Michael Pici - VP, IR Mark DeYoung - Chairman & CEO Stephen Nolan - SVP & CFO.

Scott Hayman - KeyBanc Capital Markets Greg Konrad - Jefferies Bill Ledley - Cowen and Company Jay Sole - Morgan Stanley Dave King - Roth Capital Partners Scott Stember - C L King Andrew Burns - D.A. Davidson Ronald - Wunderlich Securities Jim Chartier - Monness, Crespi, Hardt & Company.

Good day and welcome to the Vista Outdoor Q4 and Full Year Fiscal Year 2017 Earnings Conference Call. As a reminder, today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Michael Pici, Vice President, Investor Relations. Please go ahead sir..

Thank you. Good morning and thank you for joining us for our fourth quarter and 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..

All right. Great Mike. Thank you. Good morning, everyone. Thank you for joining us on our Vista Outdoor FY'17 fourth quarter and full year earnings call. Just two years ago, we launched Vista Outdoor with a vision to create a world leading provider of products for outdoor enthusiasts.

Our company, the executive leadership, we remain excited about this vision and we remain committed to our core goal providing innovative and high-quality products to our customers, creating rewarding careers for employees and generating growth and returns for our shareholders.

We believe, we've assembled a brand portfolio that's well-positioned to achieve our vision and take advantage of growth in the outdoor recreation market. Although current retail challenges exist, we're seeing participating growth.

As most recently highlighted in Outdoor Foundation's topline report, Vista Outdoor has strong product offerings in six of the 10 outdoor recreation growth categories, including stand up paddle boarding, BMX cycling, cross-country skiing, adventure raising, trail running and hiking.

These trends indicate the strength and potential this industry over the long term and reaffirm our strategy to expand our outdoor products portfolio in the other outdoor recreation categories. Additionally, the majority of our hunt-shoot product offerings are consumables.

These product support an installed base of approximately 350 million firearms in the United States and this space continued to grow by approximately 60 million additional firearms over the last four years. The number of shooting sports participants has increased by 15 million since 2009.

To achieve our vision, we must consistently deliver innovative products, continuously improve our operational performance and build on strategic partnerships. This requires us to invest in our business even during periods of challenging market conditions.

Today e-commerce through our own and our partner's presence represents over 20% of outdoor product segment sales. We are continuing to expand our e-commerce presence to capitalize on the ongoing shift by consumers to online shopping.

We are leveraging the knowledge and experience of our acquired brands and have hired a new dedicated Corporate Vice President for e-commerce to drive growth across direct-to-consumer, business-to-business, dot com and dropship channels. We continue to invest in R&D and innovation across all of our product lines.

In the fourth quarter, we launched more than 150 new products at tradeshows for golf. We're in trial sports and the hunt shoot markets. These new solutions have garnered cover stories and best of the best awards with nominations from both industry publications and our consumers.

Vista Outdoor's goal is to have the right person in the right place at the right time. This our two strategy is we call it is evolving along with our relatively young company and I'm pleased to say that we're attracting high-caliber talent and strengthening our teams.

We are also elevating and maximizing the capabilities of high potential employees from our recently acquired businesses and our traditional businesses. The company has and we will continue to drive cost savings initiatives and improved efficiencies within our manufacturing, sourcing and distribution capabilities.

In the fourth quarter, we reduced our headcount to align with demand. Additionally, we're reducing working capital, primarily through inventory reductions in both segments. We believe these efforts will position us to deliver strong cash flow and achieve long-term organic growth. We recognize that we fell short in the fourth quarter and the full year.

We anticipate channel inventories will stabilize by mid FY'18 and we are determined to improve the performance in the second half of this fiscal year. I'm pleased to announce that we finalized the new long-term supply agreement with Orbital ATK that extends through September of 2020.

This agreement allows us to ensure an ongoing supply of ammunition products, produced at the Lake City Army Ammunition Plant and supports our long-held market position as the leader in these ammunition categories.

With the first phase of our long-term ammunition capital investment plan coming online in the second half of this fiscal year and even the current market conditions, we are suspending future capacity expansion phases at this time.

While the current period of market softness has impacted our business, the breadth of our portfolio has allowed us to benefit from strength in certain markets, such as powersports and outdoor cooking. We are benefiting from growth in these areas through our acquisitions of Action Sports and Camp Chef.

Over the short term, our primary focus will be on delivering improved performance within our current brands.

We continue to evaluate the performance and capabilities of our portfolio to ensure we have the right products and brands to support our long-term strategy and that the various components of our portfolio are generating the returns that we expect.

We've issued FY'18 financial guidance, which reflects our focus on generating strong cash flows through cost management, efficiency improvement and our operational excellence.

We believe that our scale and diversity will continue to give us opportunities to capture market share by leveraging product innovation and distribution strengths across all of brands. Stephen will provide more detail on our view for the full year including the first quarter.

Much progress is being made across the company and functional and operational areas. We are confident that a continued focus on our long-term strategy and execution of our near-term initiatives will ensure that we achieve the vision we created just two years ago.

We cannot change the market but we are taking actions on those things that we can control to improve the performance of the company.

With that, I'll turn it over to Stephen to discuss financial results for the past quarter and full-year, Stephen?.

Thank you, Mark. Good morning, everyone and thank you for joining our fourth quarter and full-year fiscal '17 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 find a more detailed financial presentation of our fourth quarter and full-year performance of our website. Today I will discuss the adjusted results first for Vista Outdoor overall and then I'll provide a little more color on the drivers of the segments.

As we talk about results from acquisitions, I'd note that we're referring to the operations of our acquired businesses only for periods in which they were not part of Vista Outdoor in the comparable prior-year periods. For the fourth quarter, we recorded sales of $579 million down 5% from the prior year quarter.

The decrease was caused by lower sales in both segments partially offset by $93 million of sales from the Action Sports and Camp Chef acquisitions. The company achieved full-year sales of $2.55 billion up 12% from the prior year. The increase was driven by $426 million of sales from acquisition, partially offset by organic declines in both segments.

Our fourth quarter gross profit of $144 million was down 12% from the prior year period including $24 million of gross profit from acquisitions, partially offset by declines in both segments.

Full-year gross profit was $670 million up 8% from the prior year, including $122 million in gross profit from acquisitions, partially offset by an organic decline in the outdoor product segment. Our operating expenses for the fourth quarter were $129 million compared to $93 million from the prior year quarter.

The increase reflects a $17 million write-off of receivable from Gander Mountain due to the recent bankruptcy as well as additional operating expenses incurred by the acquired businesses and increased new product development activities. Full-year operating expenses were $455 million compared to $344 million from the prior year.

The increase reflect additional operating expenses incurred by the acquired businesses, the $17 million write-off mentioned earlier and the increased new product activities, partially offset by a reduction in annual incentive expense as a result current year performance.

Interest expense for the fourth quarter was $11 million up 48% compared to the prior year period. For the full year, interest expense was $44 million up $19 million for the prior year. The drivers of both the quarter and the full-year reflect the increase in average debt balance, partially offset by a decrease in our average borrowing costs.

The tax rate for the quarter was 56.1% compared to 38.2% in the prior-year quarter. The tax rate for the full year was 34.9% compared to 37.9% in the prior year. The increase to the quarter's tax rate reflects certain small adjustments, the impact of which was magnified by the low pretax book income.

The decrease for the year is driven by a settlement of an IRS examination and a one-time true-up of deferred tax assets in the prior year, partially offset by a lower tax deduction for stock-based compensation. EPS in the fourth quarter was $0.03 down 95% from the prior year quarter. EPS for the full-year was $1.90 down 24% from the prior year.

These decreases were due to the results just discussed, partially offset by share repurchase performed throughout the year. The EPS results also include an $0.18 impact for the write-off I mentioned earlier. Free cash flow for the full-year was $38 million compared to $163 million in the prior year.

The decrease was primarily caused by increased capital expenditures as previously communicated, decreased net income and increased inventory levels due to the recent sudden change in market conditions. As previously communicated, the company repurchased approximately 780,000 shares for $24.5 million in the fourth quarter.

In fiscal year '17 overall, we repurchased a total of approximately 3.9 million shares for $151 million. Now turning to our business segments, where we report both sales and gross profit.

For the fourth quarter, our outdoor product segment reported sales of $270 million a 17% increase from the prior year quarter, including approximately $93 million of sales from acquisitions. Organically, the segment was down 23% over the prior year quarter.

This decline was caused by decreases across most product lines due to the challenging retail environment, which began to worsen in the third quarter, partially offset by growth in the iWear and golf product lines.

For the full-year, sales in outdoor products were $1.2 billion up 36% from the prior year, including $426 million of sales from acquisitions. Organically, sales in the segment were down 14% year-over-year caused by decreases across all product lanes.

Outdoor products gross profit for the fourth quarter was $57 million, a 17% decrease from the prior quarter, including $24 million from acquisitions. Organically gross profit decreased 52% compared to the prior year quarter. The decrease was caused by lower organic sales, unfavorable product mix and the inventory rationalization.

Gross profit for the full-year in outdoor products was $293 million, an increase of 21% from the prior year, including $122 million from acquisitions. Organically gross profit was down 13% due to a decrease in organic sales, unfavorable product mix, increased sales programs and inventory rationalization.

Now turning to our shooting sports segment, fourth quarter sales of $309 million were down 19% from the prior year quarter. The decrease over the prior year quarter reflects lower demand across our product lines due to the challenging retail environment, which began to worsen in the third quarter with the exception of rimfire ammunition.

For the full-year, shooting sports reported sales of $1.4 billion down 2%, just caused by decreases in center fire and shot show ammunition volume, partially offset by increases in rimfire ammunition volume. Fourth quarter gross profit was $87 million, down 8% from the prior year quarter.

The decrease was due to the lower sales, partially offset by product mix and lower sales programs. Full-year gross profit in shooting sports was flat compared to the prior year of $377 million.

As Mark mentioned, we've entered into a new long-term supply agreement with Orbital ATK for Lake City product as part of our long-term strategy to secure supply of 223 556 product. While this product remains important, it does represent the market area where we expect to see the largest year-over-year declines in fiscal '18.

In addition, the terms of the agreement include some cost increases for those products in fiscal '19 and beyond. Looking forward, we've established fiscal '18 guidance for our existing business. We expect fiscal '18 sales in the range of $2.36 billion to $2.42 billion. We expect overall gross margins and R&D investment in line with fiscal '17.

We anticipate shooting sports margins to be in the mid-20s and outdoor products margins to be in the mid to upper 20s. We expect EBITDA margins to be approximately 11%. Our fiscal '18 guidance also reflect interest expense of approximately $50 million including amortization of financing costs.

The effective tax rate for the year is expected to be approximately 37%. We expect EPS in the range of $1.10 to $1.30 per share with improvement in the second half of the year. Our expected fiscal '18 capital expenditures are approximately $70 million, which includes the completion of the bulk of our investment in capacity expansion.

We expect free cash flow in the range of $175 million to $200 million. During fiscal '18 we expect to monetize excess inventory that we accumulated in the third and fourth quarter of fiscal '17. Looking to the near term, we seek conditions in the first quarter similar to those we saw in the fourth quarter.

We expect these conditions to be exacerbated by impacts from Gander Mountain inventory liquidations and the recent incident at Orbital ATK Lake City Army Ammunition Plant, which will lead to constrained supply of certain products from that facility during the quarter.

Therefore, we expect to generate approximately 22% to 24% of our full-year revenue guidance and 10% of our full-year EPS guidance during the first quarter. We expected to be a strong cash generator in the coming fiscal year.

We also expect to see continued pressure on our leverage ratio, driven mainly by the decline in year-over-year EBITDA, which is implied by our financial guidance. As a result, we do expect that our leverage ratio will at times during the year exceed the 3.5 level reflected in our existing credit agreement covenants.

In fact, it is likely that we'll exceed 4.0 near the middle of the year driven by the combination of the lower trailing 12-month EBITDA and the normal seasonal nature of our cash collection. To address this issue and to ensure an adequate cushion in our credit covenants, we've executed an amendment to our credit agreement.

This amendment has relaxed the leverage ratio covenant to 4.75 for calendar year '17 and '18 to 4.25 for calendar year '19 and 4.0 thereafter. The pricing grid has also been adjusted to reflect two new pricing tiers.

All of the current pricing tiers remain unchanged but the interest rates have leverage ratios about 3.5 and above 4.25 increase by 25 basis points and 50 basis points respectively. Finally, the amendment includes the new senior secured leverage ratio covenant established initially at 3.5 with a step down to 3.0 at the end of calendar '18.

We believe that this amendment will give us improved financial flexibility that we need during this current period of market softness. In closing, we've taking actions on the credit agreement, on the Lake City agreement, on our go-to-market approach and on our cost structure that we believe will position Vista Outdoor for the long-term success.

With that, we'll open it for questions..

[Operator instructions] We'll take our first question from Scott Hayman with KeyBanc Capital. Please go ahead..

Thanks. Good morning.

Hey Mark, could you kind of give us a little bit more detail as to what you're seeing in the channel just with respect to inventory level of the progress what still kind of heavy and then your commentary in the release was that you thought the downturn would last a little bit longer and just curious what data points you have that might support that?.

Okay. Sure. Thank you, Scott. Good morning. So, on channel inventories what we are saying is that those channel inventories still remain fairly high particularly in the wholesale categories.

As we mentioned previously and as you've heard other companies mention prior to the election, the wholesale distribution channel in particular stocked up on additional inventories in anticipation of a different outcome in that election, which would've driven heightened demand for a lot of shooting sports product.

That inventory remains high with most of our functional wholesalers and it's going to take some time to work that out. We had mentioned in the last call that we thought it would be mid of this fiscal year, which is around the September early fall timeframe before those inventories began to be rationalized.

We still think that looks about right, that those inventories are going to have a couple more orders before they get normalized and rationalized based on the lower demand and it will take longer to clean up those inventory balances.

So that's a key part of why we believe this market softness is going to likely to continue at least through the summer and into early fall. So that's one of the challenges we face in terms of the inventory levels in channel.

In terms of the downturn in general, traditionally Scott these downturn have lasted between 12 and 24 months in the shooting sports. The last downturn was around 18 to 24 months in shooting sports. This downturn to us is a little unique because it was precipitated by a national geopolitical event primarily with the election results.

And so, it's a little bit harder to call based upon it's a unique environment that we're in now, but we anticipate just based again on channel inventory and current POS data, which remains generally negative in terms of year-over-year POS both in four weeks, 13 weeks and 52 week across the majority of shooting sports categories POS remains down.

So, it is a slow turn and because it is slow turn, we're anticipating a couple more quarters before we begin to see any real momentum return to shooting sports market..

Okay.

And then Stephen just a question on the guide, is there any chance to give us a little bit of help on the sales breakdown between the segments and then on the margin side, what are you contemplating within I guess primarily shooting sports for some of the moving pieces there around input costs and volumes and things like that?.

Sure. Scott, as you know, we don't guide revenue by segment and I don't think in the stage we will provide additional color there, but on the margin side, I did mention in my script that we do expect shooting sports gross margins to be somewhat lower than they were this year to give my combination some promotional activity, some mix shift.

And in addition, the potential impact of some increased commodity cost later the year as you know, we typically engage in forward purchases of commodity products to insulate ourselves against short term shifts in those prices. However, when there is a sustained shift in pricing, eventually it catches up with us.

Copper in particular has seen an increased price over the last six months. Right now, we're projecting that those price increases will continue and at some point, we will lap forward purchases at lower pricing and that will start to hit us.

So, we think Shooting sports is going to be somewhere in the mid-20s for gross margins probably in the high 20s we assume for much of fiscal '17.

Outdoor products on the flipside where it has been operating more in the low 20s we expect to see that increase somewhat during the coming year driven partially by mix driven significantly by cost reduction activity we've engaged in that segment where we've taken out a lot of that cost of goods sold based on both supplier renegotiations and also some nonproduct cost of goods sold cost that's embedded within that statement for everything from that distribution to management of the supply chain..

Okay.

And on the positive side, can you quantify any of the cost reduction stuff that you've done within the segments and how sticky is some of that stuff is as we move forward?.

Yes, so the impact of this is embedded in our cost. We've taken that significant cost in both segments. On the outdoor product side, given the sourced finished goods nature of most of our sales there, a lot of that is hitting the bottom line, which is why you're seeing the increased gross margin of that segment.

On the shooting sports side, probably we've taken that significant costs, most of those costs are nearly offsetting the most of fixed cost absorption because of the lower production rate at those facilities based on our recent departure from our long-term trend of operating at 100% capacity as we mentioned on our last call.

We have reduced shifts, we engaged in certain layoffs and started reductions that both our ammunition facilities. So, a lot -- while those cost reductions are not immaterial they are offset by those increased fixed cost..

And I think Scott, based upon Stephen's answer, those are very sticky cost savings. We anticipate long-term savings. We anticipate those savings to be locked in going forward. The supply chain work we've done, the headcount reductions we've done, the efficiency improvement investments that we've done are all very sticky in terms of cost reductions..

Thank you. We'll take our next question from Greg Konrad with Jefferies. Please go ahead..

Good morning. I just wanted to follow up on kind of what you're seeing in terms of longer-term trends.

It looks like you took down your organic revenue goal over the next two to three years and I think most of that has to do with your expectations around fiscal year '18, but if I calculate that CAGR, it would imply as you get into '19 and '20 high single-digit growth, am I looking at that the correct way?.

I think what we're projecting -- what we're suggesting is the growth is from fiscal '18 forward, not carrying it from fiscal '17 forward. So, the declines in fiscal '17 to fiscal '18 is not embedded in our short-term guidance or outlook I should say that we've provided in our investor brief..

Thanks, and then are there any limitations on share repurchases going forward or would you expect to continue buying back shares?.

We don't have an open authorization right now from our Board and so I think that that option in terms of how we manage capital deployment going forward is still on the table. We would just need to go back and work with our Board for an authorization to execute that going forward..

As we mentioned before Greg, our limitations on restricted payments and our credit agreement but right now we started this open capacity under that restricted payments basked, I think our near-term focus is on internal operational improvements and capturing market share in our existing markets and managing our debt balance as I mentioned while we've increased our leverage ratio in the near term by several step downs in that leverage ratio within our amended credit agreement.

So, I think our focus certainly in the near-term will be on debt repayment..

And then just lastly in terms of your long-term financial goals, one that's missing is how we should think about free cash flow conversion going forward? Obviously, you're calling for a very good number in '18. Some of that is working capital improvement that didn't work down in Q4.

How should we think about free cash conversion going forward in a more normalized environment without the working capital?.

This has traditionally has been a strong cash flow provider and we believe that will continue in the long-term. So, we focus this year as you saw in our guidance, we focused on efficiency improvement. We focused on working capital improvement.

As I mentioned earlier, we're very focused on inventory and getting the right products and inventory and reducing our inventory balances. So, we'll work on that very hard this year.

I am very optimistic that we'll be able to drive our inventory balances down and that we'll be able to generate the cash that we had given in our guidance and then our anticipation is that the company will continue over the long-term to be a strong cash generator as it's been in the past..

Yeah Greg, that's why we obviously don't provide guidance beyond fiscal '18. I would expect our cash conversion ratio to return to the levels we have traditionally seen with the exception of fiscal '17..

Thank you..

We'll take our next question from Gautam Khanna with Cowen and Company. Please go ahead..

Hey gentlemen, good morning. This is Bill Ledley on for Gautam.

Had a quick question for you on the new OA agreement, can you perhaps quantify the inflation on the new agreement and how much more expensive the 223 556 gets in fiscal '19?.

Yeah so let me just back up and clarify for everyone and Stephen can jump in if he would like to, so just to clarify for everyone, the long-term agreement will take us through September of 2020. So, we're very pleased to have that locked down over the long-term here.

There really is no cost increase in this fiscal year FY'18 as Stephen mentioned as you reiterate those cost changes come in beginning in FY '19 and beyond. The cost increases are I think fairly modest in terms of the agreement and how those cost increases will be feathered in over the longer term.

That agreements I think provides for us an opportunity to retain leadership position selling a bulk of that ammunition in the commercial market where we have a strong foothold and very strong brand presence and distribution already established for that product.

So just to make sure people understand there really is no financial impact from the renegotiated agreement this year. In terms of going forward, Stephen is there anything you want to add there..

Yeah the one thing I would just add is that Bill given that agreements in fiscal ’19 and beyond is no longer an exclusive agreement and Orbital ATK has the right to sell certain amount to ammunition to other providers.

We're not going to be disclosing anything publicly about our pricing under that agreement given the competitive nature of that market..

Yeah got it that's fair, trying to see if it's modest or if it's pretty big and then just secondly, just talking about mix you guys mentioned some better mix in outdoor products in fiscal '18 and you highlighted your focus on e-commerce.

Is e-commerce the lower margin business in the traditional retail environment and how should we think about growth in e-commerce impacting gross margin..

No e-commerce is not typically a lower margin business and we do as we mentioned about 20% of the outdoor product segment sales today are generated through online sale of our products and that's through a variety of large and capable partners as well as our own direct to consumer websites and selling that we have for online purchases.

The margins are very much in line with other margins and other channels of distribution. So, we are focused on that. We completely understand and see the shift of the consumer to online purchases. We're focused on making sure that when they go online, that they see our products, that they're able to purchase our products.

As we mentioned we just hired a dedicated resource Vice President of e-commerce to join us. This executive has extensive experience and talent in establishing and growing e-commerce business. So, we're excited about that. So very focused on it.

We believe that over the long run, consumers will continue to shift some of their purchasing habits, particularly for our outdoor products type accessories to their online marketplace and we want to ensure that we're the leader in our space in that area. So, margins there are good.

The opportunity for us to grow there is good and we're very focused on it and we'll be making investments both in personnel and in capability going forward..

We would just like to amplify we are no way backing away from our traditional customers, our brick and mortar customers are still obviously very working customers of ours and this is merely the next evolution of our Omnicell strategy, which we have adopted -- which we adopted several years ago and we continue to execute.

As the margin has shifted online, we are merely moving where the consumers are..

Okay. Thanks, and then just a couple other clean-up questions.

Is the accounts receivable write off at Gander the entirety of the accounts receivable balance there and is there any more risk around any other customers potentially needing write offs? And then Stephen just what's your capacity for capital deployment under the credit agreement either for M&A or for buyback?.

Yeah so to answer your first questions, in terms of Gander Mountain, the $70 million write off is the entirety of the receivables balance from Gander Mountain, while that process, that bankruptcy process is ongoing and there was a successful auction of the number of their assets there a couple of weeks ago.

The likelihood of our recovery under that is a significant recovery is low and we believe it was prudent to write off the entirety of that balance. In terms of other customers, we obviously monitor customers very closely and unfortunately some of these things are difficult to predict. By their nature they often occur at relatively suddenly.

There are no other significant customers about whom we have any material concerns today and certainly none that we have on any significant credit watch or other type of treatment.

In terms of our credit -- of our capacity and our liquidity, our liquidity I can say at the end of the quarter will be finished with liquidity of a couple of $100 million and I am not going to provide an update of where we are today. We've not updated our cash position in the middle of the year.

But I would think as we go forward, we would like to maintain some amount of liquidity in that couple $100 million range.

I would not expect us to deploy a significant amount of that in the near-term for M&A activity given the focus as Mark indicated on our organic business, but we're always very mindful of what assets are available out there and we certainly keep a close watch and as it comes up for sale, to make sure there would be no particularly strategic asset we would miss out on.

So, we're going to take a look at everything that comes for and there is something particularly strategic came along our posture might change..

Okay. Great. Well thanks guys and good luck..

Thank you..

We'll go next to Jay Sole with Morgan Stanley. Please go ahead..

Great. Thank you. Mark, I had a question, it seems like the next checks have been okay.

Some of the industry data suggests that firearms sales have general been okay, but it seems like ammo as a category that's performing worse than firearms and in the firearm accessories continued to also be weaker then maybe the next checks would imply or even firearm sales.

Why do you think that's the case that you normally the different categories all seem to move together in terms of your sales growth right? What's happened now that's made that difference?.

Yeah Jay it's a good question because it is unusual. So I would agree with you it's been a bit unusual and this has been unusual for about 12 months for most of our fiscal year '17 we saw accessories the kind of things that you talked about accessories and optics and holsters, some of those categories seem to trail the firearms spending.

When you look at Nix Checks, in our view Nix Checks has been led primarily by handgun purchases and by MSRs. Right now, when you look at those markets both in handguns and MSRs where we really don't materially participate even though we launched our own savage MSR line, it was our strategy we could come up, bit provider of MSRs.

It was a great complement to our long gun line.

So that's where most of those purchases are Jay is in handguns and MSRs which we just believe it's still purchases in personal defense primarily and there has been heavy, heavy discounting in the last couple of months by firearm manufactures of both MSRs and handguns, prices that I haven't seen in many, many years for some of their premium kind of leading products.

So, I think that's driving some of the Nix Checks is they're very good pricing right now in handguns and MSRs being offered by some manufacturers and by some of retailers.

So, I think that's propping up or supporting some of those purchases and so it might be a little bit of a disconnect between what people are seeing as where to spend their discretionary money in shooting sports and taking advantage of some of the discounting that is going on in handguns and MSRs. I think that's part of it for sure.

I think the other part is most people have only a certain amount of disposable income and they appear to be still prioritizing firearms instead of accessorizing the firearms they purchased or instead of buying accessories and other items to complement the firearms they purchased.

They seem very much to be taking their discretionary income and still putting it in that hard good. I think that's part of why we have issued guidance for this year, which says that this correction and some of the inventory liquidation that is going on and some of the discounting which is going on is likely to continue.

The signs we're seeing in point-of-sale data remain negative as I mentioned earlier and I think people even in this economy I think there's a lot of uncertainty. The economy is still a lot strong and people have just chosen it appears to take advantage of that discounting in firearms..

Also on the ammunition firearms as we've discussed before, we do believe the stock filings should play some lead up to the election and there are currently very little fear about future regulations or lack of availability of that ammunition.

So, it is a purchase that consumers I think can feel they can readily delay it right now but as we start to mount those personal stock files..

Got it. That's helpful.

And then maybe just a follow-up, do you have a theory on what it takes to let the stamina up there amongst consumers and what get them to come back to the store to accessorize their guns or to buy more ammo or to go target shooting ranges?.

Yeah, I do think that the participation rights, if you look at the participation rights, it's really an all outdoor recreation. I mentioned that briefly in my initial comments. There is good growth in outdoor recreation across lots of outdoor categories and we mentioned we have six of the top 10 growth categories are now directly participate in.

And then if you look at participation in the shooting sports, you have 15 million new firearms purchasers that have entered the market range growth has been positive in terms of new ranges opening up and participation shooting at the ranges has been positive. So, I think we're in a bit of just a lull.

I don't have any real concerns about the long-term health or strength in outdoor recreation or shooting sports. I think we are going to see that return.

I think right now as Stephen mentioned, there was pent-up purchases which occurred during the election year and prior to the election year during the prior administration and so there is I think a period that we're in of liquidation of personal inventories in addition to some of the inventories that are in the distribution channels.

And so, Jay I think we're just in a temporary lull in terms of consumption and as people continue to shoot, which I believe they are and as they continue to consume those inventories Stephen referred to I think you'll see them come back. I really have no doubt that shooting sports continues to be a growth market.

It's been running about 7% CAGR for a long time.

I think in the future we'll return to that, but we're just in a period that we got to work through and as we've said in our discussions previously, we think there's a good likelihood that you don't begin to see some of those indications of people flipping back to purchasing of accessories or additional amounts of ammunition until the fall of this year, the back half of this year..

Yeah Jay, we've seen no data that would suggest the current correction in any way reflects a change in underlying consumption of ammunition.

While as you know there is no good hard date on that the anecdotal data but certainly the anecdotal data we see and collect from talking to range operators and retailers that suggest that ammunition consumption remains strong.

It is merely that we are now two levels removed -- ourselves at two levels removed from that consumption as we manage through both the stockpile and the inventory or in that the channel and also the stock piles in personal last inventory..

Got it. Okay. Thank you, Mark. Thank you, Stephen..

You bet..

Our next question comes from Dave King with Roth Capital. Please go ahead..

Sure. Good morning, guys..

Good morning, Dave..

I guess first on the guidance, it sounds like the shortfall there is the ammo downturn lasting longer.

I guess Mark, how are you thinking about the outdoor side of the business at this point I guess one given the correlation to shooting sports, but also challenging at retail? And then how should we be thinking about anticipating a rebound there versus I think the 14% organic drop we had this year, thanks?.

So, the biggest issue I think we've been facing in terms of general outdoor, which has impacted our businesses has been the ongoing shift in retail and the retail malaise and lack of consumer spending that has occurred there. I think we also had as you know the bankruptcies last year impacted us in out outdoor products.

Weather impacts that business as well depending on how the ski season and sell season and what happens to the inventories there. So, there have been a lot of moving parts in general outdoor rack including the bankruptcies and shifts in the market, which have had some impacts. I feel much of the same way about outdoor rack.

If you look at the Outdoor Foundation's annual report they published in terms of participation growth, read that report and you'll feel really positive about the long-term future of Outdoor Rack and the categories in which we've chosen to participate.

If you look at the acquisitions we've done whether it being standup, whether it being personal protection for cycling and motor stores or cooking for example, those are great growth areas which are seeing significant increases in participation and I think our acquisitions have positioned us to be in markets, which are going to continue to grow.

So again, I think in this case Dave, we're in some lulls here of uncertainty in the economy and uncertainty around consumer spending compounded by this retail malaise and some of the bankruptcies that have impacted that segment. So, I think that's what we're seeing there. All the long-term indicators are returned to help and we anticipate that.

I also think we do a better job in how we've managed some of our inventory and supply chain and some of the ways that we've gone to market with some of those outdoor products. As we mentioned previously in the hydration side in CamelBak there has been a fairly rapid shift to stainless steel solutions. We were a little bit behind that.

So, we're working hard. We got several new offerings, which will put us back in play on stainless steel. So, I think that's something we're catching up which we fell a little bit behind with the CamelBak brand. The back-pack business and the Outdoor Hydration business is going but the shift to stainless steel, we need to catch up on that.

So, we are working that very aggressively to make sure we have value offerings there. Some of the challenges we face, but I think with the exception of a few of those internal opportunities for improvement, I think this one is going to work its way out over time and I have every confidence that that is going to be a very good market for us.

We've got the right brands. We need to just make sure we get the right inventory, the right products and catch up to that growth..

Okay. That's good color. Thanks Mark and then Stephen in terms of the new credit agreement, where did you exit the quarter on leverage on to those terms and then you sort of touched on it in terms of how you're seeing that progress over the course of the year.

But if I plug-in some of the first quarter guidance it seems like you're going to be kind of in the low fours exiting Q1 and then if the weakness persists into Q2 you could be maybe even hitting or surpassing that level. I guess how should we be thinking about that..

Sure Dave, so we finished the year under the management use for the category. This year it's about 3.3. While we don't surveys the last year on Thursday the three and while you we don't provide cash flow guidance by quarter we do not expect to be above four at the end of the third quarter.

And while we maybe modestly above four at the end of the second quarter we would expect to maintain significant buffer below the 4.75 and so we don't in any of our modeling come anywhere close to approaching that level. We remain much, much closer to four at points within our modelling..

Okay. Perfect. All right. Thanks for taking my questions and good luck..

Thank you..

Our next question is from Scott Stember with CL King. Please go ahead..

Good morning, guys..

Good morning..

Could you maybe talk about the optics business? I know that was a big part of the weakness that we saw in outdoor sports this last year and what led to the big write down you had.

Can we maybe just talk about the product there, R&D efforts to make it more competitive and maybe just talk about the competitive landscape and how that fits into your guidance for 2018, thank you?.

Yeah so on the optics, let me just refresh everybody's memory in the optics category, when we talk about sports optics, we participate with a couple of different brands that allow us to have a good, better, best strategy and allow us to segment our product branding both by price and by channel. So, we have Bushnell, Simmons, Tasco and Weaver.

Those are our primary optics lines. We've done I think an excellent job this year in repositioning our optics in terms of channel segmentation by brand, by feature and benefit and by price.

So, we've made great progress I believe this year and I think the optics team in Kansas City has worked very, very hard and made significant progress in getting our optics brands in the right channels of distribution.

We were not in all the right channels of distribution by brand previously and it was putting pricing pressure on our optics and it was causing us to lose revenue opportunity by not having the right product in the right outlet at the right time for consumers. So, the team has worked very hard on that.

We made huge progress the year in getting that right. Also in terms of our investment in innovation and new products, we have revamped our entire optics team. We brought in new talent from competitive optics companies as well as outside talent with great expertise and channel management and in R&D development. We've launched new lines of optics.

We did a mid-year launch at the NRA show, the new optic line of Bushnell brand which was very, very well received. As we go forward in the future, you'll see us cleaning up our branding and our product offering in optics. We are going to be launching an entire new line of Bushnell optics next year which I think will be very exciting.

We've previewed to key accounts. They’ve all been very excited about taking that product line on. So, I believe we're current in the quarter on optics. Now that said, the market for optics remains soft. If you look at POS on optics, it has been negative. So, the market itself for optics is down and has been soft and is very, very competitive.

As I've said in the past, when it comes to optics there are very few barriers to entry, nearly all of the optics that are sold whether they be riflescopes, binoculars, rangefinders, spying scopes, they're nearly all sourced in Asia. So, the barriers to entry are not great.

The key for us will be leveraging our brand equity and leveraging our distribution channel strategy and those things are going very well.

So, although optics remains an area where we're very focused on it and although it remains a soft to market in optics, we lost a little market share in the riflescopes segment but literally held our own in binoculars, spying scopes and rangefinders there.

So, I'm becoming increasingly pleased with the performance and the progress we're making in optics and excited about the new offerings, the brand rationalization and the brand segmentation strategies we've put in place. So, good progress there..

Got it and maybe just talk about the new e-commerce or the heightened e-commerce shift that you're expecting.

Can you maybe just talk about the timing of that and just maybe just give us a little bit more granularity about how will this be a companywide processor or the individual brands that will be working on their own initiatives?.

So, we now as Stephen mentioned earlier, we value all of our distribution outlets and our great partnerships with a bunch of wholesalers are important to us are a great partnerships and relationships with key retailers is very important to us and we work very carefully with customers that currently offer online sales programs and those sales have been growing significantly for us with our online partners.

We felt it was time to add true expertise and focus inside the company to how we drive that strategy going forward to support the shift in the market where consumers are shopping more and purchasing more online. So, this will be a companywide focus. The executive that we've hired has extensive experience in building and creating online sales.

When I say companywide of course I think most of you understand there are certain regulatory constraints and issues which impact ammunition and firearm sales.

So, although we'll be looking at strengthening our product placement for firearms and ammunition, I think you'll see the biggest benefit of this book as being an afro products and accessories and that's where I think you'll see the real improvements.

And we'll be looking as we said in terms of our strategy for online sales it includes direct to consumer, it will include improving our business to business sales and replenishment of our partners, it will include dropship capabilities where we can work with partners.

So, when consumers are going to their websites and purchasing our product, we can get that product directly to consumers quicker and capture that order quicker. So, we'll be focusing on the dropship capability as well as working with our dot com partners. So, I think it's a very fulsome approach that we're laying out people that were laying out.

I would encourage you to think of it in terms of the biggest impact will be continuing to drive growth in our 20% of sales which is already created new products from online sales..

And just following up on that, do you have a targeted percent that you would like to get to over a specific….

No, we're not going to release that yet. We're working through this process right now and targeting that. We've actually done some work. Now we think we know what good looks like. We've been looking at competitors whether it be in other outdoor product, online sales and competitors for example in the cook area or other products like that.

So, we know about what good companies who have great e-commerce capabilities are able to generate as a percentage of revenue from online sales. We're working our own targets right now and what we think that could look like, but I think it's a substantial increase and upside for us in the future..

Got it. That's all. And thanks for taking my questions..

You bet. Thank you..

Our next question is from Andrew Burns with D.A. Davidson. Please go ahead..

Good morning. I have a couple of questions on the shooting sports gross margin.

First on the 4Q improvement, I understand that the commentary on the lower year-end sales programs but curious about the favorable mix that was highlighted and if there's anything sustainable to call out there?.

Nothing in particular that -- as we regularly discuss mix in our ammunition business both positive and negative quarter to quarter. As you know we've a full range of products not only the split between our premium and more value-oriented brand, but also even within those families across different brands and products categories, the margins.

Within a bands not terribly wide range bands, but there is also the impact of shooting sports of firearms.

A lot of the mix shift benefit we discussed as we've gone through the year has been, the growth of firearms and ammunition and some of our what just been in Q4 is relative weakness in ammunition compared to our firearms business where there has been a slight benefit there but nothing terribly material that one would expect to continue on a sustained basis..

Thanks and as you look on a longer-term basis at that segment gross margin, you look at FY '19 there's a new Lake City contract, there's capacity coming online, which you should be more efficient in a normal market, commodity cost inflation, a lot of moving parts, but as you roll all that up and look at what's the margin performance could be in a normal market, is it structurally similar to that high 20s gross margin performance that we saw in '16 and '17 or has it essentially structurally changed in any way..

So obviously we can't guide forward into '19 and probably answer your question, but I think we are focused on margin improvement. We are focused on cost reduction and efficiencies. You talked about the additional capacity coming online, our one investment in CapEx that capacity begins to come online later this year.

We'll see some benefits and efficiency across those new machines as you described. So, we're excited about that. I think it's just -- we can't on '19 I think what we can say is that we're very focused on cash generation, getting back to our traditional cash conversion rates, which were very good for this company.

We fully believe we will do that and we're focused on margin improvement and not only through manufacturing efficiencies, but also through our sourcing and supply chain efficiencies with our suppliers. We're very focused on that.

I can tell you we've bene over in Asia about six times this year already working with the supply chain and making sure that we have an efficient supply chain and we're taking cost out. We've had good success there in our outdoor products segment.

So, we are very focused on margin improvement and look forward to being able to discuss with you the results as we go forward, but it's just too early to talk about '19..

Thanks, and good luck..

Thank you very much..

We'll go next to Ronald with Wunderlich Securities..

Thanks. Good morning. Maybe a big picture for you Mark. In all the years, you've highlighted this focus on your retail customers and having that sales force call they had their relationship with the customer and you market a variety of different products which some you gained through acquisition between those customers.

So as the market shifts to online, does that in some way negate corporate strategy or the general strategy you pursued these past several years. How do you adapt to that, that online market going forward? Thanks..

Sure, that's a very good question. We think that this is synergistic with our relationship that we have with online partners and retail partners that brick-and-mortar store.

So, if you look at a lot of our brick-and-mortar partners where we have I'll just say, we have fantastic relationships with them, which allows us to capture some real opportunities and have strategies that supplement support their strategy. That is always going to be a strength for us.

I think when people talk about whether the shift to online shopping is somehow going to degrade our distribution strategy that we have, I do not believe that at all.

I think that a lot of these retailers that have an online capability they value our brands, they value the trust that we have and they value the profits that we create for them with our brands both on their online stores and in their brick-and-mortar stores.

So, we're leveraging those relationships more of our offerings in their loyal following of lots of dealers across the country. I just attended a conference of dealers in Kansas City. We had our top 12 dealers from across the country. The feedback was incredibly positive. The relationships were incredibly loyal.

The brands that we have and the value created on the dealer network is important to us. There is about 10,000 dealers, which are still servicing this country with our products and we value those relationships as well. So, our focus on moving to online sales as I mentioned, we're doing what we think in a holistic way. We're going to focus on dot com.

We're going to focus on strengthening with our partners. We're going to focus on drop shift, so that we can have more products delivered more quickly to consumers that are shopping online and we're also going to focus on dot com and our own capabilities.

So, it's a holistic approach and I don't believe that it will impede our relationships with our partners and in fact I actually believe it will enhance them. So, we're excited about it and we believe that we can walk and chew gum at the same time so to speak in supporting both brick-and-mortar and online sales growth..

Okay. Thanks. That's very helpful Mark..

Sure..

We'll go next to Jim Chartier with Monness, Crespi and Hardt. Please go ahead.

Good morning. Thanks for taking my question. I wanted to talk about the outdoor product's gross margin down significantly this year. I think largely due to some promotional pressures and in your guidance for this year seems like the improvement is mostly due to cost savings that you negotiated with vendors.

So, I am curious what do you think has happened with pricing in that category retail, is it structurally lower and more promotional or as inventories better aligned with demand later this year or into next year do you think that there is a more gross margin opportunity for better pricing there?.

Yeah Stephen can jump in if he like, but let me just start with that question. I think it's a great question in terms of what's happened when we look at the market for outdoor products, there is still a lot of promotional activity there.

There will be I think as we go forward particularly in the next few months there will be some pressures I think in terms of pricing in the market. That's why we work so hard on our cost structure. That's why we work so hard on our supply chain and the cost side of this model and cost of goods sold in this model.

We are also going to be driving our inventory balances down as we mentioned as part of reducing our working capital and increasing our cash flow and we will need to do some of that through promotional activity, we understand that.

We think as we work our way through these inventory reductions and as we compete in the marketplace to protect our market share and garner additional shelf space, that we'll be able to fight though that even though it is a promotional activity and offset some of that promotion with our cost reduction and that's basically what we've factored in to our plan and to our strategy going forward in terms of outdoor profit margin and do you want to add Stephen..

Yeah, I would just add, the cost reductions in outdoor products are much more than cost reducing the cost and the pricing we get from our suppliers, but that's important.

From a substantial cost involved with operating the distribution capability and the product development and product management within the outdoor product segment and we certainly take a significant cost out of those parts of the business.

So, a much more than just asking our suppliers to cost reduction and particularly as Mark mentioned earlier, those cost reductions we take on our side of the return with folks in our own direct cost, we can make sure that cost reductions stick.

This is not a short-term impact where we've just got some great pricing from our suppliers, which may or may not going to last for years to come. We know that the cost reductions we take within our cost structure we can sustain..

The only other thing I would mention when we were talking about cost management is we believe we're never done. So, we don't want to talk about cost management just in the past tense, its future tense for us. So, we'll be monitoring our cost. We'll be monitoring margins, revenue and what's happening in the business throughout this year.

We have a plan to continue to out cost going forward and initiatives that are in place right now in both segments to drive further improvements and efficiencies and cost reduction. So, this is always that work of continuous improvement for us.

So, we've done a lot of work in the third and fourth quarter after the market turned and we'll be doing a lot of work going forward this year to continue to make sure we get that right..

Right and then Stephen just quickly, what's your assumption for instinctive comp this year. I know it was down last year.

Do you assume that that is up in FY '18 or is that flat or down?.

Our standard approach entering every year is to assume that half will be at the target level of performance. Obviously, we felt well short of that last year and the vast majority of certainly management received no bonus for fiscal '17 or will receive no bonus for fiscal '17.

So, with fiscal '18 we assume that a full level of target, saw a significant increase over what was in our results in fiscal '17 so that is one of the significant from an SG&A perspective, headwinds in our guidance because all of that bonus gets reflected there in the SG&A line..

Great. Great. Thanks, and best of luck..

Thank you..

It appears we have no further questions. I'll return the floor to Mark DeYoung for any closing comments..

Well thank you all very much for joining us on the call. We look forward to talking with you at the end of the first quarter and we're excited about our business. We're excited about the long term for our business and are confident we can work through the current market challenges we face. So, we'll update you here in a quarter. Thank you very much..

And this will conclude today's program. Thanks for your participation. You may now disconnect. Have a great day..