Michael Pici - VP, IR Christopher Metz - CEO & Director Miguel Lopez - CFO.

Brett Andress - KeyBanc Capital Markets Inc. David King - Roth Capital Partners Scott Stember - CL King & Associates James Chartier - Monness, Crespi, Hardt & Co. William Reuter - Bank of America Merrill Lynch Jeffrey Molinari - Cowen and Company.

Good day, everyone, and welcome to the Vista Outdoor Inc. Q4 Full Year 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Pici, Vice President of Investor Relations. Please go ahead, sir..

Good morning, and thank you for joining us for our fourth quarter fiscal year 2018 earnings call. With me this morning are Chris Metz, Vista Outdoor Chief Executive Officer; and Mick Lopez, Senior Vice President and Chief Financial Officer.

Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act.

These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements represent -- or 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 our non-GAAP financial measures.

With that said, I'll turn the call over to you, Chris..

Thank you, Mike, and good morning, everyone. I appreciate you joining us on our fourth quarter earnings call. I want to start by welcoming our new Chief Financial Officer, Mick Lopez, who's been with us now for about 2 weeks.

I'm very excited that we were able to attract a seasoned, strategic and technical expert like Mick to joint Vista Outdoor, and we wasted no time in getting him engaged in our strategic transformation.

You will hear from Mick shortly as he shares with you a bit of his background and skills as well as he can -- how he can contribute to our future success. We've issued our press release this morning outlining our strategic portfolio actions, full year '18 results and full year '19 guidance.

We issued this a bit earlier than we have in the past in order to allow us to execute the previously announced refinancing plan. We are working to refinance our current credit facility using an asset-based loan or ABL structure, accompanied by a Term Loan B.

That refinancing process is underway, and we anticipate completing it prior to the end of the first quarter fiscal year '19. Given the materiality of the business transformation plan we announced today, we elected to delay the launch of our refinancing briefly to allow our lenders and investors time to absorb the new strategy.

We also expect to obtain a consent from our existing lenders to an amendment of our current credit agreement that will provide leverage covenant relief through the end of fiscal year '19, giving us flexibility to execute on our refinancing plan when market conditions are most favorable.

In our release, we have disclosed both adjusted and as-reported fiscal year '18 results and the primary drivers. We have also published on our investor page an earnings presentation, which supplements the press release. Additional detailed information on our fiscal year '18 results will be available in our Form 10-K, which will be filed in late May.

The focus of this call today is to outline the strategic direction we are undertaking and to provide clarity around our fiscal year '19 guidance. However, we encourage you to review the release to better understand our fiscal year '18 performance.

Now before we discuss our strategic transformation plan and fiscal year '19 guidance, I think it's important to step back and discuss how we arrived at this critical point in a relatively brief history.

A little more than 3 years ago, we embarked on a journey to become a leading consolidator in the growing outdoor sports and recreation market, following a successful spin-off from our predecessor company, ATK.

During the first 18 months, the company was very active on the acquisition front, had a share repurchase program in place, and the Shooting Sports business was peaking. A key tenet of the strategy was to be the largest participant in the highly fragmented market and balance the portfolio between Shooting Sports and Outdoor Products.

The acquisitions quickly accomplished that and diversified the business, forming 2 equally sized segments with over 50 brands in the portfolio. As a result of that, our stock price was at an all-time high, and all was going according to plan. The last 18 months has been a different story.

While it is not my intent to rehash in detail all the factors that had impacted the business and contributed to the downturn, I do believe that it is important to acknowledge that while some of the factors were external and beyond the company's control, others were in fact self-inflicted.

We launched brand equity and the founder's mentality of our acquired businesses as we imposed the Vista way. Product innovation was lagging, business leaders were departing, and planned synergies with acquisitions were not materializing.

Bankruptcies and consolidations impacted the broader outdoor recreation market, then unexpectedly, the election results turned the shooting sports industry upside down. All of this put tremendous market pressure on both our Shooting Sports segment and the hunt/shoot-related portion of our Outdoor Products segment.

The bottom line is this, the company grew too fast and beyond its core. The portfolio became too diverse, and the pressure has mounted. We were too slow to make adjustments, and the ones we did make didn't have enough of an impact to right the ship.

This led to missed expectations and disappointment with our overall business, and our stock hit an all-time low. This brings us to today. As I mentioned on our last call, we've begun a process of reevaluating our strategy and our brand portfolio as soon as I joined the company.

The first step was the sale process of our eyewear assets under Bollé, Cébé, Serengeti brands within our Sports Protection business. This sale process is underway, and we have received very strong interest from potential buyers.

We've completed the evaluation, and we now have clarity about what is core to our business, who our target consumers are, which categories can achieve market-leading positions and how a better-defined portfolio can deliver growth both organically and through disciplined acquisitions.

The portfolio evaluation began with identifying our core market and target consumer. We can confidently say that our core lies in the hunting and shooting sports market and in adjacent activities, such as camping and hiking. Our key consumer is someone who participates in these and other outdoor activities.

Building on this, we identified 4 product categories within our existing business where we believe we will be best able to achieve market-leading positions, maximize operational efficiency and deliver shareholder value. These categories are ammunition, hunting and shooting accessories, hydration bottles and packs and outdoor cooking products.

By refocusing our efforts in these core categories, we are confident that we can achieve growth by deploying capital efficiently, both organically and via acquisitions, and drive operational improvements that will further increase the profitability.

Additionally, we are capable of expansion into adjacent categories via disciplined approach to an acquisition of leading brands in these areas. These categories and several adjacent markets represent a $71 billion market opportunity. This approach is different, I'll explain why.

In the past, Vista grew via acquisition into what we believed were growth markets, regardless of how that acquisition fit around our target consumer. In identifying these categories, we are narrowing the breadth of our portfolio but also playing to our product development, manufacturing, sourcing, marketing and sales strengths.

So of those 4 categories, let's start with ammunition, which anyone would have said was something that is core to our business. It is the foundation and bedrock of our company. We are extremely proud of our ammunition heritage, and increased focus will manifest itself in more innovative and breakthrough new products introduced over the next few years.

We also anticipate, by prioritizing this business, we'll be able to invest more capital to further enhance and expand our global leadership position. As you know, we are the world's leader in ammunition for both law enforcement, military use and the commercial hunt/recreational shoot market.

And our team is excited about the increased support and focus we will be placing on ammunition. Our next category is hunting/recreational shooting accessories. This is an area where we hold several market-leading positions, and we see a path for further expansion here.

Importantly, we also see opportunities to recapture lost sales and profits with better leadership and execution. In the hydration category, where in the past we've missed some opportunities, we still hold a leadership position in bottles and packs.

We believe, with the change -- with changes we have identified already, we are well positioned to leverage our product innovation capabilities and to further expand our product offering to meet the needs of our target consumer. Finally, we have successfully entered into the outdoor cooking category via acquisition a year ago.

The business has grown approximately 25% since becoming part of Vista Outdoor, and we see significant opportunities to expand the strong foundation we have established there. Through our process, we discovered 3 common characteristics that linked these brands together. First, these core brands are all leaders in their competitive spaces.

This gives us strategic advantages such as scale, leading to greater product innovation and manufacturing procurement expertise. We know through our research that there's a strong positive correlation with leading share position and leadership economics.

Second, they're all synergistic products that complement one another, allowing us to focus on market research on the same core consumer. This in turn gives us greater insights into their buying behaviors, leading to more impactful new products and cross-selling initiatives to drive sales.

Third, they share an omnichannel distribution capability ideally suited toward reaching our target consumer. In other words, we can sell into brick-and-mortar retail, functional wholesalers and distributors and e-commerce channels essentially wherever and however our target consumer wants to purchase.

So with those four categories established as our core, what does this mean for our brands outside this definition? In short, we believe that evaluating strategic options for these noncore brands provides an opportunity to unlock greater value. And I'd like to take a few minutes to explain.

In our Outdoor Products segment, we are exploring strategic options for the Bell, Giro and Blackburn brands with our Action Sports reporting unit and our Jimmy Styks paddleboard business.

Similar to our eyewear brands, which we previously announced for sale, these brands have little overlap with our core product categories and also target a different consumer base. These are highly -- high-quality, innovative, iconic, well-respected brands in the marketplace.

However, we do not believe there's a significant enough overlap between what we have identified as our core consumer and the road cycling, mountain biking, skiing or paddleboard enthusiast. Furthermore, the product design, marketing and distribution of these products are vastly different than our other identified brands.

Therefore, we believe they can be more valuable under different ownership. In the Shooting Sports segment of our business, we intend to explore strategic options for the durable hard good products of the Savage and Stevens firearm brands.

Savage is a high-quality, well-known brand steeped in history, with a reputation for accurate and reliable products. The team has made several innovations to enhance the product offering since we acquired the business 4.5 years ago. These new products have repositioned Savage as a modern, innovative long gun manufacturer.

We thoughtfully analyzed the market position of these brands today and where we could take the business in the future. We realize that in order to achieve a leadership position and, thus, leadership economics, we have to grow.

Growth would require large investments in capabilities to develop new products that are outside our current long gun product offerings and position the business as a full-service firearms manufacturer. Additionally, Savage and Stevens cannot take advantage of omnichannel distribution and other core Vista competencies.

While these brands deliver fantastic products, we believe the divestiture should unlock greater shareholder value. This is an important decision, but we believe it may be the correct decision to help Vista realize its full potential.

Now we begin the next phase of repositioning the business to focus on assets that are core to our mission and strategy and divesting those that are not. We will begin this process immediately, but we'll proceed prudently to ensure we maximize our value for each potential transaction.

We anticipate completing all of these transactions if they meet our financial thresholds by the end of our next fiscal year or within the next 24 months.

If we fully realize all divestitures and make no acquisitions, we would expect Vista Outdoor to be an approximately $1.6 billion fully delevered, consumer-focused company, with iconic brands serving a $71 billion market opportunity.

However, we anticipate that a significant improvement in our capital structure will provide the resources necessary to invest in growth initiatives across our core and adjacent categories to generate additional value. We would anticipate utilizing the proceeds from the current eyewear transaction to begin our deleveraging process.

Going forward, we target a leverage ratio in the 2 to 3x range. We hope this provides some clarity on the direction we will be moving toward as we position Vista Outdoor for success. Turning to the market. We know that consumer preferences and shopping habits are evolving around e-commerce and brand authenticity.

This year, we have seen disruption in retail, including consolidations and bankruptcies across the outdoor industry, ranging from large retailers to independent dealers. We're staying close to our customers and monitoring the situation carefully.

In the Shooting Sports business, high channel inventory and a heavy promotional environment that impacted our business late -- since late fiscal 2017 seems to have normalized at both the retail and wholesale channels.

As always, we are committed to maintaining our market share, but we do expect the price -- the previous pricing actions to be replaced with a clear and rational pricing approach going forward across the industry.

As it relates to our pricing actions in the face of increasing commodity headwinds, we have thus far seen little negative reaction to the increases we took in January and April. If the current market conditions persist, we'll continue to evaluate opportunities to adjust pricing further.

In the Outdoor Products business, poor weather conditions in North America have had an impact on the spring-related product categories, specifically impacting the cycling and golf businesses.

However, in golf, the launch of the new hybrid laser rangefinder is receiving strong reviews and likely could offset some of the pressure from poor spring weather. Archery is performing well, as evidenced by the high demand for the SurroundView Blind.

Hunting, recreational shooting accessories and related categories, while still negative, are all trending toward signs of improvement, with trailing 13-week trend improving over the 52-week trend and last month improving over the trailing 13 weeks. I would like to spend a few minutes on the fiscal year '19 guidance.

I would like to remind you that our guidance excludes any impacts of the actions we may take as we transform the portfolio. Fiscal year '19 is the inflection point for Vista Outdoor. We realize that the guidance we have provided is significantly lower than the fiscal year '18 performance, and like you, we are not satisfied.

What is important to focus on is that this is the bottom for Vista Outdoor. It is not remotely indicative of the true potential for this business. However, it's the reality of where we are today.

While the inventory issues in the channel have improved and there appears to be a sense of rational behavior around pricing, there are still several headwinds to overcome. First, on the sales expectations.

POS trends in Shooting Sports are beginning to bottom out, as indicated by the trailing 13 weeks performance, and have modestly started to turn positive over the last month. We're certainly encouraged by this early trend and anticipate it continuing with greater improvement in the back half of our fiscal year '19.

In Outdoor Products, we see modest improvements in categories that are not related to hunting/recreational shooting accessories. In hunting/recreational shooting accessories, we expect the category to mirror the greater shooting sports market and anticipate improvement as the year progresses.

New product launches in Outdoor Products on helmets, goggles, ground blinds, optics, trail cameras, clay targets, outdoor cooking and bottles and packs, all position us and position our portfolio well for quarter 2 and the balance of the year.

Overall, volume declines across the segments due to further market erosion and bankruptcy impacts, along with the loss of exclusivity in certain ammunition categories, will pressure the top line results. Market share gains, new product introductions and price increases will only partially offset these challenges.

I want to point out that our fiscal year '19 EBIT decline is about 12% when compared to prior year. Operationally, we anticipate approximately $60 million of headwinds and approximately $50 million in cost reductions to mitigate a significant amount of the pressure. As for EPS, several factors contribute to the decline.

Commodities is a large headwind facing us and the industry overall. We anticipate approximately $0.40 of earnings pressure as the result of the current raw material market conditions. Volume and mix, net of pricing actions, negatively impacts the earnings approximately $0.35.

Additional interest expense and the higher tax rate pressure earnings approximately $0.15. Cost reductions and other efficiency initiatives partially offset these pressures by $0.60. These initial actions include headcount and overhead cost reductions.

Additionally, we have engaged a leading third-party firm to assist our strategic sourcing center of excellence with the first wave of our ongoing procurement savings project. Free cash flow was primarily impacted by the lower income and reduced working capital leverage.

We've made significant strides in fiscal year '18 to reduce our working capital position to generate cash. We continue to look for incremental improvements in working capital. We have seen our inventory levels reach an appropriate level.

Historically, we have converted free cash flow at approximately 65% of EBIT in a normal year, and we project this year at about 100%. To summarize, our fiscal '19 financial guidance, which assumes that there are no major divestitures, is as follows.

We expect sales in the range of $2.205 billion to $2.265 billion; interest expense at approximately $55 million; an adjusted tax rate of approximately 30%; adjusted earnings per share in the range of $0.10 to $0.30; capital expenditures of approximately $60 million; free cash flow in the range of $55 million to $85 million; and R&D, also generally in line with our prior expectations at approximately $30 million.

When thinking about timing at how the year is expected to evolve, I would like to take a few minutes to provide some commentary on the cadence, specifically as it relates to the first quarter. We anticipate the sales cadence overall to match our historical trend of building throughout the year, with the peak in the third quarter.

The first half of the year, we will still experience tough comparisons, mainly in Shooting Sports as the rimfire market was slower to tail off last year. We expect to see the recovery in second half across the company as the shooting sports market continues to normalize and new product launches begin to hit the market.

We anticipate EBIT margins to be breakeven in the first quarter, and as a result of our tax rate, we expect a loss per share.

We believe the first quarter EBIT will be the trough, and we anticipate a recovery in earnings as the year progresses, specifically in the back half of the year, driven by improved market conditions, new product launches and savings, driven by our continuing direct and indirect sourcing initiatives.

These initiatives will drive margin expansion in second half of the fiscal year. We expect to exit fiscal year '19 in a much better position than where we started. For the year, we anticipate Shooting Sports gross margins of approximately 20% and gross margins in Outdoor Products in the mid-20s.

We expect EBITDA margin of approximately 7% for the full year. We realize that we have a challenging path ahead, and fiscal year '19 is the beginning of the path to recovery. We believe that there are much brighter days ahead.

In fact, looking out over the next 2 to 3 years, we anticipate revenue growth in the 3% to 4% range, with EBITDA margins of approximately 10%. We've begun to shift the focus of the brands with a founder's mentality by decentralizing customer-facing functions and placing them back in the businesses.

This is part of our transformation to be more consumer-focused and ties in perfectly with this transformation strategy.

Once fully executed, I'm confident that the transformation plan we have outlined for you this morning will result in a more agile company of market-leading iconic brands, one with a razor-sharp focus on the consumer and well positioned to deliver profitable growth.

Vista Outdoor has a great opportunity in the fiscal year to get back on the path to success. Our portfolio review told us some things we already do and others we didn't necessarily expect. But I believe this process is what we need to fully realize the potential of this company. I'm excited to help usher in a new beginning for Vista Outdoor.

I would like to turn the call over to Mick to spend a few moments to discuss his background, and then we will open up for questions.

Mick?.

Hey, thank you, Chris. I'm really excited to join Vista Outdoor during this critical phase of the company. First, I would like to take this opportunity to thank Anneliese, Kenny, Mark, Mike and all the members of the Vista finance leadership team for their exemplary performance over the past quarter to deliver high-integrity and quality results.

I decided to join Vista Outdoor because it met the 3 criteria that I set for my next Chief Financial Officer role. First criterion was that there must be great chemistry with the leadership team. Chris and I immediately bonded on approaches for disciplined management, investor returns and leadership development.

His experience and that of others on the executive team is just perfect for our mission at Vista Outdoor. The second factor was whether I would be able to contribute to the success of the firm.

Given my tenure at large companies like Harris, IBM, Cisco and Tyco, that experienced major transformations, I believe I can contribute with portfolio planning, strategy, mergers and acquisitions, integration, pricing, change management and cost optimization. These skills will be valuable as Vista Outdoor goes through its strategic shift.

Final criterion was the ability to create value for our shareholders. As we refocus the company on our core customers and drive operational excellence in the near term, we should be well positioned to improve profitability and revenue growth in this large, profitable and segmented market for outdoor enthusiasts.

It's really a privilege to be part of Vista Outdoor team and contribute to the future success. I look forward to learning the business and meeting our investors and analyst community in the next months. Thanks again for the opportunity, Chris..

Dan, we're ready for questions..

[Operator Instructions]. It appears our first question comes from Brett Andress with KeyBanc Capital Markets..

Mick, welcome to the team. So a lot to try and kind of unpack here. Chris, if you could provide, I guess, first of all, a little bit more insight for us on your industry comments.

I guess more specifically, what have you seen with distributor-level inventories and buying patterns? Where do you think the consumer-level stockpiling is at? And also, is there anything in your point-of-sale data on the ammo side that serves as evidence that the category is really starting to level out here?.

Yes. So Brett, thank you for the question. And we're excited about what we're seeing on the inventory levels at both retail and wholesale. So we've always said that we think these troughs last 12 to 18 months. This could be protracted in as long as 24 months. We're about 15 months into it.

And we see a return to growth because of the inventory levels and consumer consumption in the back half. So won't be as long as 24 months, we don't anticipate that. As I mentioned, retail, wholesale, pretty clean right now. Consumer stockpiling, we think, is getting in a much healthier position.

In fact, we've gone out recently with the help of a leading consulting firm and have spoken to over 1,000 shooting consumers, in fact, a couple of thousand consumer shooters. And we like the activity that we see.

We see a continuing healthy increase in recreational shooting, and we think that this will lead to POS trends that will pick up as we move through the year. I wouldn't yet claim that POS is on a positive sustained path, but we think we are shortly there as we go through the -- or certainly will be there as we go through the year..

Got it. No, that's helpful. And the next question, on price. So you took low single-digit price increases in select calibers last quarter. I think you had price increases implemented in April.

So I guess if you look at the portfolio in total, can you help us with what really the weighted average price increase was across all the products that you currently have in place? And then also what are the plans for fiscal '19? I mean, how much more price do you think you need from here? And what is the cadence that we can expect to see that?.

Yes. So Brett, just to remind everybody, in January, we took an across-the-board price increase low single-digits. In April, we passed on another price increase but in select categories, again in the low single-digits. We don't anticipate another price increase at this point but are watching the market very closely.

And as I mentioned in my prepared remarks, we believe that if commodity pressures continue and don't abate, that we will be looking at another price increase as we go forward. But at this juncture, it's not in our plans..

So if commodity prices stay where they're at today and don't move, then that would require another price increase, correct?.

If commodity prices stay -- yes, if the commodity prices stay about where they are right now, Brett, we have that baked into our plans. If commodity prices, frankly, moved down a bit, it's upside to our plan. If they move up a bit, we're going to step back and look at the action we need to take to mitigate..

Okay. And then one more here. Can you walk us through the transformation process in maybe a little bit more detail? I think good color in the prepared remarks. But you're putting a for-sale sign on a fair amount of assets.

And what is your sense of the strategic and financial sponsor appetite at the moment? And do you have any valuation threshold in mind on these? Because I think you mentioned fully delevering by 2020.

So I guess how much of that comes from cash flow? And how much of that would come from divestitures, just to help frame that up?.

Yes. So Brett, a lot packed in that question. And so let me try to go through it one by one here. An excellent question on transformation process because when I walked in, the first thing that I wanted to do was make sure that we're surrounded by thought leaders and best-in-breed strategic thinkers.

So the first thing we did was we marshaled our internal resources, so we had all the industry expertise we needed in each of our categories. And then we went out and signed up one of the leading consulting firms, strategic consulting firms in the world.

And so those 2, coupled with our advisement of the -- from our board, we started down the road of determining what was core to our business and what was not. And we studied lots and lots of successful companies. And ultimately, what we determined was that for long-term shareholder value, we needed a few things in each of our businesses.

One, the businesses had to be leaders. We know there's a positive correlation between leadership market position and ultimately leadership economics. Two, they had to be close to our core.

There are certain benefits of being a leader, and the closer you stick to your core, the more you can leverage those economies of scale and take advantage of those benefits.

And thirdly, by having synergistic products, we're able to develop what we called spiky capabilities, a center of excellence here or there that we can leverage future acquisitions with. So take procurement.

We're going to realize tens of millions of dollars improvement in our procurement because of the actions we're taking and the expertise we're bringing into this functional area over the next few years. So you mentioned kind of putting a for-sale sign up. We're in no hurry to sell these assets. We think they're great businesses.

We look at them, they have some of the best leaders and some of the best management teams. And frankly, you take a Bell, a Giro, leader in its space, and you take a Savage, close to our core. But they don't meet the criteria, and we know there's an opportunity cost. And we think that's why they're better suited with another owner.

Based upon our experience with eyewear, there's a lot of buyer interest out there. Everybody knows that there's capital aplenty in the marketplace right now. Interest rates are still fairly low. And we know in some of the early whisper conversations we've had, there's a lot of interest.

In terms of evaluating thresholds of sale, we don't want to give up our bargaining position, but we're going to look for a very attractive price or we're not going to consummate..

That's fair. And I do have follow-up on that. I mean, but if you're thinking about the 2020 target of being fully delevered, are you assuming all of that comes from new divestitures? Or -- just trying to think about how we kind of eventually get there..

So Brett, if you'll think about the divestitures, clearly, that's the biggest portion of our ability to delever. But one thing that I'm really, really excited about is, in the past 12 months, we take -- we delevered by $200 million. So we started at roughly $1.1 billion, ended the year at $900 million of debt.

And that wasn't through a single divestiture. As we go forward here, we've stated that historically, we convert about 65% of our EBIT.

This year, we're going to convert about 100%, which means we're going to be able to generate some cash through further working capital improvements, not nearly as much opportunity as we've had in the past because we took out $150 million of inventory this past year, which was a huge, huge effort from our team.

So clearly, the bulk of our delevering as we go forward is going to be from divestitures..

Our next question comes from Dave King with Roth Capital..

Maybe sticking with the portfolio review questions a bit. I guess when do you expect to have the Bollé sale divestiture completed? And then I guess more broadly, what has the process around that sort of demonstrated? I -- you obviously don't want to give away your bargaining position at all.

But is it reasonable to expect bids near what Vista originally paid for them? And then who are the potential buyers out there? Is it strategics? Is it private equity? Is there a market for firearms? I guess some color there would be helpful..

Sure. So Dave, we're really excited about the eyewear sale process. I mean, if anything, it's emboldened us a little bit in terms of if you've got good assets that make economic sense for certain buying groups, there's opportunities out there. We expect to have a definitive agreement in place within our first quarter here.

And indicative -- indications of interest were higher from a number of buyers in terms of number of buyers. In terms of financial proceeds, we expect it to be within the range of what we had originally planned. And the buying -- potential buyer set is across the board. I mean, we've seen healthy interest from both strategics and financial buyers.

And we would expect that to be the case were we to pursue other divestitures as well..

Okay, that's great color. And then maybe turning to the quarter.

What sort of impact do the inventory liquidations in ammo have on your margins? And then as we think about your guidance for the current year, what does that assume in terms of further liquidations, particularly given the comment on the 100% free cash flow conversion? Seems like that assumes a little bit more on the liquidation front..

Yes. So Dave, I mean, certainly, the biggest drop in ammunition margins was the volume and pricing that we gave away. In fact, when you look at volume and mix going forward this year, we expect that to continue. And that's why we've guided in total $0.35 of pressure.

But I also want to underline the fact that we've got a fair bit of commodities pressure. And I think a lot of people knew this coming in. I'm not quite sure people really understood the magnitude of it, but that commodities pressure on our ammunition business is $0.40.

Now what I'm proud of is we're putting in place a leaner cost structure and a procurement and efficiency operational excellence team to be able to offset and mitigate a lot of this..

Okay, okay, fair enough. And then I guess one more for me, and then I'll step back. On the debt, sounds like you're still finalizing the refi there.

I guess particularly with LIBOR having moved up, looks like fiscal '19 leverage over 5x even if I assume all your free cash flow is used to pay that -- pay down your current debt, I guess what sort of rate do you anticipate getting based on your current conversations?.

Yes, I'll take that question. We are certainly looking at the market, as you have heard before. We're looking forward to going forward with an asset-based loan, which has a much lower rate than a more secured type of -- or unsecured type of facility, and do not foresee us actually increasing significantly our rate on a year-to-year basis.

Of course, there will be a slight increase because rates have gone up. But because of our new structure, we should be able to mitigate some of that..

Our next question comes from Scott Stember with CL King..

Welcome aboard, Mick..

Thank you..

Chris, could you talk about -- you said there was a loss of exclusivity or you expect that, I think, in the ammunition business with some of your customers or a few of them.

Can you maybe just elaborate on that a little bit?.

Yes. So this is, Scott, not a loss of exclusivity with customers. It's our Lake City contract where we had exclusive right to the commercial volume, which is really the volume -- remember, it is a government-contracted facility predominantly for government/military use.

And the general contractor then can take the excess capacity, sell it down to us exclusively, and we sell it into the commercial marketplace. That exclusivity has ended. And for the next 2.5 years, we expect to get about 3/4 of that excess capacity, and we've lost about 1/4 of it.

And that's the exclusivity that we lost, and that's built into our guidance here. But that's the headwind that we're facing this year..

Could you maybe talk about what the actual dollars and cents, what the actual numbers that you'll be going up against or losing?.

Yes. So Scott, we don't give exact guidance on specific suppliers or specific customers. But certainly, that's built into the $0.35 when we talked about volume and guided on volume and mix..

Okay.

Maybe just talk about deleveraging, and what was your leverage ratio at the end of the year?.

We ended the year at 5.4x..

And just remind us again what your most recent covenants have been waived to..

We had a waiver for the quarter and anticipate the process, as noted at the beginning of the presentation, that we're going to get an amendment to our covenants so we can have ample time to refinance the rest. So waiver -- the covenants are not going to be a major effect..

Okay, got it. And maybe just talk about -- there were some reports out there, there were certain retailers that didn't want to carry certain products from the Vista brand, just given some of the activity, tragic shootings and things like that.

Can you maybe talk about, has that had any impact on your business? And what was the ultimate movement on that? And that's all I have..

Okay. So Scott, we've publicly stated that we think the impact is -- certainly for the largest customer, which was REI, was less than 1% of our overall sales. And I think it's safe to say that as we look at the rest of it, there's been some puts and takes.

So we've had some small independent dealers that have sided with the REI side, and we've had some independent dealers, frankly, that stepped up and said, "You know what, we want to take advantage of this market opportunity and replace that volume." So in total, it's built into our guidance and our expectations.

And fortunately, we had been on a -- this path of strategically determining where we wanted to guide the company way before any of the noise came about 8 weeks ago..

Our next question comes from James Chartier with Monness, Crespi, Hardt..

First, I want to talk about your kind of the path to that 10% EBITDA margin that you talked about. How much more cost opportunities do you see beyond this year? I think you mentioned this is the first wave of procurement initiatives, so if you just talk through that, please..

Yes. So we don't typically give guidance beyond the first year, but we pull together every year a three-year long-range plan. So as we start to look out, we expect a couple of things. One, we expect to get more traction on some of the operational excellence initiatives that we've put in place. So take procurement as an example.

We've really only evaluated a small percentage of our overall spend. It's lower-hanging fruit, but it's a smaller percentage of our overall spend. And we would expect that to result our -- show results in our EBITDA, our EBIT and our EPS as we move through the quarters and as we move through the next year or so.

So this is -- part of the new Vista is a leaner G&A structure and a greater emphasis on expanding our margins through operational efficiencies and procurement..

All right. And then you've mentioned loss of kind of the entrepreneurial spirit and some management defections for some of the brands that you acquired.

Where does the leadership stand for kind of the go-forward brands? Do you need to bring on some new people? Have you put in place some different people?.

Yes. So frankly, a little bit of both, and we still got some work to do there. Leadership and talent doesn't get lost overnight and doesn't get replaced overnight as well. And that's part of the reason for the guidance that we've given. We're on a path of recovery in many of our brands, but we know it's going to take some time in others.

An example of a great recent hire, we hired a President and General Manager of our Bushnell business, which is more than just the Bushnell brand. It covers a number of brands in our hunting and shooting accessories.

A business we bought years ago, probably right after ammunition was the first major acquisition the company has made, and we've taken a couple of impairment charges over the years. We think there is a large opportunity for margin recovery.

And Vishak Sankaran, I worked with Vishak years ago back at Black & Decker, and he went on to demonstrate himself in other leadership roles, and we're highly excited to have him on board. He's been on board for a couple of weeks, and like Mick, he's digging in and already making contributions.

As we start to look at our other brands and our other portfolios, we're looking at how to augment these brands with leaders. But that hasn't stopped us from instilling that founder's mentality back into the brands. That was part of what we announced previously when we changed the sales, marketing and commercial structure.

And importantly, this not only brings that founder's mentality back to the brands, but it also allows us to hold those brands accountable..

Great. And then lastly, can you just talk about how your ammunition business to the law enforcement and military has been over the last year or so? One of your competitors seems to have had some nice growth in that area..

Yes. So we're really excited about the position we've got in law enforcement and military and government work. In fact, we just announced recently that we won the FBI training round, which is a significant win because it's the largest-volume part of the FBI. They go to a lot of training rounds. Secondly, we're excited that we won the LAPD contract.

Now when the Los Angeles Police Department evaluates a product like Federal, it has a halo effect and a cascading effect, much like our contract that we have with the New York Police Department. So we've got the largest precincts in the country. We also announced recently that we've got the Israeli National Police.

And so our position in law enforcement and the military, I think you'll see us continue to grow. Some of the product innovation I talked about, we've had a little innovation over the last few years in ammunition, but we've kind of taken our eye off the ball a little bit. And under Jason Vanderbrink's leadership, we're revving that back up.

And so some of the innovations and the opportunity for breakthroughs that I'm seeing the team working on right now, I'm highly excited about, and some of it fits really nicely into that law enforcement category..

Our next question comes from William Reuter with Bank of America..

My first -- the first question is, at one point, you talked about a 2 to 3x leverage target, and then you also talked about fully delevered. I wasn't sure what fully delevered meant, whether that meant getting to the 2 to 3x target or that meant getting to a point where you had no debt on your balance sheet..

Yes. So William, good question and gives us ability to clarify it. What we're trying to do is paint a picture of what the future Vista will look like. And so if we simply delevered or simply took the divestiture proceeds and paid down debt, we'd be in a positive cash position. Clearly, not the capital allocation model that's optimal.

So what we envision as we evaluate the divestitures, we will use the proceeds, first and foremost, to deleverage the company. However, in parallel, we're going to look to reinvest in the business both organically and inorganically.

And so we understand that businesses are not necessarily run sequentially, and so some of these things might be in parallel. We envision over the long term, mid to long term, that our leverage position will be 2 to 3x.

But make no mistake about it, we are focused on deleveraging our balance sheet to give us the dry powder to be able to execute our plan that we've put in place..

Okay, that's very helpful. And then in terms of the 2 price increases you've implemented, one in January, one in April, you talked about some increased input costs.

I wasn't sure whether, at this point, those 2 price increases have fully offset what you guys are expecting to see in terms of your costs or -- because you kind of made some comments about, well, who knows where things go from here in terms of, like, whether we would do another one.

So did they fully offset the inputs?.

No, William, they did not. So what we've factored in is $0.40 movement in our EPS because of commodities. We've passed on what we think the market can bear in terms of pricing right now. We think it's a very rational environment.

And what we've planned -- what we've put forward in our guidance is no more movement in pricing, no more movement in commodities. What I did state, though, is if commodities do increase from here, we will evaluate a further price increase..

Got it, that's helpful. And then just lastly, you spoke a little bit about innovation and how your pipeline for this year is -- I don't remember the exact adjective you used, but it was something positive.

Can you talk a little bit more about what we might expect in terms of what percentage of your sales this year might be from new products and how that would compare to maybe the past couple of years? Just to get a sense whether this is a better year or kind of an average year or a little bit less..

Yes. So William, you're talking specifically about a KPI that we look at, which is a new product index. And we haven't publicly stated that, and that's something we're evaluating as we go forward. But clearly, we are looking more intently at the contributions to our sales line from new products.

It does a number of wonderful things for the company, for our customers and for our consumers. So we understand more than anything else that new product innovation is the lifeblood of this company and this industry. So you're going to see a continued focus on new products from us. You're going to see some really neat new products coming this year.

I mean, we've introduced the SurroundView Blind, which is -- we can't build enough of these. And the excitement we're getting in this blind is amazing. We're introducing a new laser GPS rangefinder in our Bushnell Golf business.

Again, we can't -- we anticipate that it's going to just -- the interest we're getting is super, and we're having supply constraints right now as we look at that product. And then as we move through the year, we know we're going to see contributions from those 2 categories as well as others.

But I think the expectation from this business ought to be more new products contributing to both our sales and our profit line over the next couple of years..

Our next question comes from Jeffrey Molinari with Cowen and Company..

This is Jeff Molinari on for Gautam. Welcome aboard, Mick. I have a couple of questions for you guys. First, another one on Lake City and then also another one on the planned asset sales. But to start with Lake City, so we talked about how this deal is no longer exclusive.

Can you give us a little color about the pricing on that product? Has that changed since this change in exclusivity? And also, what was the kind of level of annual sales from that Lake City ammo for fiscal year '18? And then on the asset sales, kind of interested in hearing what's the tax basis of that group of assets and what the tax implications are for any of those sales that have been announced or with regards to the strategic review..

Thanks, Jeff. And so on the Lake City contract, there is a double effect. So we've lost exclusivity in some volume, and at the same time, they've taken a price increase. Now we don't state specifically what that price increase is or what the volume reduction is in terms of rounds or dollars for competitive reasons.

As it relates to the asset sale and the tax basis, I'll turn that over to Mick..

All I can say at this stage is that we are exploring strategic alternatives. It would be remiss on our part to give out this privileged information. You can see in our 10-K that we have already held for sale our eyewear business, and you can see the book value for that, which is approximately $160 million.

That's the only publicly available information that we are disclosing at this time..

We have no other questions in the queue at this time..

Okay. Thank you, operator, and thank you all for joining us today. I'm excited about the strategic transformation plan we've shared with you.

I want to reiterate the key priorities for the year include deleveraging, focusing resources and pursuing growth in our core product categories, maintaining our customer focus and improving profitability through operational excellence, which includes a leaner cost structure and improved procurement capabilities.

I look forward to updating you on our first quarter earnings call. Thank you..

That does conclude today's conference. Thank you for your participation..