Q1 2020 Earnings Call

Ladies and gentlemen, good day.

Hey, Scott.

First quarter earnings call today's conference is being recorded.

This time I would like to tend to call over to Katy Rice. Please go ahead.

Thank you Gail.

Good morning, and thank you for joining us for our first quarter fiscal year 2020 earnings call with me. This morning are Christmas This 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, we will be making several forward looking statements and we make these statements under the safe Harbor provisions of the private 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 that face Vista outdoor and the industries in which we operate we encourage you to review todays press release and Vista outdoors SEC filings for more information on these risk factors and uncertainties.

Please also note that we have posted presentation materials on our website at Vista outdoor dotcom, which supplement our comments. This morning and include a reconciliation of non-GAAP financial measures.

With that said I will turn the call over to Ukraine.

Thank you Kelly and good morning, everyone. Thank you for joining us today as we discuss our results for the first quarter of our fiscal year 2020. Since this is the first time speaking with many of you at our new fiscal year I thought I'd start with a discussion of work this is Ben.

Where we are today, and most importantly, where I see us going in fiscal year 20 and beyond.

As a threshold that are before we can dig into where we are and where we're going it's critically important that we start with the current state of the market first is I'm sure everyone knows the end markets for our ammunition and hunt shoot accessories businesses remain soft.

Well, we had a.

Good quarter in general in our ammunition business, only being down 1.5% year over year versus a market that we estimate is down mid to high single digits, we continue to face unprecedented challenges.

Yet again, we absorbed the impact of another customer bankruptcy with a key distributor Allen brothers.

Parents have United Sporting filed chapter 11 in June .

This move flooded the market with actually just kinda product in June affecting both our ammunition and hunt shoot accessories businesses in Q1.

We also saw continued soft demand for rimfire, putting even more pressure on our ammunition business.

As a clear market leader in rimfire the downturn in the sandal category is hitting us fairly hard that said the team continues to do extraordinary things to mitigate these challenges and I believe that I fully believe.

That we're in a better position in our overall ammo business than our competition in terms of market strength product innovation and overall leadership positioning I will talk a bit more about this in a minute.

Another headwind that we continue to deal with is the effect of tariffs on goods being shipped in from China.

As you probably realize much of the outdoor products industry sources goods or components from suppliers in China quite simply it's still the most cost effective way to produce many is a highly engineered products that we bring to market.

And our first quarter, many orders for retailers were delayed or canceled as they took a wait and see approach to how the tariffs would impact the products they carry.

We also know that consumers are becoming we also know that consumers are becoming more cautious and thereby we continue to work with our entire supply chain, including all suppliers and retailers to minimize the impact.

As many of you are now were just recently the U.S. announced that on September Onest. They will implement another tariff of 10% on approximately 300 billion worth of Chinese goods that are not already pacing tariffs.

This is considered the list for and unfortunately impacts Vista outdoors brands and most of our competitors at a much more meaningful way than previous tariffs have.

The list for products include previously excluded products, such as bicycle helmets in sporting optics, whichever larvae larger impact upon our belge Euro and Bush now brands. The tariffs will will include components for water bottles, which will also impact our camelbak business, who has previously been unaffected.

We testified in June as to why these products and others should be should not be included the new tariff. The U.S. trade representative has yet to say if any products will be excluded.

So we are moving forward, assuming all products on lists for will remain on the list.

We continue to work with our vendors and retail partners to find ways to mitigate these costs, but ultimately this will impact our business and our results in the coming quarters. We've adjusted our guidance in response to the headwinds our brands face on tariffs and Mick will walk you through this in a bit more detail in a few minutes.

There are few other factors that adversely affected our Q1 results as well, we had an unseasonably cold and wet spring, which limited the amount of outdoor activity and had a trickle down effect on new purchases for our bike hike and run products.

Additionally, the firearms market was very weak in the first quarter. Despite nics checks being up in April may and June relative to prior years sales of firearms, where frankly terrible.

Savage, which was part of the company for Q1 was down more than 40% year over year.

So with these challenges and headwinds as a backdrop to the environment. We are currently operating in.

I want to share with you what we are doing to mitigate as well as the progress we're making on our turnaround.

In our biggest business ammunition, our business in fiscal year quarter, one we were only down 1.5%.

This is the second quarter in a row of relatively flat year over year growth. While this has nothing to Crow about this is a leading indicator for the extraordinary effort. Our team is delivering we believe the market is improving but still down.

Mitch mid to high single digits and thus we believe we are taking share a good indication of our share gains in fact, our share of federal excise tax or MPT, which increased from 17.5% in the fourth quarter of calendar year, 2018% to 22.5% in the first quarter of calendar year 2019 up five percentage points quarter over quarter. While this is by no means a perfect measurement. It is a strong indicator of our share in the commercial markets.

Our gains are not just in the commercial space. However, in fact in the law enforcement and military space. We are increasing our leaders are industry, leading share position with a number of recent coveted wins.

We just recently won the duty round contract with the LAPD or the Los Angeles Police Department, who chose our spear GE to round.

This is a huge win for us as it displaces our biggest competitor and will undoubtedly have a trickle down effect on other police precinct.

As we look to the LAPD stamp of approval for their own departments.

This win accompanied with our end why PD win recently now gives us the two largest police departments in America.

We also recently won a sizeable contract with the KFC or the Kingdom of Saudi Arabia, and finally, we just won the Army's recently awarded for annual contract Award.

These three wins were not forecasted at the beginning of the year, but will contribute greatly to our Q3 and Q4 and help offset some of the headwinds we continue to face.

Another focus area to help our ammo topline growth is by partnering with leading firearms manufacturers to develop unique and innovative round specifically designed to meet with their products.

This is one of the benefits are ammo team can now take advantage of was savaged no longer being a part of Vista outdoor.

We are already working with three leading manufacturers on such products and you will begin to see this come to fruition in the back half of this fiscal year.

Given the unprecedented unprecedented downturn of the animal market. It continues to be what I would call a lumpy market.

We feel like we see light to an upward trajectory, but it won't be linear in fact, the way the business is looking to shape up for the rest of the fiscal year. We are going to have a very challenging second quarter for a variety of reasons.

But feel very confident in the back half given the contract award wins I just mentioned the orders we have already secured around black Friday, and some new products that we'll be launching later this year.

I'm also very proud of the way our ammo team has reacted to the prolonged market softness and continued competitive price pressure.

Our team has and will continue to relentlessly take out cost improved factory efficiencies procure better and take advantage of the lower commodity prices. We are starting to see in total we have good confidence on our path to recovery on both the topline and margin line as we move through the back half of this fiscal year.

On the outdoor product side of our house, we are making good progress as many of you know we have spent the past year, bringing in new leaders and helping our leaders reconstitute their businesses.

Reinstalling foundries mentality focused on product innovation and world class marketing and building a winning culture.

We certainly have a ways to go but I'm proud of the progress we are making so let me share a little on each of our key brands.

And our key business units.

And our hunt shoot accessories business similar to our ammo business, we continue to face a very soft end market.

However in hunt shoot we also faced the additional challenge of tariffs with a fair bit of our product being contract manufactured in China.

In Q1, the business was down 8% and holding its own but the focus for this team over the past year or so has been to rebuild its profitability, while developing a robust pipeline such that when we do launch new products. They are both innovative and accretive.

A great example of this is our new golf laser range finder, which hit the market in Q1. It is the Industrys first range finder that can capture the effects of humidity and altitude both big deals for avid golfers the new Pro X C is premium priced high margin and we can build enough of it.

Another Great example, in the hunt shoot accessories categories in Black Hawk, where we just launched a series of new patented holsters called T series.

That have been thoroughly researched with law enforcement agents special forces and through and enthusiasts alike.

The route the result is arguably the world's best hand on holster built in our own Montana manufacturing plant in a product that will be our best selling and highest margin holster and the company.

Our camel back business is showing signs of recapturing its footing.

We know we have lost share over the last over the past couple of years.

But under an entire new leadership team. We just finished the best quarter, we've had since our acquisition of the brand.

With profits in quarter, one being up significantly year over year, although one quarter certainly does not make a trend we are seeing strong indicators from our team and expect continued momentum.

The team is marketing more effectively with its consumer base online and is winning space with key retailers and has a much more robust consumer research product road defined and has a more innovative product lineup coming out later this year.

If you are attending our Investor Conference next month, I believe you'll be excited with the changes we are making a camelbak.

In our action sports business, we were down 5% year over year. However, this mask the underlying trends and I'm encouraged by what we are accomplishing.

Despite an unseasonably wet and cold spring, both as Euro and Bell grew their specialty businesses, which as you know the specialty dealer is the heartbeat of the brands.

In fact, it was one of the better first quarters, we've had in years.

Both of these brands continue to develop unbelievably innovative product in fact in zero Snow. We moved ahead of Oakley into the number two market share position in snow goggles with our extremely innovative line of vision goggles.

This along with a very healthy snow season sets us up nicely for this coming winter season.

Unfortunately for action sports, our Bell mass business did not have a good Q1 and this brought the rest of the business down however, much of the mass business decline was because of their largest customer deciding to stop ordering in June to manage their own inventories. We see this as a timing issue and have already begun to see orders come back in July .

Our caps our camp chef business continues to be a star within Vista outdoor.

Despite a very hard year over year comparison, you may recall that we had a very successful grilled God campaign in quarter, one last year. The team finished quarter. One this year flat and on plan. We have partnered with the iconic guy fee, Eddie and created an entire online and retail marketing campaign, which we recently launched in our flat top stove system.

We will follow this up with another marketing campaign towards the end of the second quarter with a brand new pellet grill, which should set the standard for all pellet grills and although we launched the ended this quarter much of the impact will be realized in quarters three and four.

If you haven't seen the marketing videos I am referring to I encourage you to Google Camp Chef and guide Eddie you will be impressed.

Guys been a long time camp chef loyalist and has been a wonderfully generous with his time in support of our brand. We should continue to see growth from this terrific team and business.

In addition to building out and strengthening our brands. We are very focused on reducing our overall GA structure, while investing in support functions that AD demand for both value and revenue across our brands.

We call these centers of excellence.

A great example of this is in e-commerce , where we have quietly been building up a center of excellence to leverage across all Vista outdoor brands.

The Genesis for building our e-commerce is to ensure that our consumers can purchase our products in a way they choose when and where they won including directly from US is for this reason that we put such an emphasis on continuing to build up our e-commerce capabilities.

Quite simply we must provide our end users better experiences and get them access to our products, when and where they want to shop.

In fact, just a few weeks ago, we launched a brand new direct to consumer site for our federal premium ammunition.

This is for our premium line of ammunition and it's in direct response to our consumers biggest requests of not being able to find certain premium rounds at their favorite retail stores.

However, a key reason for also creating this site is to gather consumer insights to help us create new products help us forecast trends better help us manage inventory and product builds in a much better fashion, which ultimately allows us to share all of this information with our retail partners and enable us to create better product assortments in both their stores and online and we will be selling all of these products at full.

MSRP.

Across our hunt shoot accessories business as we have seen growth in us ecommerce channels up double digits in the first quarter and our bush sell Bushnell golf and pretty much brands are off to a good start in direct to consumer sales with five times growth over last year.

Again, all of this is additive to our retail partners are selling.

Pre most recently launched an online custom mill shop that allows hunters or their family and friends to order custom personalized high performance Primos box calls directly from Primos would works in Mississippi. Initially conceived as a graduation gift idea. The primos team ran a special father's day promotion, which generated excellent engagement and contributed over 30% of the product sales so far this year.

Additionally, our Eagle industries Tactical brand, which is a leader in military equipment business just launched their ecommerce website in July to bring its top of the line duty geared to the commercial market product offerings include everything from carriers and rigs to packs bags pouches in more we're very excited about expanding our consumer base with these top tier gear offerings.

As a final example of our progress in E. Commerce Camelbak had an incredibly successful Amazon Prime day with nearly 47000 units sold this was a 57% increase in year over year sales of particular note a spotlight deal of our new Eddie plus and podium water bottles generated over 24000 units sold.

As we continue to build on our relationships with our end consumers. We've responded to their feedback to be able to buy our products and the way they choose when and where they want.

All told since October of 2018, when we hired our Chief Digital Officer, Bob Steele Hammer, We've launched 13, new ecommerce branded websites, where we either significantly improve the overall customer experience or enabled ecommerce where there was none the new sites include Bell and zero Black Hawk Bush now Bush sell Gough federal CCBI spear ammunition and pre most among others.

We have developed two strategic relationships that are helping us to accelerate our speed and growth in the direct to consumer channel. The first relationship is with Salesforce, where we have partnered with them to provide provide both commerce and marketing cloud services.

To enable this strategy via systems integration for ecommerce services is Lions consulting group, a part of cap Gemini.

We continue to build the digital team and focus on this digital center of excellence. We're focused on three key areas first digital marketing, which is about acquisition and conversion second content and creative which is the user experience and third is development and operations.

We will leverage this center of excellence by allowing our brands to access to resources that help them continually improve their velocity of change in connection with our end consumer.

So as you can see we're delivering on our promise to increase our e-commerce capabilities, we still have much more to do and more certainly already in the works, but I'm proud of the brands for embracing this challenge and getting us closer to where we need to be.

Throughout our turnaround we've continued to balance improving the business for now while simultaneously working on the future.

Although our top capital allocation priority is and will continue to be paying down debt. We have also been thinking about and even looking at what might be compelling businesses to add to our existing businesses.

Simply said, although we need to wait to consummate an acquisition until our debt is paid down to levels. We have communicated previously we cannot afford to wait to start evaluating where we will be behind the curve and will not grow our EPS as fast in outer years as all of US expect we can.

When we think of M&A in the future you should expect to see a noticeably changed a noticeable change in our approach we will take a much more disciplined approach in which categories will evaluate how much will pay and the overall size of the businesses, we will be willing to acquire.

We envision a strategy that begins with thoughtful tuck in acquisitions that bolster the position of the current portfolio, we have and increase the speed at which these brands can achieve leadership economics.

I can assure you that we will resist the temptation to jump in and into new categories too quickly.

In addition, there are potential opportunities that we believe could bring value to vista outdoor and our centers of excellence.

As an example, there may be an interesting and compelling opportunities in technology platforms that could accelerate growth for all of our brands and leverage our model.

We truly believe that with an improved foundation and a more disciplined and strategic approach to M&A, we will grow a company for the long term and one that will consistently deliver shareholder value over time.

Now before I turn the time over to Mick to go through the financials I want to share one more important item.

Because of the continued market headwinds and ongoing pressure, we we face with increase tariffs were putting the final touches on a further reduction in gionee that we will believe that we believe will not only reduced our total overhead and thus our cost, but also make us more nimble and effective.

We can't afford to continue to hope that the pressure goes away, we need to control our destiny by affecting what we can.

Although we are not quite ready to announce the changes, we're close and we'll be able to share more detail at our upcoming Investor Conference and certainly in our next earnings call.

I hope this discussion has been instructive to give you a better idea where it is today and where we're headed in the future.

We had strong growth strategies identified for our brands, we continue to build leaner, but stronger functional support we've got excellent brand talent that is getting better every day, we continue to challenge and take out unnecessary cost and we're instilling a winning culture that starts with achieving commitments.

While there will be lumpiness in our results as the market continues to shake out we can certainly see the path to an upward trajectory and I'm confident that we can achieve real profitable growth across our brands in the coming quarters with that I will turn the remainder of the time over to Mick to discuss the financials Mick.

Thank you Chris Good morning, everyone before going through the numbers I would like to give some context as to what we've accomplished also as well where we are headed we are pleased with the long and challenging sale process of Savage is behind us the sale per cents, a inflection point in our portfolio reshaping and allows us to narrow our strategic focus simplify organization, but most importantly, it is a big step toward debt reduction goal you will find on page eight of the management presentation that we have provided a complete set of pro forma financials and Savage firearms to assist you in valuing our business going forward.

Building on the restructuring efforts from fiscal year 2019, the key CFO priorities for fiscal 2020, our strength during our overall cash performance through improvements to inventory and capital expenditures and continued cost reductions through the simplification of our conversation.

We continue to complete detailed Buckley operating and forecast reviews as part of our profitability improvement efforts. We started CFO team reviews for capital expenditures and as a result forecast that significantly less capital from last year without affecting innovation of new products. We are now focused on monthly CFO team meetings to optimize inventory that should improve customer service fill rates inventory turns and ultimately our return on invested capital has increased focus on inventory continues we expect to see similar results.

In our capital expenditures optimization program, thus far.

Our first and foremost financial goal remains reduction of leverage by paying down our debt as of the first quarter, we had approximately $738 million in net debt using the proceeds from the divestiture of Savage, we were able to reduce our debt by a total of $157 million, our net long term debt balance after.

The divestiture of Savage is $581 million, which is a major milestone as we have effectively cut our debt in half from our peak of $1.17 billion. In particular. Please note that we have used the savage proceeds to pay off that $95 million per therm long and applied the remaining funds towards our asset backed loan revolver in order to maintain adequate financial flexibility, we will plan to maintain to $40 million junior term loan until our seasonal cash inflows allow ample liquidity, which is expected in the third quarter. As you can see on slide three our expected leverage ratio. After proceeds from the sale of Savage is 5.9 times, our fixed charge coverage ratio at the end of the first quarter was 1.37 times, which is above the 1.15 times requirement. We look forward to sharing more with you regarding our capital allocation strategy at the Investor Day that Chris mentioned earlier, our goals remain to allocate capital to pay down debt.

Vance the organic growth initiatives that we see are there are there were multiple external revenue challenges in the first quarter you will find the results a 14% year over year reduction to our adjusted operating expenses, which is 6% on an organic basis. This reflects a consistent committed and discipline level of execution to rightsize, our company and in particular, our corporate overhead in light of recent divestitures, Let's review our first quarter consolidated results. We have provided you today with both as reported and adjusted results on an organic basis in our press release to assist you in your understanding of the underlying numbers and comparisons to prior periods.

My comments today are going to focus on our adjusted results, let's turn to slide four in the presentation. The company reported first quarter sales of $460 million down 13.1% from the prior year quarter or down 7.4% on an organic basis. The year over year decrease primarily reflects the deterioration in the firearms business and overall continued softness in the hunting and shooting accessories divisions about their product ammunition as Chris said was almost flat had a decrease of 1.5% compared to the prior year on a GAAP basis gross margin was $95 million for the quarter down $113 million.

Down from 113 million in the prior year quarter on an adjusted organic basis gross profit was $95 million down $9 million from $104 million in the prior year quarter of the $9 million declined approximately $3.6 million was attributed to firearms.

On a GAAP basis operating expenses were $100 million down 35% from the prior year.

Adjusted operating expenses for the first quarter were $89 million down 14.1% from the prior year quarter adjusting for the sale of eyewear up writing expenses were down a total of 6%. The primary driver in the decline of operating expenses is the result of cost reduction actions taken within our business segments.

As Chris mentioned, we need to make our corporate organization more efficient and you can expect to hear more about this topic at our upcoming Investor day interest expense for the quarter was 11 million compared to $13 million in the prior year quarter. The decrease was due to the reduction in our debt balance the average borrowing rate in our first quarter was 5.7% compared with 5.8% in the prior year quarter.

The net debt balance at the end of the first quarter was $738 million subsequent to the first quarter. The total net debt balance was offset by the sale savaged by a total of 157 million for a new balance of about 581 million.

On a GAAP basis, our tax rate for the quarter was negative 5% our adjusted tax rate for the quarter was 10%. The adjusted tax rate was primarily affected by unfavorable discrete items booked in the quarter.

GAAP net income for the quarter was negative 16.6 million, resulting in a GAAP earnings per share of negative 28 cents compared with a negative 91 cents in the prior year quarter.

We recorded adjusted net income of negative $4.7 million, which is down from breakeven in the prior year quarter, resulting in adjusted EPS of negative eight cents compared with zero cents in the prior year quarter year to date free cash flow was negative $45 million, which is a difficult comparison with the $70 million in the prior year period as a reference prior to fiscal year 2019.

Average first quarter cash flow generation has been historically negative $25 million.

As you May recall, the first quarter fiscal year 2019 free cash flow was unusually strong because in the fourth quarter fiscal year 18, we took advantage of accounts payable discount and prepaying interest. We also had the benefit of timing for accounts receivable and corporate wide inventory reductions in the current quarter. We have the opposite effect as we built up inventory in anticipation of summer sales and to improve our customer fill rates. The result was similar to years prior to fiscal 19 with higher inventory and accounts payable in the first quarter, we expect a moderation of cash outflows in the second quarter as well as usual seasonal cash inflows starting in the third quarter to achieve our guidance turning to slide five we will now review operating segment results.

Shooting sports recorded first quarter sales of 238 million down 8% from two.

$158 million in the prior year quarter ammunition revenue decreased 1.5% compared to the prior year as a result of continued softness in both rimfire and two to 3.56 markets offset by increased demand for Centerfire ammunition.

Firearms revenue decreased by $17 million, which is minus 41.

Per cent compared to the prior year quarter first quarter gross profit in shooting sports was 39 million down 12% from $45 million in the prior year quarter. The year over year decrease was the result of lower sales volume, partially offset by favorable overall commodity price.

Turning to slide six.

First quarter sales in outdoor products were $222 million down, 18% when compared to the prior year quarter on an organic basis adjusting for sale of high where sales were down 7% year over year organic adjusted gross profit was $56 million, which is a decrease from $60 million in the prior year quarter gross profit declines are primarily volume driven as a result of lower demand for hunting and shooting accessories.

We were able to hold the overall gross profit rate flat in the first quarter when compared to the prior year quarter. This was largely due to efforts focused on cost containment.

Turning to guidance on slide seven.

As we think about the remainder of our fiscal year 2020, we have recalibrated our outlook to reflect the expected results for the full year adjusting out the Savage arms business looking forward.

Our guidance reflects our ownership of the firearms business through the first quarter.

In conjunction with the set of pro forma financials included on slide eight.

We want to provide you with a picture of our remaining businesses going forward.

We have updated our full year fiscal 2020 revenue guidance from 1.41, 0.94 to 2.03 billion down to a range of 1.79 1.8 billion.

This simply reflects the loss of Savage arms revenue for the last three quarters.

We have lowered interest expense from a range of $45 million to $50 million for our approximate annual expense of $40 million. This reflects keeping to junior term loan in place until the third quarter.

We expect an adjusted tax rate of negative 25% updated from 5%.

We expect full year adjusted earnings per share in the range of 10 cents to 25 cents.

Which has been updated to reflect three matters first the savage.

EPS impact was anticipated in our previous guidance at 10 cents to 15 cents for the full year.

First we subtract the midpoint of 12.5%.

Then we also subtracted the pro forma loss of 1 million or one cents because it was projected to be at least breakeven for the first quarter for a total savage arms related decrease of 13 cents.

So the adjusted EPS guidance, we had before of 28 to 38 cents is decreased by a total of 13 cents to a range of 15 cents.

To 25 cents all solely due to Savage firearms.

Lastly.

The recently announced list for tariffs on imported goods from China may increase costs up to $10 million beginning on September onest.

While we are working to mitigate these tariffs we have taken a fraction of the risk and reduce the lower end of the guidance by five cents to reflect this uncertainty.

As such only our lower end guidance, then moves from 15 cents down to 10 cents.

At the trade discussion continues we will update our guidance as that information becomes available.

Looking to the subsequent quarters in our fiscal year 2020, there are series of headwinds and timing issues, we are facing particularly in our current.

Quarter, two we anticipate more pressure and ammo sales and margins in the second quarter as a result of accelerated black Friday discounts and competitive pricing pistol as a major competitor just announced that drop in market pricing on nine millimeter.

We have strong mitigation plans in place that we are executing to offset these pressures and tariff uncertainty in the second half of the year.

These actions include the following first.

A large DNA cost reduction to supplement business unit cost reductions already underway.

The benefits of known commodity and currency Tailwinds.

Three ammunition manufacturing efficiencies that are planned and.

Being rolled out.

For.

Sales volumes led by contracts, Chris mentioned in law enforcement and military contracts. We have recently won.

Five lower seasonal discounting.

Six improved product mix.

And lastly, reduced interest expense from additional reductions to our debt balance.

From a cash flow standpoint, we expect better second quarter performance than the first quarter with positive strong cash flows delivered in the back half of the year has fall hunting and holiday season sales are collected.

We would like to summarize our fiscal year 2020 guidance as follows sales in a range of $1.79 billion to $1.89 billion interest expense of approximately $40 million and adjusted tax rate of approximately negative 25% adjusted earnings per share in a range of 10 cents 25 cents capital expenditures of approximately 40 million free cash flow in a range of $30 million to $40 million, we anticipate R&D spending to be approximately 30 million, we would like to call out that it missed the cost reduction initiatives as a management team we have purposely protected to research and development dollars do continue dosing and aggressive product innovation pipeline.

We expect full year EBITDA margins of approximately 6%.

We also expect shooting sports gross margins for the full year in the mid teens and outdoor products gross margins for the full year in the mid Twentys.

For the second quarter, specifically with the divestiture of the Savage arms business, we expect shooting sports gross margins to be in the low to mid teens in the second quarter gross margins in other product in the low to mid Twentys.

In conclusion, we have made much progress, but theres still much more to do we look forward to updating you on the evolution of our strategy, our financial model and industry dynamics in more detail at our Investor day in September .

Now we will open the line and take your questions.

Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.

The first question is coming from Scott Stember from CL King. Please go ahead. Your line is open.

Scott you there.

You might be on mute sorry about that I was on mute [laughter]. Thanks again, guys for taking my questions.

Just a question about the pricing environment. It seems over the last couple of quarters up until one Q that things had been firming up and talking about the discounting I guess starting to abate a bit now obviously with the bankruptcy that you guys talked about seems like things have.

Started to decline again, maybe just frame out for us where.

Within historical range over the last couple of years, where pricing is right now have we taken a step down further than where we were a year ago.

And.

You know what you guys can do to potentially offset that.

Yes, Scott.

There's a number of factors that are affecting pricing I mean, the first one you mentioned, which was the bankruptcy.

We see this is not a long term impact, but certainly affected our first quarter, where we saw.

We saw the liquidation of a lot of our products and our competitors saw the same thing that should be behind us.

The bigger concern is on.

A couple of the caliber is within ammunition. So the two to 3556 continues to be a.

Discounted product and.

And I would say year over year. It's about the same we can say, we we continue to see about the same level of pricing nine millimeter. Unfortunately is come down we've just learned on July onest, our biggest competitors taken their pricing down and so we've had to adjust our our business model accordingly. So.

That's probably the.

The only change that that we see at this point from a pricing standpoint.

Rimfire, although not a pricing issue continues to be a challenge for us were clear market share leaders. It's a.

Good profit category very good profit category for us and.

And demand is continuing to be soft so what are we doing to mitigate it I mean these are all the actions that we tried to outline is.

First and foremost is making sure that we're driving.

Productivity and efficiencies in the factory, we're rightsizing, our overhead structure to accommodate the volumes and.

The team is doing a wonderful job that we've got a bit of tailwind for the first time with commodity pricing, which you'll start to see read in as we move through the year.

But our team is just banging away and create and some really really nice wins I mean, these commercial contracts.

We havent had before some of them are certainly going to help and I think thats why you see us.

Stabilizing the topline I mentioned some of the the margins issues I mean, the second quarter, we've got some timing issues we've got.

Black Friday discounts that we.

We took in the third quarter last year, when taking the second quarter. This year just happens to be a timing.

Issue and some other things that are hampering our margin line, but.

We continue to be price leaders and what will stick the course there.

Got it thanks.

And in the past you've alluded to the fact that you're considering the sale of the action sports business, but it seems like you're making some headway there notably on the ecommerce side.

Are we still thinking about potentially.

Selling this business at some point.

Hi, Scott listen we had something we continue to evaluate and what we said last time was that bells year. It was a business that we just felt like we could improve.

And.

And drive greater better value for when we do eventually.

Sell the business and our thoughts haven't changed but we continue to remain open and we.

We've got some great folks in that business that are.

Long time industry veterans that really help us drive the innovation and the.

And the share positions, we have in the marketplace. So we're.

We are.

I wouldn't say, we're we're pleased with.

The current performance, that's why we're holding onto an improving it but we'll continue to evaluate it as we go forward.

All right and then just last question before I get back in the queue on the second quarter you guys gave some good.

Clarity on the gross margins for the individual businesses, but just looking at that and.

Some commentary about the sales just trying to frame out to make sure that we're all in alignment.

Where the second quarter will be and Im just trying to frame that out.

Versus the first quarter was whether we would see.

And expand the loss in the second quarter with.

With a sharp recovery in the back half of the year is that is that how we should be looking at it.

When it's making I'll add on share.

So.

We do have has has stated some significant headwinds. We also have some timing issue is that we will have a.

Not a good performance in the second quarter than the first but yes, a strong recovery in the back half of the year, we highlighted about seven things that we have already in place and are going to be helping us in the second half as we all know our profit is basically at.

And the pennies is breakeven for just talking very small amounts into millions of dollars so $5 million to $10 million add 10 cents 20 cents very very quickly.

Yes, Scott I think you framed it up correctly, which is.

We.

Despite the Savage.

Declined in the first quarter internally, we largely hit our our internal plan.

For all of our businesses in total apps and Savage, what we see now in the second quarter. If you look at them stack on stack is.

It is likely a worsening and we're trying to do as much as we can to offset that but we know a lot of this stuff. We are doing is coming in the back half and.

And I don't want anybody to think that all boy. This is.

We are uncertain about it or it feels like a hockey stick or what have you I mean, there are absolute.

Contracts that we've won that contribute to it there are.

Mitigating actions that we've already taken that are coming to fruition.

There are commodity.

Tailwinds that we are.

Locked into so.

We can see a clear line of sight to it but would brings to second quarter down a bit more than the first quarter is frankly some of the pricing that we've had to adjust to recently I mentioned the.

Black Friday, where we've got a really good black Friday lined up I think we're not only going increase our sales and our margins on black Friday, but from an accrual standpoint, we've got a timing difference where we recognize most of the discounts in the third in the third quarter last year, we're going to do it in the second quarter. This year. So.

We should see a bounce in third quarter because of that.

And then we're taking action Chris right, we have already identified a cost reduction program.

At corporate in particular, but also.

Great efficiencies that we have identified and manufacturing plants and some commodity tailwinds that will help us in the second half.

Yeah.

I mean Theres no question and Weve talked before about another center of excellence being our.

Our procurement purchasing area I mean, the team is driving wonderful productivity year over year. Unfortunately, it's being masked by a lot of the the headwinds we're facing now we know thats going to abate at some time in and certainly we're we're not projecting it anytime soon that's why we're continuing take even further action to mitigate it.

Got it thank you.

Yes, Thanks Scott.

Our next question is coming from.

From now.

Thanks Christine. Please go ahead your line is open.

Hi, Thanks for taking my question.

On the new contract I know in the past on the international business, there's been some volatility around timing for those contracts.

On the other law enforcement contracts you know how certain just the timing of those and is there any chance it slips into next year.

Yes. So good question I mean, Jim what we're actually already starting to ship against the law PD contract. So that is done dusted in and we're starting to see small shipments now the trickle down effect because this is.

This is a nice halo effect there is a lot of other precincts that don't have the capability of doing all the testing and everything like that so they look to LAPD or in white PD for their stamp of approval, we haven't seen any of that yet, but LAPD shipping the army fringe of Bull if it's not shipping its.

It's close to being.

Shipped and then the K Assai is that's always the one that's that's more lumpy than than others, but.

That's a that's coming in.

We'll be building it.

This quarter type of thing.

Okay.

And then on the tariffs.

Oh, the other companies who have been impacted by you know 10% tariff previously you had said that you know we were able to largely mitigate the impact of the first 10% so with currency somewhere.

No concessions from vendors so you know.

How conservative are you guys being in the five cents impact from the tariffs for for this year.

Yes, Jim it's a it's a question that we debate we debated largely as we look to the guidance. So here's how we framed it up.

All the tariffs that we've seen to date I think the team has done a really nice job of mitigating those and its partnerships with our vendors and movement of some of the product outside of China. So we've done everything we largely can.

This.

10% on the list for we've sized it up is at about.

$5 million to $10 million of risk now we put.

Five pennies into the lower end, taking the lower end of the guidance down by five Penny. So clearly we haven't reflected the worst case scenario, which would be 10 million.

But.

That is absent us going out and mitigating it. So what are we doing to mitigate it well clearly there is going to be some price increases and it's unfortunate, but the consumer is going to see that.

To.

As the RMB or the one is continue to devalue, we're hitting our suppliers hard because they've just effectively gotten a big profit bump. So we're working with them and that's ongoing.

Thirdly, our suppliers have been very good partners with us and so we've been working.

Thinking that this lists for was going to come to fruition at some point. So we're already working with some of our vendors and have been for many months now in moving their production to other locations. So.

Five to 10 is the is the risks 10 is the worst case, we don't anticipate that happening we feel like we've guided to cover.

The tariffs as we know today.

Okay, and then just on the.

Prime day, and the Black Friday wins, I mean, how do you guys manage to maintain or it sounds like you didn't increase profitability.

During those promotional events.

Yes, I'll give you a little bit more color on Black Friday Black Friday is a huge promotion for a number of industries and what happens in particular, the ammo in the hunt shoot.

Accessories industry is you know, we we just kind of pretty heavily that product. So the consumer is getting a a a great great deal and our retailers participated and it ends up driving a lot of traffic and what have you.

What's different this year than last year is not just the timing of the accrual, but our business is going to be up quite a bit year over year. So with the discounted product that is kind of a good news bad news. However, our margins are going to be up as well. So we feel pretty good about the fact that we're executing this year is not only accretive to the topline, but it's also accretive to the bottom line.

So we feel good about where we're at it's yes overall it creates a great.

The relationship with our retailers and it drives a lot of foot traffic. So hopefully, we'll see trickle down effect to our other categories as well.

Great Thanks, and best of luck.

Thanks for thanks.

The next question is coming from.

Khanna from Cowen and company. Please go ahead your line.

Yes, I was wondering if you could.

Well why agreement with North.

But I think there.

Bidding for the Recompete now what sort of.

What kind of contract structure do you have in place now to guarantee supply at a given Brian .

For the.

Lake City ammo.

Well, so the way to Lake City Ammo knows you guys know the contract is up we should here fairly soon the outcome of that contract. However, there is ongoing supply that contract for the next.

Next 12 months and we're locked into that price were locked into the volume. So there won't be any effect, even with an announcement here soon over the next 12 months.

But as we stated previously we feel like we've taken the two best companies in the world in Gd.

From the arm side and the government contract side in federal from the munitions side and we've got the dream partnership it doesn't guarantee a win but certainly we feel good about our position vis-a-vis the competitors, so we'll wait and see and.

You know hopefully it.

The ball bounces our way on that one.

Thank you.

Our next question is coming from deals that came in from a rough.

Please go ahead your line is open.

Thanks, Good morning, everyone.

First on the first one the second half improvement for ammo how much of a benefit are you expecting from these new contracts versus.

How much is coming from new product benefits or or possible industry improvement.

Well, let me start with the latter we're not expecting any industry improvements.

You know I've.

I I've gone I've stopped trying to figure out when that is sure he's got to improve but I do look at leading indicators all the time. So we're looking at at P.T.. We're looking at Nics. We're looking at sell through we are looking at a lot of things that have us, believing that we we definitely see light at the end of the tunnel now that being said.

We're trying to control our own destiny and that's what the ammo team is all about the grabbing the things that they know our shore and they're driving those hard so the contracts are real and.

And we work on contracts or incremental every year, we just can't plan for all of them unless they are signed and so we didnt plan for these unfortunately, we're going to get these contracts that I mentioned that will mitigate.

Whatever headwinds continued to persist from a new product standpoint. The team has been sensational I mean, weve introduced more new products over the past 12 months and will over the next 12 months, then I think we ever had in the Companys history, I mean, it's a tremendous amount of new products and its driving vitality with our consumer but it's also driving great relationships with our retail partners and.

And you will see some of this coming this fall.

But you know frankly, some of the volume in the back half as I mentioned in the Black Friday, you know our sales are going to be up quite a bit year over year. That's why we're expecting a a a good third quarter in all that stuff is already.

Contracted and and agreed to so.

You know there is a.

You know, we we saw flatness in the last two quarters, we'll have a little bit of a tough quarter here in the second quarter for some of the reasons I mentioned, but as we move into the back half you're you're likely to see ammo increase potentially year over year, which is a which is good for us.

Okay. That's that's.

That's good color, maybe turning to outdoor.

Sounds like part of the drop this quarter was Peter due to weather you have the monthly cadence.

For the quarter versus sort of 7% organic decline and then I guess, just how should we be thinking about that business going into Q2, how is the trend Baird.

In July and August so far.

Yes. So you know it's interesting I'm, just kind of a tale of two cities that I mentioned with the the wet weather I mean, a wet weather effects.

A number of our businesses right that are outdoor everything from cooking in camp chef to hike bike run with camel back too.

You know just pure cycling with the Belden zero brands. Despite the cold wet weather the team actually got off to a pretty good start in April and in May in total what happened in June as we had a very large customer that we built some inventory for and then they shut the spigot off and it was kind of a double whammy for us we're starting to see that come back in July two so it's a timing issue I think the other businesses we're seeing.

You know the.

You know, we expect them to continue to improve as we go forward I mentioned camel back where we're excited about the prospects for that business.

But I want to temper it right I mean were.

You know in the middle of.

Rebuilding that team in reconstituting, but what we see are definitely green shoots camel back I mean, a camp chef, we got some new product coming out I mentioned in my scripted remarks that you know we've got.

We've got a new pellet grill that we think is going to set the standard and a great campaign going with CGI P., Eddie So we'll continue the the momentum but.

Some of the new products that these new the new teams are working on you'll see us start to see come in as the.

As the ordering for spring season.

Starts to come through here in the fall to winter timeframe.

[noise].

Our final question is coming from Mark Smith from Lake Street. Please go ahead. Your line is open.

Hi, good morning, guys.

First looking at the ammunition business, if we excluded rim fire did we have ammunition business flat.

You know, we don't give that type of color for.

You know for competitive reasons, we don't just dissect it down by category, but I can tell you absent rim fire and.

Two to three.

556, our business was was really pretty good I mean, our shot shells, we had a very good.

Business and shot shells our centerfire.

Very good business.

So other than the but if it just so happens to be that you know pistol, particularly nine millimeter and a lot of the Lake City volume there, they're very very high volume categories and.

Yeah, They continued to.

Show.

Struggles from a margin standpoint, but nine millimeter is is growing like crazy I mean, its one of the hottest caliber is out there.

And that's why people trying to grab share of it but yeah absent rimfire be weve.

We've done.

We've done pretty well and we're not losing share we don't believe in rimfire. It just happens to be where such a big industry leaders with a big part of our business that when it.

You know it suffers so does our whole business.

Okay.

And then it's looking at rimfire in particular is this still hang over from.

For so much so long people couldn't get hold of rimfire. It was it was.

Tough for consumers to find it on shelves did we just see a big build up and we need to work through some of that supply that's out there.

Yeah, Mark it's a good question I wish I had a very solid answer for you.

But but but honestly we don't know we know we know shooting is not down people are still planking people are still shooting a lot of.

Rimfire product in.

As as the market does eventually bounce back we would expect this to to bounce back strongly.

There's been a lot of innovation on the.

Or a lot of new introduction on the product side from firearms manufacturers.

One of the folks were talking to now we're talking to about developing a a kind of a rim fire product for them. So there is there is a lot of interest always will be in rimfire and plinking and we expect it to bounce back.

Okay, and then secondly from me.

If you can just talk a little bit about some of the benefits of the Savage divestiture that maybe are hard to quantify.

First you know already I.

You know back online worse that out what kind of potential impact could we see and then secondly, if you could speak just a little bit more to potential impact from working with some of these firearm manufacturers for some specialty ammunition for the guns they make.

Yeah, Mark so those those are clearly two big benefits for us and so you know already I.

The their new CEO , Eric Arts, and I have a ongoing dialogue.

Great discussion and they're excited to bring our products back in I personally walked over a dozen already I stores and been kind of a a a blind shopper. If you will a mystery shopper and I know when I ask about Hey, why are you where are you guys might carry and camel back camp chef what have you, they're saying we want to we are going to so so airports has done a wonderful job of making sure that the Ari I associates understand the situation into the product is going to come back in but the Frank Matt Frank answer is always going to take time right. So they they brought other competitors in and they want us back, but it's going to take some time, so it's not going to be an immediate boost to us but.

And hence that's not the reason why we sold Savage, but we certainly should see a boost from that working with other firearms manufacturers. We've got three industry leaders in their categories that we're working with right now on developing very specialty rounds for them, which again is a is a great nod to the hustle and hard work that the ammo team is doing to take advantage of it.

Excellent. Thank you.

Thanks Mark.

The next question is coming from William Reuter from Bank of America. Please go ahead. Your line is open.

Hey, good morning, and thanks for sneaking me in.

My first question is on yours.

Slide where you show leverage.

You showed a 5.9 times at the end of the first quarter.

I don't think that was pro forma for the Savage sale and then you show so that shows that debt reduction was the sock sales de leveraging on a net basis.

Very good question Bill and since we sold Savage at approximately a six times.

It doesnt could lever very much from a ratio perspective right. So we think the 5.9, we will go down somewhat.

But not significantly as a consequence of the final price that we received on Savage.

Okay, and then you mentioned that at this point, you're going to continue to try and turn around the bells Gerald.

Business.

Ours or other asset sales that you would consider or do you feel like you want to move forward with them. The rest of your businesses at this point.

Yes, what I don't want to do is send a message that you know we're looking at.

Add that fire sailing companies because that's that's not the way we operate we feel like we've sold two assets that didnt fit well for us.

That would be in.

More valuable and other People's hands. We stated previously that we feel like bells euro could be in that category and we haven't changed our thoughts on that other than the fact that we think theres improvements to be had.

There may be some other smaller brands that people knock on our doors that we contemplate but we're not looking at any other wholesale changes at this point in our portfolio mix.

Okay, and then just lastly for me.

With the underlying I guess with the action sports continuing to decline I know you have some exciting innovation that you called out and.

Certain of those sub brands do you think it would seem to me that the underlying growth rate of that category is not necessarily declining I guess do you think that is correct that the action sports.

Segment continues to grow as a category in that you guys could return to growth later this year.

Certainly yeah, I mean, that's the way we see it lining up is.

No we don't see big growth from that business there's.

You know that if you look at the trends in cycling in general and you can look at all the bicycle companies or what have you.

E bikes are growing mountain bikes has been a really really strong category over the last number of years, but that's flattened out and road cycling is frankly down so and skiing is Scott.

Pretty good trends, but particularly for those it innovate like us in goggles. So you know we kind of look at it is a.

As a lower growth business.

But something that should certainly returned to growth as we move forward with the innovations that we have as well as coming off a strong snow season, which is always a harbinger for the next season, because shelves are empty and they need to replenish.

Great.

Look forward to seeing some of that growth. Thank you.

Yep.

Our next question is coming from.

From Keybanc capital markets. Please go ahead.

Hi, Good morning, just just one from me Chris can can you help us with the variance in Nics versus what I guess is actually happening happening in the firearms market I mean, it's a metric we all track but.

What do you think is causing that divergence is it just liquidated inventory flow into retail or is there something else.

At play there.

Well, Brett if I if I don't fully answer your question just just hit me up again here, but I can tell you what's affecting the mix. So first of all with the liquidation from.

You asked Zerella brothers that certainly affect the street price and you see it in a lot of the hunt shoe categories, where there is lower pricing in some of these categories over the short term than than any of us would have expected.

Secondly, as I mentioned rimfire. So we were still benefiting a year ago in the first quarter by higher pricing and rimfire.

That pricing has come down.

And so thats affecting our mix I mentioned nine millimeter, which.

We've seen come down a little bit that's affecting our mix.

Lake City, we promoted particularly at the consumer level to try to drive that that category that's affecting the mix.

So there's a number of things that continue to affect it but.

What again is being masked is a lot of the good stuff, we're doing internally to drive manufacturing efficiencies and to drive cost out through better procurement initiatives or would be a lot worse to be honest.

Got it yeah, because I guess, what I was getting at is in your prepared remarks, you said that mix were up but the firearms industry underlined was I think you called it horrific are horrible.

I was just trying to Oh, Okay Bridge bridge that gap.

Two.

Oh, I'm, sorry, Brett I think though our mix rather than mix Oh, yes.

Yeah, Yeah. So the Nics data is I think it's a a little bit confounding because it has been up but remember that it's been so low for so long I mean, the firearms industry is.

We really started to see it a downturn is I think our competitors did at the beginning of this calendar year. So this isn't just the first quarter thing I mean, this has been going on now for a couple of quarters and.

You know its you know nics is a good indicator EFI team is a good indicator. There's a number of things that are good indicators it all kind of point towards.

Yeah, a light at the end of the tunnel, but.

You know I I don't know when that.

That firearms business and how mix is affecting it is going to come back I just don't.

Thank you.

Yeah. Thanks, Brian .

That concludes todays.

And Mr., Matt at this time I would tend to conference back to you for any additional or closing remarks.

Thank you operator, and thank you to all of you for being on todays call well, we certainly have our challenges I'm confident we've got the correct plan and the right team to execute it as a reminder, we have our upcoming Investor day, which we just announced will be held in New York City on September 10th.

At this event we will.

This event will be webcast webcast for those not able to attend we'll share our vision of Vista outdoor for the mid and long term as well as what you hear from our brand leaders on their goals and progress for fiscal year 2000 and beyond.

I look forward to seeing you on September 10th and or updating you on the progress during our next quarterly call. Thank you.

Ladies and gentlemen that concludes today's conference call. Thank you very much for your participation you may now disconnect.