Michael Pici - Vice President of Investor Relations Mark DeYoung - Chairman and Chief Executive Officer Stephen Nolan - Senior Vice President and Chief Financial Officer.

Greg Konrad - Jefferies Dave King - Roth Capital Partners Scott Stember - C L King Jay Sole - Morgan Stanley Andrew Burns - D.A. Davidson Bill Ledley - Cowen and Company Jim Chartier - Monness, Crespi, Hardt & Company Grant Jordan - Wells Fargo.

Good day and welcome to the Vista Outdoor Q3 FY 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Michael Pici, VP of Investor Relations. Please go ahead sir..

Thank you. Good morning and thank you for joining us for our third quarter fiscal year 2017 earnings call. With me this morning are Mark DeYoung, Vista Outdoor’s Chairman and Chief Executive Officer; and Stephen Nolan, 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 today’s press release and Vista Outdoor’s SEC filings for more information on these risk factors and uncertainties. Please also note that we have posted presentation materials on our website at vistaoutdoor.com which supplement our comments this morning and include a reconciliation of non-GAAP financial measures.

With that said, I’ll turn the call over to you, Mark..

Okay, Mike. Thank you very much. Thank you all for joining us this morning. We appreciate it. Today we reported third quarter results as Michael mentioned which included a 10% year-over-year increase in sales, and gross profit being flat compared to the prior period.

During the third quarter, we experienced the downward shift in point of sale data as we entered the holidays. In the past quarter, we faced a very challenging retail environment with late holiday shopping, weak hunting season due to weather conditions.

Reduced indoor in-store retail traffic, expanding channel inventories and all of this being compounded by continued share of wallet going to MSRs and handguns that we do not offer. The sluggish market conditions result in increased competitive pressures that drove deep discounting.

In order to maintain market share and shelf space and to sustain revenues, we engaged in promotional activity that pressured margins and impacted our near-term cash flow. Part of these negative trends can be directly tied to the outcome of the 2016 Presidential election.

The Shooting Sports market softened significantly following the election, as consumer demand was reduced due to more severe regulatory environment for gun owners under the current administration. We are currently experiencing volatility in the ammunition market in terms of daily and weekly order flow, and weaker point-of-sale trends.

This post election decline in demand for shooting sports product is continuing into our fourth quarter. And we believe will continue into our next fiscal year. Therefore, the company is actively engaged in initiatives designed to reduce working capital, our overheads and product costs.

We are also continuing to invest in capital for improved efficiencies in our operations. In addition, I'll note that we are actively engaged in pursuing long-term supply of products from the Lake City Army Ammunition Plant.

As a result of these dynamics in the Hunt Shoot market, the company recorded pretax non-cash impairment charge of approximately $450 million related to our Hunting and Shooting accessories reporting unit.

Although, we are clearly disappointed with this impairment of tangibles, Vista Outdoor remains committed to delivering long-term value to the execution of our strategy, a focus on operational efficiencies and execution excellence, increasing our market share and improving our competitive position.

We've been executing a capital deployment strategy which include share repurchases, internal capital investments and strategic acquisitions. On January 23, the company completed a $100 million share repurchase plan. Since the creation of Vista Outdoor in early 2015, we've repurchased approximately 7 million shares.

We are also continued to carefully execute and manage our capital expenditure plans, including our previously announced efficiency improvement and capacity expansion program. In this program, we are focused on safety, efficiency, product cost and quality within our manufacturing sites but also looking into supply chain.

The execution of the first tranche of our multiyear capital investment program to reduce cost and increase capacity in specific bottleneck operation is on track. We continue to evaluate and target opportunities where demand outpaces supply were significantly cost savings opportunities exist.

We currently see organic growth, cash generation and margin improvement as our best near-term opportunities for value creation. But we'll continue to judicially adhere to our disciplined M&A process. And we'll continue to explore the most fitting and highest value creating opportunities.

On this note I am pleased to report the integration and performance of Camp Chef brand is on track and the business results are exceeding our expectations. We continue to drive improvement and innovation in new product development across the portfolio. And the company launched more than 150 new products.

During the winter trade show season at the Archery Trade Association Show, the Outdoor Retailer Winter Market, the Shot Show and the PGA Show. We've created market leading positions in numerous outdoor product categories and we will continue to pursue leadership and growth with our leading portfolio of top outdoor brands.

Helping to further enhance our focus on innovation and execution, we've announced new roles for Dave Allen and Jason Vanderbrink. I have asked Dave to lead the outdoor product segment as part of the leadership designed to drive growth in our sales and margins, address increasing market pressures and further accelerate our innovation engine.

I have asked Jason to lead our worldwide sales organization and he will be instrumental in helping us capture additional market share and leverage our portfolio capabilities and our strong relationships within the global sales and distribution network.

I'd note that we've accomplished a lot at the past quarter and this past fiscal year to enhance our company's talent base, deliver execution excellence in our operations, strengthened our brand positions and deliver innovative solutions to consumers.

Although, we faced market challenges, we are remaining disciplined in implementing our strategy and steadfast and upbeat in pursuing our objectives. As we've done many times over the years in many different business cycles.

We will focus on capturing market share, ensuring our role as a premier provider of outdoor product solutions for our customers and on delivering strong cash flow. Our overarching goal is being one of the world's top outdoor products companies is to deliver long-term growth and shareholder value. That has not changed.

We are motivated, energized, focused on a bright future we know is ahead of us. Given the unprecedented acceleration of market pressures during the third quarter, the company has updated its fiscal year 2017 financial guidance.

Stephen will now provide more detail on our updated view of the current fiscal year and provide additional insights into the financial results for the past quarter.

Stephen?.

Thank you, Mark. Good morning, everyone. And thank you for joining our third quarter earnings call. We've disclosed both as reported and adjusted results in our press release to assist you in your understanding of the underlying numbers and to assist in comparison to prior periods.

You will also find a more detailed financial presentation of our third quarter fiscal 2017 performance on our website. Before I share information on the overall financial results, I'd like to give you an update on our previously announced expectations of an impairment charge.

As Mark indicated, the company recorded pretax non-cash $449 million impairment charge related to our Hunting and Shooting Accessories reporting unit in the third quarter. After tax the charge was $414 million.

Breaking it down pretax $354 million was recorded as impairment to goodwill and $95 million was recorded as impairment to identifiable intangible assets. The impairment was primarily related to assets acquired as part of the Bushnell and Blackhawk transactions. We'll share more detail on the impairment in our 10-Q.

I'll now discuss our adjusted results, first for Vista Outdoor overall and then for the segments. The company achieved third quarter sales of $654 million, up 10% from the prior year quarter.

The year-over-year increase was driven by $92 million of sales from acquisitions, and slight organic growth in the Shooting Sports segment partially offset by a decrease in organic sales for the outdoor product segment. . Third quarter gross profit was $169 million, which is relatively flat compared to $168 million in the prior year quarter.

The third quarter results include $24 million of gross profit from our acquisitions, offset by a decline in organic gross profit in both segments. Our operating expenses for the third quarter were $103 million, compared to $92 million in the prior year quarter.

The increase reflects operating expenses generated by the acquired businesses, partially offset by a reduction in annual incentive accrual as a result of our current year performance and also by cost cutting initiatives. We reported operating profit of $65 million in the third quarter, a decrease of approximately 14% from the prior year quarter.

The decrease was caused by the increased operating cost I just mentioned. Interest expense for the quarter was $11 million, an increase of $3 million over the prior year quarter caused by an increase in the average debt balance due to acquisitions, as well as higher average interest rates.

The tax rate for the quarter was 33.6% compared to 36% in the prior year quarter. The lower tax rate was driven by more favorable true up of the prior year return and the higher domestic manufacturing deduction.

For the third quarter, we recorded net income of $36 million, down 17% from $44 million in the prior year quarter resulting in EPS of $0.62 compared to $0.70 in the prior year quarter. Year-to-date free cash flow use was $18 million compared to free cash flow generation of $51 million in the prior year period.

The year-over-year decrease in free cash flow was caused by the reduction in net income and increase in working capital and increased capital expenditures. The primary driver for increase in working capital is higher inventory levels caused by the decreased organic sales noted earlier.

The company is taking appropriate actions to lower inventories by reducing certain purchases of sourced product and output of certain manufactured products across both operating segments. As part of our long-term capital deployment strategy, the company repurchased approximately 1.56 million shares for $60 million in the third quarter.

Since the end of the third quarter, we repurchased approximately 780,000 shares for $24.5 million. As Mark mentioned, we've completed the $100 million share repurchase program in the fourth quarter. Since the inception of the program, we repurchased approximately 2.7 million shares.

Now, turning to our business segments where we report sales and gross profit. Third quarter sales in Outdoor Products were $293 million, up 24% from $236 million in the prior year quarter, including approximately $92 million of sales from acquisitions. Organically the segment was down approximately 15% from the prior year quarter.

The organic decrease was caused by lower sales across all product lines including the impact of the increased promotional activities across the segment. Gross profit in the third quarter for Outdoor Products was $71 million, an increase of 11% from $64 million in the prior year quarter.

The recent acquisitions contributed $24 million of gross profit while organic gross profit in the segment was down 26% as a result of the decreased sales and increased promotional activity. Shooting Sports recorded third quarter sales of $361 million, up 1% from $356 million in the prior year quarter.

Sales of centerfire and rimfire ammunition increased partially offset by decreases in shock shell ammunition and firearm and increased rebate and promotional cost. Third quarter gross profit in Shooting Sports was $98 million, down 6% from $104 million in the prior year quarter.

The year-over-year decrease was a result of products mix and increased rebate and promotional cost. Turning back to the company level, we have updated our fiscal 2017 guidance which takes into account continuing market challenges and increased promotional activity through the fourth quarter.

We now expect sales in the range of $2.5 billion to $2.54 billion. Interest expense of approximately $45 million and adjusted tax rate of approximately 35%, adjusted EPS in the range of $1.95 to $2.10. Capital expenditures of approximately $90 million and free cash flow in a range of $25 million to $40 million.

Additionally, for the full year we expect gross margins roughly in line with our third quarter results. Our preliminary review for fiscal 2018 is for continuation of the current revenue and margin challenges. As per our usual practice, we'll provide additional insight on our expectations for fiscal 2018 during our fourth quarter earnings call in May.

Despite the pressures this year and next, the company is committed to its capital deployment strategy, long-term sales growth and margin improvement and delivering long-term value to our shareholders. I am now happy to open it up for questions. .

[Operator Instructions] And we will take our first question from Greg Konrad from Jefferies. Sir, your line is open. Please go ahead. .

Good morning. Just when we look at the 2017 guidance, I know you don't give quarterly guidance or recent kind of imply what your expectations are for Q4 and you mentioned that a lot of those trends kind of continue into 2018.

Is Q4 kind of good guide for what you expect for margins in sales as we start heading towards 2018?.

No. Greg, I don't think you can necessarily annualize Q4 and clearly as Mark indicated in the script and the challenges we face accelerated in the back half of our Q3 and into Q4 and really gave us insufficient time to react to those changes.

And from a cost management perspective and from inventory management perspective, so I think Q4 should not be viewed as a normal quarter in this new environment.

It's a quarter where we were unable to take the actions necessary within the quarter to adjust revenue and margin but as I mentioned it will be premature right now for me to give any sort of quantitative guidance for fiscal 2018.

We do expect continued revenue pressures, continued promotional management pressure but as Mark mentioned in his script, we are engaging a series of activity around cost management both overhead and product cost and inventory and other working capital management to improve cash flow..

Yes. I agree with Stephen, Greg. I think it would be mistake to just straight line Q4 and annualize it.

We will come out and react to this market as we have a long history of up and down cycles, taking share in all those cycles as we have a very, very capable organization in terms of cost management and so there is a lot of work we will be doing to improve as we go forward. .

Thank you. And just follow up around cash flow. I mean just looking at the stock price performance as of late. Why not focus more on share repurchases over acquisitions and then just second part of that any issues just related to the covenants with either share repurchases or just the decline in EBITDA..

Yes. So on share repurchase, that has been an important part of our strategy going forward. As we look at the intrinsic value of the company.

And as we look at the portfolio we've built and the opportunities we see ahead of us in this market to be able to continue to grow and take share and drive organic growth and improvement going forward over the longer term.

So I agree with you that as I mentioned earlier that we are going to be focused internally on our organic performance much more than any other strategy that we've been executing. And then in terms of share repurchase, that's been also part of the strategy we've been executing obviously as we've gone forward.

We'll be talking to the Board about that and working through what that outcome might be as we look at entering our next fiscal year. Yes, in terms of credit agreement and our notes, Greg, our agreement has obviously been publicly filed and welcomes to look at them. And we certainly do not have any current issues with respect to the covenant.

And within those agreements and as I think is clear if you read through them, there certainly are restrictions in those agreement about restricted payments and the level of cash flow which we can direct towards to share repurchase or other similar activity.

And so we are certainly not unlimited in how much of that sort of activity we can do even above and beyond as Mark mentioned any authorization. But I welcome to -- sorry you are welcome to look at those publicly filed documents. .

And we will take our next question from Dave King from Roth Capital Partners. Your line is open. Please go ahead. .

Thanks. Good morning, guys. I guess thinking about this the guidance a little bit, maybe little bit more color there. Can you talk about how are you thinking about the Shooting Sports business versus the Outdoor side? Shooting Sports I think is still up, I want to say 1% or in the quarter.

So as we think about the guidance for next quarter it looks to me like it sort of implying kind of 25% organic decline overall. How much of that is driven on the Outdoor side versus the Shooting Sports side? And any color there I think would be helpful. .

Yes. David, as you know, we don't provide guidance by segment and so I can't give you quantitative sense but obviously with the size of the organic decline we are talking about with our Q4 guidance, it's clear that we see weakness across both segments in line with Mark's description of the overall market conditions.

So we clearly will see challenges in Shooting Sports but I can't break apart the size of that organic decline between the two segments at this point in time. .

Okay.

But it is fair to then say it's declined in both businesses as we think about the fourth quarter and then maybe even next year both businesses having [Technical Difficulty] correct?.

I think particularly Dave in the fourth quarter which we are in the middle of right now which gives us a lot more clarity. We are seeing challenges in general in retail. We are seeing challenges in general across our distribution network as consumers have pulled back.

So we are seeing some of those pressures in both areas primarily again in the hunt and shoot. You remember the Outdoor Products segment; there is a significant portion of that business which is associated with the Shooting Sports although it's not guns and ammo. Those are being impacted by some of the same trends.

If you are not buying a new rifle, you are not buying a new scope. If you are not -- if guns decline and you are not buying firearms you are not buying accessories. So there are some links there that prevail that impact the Outdoor Products segment.

And so that's the trends I think we are most concerned about as what's happening post the election in the Shooting Sports market which has been a very quick pull back in terms of demand and sale through which is then caused inventories to build in wholesale and retail channels.

And we are just concerned it's going to take a while to work those inventories out and get back to where we are pursuing replenishments. And then during those kinds of time we focused heavily on taking market share.

There are several companies that have entered this space over the past eight years of plenty under the prior democratic administration as this been a boon for this industry for eight years. Lot of small companies and other companies have come in with products because they could as demand outpaces supply.

As we've consistently said and as we've consistently demonstrated over the last third years that these markets go through the cycles, we've demonstrated an ability to take that share back from importers or smaller suppliers because of our relationships in the channel and in distribution as a key strategic partner across a broad portfolio.

So we definitely be pursuing those strategies that we have used successfully in the past. So I don't -- I can't speak to exactly what's going to happen in FY18 but in the fourth quarter it's really Shooting Sports is our largest concern and those products associated with Shooting Sports that are in the Outdoor Products segment. .

Okay. That's good color. Thank you, Mark.

And then as you think about sort of the Outdoor then side of the business, how do you think about that these days in terms of the problems and issues that are arisen there? Those -- to what extent do you think those are self inflicted versus end market driven and then as you think about the opportunities to kind of capture share there.

Do you have the same ability to kind of do what you've done over the last third years on the Shooting Sports side to try to be able to get some additional business given the retail challenges that are happening in Outdoor?.

Yes. That's a great question. I do appreciate that question. It is one that we are working through to ensure we get the proper answer and that we prevail through the challenges that we face.

I think your question in terms of self inflicted versus market driven, as we look at this and we look at the magnitude of the issues and we look at materiality, any time you have a portfolio like ours which is broad and complex, you have various areas of improvement organically.

But the majority, the issues that we face I don't see them necessarily as internal self inflicted wounds.

Vast majority of the issues we've been facing are market dynamics and are being market driven by consolidations in the retail space for example in golf, and the declines we saw in the golf market as some of our key customers exited that market through bankruptcies or through consolidation.

Some of the challenges we saw, we mentioned earlier in the year with retail consolidation was sports chalet and sports authority impacted some of our camel back business and bell helmet business and those kind of brands a little bit.

So we don't -- when we look at our balance scorecard or we look at our performance and hold ourselves accountable, the real material impact that the company are seeing are not organic self inflicted wounds or unforced errors. We really are facing market dynamics which are giving us a majority of challenges.

And I think those market dynamics in time we'll be able to respond to them and they will be begin to stabilize particularly as post election impact in the Shooting Sports will -- we will soon I believe find out what the new normal is.

For several years the question has been asked, what does the new normal look like? I think we will discover that new normal in our next fiscal year. And we'll capitalize on every opportunity we have as we get to that new normal. .

Okay. That's great color. And then one last clarification.

Stephen, on the impairment, sound like it was primarily related to Bushnell, Blackhawk, any other impairment in there related to CamelBak, JimmyStyks, DRG anything else?.

So, no, the impairment we recognize is purely within our hunting and shooting reporting unit. Within our Outdoor Products segments are three reporting unit. There is Outdoor recreation which includes the assets acquired as part of CamelBak, JimmyStyks and Camp Chef transactions.

Those are sport protective reporting unit which is primarily comprised of the action sports of DRG transaction plus some of the Bushnell acquisition we acquired brand such as bolle safety and Serengeti and then our hunt shoot reporting unit which include some assets which were acquired as part of the bolle transaction back in 2001 and plus Blackhawk transaction plus the majority of Bushnell assets.

The impairment was all within the last reporting unit and it's difficult to break apart as you know the goodwill and which acquisition and the goodwill impairment is related to because goodwill is treated monolithically and within the reporting unit and but we do know that the bulk of the goodwill in that reporting unit came from the Blackhawk and Bushnell transactions.

So we can try to call those out but there was no impairment recognized in a quarter two either of other two reporting units..

And we will take our next question from Scott Stember from C L King. Sir, your line is open. Please go ahead. .

Good morning. I just following upon that last question about impairment charges and potentially some of the other two site [Technical Difficulty] also recreation.

I know that there was nothing related to those sub segments in this quarter but given the sales trends that you see right now, [Technical Difficulty] relatively confident that we will not see any other impairment charges just given the some of the large acquisitions that you made in those two sub segments?.

Sure. Look it's difficult to give forward guidance on the impairment or the like thereof. If we believe there was a need for an impairment charge in those segments, in those reported units we would have taken it already.

Certainly during the quarter as we mentioned in our release about the impairment four weeks ago, we declared a [true coming] event for the whole of the Outdoor Products segment which cause us to evaluate all three reporting units within the segment for impairment.

All three went through what's call the step one test under rout and accounts code ASC 350. There was only an indication of impairment in one of the three and that hunt shoot which then went into step two analyses which resulted in the $449 million charge we have announced today.

The other two reporting units were tested and no impairment was identified. Obviously, going forward it is difficult for me to give a level of confidence around the impairment or lack thereof since we don't guide by segment.

And since I can't predict when we go through an impairment test next, got all of the variables that apply within the impairment test will be.

But certainly there was no indication during the quarter as you will see when we file our Q there was positive cushion which is an access of fair value over the carrying value on the book in both of those segments. So it's not as if they were at the position where carrying value is equals fair value.

There was a cushion and access in those segments which certainly indicate that we are not sitting right on the edge of impairment but that's probably all the guidance I can give looking forward. .

The only other thing I would mention on impairment is as you may recall we took impairment against Savage a year or more ago based upon market conditions again. And then we six months later Savage is our home run and the business were not impaired at all.

And so I think our goal here is to ensure that these impairments are goodwill and intangibles does not impair the future ability of those businesses to deliver great products grow and increase their margins. And we are very much focused on that as much as we were on Savage. .

Got it. And just one last, I'll hop on optics. I know that in prior calls you guys have talked about increased competition and maybe having to upgrade or assess some of the product offerings that you had. Obviously, with the marked away that is right now I imagine that's accelerated that for that effort.

Can you maybe just talk about what you are doing in that front to -- from a product standpoint to continue in market?.

Yes, no, absolutely happy to do that. In fact I am pretty excited about this. So we've complete the restructure of our optics capabilities within the company over the last year or so since we began to talk about the challenges we were seeing in terms of market share in optics we rebuild the team.

You'll recall that optics business is about $150 million of our revenue. That's a size a bit when we talk about optics it is about $150 million. We completely rebuild that team, we hired really capable engineers, and we brought in additional equipment to support those engineers.

We've hired great designers to be able to allow us to manage our own destiny to designing our product so features are benefit so we believe the consumer will look for. And so I am very excited about that team. I am excited about the talent we brought on board and the quick progress they are making.

We just we are talking through some of those strategies this week as a matter fact with our Vice President over the Hunt shoot segment focused particularly on optics conversations and I was very heartened by the progress we are making. You are going to see us introducing new lines, new capabilities.

You are going to see significant improvements in our products that will be launched this year. And so we are making terrific progress coming back in that very, very competitive market.

And I am quite bullish that we have turned the corner on that and that over the course of the next year we'll be taking market share back and will be introducing new and more exciting products which will appeal to our customers and to consumers. .

And we will take our next question from Jay Sole from Morgan Stanley. Sir, your line is open. Please go ahead..

Great. Thank you. So the question is on the sale guidance for 4Q.

How much would you the sales guidance is because of what you are seeing from the point of sale trends or how much of it is just destocking that retailers are having too much in for right now and they are coming back to or respond more than US trends was just as a precautionary type of measure?.

Yes, that's a good question, Jay. And that's -- I think that's a critical element for us to understand as we go forward. Once really happened over the last eight weeks and is it really demand coming through the shelf or is it just clearing inventory and lack of reordering.

Initially following the election as you recall even in the couple of weeks following the election, at the time we had the Investor conference in New York City for example, point-of-sale trends were still positive. So we were seeing point-of-sale trends positive a couple of weeks after the election.

About the time we got entering into the holiday season beginning around the Thanksgiving week, those point-of-sales trends began to slip negative. And so then we began to see this accelerating of point-of-sales are continued through the holiday season in December and January.

So it really is a combination of both and I don't want to -- it's complicated to be able to trying to break that out. I am not going to be able to break it out in terms of point-of-sales versus inventory and destocking because we have so many product lines and product categories where the numbers will be different .But in general it's been both.

We've seen both the decline in point-of-sales in terms of consumption but we also know that inventories are high. We know they are high in retail and know that they are high in wholesale which feeds our dealer network of thousands of dealers.

So we do believe that one of the key contributing factors is that people built up inventories in advance of the election season in anticipation of a democratic administration.

When that didn't happen we know that many, many of our customers had inventory levels which were too high and as point-of-sales trends begin to decline it compounded the problem with their accelerated inventory build they done pre election.

So truly as both of those and we'll be working through this quarter and into our next year to ensure the results inventories realign with demand that we are taking market share, taking shelf space and getting those replenishments. .

Got it. Okay. Thanks Mark. Let me just ask about SG&A and R&D for next year.

Obviously you are not giving guidance but the track record of your company over long time, excellent ability to control SG&A, can you just give us in high level like what your ability is to bring SG&A down to a level in terms of dollars or R&D, how we might think about that you are -- how much is variable in your ability to adjust based on the environment that you are seeing?.

Yes. We have a long history of success in terms of cost management and managing variable and semi variable cost both in factories and in our SG&A side. So we are very focused on that. This is not our first priority in terms of these cycles up and down cycles over the third years.

We've seen this many times may be not with the velocity we've seen in the last eight weeks but we've seen these trends go up and down and so we are working right now with Stephen the financial team, our President and our segments and with those in our global product line.

So look at truly critical investments and truly critical expenses versus those that might be variable.

And so I am confident that we will continue to find ways to streamline and slim down the organization if we need to, to align with the challenges we'll face in the near term as we go through another one of these cycles particularly in the Shooting Sports where we have seen this before as well. So we are very, very much focused on that.

We are also focused on product cost.

Lot of the capital we are investing in our capital investment plan is focused on efficiency improvement and bringing state-of-the-art modern capabilities into our manufacturing facilities to reduce our unit cost to production and allow us to continue and pursue being the low cost leader in the segments that we serve.

So that's going to be an important element forces well beyond just the overhead element. And SG&A is driving our direct cost in line with these investments we are making. We are also working our supply chain.

We've engaged in intense negotiations with suppliers to ensure that we are getting the best possible price out of our suppliers and products that we source. So my answer I guess Jay on that is yes, we are focused on the overhead and the SG&A. But we are also very focused on direct and semi variable cost.

In terms of the other part of your question on R&D, when we look at our R&D investment, as you recall we've increased our R&D investments over the last year and even at that level when we look at our R&D investments, we are still quite slim and we are very efficient in what we are able to generate from our R&D investments.

So we'll be very mindful not to cut up our nose to spite our face while we are in a cycle like this. We want to be able to maintain our engineering capabilities. We want to be able to maintain our innovation engine. We want to be able to take market share by having great products. So it'll be a balancing act.

We've done that before very successfully and we are prepared to do it again. .

And we will take our next question from Andrew Burns from D.A. Davidson. Sir, your line is open. Please go ahead..

Thanks for taking my question. So it appears we are entering the short -term ammunition correction which is occurred several times in the past and typically lasted anywhere from 12 up to 22 months in duration.

As we enter what looks to be this correction, you think the profile is similar to historical patterns or anything to call out in terms of inventory pricing consumer shopping behavior that would make it different this time around. Thank you. .

Yes. I appreciate your recognition the fact that we've seen this movie before and we weather the storms before you are right about that. In terms of the duration, I think it is interesting. I saw that your numbers mentioned previously in some write ups that were published, this one I think it's too early to call.

I think it's too early to call the duration. But we've seen duration in that 12 to 18 months as we've gone through these cycles and established whatever new norms are and figure where the bottom of the trough is. This one we are into at about eight weeks now following the election primarily.

So we will work our way through that and we'll be to able to some point in time I think do a better job for you and being able to may be call the trough and figure out exactly where the bottom is and identify what that new normal is. This is one is a little bit different may be just for a couple of reasons.

I think the pre election inventory build compound to the problem. So this big inventory build that occur in retail and wholesale in advanced to the election compounds the problem at least in the near term as we need to work through those inventories.

So there is a little bit of different there and that was a fairly significant shift prior to what has been a fairly rapid decline. So that may compound it at least in the near term for a little while.

The other thing I think that is interesting is some of the cycles we've had -- we are coming off what I call the eight years a plenty under the Obama administration and so being able to gauge exactly where that correctional be following a strong, strong ball market in Shooting Sports for eight years is a little bit unique.

And so it causes just a little more uncertainty in exactly being able to identify what the new normal is. That said there were a lot of new shooters in the market. There are a lot of new people that have come into the Shooting Sports and put firearms for the first time or the second or the third or the fourth.

And so we know there is a larger installed base of people or consumer product which I think bodes well in the long term. We know the demographics of new shooters are favorable 18 to 34 kind of age group. It has been -- lot of growth has come and they are actively engaged in sports. So I think that bodes well for us.

Demographic shifting most recently to 50% women participants I think is a great demographic for the long-term health of the Shooting Sports. So I think all of those things are variables. Some challenges to think it could be more challenging; others frankly comfort us so we think it might be just a little less challenging.

So I guess at the end of the day it's a little too early to tell. We expect to be able to have more information as we get through our fourth quarter and we get into next year. And we'll be trying to factor all of that obviously into the guidance which we'll give for FY18 where we'll have our standard May call..

Thanks for the color. That's helpful. At the start of the call, Mark, you mentioned a list of industry and retail headwinds that you as well as your competitors are facing.

I was wondering if you could discuss what if any impact these retail headwinds are having on the non-hunting non-shooting elements of the business like CamelBak Bell and Giro which just worked through the retail bankruptcies.

What's the state of the union as we start 2017 for that area of the business?.

No, that's good question. Obviously, the retail sector in auto recreation supports a $63 billion industry that we have talked about and we've discussed in terms of this highly fragmented $63 billion market we are operating in. Obviously, retail will impact that market and sell through those items as well.

So we'll not be immune to challenges from the retail market impacting our all of our brands. However, what we've seen today with the exception really of golf where we saw the golf consolidations and we saw some of our large golf customers either go bankrupt or consolidate.

That was unique to golf and causes some real challenges right around at the end of the golf season in that July, August, September, October timeframe towards the fall. That was a specific and unique impact that is settled down a little bit now in terms of the impact of that.

The sports authority, the bankruptcy and consolidation are occurred there did impact CamelBak, it did impact the Bell, Giro businesses a little bit as those stores carry both cycle. Snow and hydration solutions and backpacks and bottles. So there was some impact we saw clearly from those retail consolidations.

But I haven't seen anything in general in retail which is heightening our exposure to those other outdoor product brands like we are seeing in the Shooting Sports side.

The only other trend Andrew we have seen in certain categories, strictly in winter sports, those a bit of an inventory overhang from the last season where retail has came into this low season with more inventory in hand. This is proving to actually being quite a good snow season.

And so we certainly seen improvement but it did -- replenishment did lag few data that in the winter market as the retail channel gone through its existing inventory.

There are also few inventory overhang issues in the independent bike dealer channel but all of those added together while they are not insignificant pressures but certainly lower pressures than we faced in the hunt shoot market today. The other thing we are very much focused on, I would just add one last comment on the retail environment.

We are not necessarily completely tied to brick and motor. And in fact our strategy is continuing to allow us to have other outlets for our products through online distribution and online retailers. As we see that shift from brick and motor to online we are very much engaged in taking the advantage or participating in that shift.

We are working that if strategy everyday and working those sales everyday to grow our ability to go direct to these consumers and to grow our ability to be able to go online to these consumers. Some of our products, it's easier to do that than others.

But frankly you can sell firearms and ammunition through numerous online outlet, traditionally that is not been the case. But that has grown significantly, so we are supporting our brick and motor retailers. They are very important to us and we are working closely with them.

But at the same time we are working to ensure we have a balanced distribution network which allows online market to become increasingly important for as well. .

And we'll take our next question from Bill Ledley Cowen and Co. Your line is open. Sir, please go ahead. .

Hey, guys. Good morning. This is Bill on for Gautam this morning. Just wanted to get your sense on the inventory that's back in the channel, I think O&N and Manchester mentioned that it's going to take at least until a summer to work through.

So you just go through how you view that and how long you think it takes to de-stock that channel before you start getting restock purchases?.

Yes. We are -- let you aware of all the Manchester earnings call and their anticipation that it takes a couple of quarters. I am not sure -- I don't think they are sure, I am not sure anyone sure exactly how this is going to settle out because point-of-sales is also shifting on us.

But we suspect it will take us end of the back half probably of next year to be able to confident that inventory resets occurred and we got towards the new demand as balanced to a supply and inventories are being cleaned up.

I think as other company's reports going forward that are in the Shooting Sports space and you got a couple more that are going to report here over the next few weeks. I think there will be a common theme around this inventory issue and clearing out that inventory and people trying to assess how long that might take.

We are in such a state flex now it's difficult but we think the back half of fiscal year 2018 we'll begin to work our way through this. .

Okay. Thanks. That's helpful. And then just going back to the free cash flow guidance reduction.

Can you talk about the major pieces of that and how you see that going into 2018? I know you don't give guidance but how long do you think it takes for you to balancing on working capital?.

Sure.

So the primary driver of the free cash flow guide for the year, the reduction in it and it was not unlike as you listen to my comments on our third quarter of cash flow year-to-date, with the significant working capital impact and particularly in inventory build in the third quarter compared to the prior year, as Mark mentioned this really accelerated from Thanksgiving on.

At that point in time we had a fair amount of product on order or in manufactured at our plant. And we can turn on the time that output. And so therefore we had not time to react to our level of inventory.

Adding to that obviously we need to collect cash in the quarter so only kind of sales through the first half of Q4 even generate meaningful cash flow during the quarter and during the full fiscal year.

We would expect as we head into fiscal 2018 while we are not currently providing guidance, we would expect to be able to address a number of those issues.

In particular, as I mentioned during my remarks, we have reduced our orders finished goods and for those finished goods we'll also reducing the output of our old manufactured product across both segments to address the inventory balance.

So we would expect that to work it-- we would -- Mark mentioned that inventory retail channel, it would be the back half of the year before we can worked that out. A lot of our own inventory challenges; we would expect to fix certain by the end of the first half of fiscal 2018..

Okay. Thanks.

And then just given the environment are you guys still looking for M&A or have you put that sort of on the back burner for now?.

Yes. So I would just say this way that M&A is not our priority now. Our priority is focused internally on margin improvement, cash generation improvement, driving innovation so we can drive revenue and doing the kinds of things we know how to do to take market share in down market or up market.

So our priority is going to be looking internally to drive execution improvement and improve our financials including a cash flow discussions Stephen just had you with about managing our facilities and our supply chain and ensuring next year we have good solid cash generation year. We feel good about that.

We can't guide to that yet but we will when we can. So we are going to be working heavily on those things. We will not turn a blind eye to M&A opportunities but I would say it's not our priority. .

Okay. Thanks. And just a last couple one. Any incremental cost to enact those margin enhancements and if you could just update us on the discussion with Orbital Lake City? Thanks so much and good luck..

Yes. So let me take the first one and Stephen can take the update on Orbital Lake City. So in terms cost associated with our own internal inventory reductions. Largely this will be really pulling back our order quantities in the supply chain and reducing order quantities which we are giving to our vendors on a lot of our sourced product.

So there is no really additional cost there. Working through our factories, we've been working over time in many of our factories. We obviously will be pulling back off the over time as we go forward and it will no longer be necessary. That's a cost savings actually by not asking the pay time and having over time.

As we work through our overheads, as we work through other things there may be some additional cost here and there. But it is not going to be material driver. We will be able to do this I think very efficiently.

Steve, do you want to talk away?.

Sure. In terms of -- as we mentioned before we are actively engaged in discussion with Orbital Lake about the future of long-term sly agreement. Those discussions are ongoing. Under that agreement there is a couple of month's time negotiation period has spelled out in that agreement. We are in the middle of that agreement.

There is nothing to report at this stage. When and if there is, we'll certainly announce it. .

And we will take our next question from Jim Chartier from Monness, Crespi, Hardt. Sir, your line is open. Please go ahead..

Good morning. Thanks for taking my questions.

First, can you talk about raw material costs for the ammunition business? How are they trending for you? And then with overall kind of prices or cost going up, what's your ability to a way its prices in an environment where demand is a little bit softer than has been historically?.

Sure. Yes, so that's something we've managed I think successfully for many, many, many years.

As we told in the past how we go about this is we exercise a process of looking at our manufacturing schedules and what our demand planning for our factories is going to be for consumption of raw materials which are generally for us heavily focused on lead and zinc.

Those are the elements of brass and lay in bullet so copper; zinc and lead are our three primary metals which drive our commodities as we buy those for brass and as we buy those for lead chores in our projectile.

So our process is we are always buying well ahead of demand based on a percentage of demand, based upon where we believe the market is going. So we've been locking in favorable pricing on materials. So we've been locking that ended for various periods of time at ahead of us depending whether its zinc, copper, lead.

And then going forward as courses we deal with the market. We've also been one of the leaders in using recycle metals and materials. We began the process of using recycled lead in our projectile manufacturing many, many years ago. And we led the market, we led the industry and thinking about recycle of lead at a much lower cost.

So we've been pretty good at this over the years. And we'll stay very, very focused on this, Jim, as we go forward. Of course, if the commodity markets all continue to rise you cannot beat the market forever.

But we've demonstrated in the past the ability to get certain segments of our ammunition capability even in flat markets with some pricing opportunities there. We are going to be very focused on not dropping prices. We've said many; many times we are not the low price leader. We want to be the low cost leader.

And so you will not see us chasing price down or significantly reducing price. We've lots of other levers we can pull to make our products more attractive in the retail environment. But we are cautious about this. We are watching that market in commodities very, very closely. .

Right. And then you talked about the impact of some larger retail bankruptcies over the last year.

With the market for guns and ammo looking soft going forward, what your outlook for the smaller, independent gun shops that have popped over the last few years? And how would bankruptcies closing there impact your business?.

Yes. So this will occur largely as you described, if you are looking at the dealer network, I think that there will be some challenges potentially for small dealers.

Whenever you have pretty rough time like we had experienced where you have eight years a plenty and demand is outpacing supply and you have hot category firearms which have been very, very interesting to consumers like the AR platforms and conceal carry handgun.

That is allow not only retailers and dealers, this is allow manufactures to come into this market many, many small one pop manufacturers enter this market as well as small mom pop dealers which have entered this market to take advantage of the favorable market conditions for almost -- now almost a decade.

My experience has been that they will be very-- they will find themselves under significant pressure. And many of them will not have the balance sheet and the cash flow and the wherewithal to remain in business. So I think that not only on the dealer side, small dealers but also small manufactures.

If depending on the length of this correction that we are in and depending we are at the bottom of the trough and where it settles out. My personal expectation is it will heavily pressure small manufactures both of ammunition and of firearms. And some of the new or smaller dealers.

And so we'll be working through that process to try and ensure that our dealer network is healthy. We have great relationships with functional wholesaler and with buy group who service this independent dealers. We had very good meeting with those suppliers of independent dealers at the shock shell. We believe we are a premier supplier of choice.

And I think as we've said in the past what you'll see typically in a market like this is you will see import products on the ammunition side begin to decline first.

Then you'll see the small mom and pop domestic manufacture supply to the market begin to decline and our goal will be to pickup all that market share and get a larger piece of what could be a smaller pie. So I don't know if anything right now which would cause material impact from the company from the scenario you lay out.

And in some cases we may benefit from our manufactures which actually have to exit and we'll pursue and take that shelf space. .

And we will take our next question from Grant Jordan from Wells Fargo. Your line is open. Sir, please go ahead..

Great. Thanks for taking the question.

Most of it had been answered but just thinking about cash flow and use of cash over the next year, how you think about your balance sheet? Do you want to keep that leverage in the 3 to 3.5x ratios; you've talked about in the past?.

Sure. Certainly our objective as we've talked before our goal was during good and to keep that leverage ratio under 3 and recognizing that we are in the consumer products market which is by its nature is cyclical. And we know there is always opportunity for cycles to curve, we are currently in one of those cycles.

We certainly will be very judicious in our use of cash over the next 12 months. We will be very careful as Mark had mentioned our priorities for cash flow deployment and value creation of next 12 months. A lot of it's focused on actions we can take internally. We'll work to reduce working capital.

We'll work to improve efficiency and gain market share as Mark had said. And so it's difficult for me to guide to an exact leverage ratio in a forward basis when I have not given cash flow guidance for next year. But we certainly do not intent to let our leverage ratio grow excessively. .

And we will take our next question from Greg Konrad from Jefferies. Sir, Your line is open. Please go ahead. .

Just one quick follow up.

In terms of ammunition capacity expansion, when is the first firm decision and kind of where do you stand in that investment program today?.

Yes. That's a great question, Greg. In fact, I am actually glad you came back for having asked to that, I think that's an important question for our investors and for analysts here today. So we let me just back up a minute and lay the foundation of this question a little bit.

So we announced that we were going to pursue a CapEx investment of up to roughly $100 million over the next several years to address bottlenecks in production where we knew that if we can address those bottlenecks we actually would have additional capacity we could sell.

And that also large portion of this capital was ensuring that we could be low cost leader across our categories of ammunition from shock shell to pistol to rifle. So we have very much still focused on that.

We are only in tranche one, the offer in terms of what we might do at tranche two is right now we are looking those decisions right now what we may do in tranche two.

The other thing I would tell you is the reconfiguring of capital is an ongoing analysis for us, or where we should be investing to reduce bottlenecks or reduce cost and improve our ability to compete and win.

So this is not a -- even though we did this in tranches which allowed us to ensure we were not committing to the full $100 million of CapEx and that those tranches have windows meaning we are getting into the second tranche window right now for that decision.

We also had a lot of flexibility in terms of how we apply this CapEx across our manufacturing facilities across the various components of our ammunition base.

So we are doing this very deliberately and very cautiously and we'll be making decisions in terms of CapEx spending which we will share with you when we do guidance, we'll talk more about the cash flow and what we'll be doing on CapEx next year. But we are in the pros of these decisions now.

We believe very strong that we've done already in tranche one is critical and necessary for the long term competitive position of the business and to drive our cost down and to drive these positions of being able to be low cost leader. So very happy with how tranche one has progressed. The team has done a great job executing tranche one so far.

We'll be reviewing tranche two and then we'll talk to you more about CapEx in general. .

Yes, Greg, I would just like to add that you shouldn't use the tranche that which is being synonymous with the years.

And tranche one our certain expenditures under tranche one which our year two the plan but also you should be aware that tranche one and we mentioned this I think several quarters ago, tranche one is really focused on the couple of types of ammunition which are still selling strongly even today.

So we still do see some opportunity from tranche one and as Mark mentioned it is also very flexible capacity. So if that demand were to change somewhat we could certainly reconfigure those lines but also that they will reduce our average cost for those calibers and types of ammunitions. .

We'll be receiving our first benefit from tranche one investment in the back half of FY18. Those begin to materialize and will allow us to have the ability to capture additional revenue and market share. .

And we will take our final question from Bill Ledley with Cowen and Company. Your line is open, sir. Please go ahead. .

Thanks guys. Forget me first second question just wanted to follow up on that question.

Do you guys believe you could make the same round yourself that you source from Orbital ATK? If you were to invest in the second tranche of CapEx?.

Well, the rounds that are manufactured by Orbital ATK are very well understood, they are same rounds of manufactured by foreign entities who make a [mil-spec] product and can be manufactured by us as well. So there is nothing unique necessarily about the configuration of the ammunition manufactured by Lake City.

But we've had a productive relationship with them over the years. They have excess capacity which we've helped them get on to the commercial market in a win, win situation. So it seems like it's a good opportunity for both companies going forward.

In the event we couldn't get that supply from Lake City, certainly we could make those products and we would have to make certain investments to do that. But there is nothing unique about the rounds we purchase from Lake City in terms of in inability to make that elsewhere..

And do you think they have the cost advantage then or --.

Well, I don't think we can -- I don't think we can get into that. I think those are questions you have to ask away about their own cost and whether they think they are competitive in the market or not.

The fact that we've been able to have a productive relationship with them I think is what we really focused on just to seeing if that relationship can continue to be a win-win for both companies. But I wouldn't want to talk about their structures or where they are in terms of being cost competitive or not..

All right. Well, we thank you all for joining us. I think that was our last question. We look forward to talking to you again as we wrap this fiscal year and we'll be able to give you guidance on FY18 when we do our next earnings call. Thank you very much. .

Ladies and gentleman that does conclude today's conference. Thank you all for your participation. You may now disconnect..