Michael Pici - VP, IR Michael Callahan - Interim Chairman and CEO Stephen Nolan - SVP and CFO.

Greg Konrad - Jefferies LLC Andrew Burns - D.A. Davidson Bill Ledley - Cowen and Company Scott Stember - C L King Dave King - Roth Capital Partners Jim Chartier - Monness, Crespi, Hardt & Company Jay Sole - Morgan Stanley William Reuter - Bank of America Merrill Lynch.

Good day and welcome to the Vista Outdoor Incorporated Q1 FY 2018 Earnings Call. Today's conference is being recorded. At this time, I would 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 first quarter fiscal year 2018 earnings call. With me this morning are Michael Callahan, Vista Outdoor Interim, Chairman and Chief Executive Officer; and Steven 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 the 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, Mike..

Thanks Mike. Good morning and thanks everyone for joining us on our earnings call this morning. Before we get into the results for the quarter, I'd like to begin today's call by sharing with you why I'm so excited to take on the role of Interim CEO of Vista Outdoor.

I've been in the industry for more than 40 years and this is the most unique retail environment I've ever seen. We're seeing unprecedented change and it's not likely to go back.

Despite current market conditions, the Board and I are confident that our diversified portfolio of iconic brands, coupled with Vista Outdoor's world-class operations, and strong customer relationships position the company for long-term success.

We have talented and dedicated employees who are both outdoor recreation enthusiasts and passionate about their sports and brands. We're innovators investing in and developing new products. We saw offer some of the industry's most sought-after brands, which we're able to leverage across our strong customer relationships.

We have well-established global manufacturing, sourcing, and distribution platforms, and we're aggressively adapting our business to continue delivering products to our intensely loyal customer base. I've been meeting with our investors, employees and customers over the last month and I'm really enthusiastic about our future.

We've made significant progress in addressing the internal and external challenges that face our business. As Interim CEO, I intend to continue the company's existing initiatives for driving operational efficiencies, investing in new product development, and expanding our e-commerce capabilities.

While we build on the progress we've already made in these areas, the Board of Directors has begun a thorough search to find a CEO to lead the company on a permanent basis. As I mentioned previously, we retained the leading national executive search firm and we're considering both internal and external candidates for the role.

While there is no definitive timetable, the Board will move forward thoughtfully to attract and select the best-in-class CEO to lead Vista Outdoor into the future. Now, turning to our results. While Stephen will provide more detail, I'd like to give a high-level overview on the quarter.

I'm very pleased with the company's solid performance in the first quarter. The entire company remains focused on several key areas to ensure we provide innovative, high quality products for our customers. We create rewarding careers for our employees and generate growth and returns for our shareholders. Today, I'd like to address the following.

R&D, cash flow and cost structure, employee development and retention, and the work we're doing across all channels to help our customers develop solutions to drive traffic, sales, and profit. First, we continue to invest in R&D to help drive innovation across all of our product lines.

Our calendar year 2018 planning is complete and our new product pipeline is robust. This summer, we launched approximately 150 new products, three times more than the prior year period, and we'll continue to introduce additional new products throughout the year.

Last month, we held a highly successful Hunt/Shoot Sales Conference, and next week we'll hold our annual customer summit. The rollout of these new products at these events is four months earlier in our process, which much better supports our customers as they determine next year's assortment plans and store sets.

As we’ve moved our innovation process forward, we've also held Outdoor Recreation, Cycling, and Eyewear Sales Meeting this summer, and the sales team is excited to introduce these new products to our customers.

We recently attended the Outdoor Retailer Summer Market where we unveiled a relaunch of the Jimmy Styks line with new products from end-to-end. We introduced two new inflatable surfboards completely unique in their design. We also have a patent pending [Indiscernible] Fin, which simplifies installation and allows the consumer to click and go.

Also during Outdoor Retailer, CamelBak launched a number of new products in the running, mountain biking, and hiking categories.

These include new hydration vests and collapsible flasks for runners; lighter, minimalist hydration packs, as well as enhanced rider protection for mountain bikers; and improved cushioning and support within the hiking hydration pack lines. CamelBak also unveiled this new stainless bottle, the Brook, designed with a female athlete in mind.

In the outdoor cooking category, Camp Chef successfully launched this direct-to-consumer campaign for the woodwind pellet grill. This was done through creative online and video marketing, which has received over 12 million views thus far.

Also this summer, Giro is receiving rave reviews on its pro-light tech lace cycling shoe, which provides a comfortable lightweight fit with a feel and performance of laces. Additionally, Bushnell successfully launched its innovative new Engage optics line, which has received strong customer and media reviews.

This sets the tone for a completely refreshed optics line. We significantly increased R&D across our portfolio of brands in the optics category. And we’ve revitalized our optics offerings under the Bushnell, Weaver, Simmons, and Tasco brands, and these new products will be available in calendar year 2018.

In addition, we're keenly focused on closely managing our cost structure and cash flow. We maintain our focus on providing our employees with market-competitive benefits, we made changes in June to our pension programs, and we also enhanced our 401(k) match, and Stephen will provide more detail on these changes in just a minute.

We continue improving our working capital by reducing the excess inventories that were discusses on our last earnings call and we're on track to deliver our cash target for the year. By the way, in the quarter, you'll notice we had strong cash generation compared to historical use for this performance period.

We're also particularly focused on employee development and retention. I've had the opportunity to speak with many of our talented employees over the last month and I'll be spending additional time in our facilities in the coming weeks.

We've always been brand focused at Vista Outdoor, and now more than ever, we are emphatic that these brands stay true to their DNA and that our employees within the brands have the resources and support to win in their markets.

Finally, while we've seen a net loss in retail square footage since 2015, we do know that outdoor recreation participation rates are up across most areas within our portfolio. And today, we are making sure we are for the right products at the right price regardless of where and how our consumers want to shop.

We renewed our focus on our relationship with independent retailers. We're expanding our e-commerce and online presence, and we're building upon our already strong relationships with big-box retailers and have expanded our merchant sales team for retail support.

Looking forward, we've intensified our focus to strengthen brand awareness, to win market share, to deliver innovative new products, and to generate returns for our shareholders. I'm looking forward to continuing to work closely with the Board, the senior leadership team, and all of Vista Outdoor's dedicated and hard-working employees.

Vista Outdoor is a great company, and I am truly honored to be able to lead it through this interim period. With that, I'll turn the call over to Stephen to discuss our financial results and outlook..

Outdoor products in the mid to high-20s and shooting sports in the mid-20s. We are pleased with our performance in the first quarter and are confident we are in the path to achieve our fiscal 2018 financial guidance.

As Mike mentioned, Vista Outdoor continues to make progress on our strategic initiatives, including driving innovation and improving our operational performance in order to position the company for long-term growth and to generate shareholder returns. With that, I'll be happy to open it up for questions..

Thank you. [Operator Instructions] And we'll go first to Greg Konrad with Jefferies..

Good morning. Just to start, you mentioned the late introduction of the promotional programs within ammunition.

Was there a certain market signal that drove the timing of those promotional programs?.

Yes, there were a number of competitors who are out there with similar programs. So, it really became important for us, Greg, to get out there and just to retain and capture additional market share..

Also Greg, the inventory in the distributor channel, which I mentioned has been slow to move, in particular in 223, 556, the promotional actions we did take was largely around consumer rebates to pull product through that channel.

And so they weren't promotional actions directed directly at our immediate customers, but rather the end consumer to try to clear out some of that stubborn product in the distributor channel..

Thank you.

And sometimes you give a little more detail within outdoor products, was there any difference in performance when I think about kind of the firearm-facing accessories versus the non-firearm portion of that segment?.

Sure. As we look year-over-year, we saw strength in a couple of areas. So, there's increased -- we've increased sales in optics products, we have some increased sales in archery and hunting accessories, and some increased sales in the eyewear, such most of the remaining business was really down on a year-over-year basis..

And we'll go next to Andrew Burns with D.A. Davidson..

Good morning. Congratulations on the year-to-date progress here.

Could you give any commentary in terms of sell in versus sell-through trends and the progression that we've seen through the quarter and really through the latest data points you have in terms of convergence there across both shooting sports and outdoor products?.

Good morning Andrew and thanks for the question. Yes, just a little detail on the market. Certainly, we've been dealing with the liquidation of Gander product as they’ve moved forward under new ownership. We've mentioned the distributor inventory buildup primarily is a function of the existing inventory already in the independent dealers.

So, as you look at our results, clearly, the sell-in has been more difficult than in years past. We anticipate that we will move through those. The Gander liquidation, we're led to believe is going to be essentially complete sometime in September.

As we look into the fall hunting season, we're seeing some encouraging signs there and we're feeling much better about that. But we continue to believe that both inventories and promotional activity is going to be continued through the holiday selling season and perhaps beyond that.

So, we have some headwinds, we're going to continue to face challenges. But we are comfortable that given where we're at today and our approach to this new market that we're going to be able to achieve our results..

In most channels, Andrew, sell-through has exceeded sell-in because we have been seeing destocking in the channels, particularly as I mentioned the big-box retail channel and ammunition, which is a major factor for us. We have seen those levels largely normalize as a result of destocking.

Even in the distributor channels, there has been destocking, but just not to the extent we would have expected or preferred. And we think that will now take a couple of additional quarters to clear the remaining inventory out of that channel..

Great. Thanks. And just a follow-up on the comments you actually made in terms of -- in the R&D section. Bushnell has had a pretty competitive brand landscape there. And as I recall, 2018 SHOT show was going to be a great unveiling of some internally developed new products there.

From the commentary, it sounded like some of that might have pulled-forward, is that fair?.

To a point, yes. We have introduced our new engage line. And part of what we have been doing at the sales conference and with our customers' summit next week is unveiling what we're calling internally an optics revolution.

And so, we have completely new lines of optics that we're going to be introducing at the SHOT Show, obviously, focused on trying to clear existing inventory before we introduce those and go to the market with them, but the R&D effort I'm very pleased. I was there in Overland Park not too long ago.

And saw the presentation and I was truly enthused, I have to say. I've been in the business a long time, but what they have done for Bushnell and Tasco and Simmons is truly going to make a big splash at the SHOT Show..

We'll go next to Gautam Khanna with Cowen and Company..

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

Just going back to the ammo business, is it possible to quantify the gross profit or gross margin benefit from the delayed promotional activities?.

No, we're not breaking that out at this time, Bill, unfortunately. But as I mentioned, we do expect for the full year gross margins in the shooting sports segment to be in the mid-20s consistent with what we'd expected -- anticipated at the start of the year..

Okay. And then just to unpack your commentary around the channel inventory, it sounds like the big-box retailers inventory is a little better than you thought, distribution's a little worse.

How does that play out going forward? It would seem at least on the surface that big-box are kind of inventoried correctly then maybe distribution will destock a little faster.

So, can you just talk about those two trends and how that works out with consumer demand as well?.

Sure. The big-box retailers, just by virtue of for the most part their level of sophistication with systems and so on are in much better shape and have been frankly. And they have been, let's say, keeping a lot of open to buy dollars in their hit pocket.

They are not currently out there in the market making big purchases, they've certainly placed their stocking orders. But beyond that, they're setting path. The smaller dealers and the distributors have struggled a little bit more.

So, we -- like I say, we're anticipating that we'll see destocking as we move through the fall, we are seeing some encouraging signs at point-of-sale, the SSI data would indicate that consumers are buying, but just not to the extent they normally would this time of year. What's encouraging is hunting products seemed to be accelerating a little bit.

So, we're going to continue to face these headwinds from existing inventory in all of the channels, along with the renaissance of the big-box retailers to step forward with purchase orders right now..

Okay. Thanks. And then if I could just follow on that.

So, the $20 million to $30 million of sales pull-forward, even with that, would you still expect Q2 sales to be up sequentially versus Q1 in line with seasonal patterns? What is the pull-forward?.

Sorry, go ahead..

Or does the pull-forward limit the normal seasonal rise?.

So, the pull-forward certainly saw some of the seasonal rise. So, I think we would typically still expect to see Q2 being a bigger quarter than Q1 even in light of the $20 million to $30 million pull-forward. Just on that pull-forward, it wasn't really planned pull-forward.

We engaged in promotional programs to remain competitive and to ensure we get our fair share of the space from the shelves. At times, those programs are oversubscribed and some of our programs were oversubscribed in the last month, which resulted, we think, in some pull-forward, but it is difficult to quantify precisely.

It is not as if the customer comes to us, here's the order, it's time to place in a month, I'm placing it now. As we just look at the patterns, they were that we expected. We suspect some of that was pull-forward in that range. But overall, yes, I would still expect to see some sequential growth from Q1 to Q2..

And we'll go next to Scott Stember with C L King..

Good morning..

Good morning Scott..

Can you maybe talk about the pull-forward of sales related to the promotional activity and the gross margin again? It sounds as if these promotions certainly helped on the topline, but there's some of the cost related to the promotions haven't been booked yet? Can you maybe just talk about that, how you got that benefit?.

Yes, for a variety of promotional programs, unfortunately, we combine them all in a short sentence or two in our script and it doesn't necessarily do justice to the different impact of each of these.

Overall, the variety of programs across both segments, which we engaged in to remain competitive, which we believe resulted in some pull-forward, but probably more in shooting sports than the outdoor products, but still across both segments.

Separate and distinct from that, some of the direct ammunition price reductions and/or the consumer rebates I previously mentioned the 223 556, they were introduced quite late in the quarter, really right at the very end of the quarter.

When we sat here three months ago on our fourth quarter full year fiscal 2017 earnings call, we'd expected that to implement those effectively imminently. We were able to delay the introductions later in the quarter. So, the impact of those is what I'm saying is really delayed.

They didn't directly result in a pull-forward because they were late in the quarter. And, therefore, we did not see the gross margin impact that those programs in Q1 we'll see it largely in Q2.

Our consumer rebate on ammunition right now, our national rebate runs through the end of August in the 223 556, although, we always look at whether any program like that might need to be extended. We've clearly been booking a reserve for expected redemptions from those, but we have yet to see a significant amount of those redemptions come in.

So, our reserve maybe a little higher, a little bit lower depending on what actual redemption level would be..

So, related to the ammo rebates, those sales have not been recorded yet?.

A small portion of them would have been recorded at the tail end of Q2. The bulk of them I would expect in Q2 -- tail end Q1, the bulk of them I would expect in Q2..

We'll go next to Dave King with Roth Capital..

Thanks. Good morning guys. I guess first on the outdoor side, I just wanted to better understand or reconcile the comments on sell-in versus sell-through.

So, it sounds like due to destocking, you're still seeing sell-through on the outdoor side tracking better than the sell in, is that fair? But then, Mike, it also sounds like you also have some pretty good sell-in to certain channels on the outdoor side, maybe in certain product lines.

I guess can you just talk a little bit about when that sell-in is occurring, does that happen in the quarter, was that post quarter? And then in terms of the preorders on the cycling side, when should that start to flow through? Thanks..

Yes, the challenge sometimes, Dave, is talking about the outdoor products market overall [Indiscernible] smaller market. And we're seeing different behavior in each of them. I mentioned that the winter sports channels are largely depleted of inventory. Clearly, right now there's not a lot of sell-through in those markets, it's seasonal.

But we start to see considerable sell-in into those markets as our customers build their inventory. Similarly, as I mentioned, we're starting to see encouraging preorders in the cycling market.

In that various hunt/shoot related categories, it's really a mixed bag, but some areas where inventories remain high in retail and therefore, sell-through is higher than sell-in.

And with our third area, such as targets, particular steel targets, where right now we're seeing very strong sell-in on strong sell-through really in balance as those products, categories have been very strong in the last three months or so.

So, at this point, painted with a single broad-brush that sell-through is higher than sell-in, it really depends on both the market and also the specific products category..

Yes and if I could add to that, the point-of-sale data indicates that the recreational shooter -- or suggest that the recreational shooter is out and active.

As strengthen mentioned, sales of targets were up, hearing, protection, gun cleaning, and so the kinds of consumable accessories are doing very well, which indicates the people are out shooting..

Okay, that helps. And then switching gears a bit on gross margin, I guess, across both segments. I guess, how should we be thinking about the impact that cost savings had under cost of goods sold both on the outdoor side and then on the shooting sports side, if you can provide some color there? Thanks..

On the shooting sports side, we had significant cost-savings initiatives that we enacted over the last -- really couple of quarters because they started in our fourth quarter of our fiscal 2017.

They have largely been offset though by some of the factors which we discussed earlier in the year, with the headwinds to margins in shooting sports such as the loss-to-fixed cost absorption as we produced the lower rate within our factories, such as some of the pricing pressures we expect to see and are seeing and also the commodity price pressure that while it is hitting us less severity now than later because of our approach of buying product forward rather than buying it at current spot price, we are seeing some headwinds from gross margin.

So, they're largely offsetting the cost savings in shooting sports, which is why you're seeing some depressed margins in shooting sports from what we delivered in fiscal 2017.

The outdoor products side, we had some great cost savings initiatives across all phases of the business, both from the supplier of pricing for our sourced finished goods right through our distribution network and through our overhead within the segment.

And I think you'll see that bear fruit this year as we start to deliver our higher gross margins than we saw in certainly in the back half of fiscal 2017..

And we'll go next to Jim Chartier with Monness, Crespi and Hardt & Company..

Good morning. Thanks for taking my question..

Good morning Jim..

You guys mentioned given that the pricing action on the promotional programs once you put them in place was more significant than you previously expected. And it sounds like the inventory clean-up is taking longer than expected in your customers.

So, just curious how you're maintaining kind of your gross margin expectation for the, particularly in shooting sports and if there any offsets in the kind of increased promotional activity that you've seen?.

Yes. So, first off, on the pricing actions, they're more significant than we anticipated. But I don't want to overstate that the impact -- the impact of the higher pricing actions on the full year will only be in a few million dollars, mid-single-digit millions slightly for the full year.

But more significantly, they will hit just over three quarters while over the three and a half quarters we expect to hit. So, it will be more significant impact in quarters two, three, four than we anticipated at the start of the year.

In addition to that, we have various cost-reduction initiatives as we discussed early that we're still undertaking to drive down our cost of goods sold. So, net-net, we still see a solid path to deliver the gross margin expectations for shooting sports in that mid-20s..

Okay. And then you mentioned in the script, you're reaching out to work more with independent retailers and we're establishing some of those relationships. How does that -- is that a difficult relationships than you sell-in to distributor? Are you circumventing the distributor? Just more color on that please..

Yes. Even today, the small independent retailers do about 70% of the business in the hunt/shoot category. So, they're an important outlook for us. And even though some of them are overstocked, as you consider for instance the Gander-Camping World acquisition.

The dealers in those markets where the stores are closing are the ones who are going to be the beneficiaries of the closed Gander Mountain storage. So, supporting them, working with them and then giving them more tools to help sell-through is where our focus is..

Yes, and as you look traditionally, we have been disproportionately strong in the big-box channels. And so while as Mike mentioned overall and the market with large, the independent dealer accounts for about 70% of the business. It's accounted for lower percentage of our revenue.

And we have significant opportunities there to reengage with those independent dealers and increase our share spending at those dealers to get it back on par with where we stand in our -- both the big-box retail channels, also our law enforcement channel are both areas where we have very high market share..

[Operator Instructions] We'll go next to Jay Sole with Morgan Stanley..

Great. Thanks so much. My question is just about, I think you alluded to a bit in your prepared comments. But just on the company's initiative to kind of maybe do more business through its own e-commerce website.

I mean, even we're in a little bit of transition, Michael, have you done any work to kind of further that effort and to maybe try to do some things to help adapt to some of the retail changing? Thank you..

Yes. Good morning, Jay. Certainly, it is a major initiative for us. And as we mentioned last quarter, we've hired a VP who has actually done this before, who is driving this process. So, yes, we're keenly focused on building out our e-commerce side of the business. And we're doing it in a -- to address all of our channels.

So, it's not just direct-to-consumer, it's an opportunity for us to help drive business to our independent retailers, to the big boxes, which in turn will also drive business to the wholesalers. So, we're very focused on that and moving forward quickly..

Okay, that's super helpful.

Can you give us an idea maybe on what to expect going forward in terms of timing? Do you think you can do on the different brands like getting the outdoor products category online on several websites? Or would you attack the biggest ones first, how do you think about those things?.

Yes. Because we are so brand focused and clearly our consumers understand brand, we're going to be conducting most of this through the brands, and they'll be having their own websites and driving e-commerce. So, we're developing that road map and we'll continue to update you as you go along.

But where you're most likely to see the results is new, enhanced websites that will help drive this..

We'll go next to William Reuter with Bank of America..

Hey guys..

Good morning Will..

So, I have a question, following up a little bit on you're talking about the importance of the independence in your chain -- the independent chains.

And I guess how was the health of those? And if you could talk a little bit about the number of doors that you might be and across your product portfolio and how that's changed over the last year? And I guess, in the context of what percentage of your sales are done online at this point?.

In terms of the independent dealers, I don't know of anybody who has an accurate count of those. Particularly, we can tell you how many federal firearms license holders there are out there, roughly 56,000. But we don't -- and roughly 3,700 independent bike dealers and Lord knows how many camping outlets there are.

In terms of the hunt/shoot side and I mean -- across all categories, we've lost 45 million square feet of retail space since 2015. I haven't gone through, we haven't gone through and quantified how much of an increase there has been, but that's a huge amount of doors.

With the independent retailers, a lot of them, because they're smaller and fairly healthy, they -- many of them own all of their inventory, even though they stocked up, many of them just because they're so, so focused on cash and paying bills, are relatively healthy. But because they have so much inventory, they can't spend anymore.

And that's what what's bothering the wholesalers is they just sell-in is because they're the ones who service them primarily. So, it is an upset disruptive market right now, but we see a real opportunity to service those independents..

As we looked at the shooting sports channel just narrowly for a moment and we look at the importance of independent dealers to our revenue, they represent while we've not disclosed an exact number certainly, other channels, in particular the big-box retailer plus our military law enforcement channel, representing majority of our revenue.

So, less than 50% of our shooting sports revenue comes from that independent dealer channel..

Okay. And then just one follow-up if I can you guys talk about 150 product introductions, which is three times more than, I guess, you did last year.

Can you talk about what percentage of your sales might be coming from new products this year? And how that would compare to the store closes? And I recognize you've been acquiring companies, so that's a little bit challenging to quantify exactly since the mix has been changing, but kind of give us a sense for that? That's all for me. Thanks..

Yes. So, we set an internal target of generating 20% for our revenue from what we consider new products, which are products introduced in the last few years.

It's somewhat lower for a third of our businesses than many other consumer products business, particularly if you look at the ammunition market, while we continue to always introduce new solutions in ammunition such as our Syntech pistol ammunition full ranges that we bought out last year and also Syntech ammunition for action sports.

There are a lot of categories of ammunition which have been selling for many, many, many decades. And so that market is slower to evolve. And, therefore, our percentage is probably lower than it would be for many other consumer products company.

We have not disclosed and are not prepared to disclose this time our exact percentage this year as certainly our target on a typical year is 20% of revenue..

Great. Thank you..

And we'll go next to go to Gautam Khanna with Cowen and Company..

Just wanted to follow-up on earlier question. I think you mentioned some of the commodity headwinds you guys will see. Was that a big driver of the Q1 gross profit, i.e. the inventory, liquidation was pretty good from a cash flow perspective.

So, were you're just selling inventory that had a lower cost basis than the inventory you'll be producing and selling going forward?.

I don't think that was the only major factor one way or the other on our Q1 margins. If we have a LIFO approach on inventory and so we don't really get to take advantage of low-cost inventory to generate higher gross margins..

All right. Thank you..

And that concludes our question-and-answer session. I'd like to turn things back to our speakers for any closing remarks..

Thank you, operator. Before we close, I would certainly like to thank all of our employees for their contributions this past quarter. They're the ones who do the work. So, thank you for joining the call and we will visit again next quarter..

Thank you, everyone. That does conclude today's conference. We thank you for your participation. You may now disconnect..