects take my questions.
<unk>.
I'm not sure who made the comment <unk> you talked about since Walmart I guess, it was going to be a shift.
Product to other means the potential for pricing pressure on gross margin, but I read that correctly, and if I get you'd get six but no but <unk>.
No, we certainly didn't mention any pricing pressure because of the Walmart shift.
So what's happened here the Walmart shift there's been a strong reaction from our other customers looking to pick up that volume, which which we certainly supported and we feel like we're around for gaming share with our key retailers, but no no mention of any price better because of that okay.
Yeah.
<unk> be that hard margins for the ammo bits that are up substantially.
And how versus prior quarter, even prior here and that reflects out some of the discount thing that fourth season, all which came in in the second quarter, but I think some of it is also that the market has had less discounting overall.
My bad.
The next question odd or I guess, the alcohol and we've seen a you know the knicks checks for firearms and quite positive as of late and you've talked about 60 220 a day.
You know.
Difference for when the the animal market catches up when you start to see any of that right now and also.
Last question, just give him the political backdrop, while you're you see any.
Cases, or any consumer stockpiling starting to happen again.
So Scott the way, we Ah see the next to check stayed at is.
Is it is generally following that lag we're starting to see a pick up in demand <unk> without question.
But yeah, the devils always into detail and so you really need to start to pull back you know where is that strength coming from and so we were we see the strength coming thumb is first and foremost we've we had as a as strong hunting season. Secondly, we see the pistol calibers led by nine millimeters certainly picking up.
But what does not picked up yet and try to sales are picked up a bit as well, but what we have not seen pick up which is critically important to our business given our large market share rooms fire.
Answering fire continues to be soft is most of you know we are the number one cheerleader <unk>, we own probably about 50% lots of the market.
And our businesses off considerably this year, so that there were taking share and all of the categories <unk> haven't lost any sharing an empire. That's certainly hurts us more that it may other competitors.
We have not seen any stockpiling, we haven't seen and you have an interest are highly we just see a healthy demand. If you will and I'm really don't know how to call. The general election at this point.
Got it that's all I have facts.
It's not.
[laughter] moving on to William brighter with Bank of America.
Barney guys about you yep the commentary around E. commerce and the success you guys are having their it sounds like it's certainly very positive and is there any metrics or anything and you can give us I know it's early but in terms of I don't know growth rates are what percentage of sales. Maybe you are now or where you you could.
Be any here too.
Yeah. So this is an area. She asked the question because we've been talking internally, how we can start to give more color on the the attraction. We're getting any commerce. So you know we said in the last call that we brought online 16, new stadiums and calendar year 29th.
<unk>.
<unk>, we'll finish up all that work here in calendar year, 2020, and it'll be about the shame again it will be about 15 16 sites, we're gonna bring on largely in the first half of the calendar year, what we've seen in the fourth quarter here with our our some of our big onto a brands like that I can't go back and.
And at Camp Chef and <unk> and Bush now is they pick up in conversions.
I picked up in order average daughter value better return on AD spends email subscriptions list what have you picking up a needs with a K.P. eyes, we look at but what we've been talking about internally is how we can start to get more colors, so more to come on that.
But we're still as we said before the beginning stages of getting traction and as you can imagine coming off of a low base, our our growth in in either seeing somebody D. commerce initiatives is it's kind of hypergrowth, but but still pretty small, but we expect that didn't continue to ramp up and we'll figure out the best way to get you guys color. So you can see how we're.
Projecting.
Okay.
Then I'm sure you've had a couple of high profile contracts plans of police departments in U.S. Army.
And we talked about and that's optic this quarter I guess, how do you view the pipeline for new opportunities. There have you been able to secure or I guess do you have you know potential other new contracts you guys. Yeah, we'll be getting on the next couple of corners.
So go it's a good question because when you look very ammunition business, we've had really healthy a year so far in our commercial side and on non commercial side, which is really law enforcement military international what have you. We've continued to win contracts and and we feel like we've got the larger share. We know we do with law enforced.
And and and we certainly get our share of the military in law and international but what's happened is is that businesses is more lumpy.
And so we haven't anniversary some of those count a year to date some of those contracts. We won last year and we've got a couple of contracts and looking to fill this quarter that that may slip and and so we've I tried our best to build all that indoor guidance, which we believe we have so.
Although we continue to win contracts and it bodes well for the next year or two or three it's lumpy and so we're not seeing quite the games. This year that we have in the past, but we think that that will anniversary easily move forward in G.D.F. subsequent years, but we feel good about that side of the business and.
Although some of that is affected by Lake city, and and what have you. We feel good about our ability to continue to get sources of supply to windows contracts.
Okay, and then just plastic for me you a friend this guidance for 6%, even a margins and this year.
I didn't see any commentary about this the longer term 10 per cent even to margins over two or three years do you still feel like those are reasonable or that as a reason to alcohol try and get there and I guess what might be the one or two drivers you think will be you touch using that.
Yes, the bill the yeah, certainly be a 10% eat marching target is front and center for my entire organization.
And we haven't seen any changes to that in fact, and what's going to be key to driving that or the things that that we've communicated investor day and all the key initiatives that were driving so with you know it starts with a driving organic growth through new products and and R.E. Commerce average continued to drive margin expense.
<unk> like we're talking about with our our centres of excellence I'm contributing and in the areas that they are so full speed ahead on on on that goal and everybody's got it in the cross hairs.
Great I taught me thank you.
And our next question come from <unk> with Monus Crespi in heart.
Worn in fact kick my question.
<unk> warehouse Preannounced fourth quarter negatively and they highlighted you know very significant <unk> <unk> ammunition category and they just want to kind of reconcile that with your comments that you solve left discount thing you know like yourselves into the channel and the third.
Corner and then if you just talk about what you're seeing it from a promotional I can be a retail today person wouldn't smoke during the holidays and some thanks.
Sure. So so Jim Unfortunately warehouse in particular, it's it's hard for us to comment on any one particular customer or competitor or what have you <unk>.
I'll give you a little bit of colors I wonder what happens in general.
Once Walmart made the the announcement that they did.
As I mentioned previously all their <unk> all of our other customers scurried and work hard and and we work with them to pick up that volume, but Walmart stated that they wanted to be out of the business by December 31st and so in doing so they they ran some pretty strong promotions, which I think I'm sportsman.
Warehouse mean, others had to react to and so I don't look at that as a a harbinger for for things to calm I look at that is just a short term reaction to channel shift and and I think that's what we'll see a bear out here.
Right and then.
Oh, you've seen any knock on impact from from <unk> and accessories or rubber categories. Some had ops l. stuff like the affected by that.
Yeah, Jim we'll watch and not really really closely. So we did daily you know P.L.S. and we'll watching the movement of that we yeah. There's concerns because the two are related and you know we feel like there will be a decline in our shooting accessories business at Walmart we're planning for.
But we hope it doesn't happen, but we're planning for it you know we're reacting in the same way we're doing what they're in addition category, which is making sure that all of our key customers can find the product in areas that they will shop. So we've reached out we understand where that for traffic may go and.
Ensure that were Joachim arms with with other customers to support the volume movement, if it does happen.
Right Okay.
<unk>.
And when you have the question from Brejc address Whiskey Bank.
Hey, good morning could if maybe just elaborate on improved sentiment that you said you're seeing across the firearms.
Industry I think you said it was the best you've seen.
You know since you've been there I guess, what's really dragon that if it is the name and toy levels expectations for demand just just any color there.
Yeah, <unk>, so what and who was referring to ask specifically was meetings that we had at the a shot show with with our customers and to a customer every customer was very very optimistic I mean, the most optimism I've seen in the and this is my third show you know some of that often.
Some I think was driven by you know <unk> Walmarts movement, which you know our other customers should be seen a lift in there business and and business from consolidation with elder brothers and some others. So they should naturally be seeing a list, but we took that into account and the optimism was was beyond that and it was because.
They're starting to see more foot traffic pick up in demand our by groups and distributors and starting to see yeah bigger orders from dealers. So it's just in general improvement and you can see in the next day, but you can see it in the federal excise tax data that supports demand.
<unk> is that started to pick up now.
I don't want us to get out in front of ourselves. It's not like this is you know back to the the yester year, but it. It is certainly an improvement from what we've seen then it's a it's a gradual improvement. So yeah, we're calling we're kind of calling it that stabilization and and and gradual picked up here and demand.
Which is I think healthy for the industry.
Helpful. Like you and then the last one Nick maybe if you could help of bridge D. updated got in a little bit more particularly to.
The sales guidance I guess, what's the driver of that lower sales Guy I mean to visit assume that this international order simply does not occur or are you taking in some kind of probability or is the bulk of that.
Simply the tariff impact if any any help in time to kind of with drug in it.
Sure a threat I think we now the sales guidance that much like growing out earnings gotten into what we think it's the more likely than that so we have taken a weighted average probability for the large international order that's nearly of reflection of what we.
I believe it's going to happen then next quarter.
Alright, thank you.
And we asked the question <unk> capital markets.
<unk> first can you just walk us through a little bit more on the outdoor products, primarily the hunting shooting accessories pessimists.
And what drove that lower did you see some people may be trade out of purchasing some of those products as they maybe purchase more ammunition was discount or the Walmart and other places during the quarter or anything it's that you can give us into kind of what drove the sales decline in that business.
So to mark the.
What's happened in 100 shoot is largely correlated with our ammunition business, they're they're highly <unk> correlated in terms of consumer demand and what have you.
But there's another underlying reason why 100 should business. We think has been I'm struggling over the the course of the last year, so and and that's really our our position in the marketplace in optics and probably won't come as a surprise to you, but we just feel like we didn't have the right string.
Added G. and optics, we we had products that were price higher than I think what our traditional consumer would give us credit for and show a credit to our general manager V. shock and his team. They went out and did thorough research they talked with consumers. They got the customers they talk to.
A lot of people and the feedback.
Back was you guys have got to redesign your optics wine your binoculars your.
The range Finder your scrolls, all that to hit a price point, there is more conducive to where the the bush now hunter and shoot or like the shop and so you saw that introduction at the shock show will be introducing it to the marketplace in late spring early summer <unk>, what pretty excited about it.
So what it is is it is you know fully feature product at price points that we think are more consistent with what abortion L. shopper is looking for and we also think that it comes with a good time, because my count as vacated some of those not price points and we're going to be moving you know in at the right time I guess, if you will.
Okay, perfect and then looking at the ammunition business can you just talk about inventory levels that you guys have currently as well as kind of what's out in the channel to the A. and your comfort levels.
Yeah, So feel [noise] you on the animals side I mean, frankly, we're we're running pretty lean on a inventory and you see an argument oriented total down 20%. Your every year R.M. away mentor. The team has done a super job of keeping service levels high in managing inventory and that's a really really increased emphasis of aren't.
Higher team to really dried service levels, it inventory and improve working capital. So the result of that is you know we're building more to demand. So we're carrying a healthier levels amendment <unk> and the channels channels are good you know, they're they they cleaned up over the last couple of years and we we don't see.
The concerns that we may have had in the past.
Well, thank you and that does conclude the question answer session now now turn offerings back over to Chris nets for any additional are closing remarks.
I see Justin and thank you everyone for joining us this morning, I'd like to start off with complimenting banking our team of employees around the globe. We've done a lot over the last 24 months to evolve and reshape organization and none of this could have happened without the talent commitment of all of our people I can confidently say that we are.
A leaner more focused version of ourselves.
Thank you for everything you do and if you've heard today, we are pleased or third quarter performance enter intently focused on executing on fourth quarter. Our strategic plan will continue to deliver performance driven in value, creating operating model. So looking forward to talk with you all again in may and thinking of joining us This morning.
Well. Thank you that that's conclude today's coffins what do you think you for your participation half a wonderful day.