Christopher Metz - Chief Executive Officer Mick Lopez - Executive Vice President, Chief Financial Officer Michael Pici - Vice President, Investor Relations and Corporate Development.

Brett Andress - Keybanc Capital Markets Dave King - Roth Capital Scott Stember - CL King Jim Chartier - Monness, Crespi, Hardt Gutam Khanna - Cowen & Co. Rommel Dionisio - Aegis Capital William Reuter - Bank of America.

Good day and welcome to the Vista Outdoor Incorporated First Quarter FY2019 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 of Investor Relations and Corporate Development. Sir, please go ahead..

Thank you. Good morning and thank you for joining us for our first quarter of fiscal year 2019 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 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 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, Chris..

Thank you, Mike, and good morning everyone. I appreciate you joining us for our first quarter earnings call. I’m pleased to report that we delivered a solid first quarter and exceeded expectations. We generated strong free cash flow and paid down long term debt. We’ve also raised our fiscal year 2019 EPS and free cash flow guidance.

Before getting into the specific results, I’d like to start by commenting on three key areas which impacted our business and results for Q1, including market trends and other external factors, our efforts to improve profitability and efficiency, and our progress on the strategic transformation plan that we announced in May.

First, the market for our products remained challenging in Q1, resulting in our total sales declining 7% versus the prior year quarter. We continue to see challenges in our hunting and shooting related product categories.

This softness has affected both of our operating segments for the past five quarters, but the biggest impact has been felt in our ammunition business. Because of the importance of ammunition to our overall results, I want to spend a few minutes discussing the ammunition market specifically and the trends we are seeing there.

Rim fire, where we are the clear market leader, has experienced the largest decline in the ammunition market.

Rim fire, you may recall, had seen a tremendous ramp-up in demand over the several years that preceded the current downturn, and it is a portion of the ammunition market that we think will likely take longer to recover, as we previously discussed.

Other types of ammunition have seen improvements recently, such as pistol, big game rifle, and water fowl shot shell. Despite the improvement in certain ammunition categories, the overall ammunition market continues to vary week to week and month to month.

Though we believe we have reached the bottom, we have yet to see evidence of a sustainable recovery. We monitor POS and sell through weekly, but the data has yet to demonstrate any consistent trends. We believe certain categories, such as rim fire and small rifle, will remain soft but there will be some offset by pistol and big game rifle.

Despite this challenging environment, we are confident we can leverage our leadership position to capture market share primarily by offering new and innovative ammunition products that will position the company to compete and win.

These include the new Valkyrie rifle round, the most innovative new round the industry has seen in years; our new Heavyweight TSS, our Tungsten Super Shot shell for water fowl and turkey hunting, the most new exciting new shot shell on the market today, and Syntech pistol ammunition, all of which have been well received by trade media, our customers and target consumers.

Our latest market share data shows we have consistently picked up market share through the first half of calendar 2018. This demonstrates the strength of our ammunition brands and customer relationships and the innovative new product pipeline we continue to bring to the market.

I am pleased to announce that Federal Premium has been chosen as the official shot shell ammunition sponsor and supplier of USA Shooting as it prepares our Olympic hopefuls for the 2020 Summer Olympic Games in Tokyo. Our ammunition brands already support a majority of the nation’s law enforcement agencies and we expect that to continue in the future.

We have also seen several recent successes in our efforts to secure new contracts with law enforcement and military customers, particularly in our ammunition and tactical accessories businesses.

For example, in Q1 our Speer ammunition brand secured a new five-year, $18 million contract from the New York City Police Department, a key win for a highly competitive award.

I’m also pleased to report that in line with our support for veterans and their families, our employees and partners came together in July to raise $146,000 to support the Veterans Community Project, an organization that strives to eliminate homelessness in the military veteran community. This is double the amount that we raised last year.

I am proud of our employees and partners’ overwhelming generosity, and it speaks to our culture of giving back to the communities where we live and work. Outside of our shooting sports related categories, we are experiencing mixed results.

On the positive side, our outdoor cooking business continues to excel with strong year-over-year performance recording over 25% growth. Our outdoor cooking business is one of our top performers in ecommerce and much of its growth has come through higher margin, direct to consumer sales.

The business is also delivering a steady stream of innovative products, recently introducing an update to its innovative Woodwind pellet grill. Outdoor cooking is a very exciting business for us, and Camp Chef is a leader in this category. Golf has also benefited from strong new product launches such as the Phantom and Hybrid GPS products.

As you know, we are the leaders in golf range finders, and in the first 90 days of its launch the Hybrid GPS has already captured 7% of the total market for range finders and the group reported approximately 14% year-on-year growth. This speaks volumes to the innovation we can bring to a category with the appropriate focus on new products.

Bushnell has also recently launched a new optics line-up that you will see in stores late this summer and fall. The new line-up raises the bar in technical solutions for low light conditions. Customer and media reviews have been very strong and this new suite of products begins to put our Bushnell team in the best position to win in years.

Despite the gains, the wet spring and retail bankruptcies last year have resulted in a slower start for our hydration and cycling products businesses. Looking forward, new products will be critical to our future success in all market conditions.

We believe that the renewed focus on our core consumer will enhance our ability to deliver a steady stream of new and innovative products in our core categories. We also are beginning to see traction on our ecommerce initiatives, particularly our efforts to expand drop ship and direct-to-consumer capabilities at some of our brands.

We added new drop ship programs with several of our customers in Q1. In the quarter, we also introduced direct-to-consumer capabilities on the Bushnell Golf website to augment our strong performance at retail. At CamelBak, direct-to-consumer sales were up 34% in Q1 over the prior year.

Lastly, we introduced new consumer-facing websites in our ammunition and Bushnell businesses. Next, I would like to spend a few minutes on our profitability and efficiency initiatives. Despite the market conditions I described earlier, we delivered a solid quarter with better than anticipated adjusted earnings per share and strong free cash flow.

These quarterly results showed that our ongoing efforts to enhance profitability and generate cash are beginning to bear fruit. To drive profitability, we have been conducting a strategic supply chain efficiency initiative with assistance from a leading third party consulting firm.

This initiative has already resulted in significant improvement to our supply chain management practices and we expect it to continue to generate profitability enhancements going forward. The ammunition team is also driving improvements in our factories, improving both direct labor costs and total efficiency.

The initial results of these initiatives have been favorable. The company’s gross profit increased sequentially from the fourth quarter to the first quarter. This was led by our outdoor product segment which saw significant sequential improvement in adjusted gross profit.

Shooting sports adjusted gross profit also increased slightly from Q4 to Q1 despite the previously communicated commodity challenges we spoke about on our last call. We are also performing against our operating expense management goals, delivering year-over-year adjusted operating expense improvement.

Our profitability initiatives and improved working capital management have resulted in better than expected cash flow generation. In the first quarter, we generated free cash flow of $70 million compared to free cash flow of $25 million in the prior year period. Tariffs could present a challenge to the year. We are fully participating with the U.S.

trade representative to make known the risks to our company and industry, as well as impacts to our consumers. Based on the most recent public statements by the administration, we see the most risk of tariffs impacting our helmets, golf, optics and outdoor cooking products in the second half.

Finally, I would like to share an update on our strategic business transformation plan. Ninety days ago, we shared with you our plan to reshape our brand portfolio to focus on our core product categories and target the consumer and put Vista Outdoor on a path for future success.

As we discussed in May, following this reshaping we will focus on achieving growth through our market-leading brands in ammunition, hunting and shooting accessories, hydration bottles and packs, and outdoor cooking products.

Last month, we announced we have completed the first step in our strategic transformation, signing an agreement with a private equity buyer to sell the legal entities operating our Bollé, Cébé, and Serengeti brands.

After a very robust auction process, we agreed to a selling price of $158 million for these brands, which represents a significant premium to the approximate 10 times EBITDA multiple paid by the Vista Outdoor predecessor company, ATK, as part of its acquisition of Bushnell in 2013.

We are very pleased with this result and expect to close the transaction in Q2 and use the net proceeds to pay down indebtedness and reduce financial leverage. With the Bollé, Cébé, and Serengeti sale on a glide path to closing, we have now turned our attention to divesting other brands that fall outside of our core product categories.

This initiative is well underway and we expect to announce further portfolio actions before the end of Q3.

As with the sale of our eyewear business, we will remain disciplined in our sale process and laser focused on delivering value for our shareholders, so we may adjust the precise timing of any individual sale if doing so will allow us to achieve a better financial result.

As we discussed in May, the initial impact of these brand divestitures will be significantly reduced leverage and interest expense.

Going forward, we are targeting a leverage ratio in the two times to three times range, which we believe will give us substantial flexibility to invest in growth initiatives across our core product categories and generate additional value. In summary, we have had a strong start to fiscal year 2019.

While external challenges remain, I am very confident that we are on the right path. Our internal efforts to enhance profitability and drive new product innovation have begun to show results, and our strategic business transformation plan is well underway.

We have initiated and implemented a significant amount of change within Vista Outdoor, and as we all know, change is hard. I couldn’t be more pleased with our employees’ efforts, accomplishments, passion, and determination to ensure we achieve success. They have truly embraced the vision.

I am proud of our progress so far and confident that this transformation will result in a dramatically more focused and profitable Vista Outdoor that will generate significant shareholder value in years to come. I will now turn the call over to Mick to provide more detail on our financial results for the quarter. .

Thank you Chris, and good morning to everyone. We have disclosed both as reported and adjusted results in our press release to assist you in your understanding of the underlying numbers and how they compare to prior periods. You will find a more detailed financial presentation of our first quarter fiscal year 2019 performance on our website.

As Chris mentioned, we are implementing our strategic transformation plan, and our first quarter results reflect some of the first steps. First, sale of our eyewear business is an important step towards our dual strategy to focus on core outdoor consumers and reduce our debt leverage.

On July 9, we announced that we entered into a definitive agreement to sell our Bollé, Cébé, and Serengeti brands to a European private equity fund. The gross proceeds from the divestiture are expected to be approximately $158 million before net working capital and transaction expenses.

The sale is expected to be completed in the quarter that ends September 30, 2018. From a GAAP perspective, we recorded an estimated accounting loss on the sale of $45 million in accordance with accounting rules for held for sale assets.

The loss is mostly due to currency translation adjustments of $36 million which will be reclassified from equity to earnings upon sale, and another $9 million for estimated deal-related expenses and net working capital adjustments.

The cumulative currency translation adjustments are primarily the result of the impact of the significant euro currency devaluation in 2015 on the European legal entities for Bole. The loss is not reflective of the value of the operating assets of the eyewear business.

The final loss on sale of the eyewear business will be of course determined at the date of closing after considering the final balance sheet, the final selling cost, and the final working capital adjustments. Also during the quarter, we took a step towards our strategic intent to deleverage by paying down debt.

We reduced our term loan by $33 million, of which $25 million of this repayment was entirely voluntary. Our current revolver balance is zero, and we ended cash in the quarter with $63 million. This was all made possible by our team’s determined focus on working capital management and strong free cash flow generation power of our business.

We finished the quarter with a total leverage ratio of 6.08, which remains well below our credit agreement covenant of 7.25 times. We will continue with our plans to refinance our current credit facility by using an asset-based loan, or ABL structure in order to allow us sufficient time to execute the refinancing.

We have received an amendment to our credit agreement from our lenders that allows us until the end of the fiscal year to complete the refinancing in an efficient manner; however, we anticipate finalizing the structure and completing the refinancing before the end of the second quarter of fiscal year 2019, of course subject to market conditions.

We believe this less restrictive capital structure will provide us with additional flexibility to operate in a highly challenging market environment, lower our interest rate expense, and allow us to de-lever without incurring penalties. Now onto our financial results, turning to Slide 3 in the presentation.

We will discuss the adjusted results first for Vista Outdoor overall, and then we’ll provide more color on the drivers for each of the segments. The company reported first quarter sales of $529 million, down 7% from the prior year quarter. The year-over-year decrease was caused by lower sales in both our shooting sports and outdoor product segments.

First quarter gross profit was $119 million, down 19% from the prior year quarter. Gross margin percentage was down approximately 330 basis points year over year; sequentially though, gross margin increased approximately 275 basis points. Our operating expenses for the first quarter were $104 million, down 7% from the prior year.

Cost reduction actions taken in both business segments and at the corporate level drove the decline. We reported adjusted operating profit of $15 million in the first quarter, a decrease of 57% from the prior year quarter due to the lower gross profit. Sequentially quarter-on-quarter, we experienced improvement of $26 million in our gross profit.

Interest expense for the current quarter was $13 million compared to $12 million in the prior year quarter. The slight increase resulted from higher borrowing rate in the current period partially offset by a lower average debt balance. Our adjusted tax rate for the quarter was over 100%.

The tax rate is affected by a non-tax deductible loss and international tax recorded in the quarter. For the first quarter, we recorded adjusted income of breakeven, down from $14 million of net income in the prior year quarter, resulting in breakeven earnings per share of zero cents compared to $0.24 in the prior year quarter.

Year-to-date free cash flow generation was $70 million compared to free cash flow of $25 million in the prior year period, an overall favorable change of approximately $45 million. The increase in free cash flow was driven by improved working capital management primarily tied to the timing of supplier payments and reduced capital expenditures.

Now we’ll turn to the performance of our business segments, where we report sales and gross profit. Please turn to Slide 4. First quarter sales in outdoor products were $271 million, down 7% compared to the prior year period.

Lower volumes in hunting and shooting accessories were due to lower demand, and declines in sport protection and hydration were due to softness in the specialty channel partially offset by increased sales in our outdoor cooking business driven by very strong customer demand.

Gross profit in the first quarter for outdoor products was $74 million, a decrease of 3% from $77 million in the prior year. The decrease was primarily caused by lower sales volume related to sports protection, hydration solutions, and our hunting and shooting accessories categories.

Sequentially, gross margin increased approximately 400 basis points as a result of favorable price and cost reduction initiatives and favorable mix driven by outdoor cooking and golf range finder performance.

Turning to Slide 5, shooting sports recorded first quarter sales of $258 million, down 7% from $279 million in the prior year quarter as a result of persistent lower demand in the market for rifle ammunition, primarily rim fire ammunition, partially offset by increased pistol ammunition and new firearm product launches.

First quarter gross profit in shooting sports was $45 million, down 37% from $70 million in the past year. The year-over-year decrease was a result of lower volume, lower pricing, and unfavorable commodity costs. Sequentially we saw a modest improvement in the gross margin of approximately 90 basis points.

Moving on to Slide 6, we delivered first quarter results that exceeded our expectations while facing continuing market challenges. We still have commodity headwinds that will impact the business, as we discussed last quarter.

Any potential impact from the recent favorable commodity prices in the market will likely be offset by the potential impacts of tariffs in the second half of fiscal year 2019. Our focus on indirect and direct sourcing initiatives and our productivity improvement plans are on track.

We invested in numerous supply chain and manufacturing efficiency projects during the quarter. As such, we are confident that these actions will drive margin expansion in the second half of the fiscal year. We have adjusted the guidance to reflect the impact of the pending eyewear sale.

Revenue guidance has been adjusted $100 million as a result of removing the eyewear business post anticipated closing date. Our guidance for the remaining businesses is unchanged.

The earnings per share guidance reflects the removal of our eyewear business and an increase in our core business due to strong first quarter performance and use of sale proceeds to reduce our debt. We have reduced EPS $0.05 for the net impact of our eyewear divestiture and raised our expectations for the remaining business by $0.10.

Additionally, we have raised our free cash flow expectations given the strong start to the year. Considering all of these factors, we want to summarize our fiscal year 2019 guidance as follows.

We expect sales in a range of $2.1 billion to $2.16 billion, interest expense at approximately $55 million and adjusted tax rate of approximately 30%, adjusted earnings per share in a range of $0.15 to $0.35, capital expenditures of approximately $60 million, free cash flow in a range of $70 million to $100 million, and research and development also generally in line with our prior expectations at about $30 million.

We expect EBITDA margins in the 7.5 to 8% range for the full year, with shooting sports gross margins approximately 20% and gross margins for outdoor products in the mid-20s. It is important to note that historically the second quarter has been a strong quarter for the eyewear business.

That, coupled with some timing of expenses that we did not incur in the first quarter, will pressure the earnings in the second quarter. We anticipate second quarter EBIT margin in the 1 to 3% range. The first half of the year, we will still experience tough comparisons mainly in shooting sports as the rim fire market was slower to tail off last year.

We expect to see a recovery in the second half across the company as the shooting sports market continues to normalize and new product launches begin to hit the market. We remain excited about the future of Vista Outdoor given our broad portfolio of iconic brands.

We are confident that our new organization structure, new product innovation, new capital structure, and focus on operational performance will better position us for future success.

Chris?.

With that, we will now open the call up for questions.

Operator?.

[Operator instructions] Our first question will come from Brett Andress with Keybanc Capital Markets..

Good morning. .

Morning, Brett..

This has become a bit of a recurring question over the last year, but can you provide 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 here recently? Has there been any hesitation to restock in this environment, and then also where do you think we are in this rim fire cycle that you mentioned? Is it primarily weaker volumes, or are you seeing maybe outsized pricing pressure in that segment versus the rest of the calibers?.

Okay, so Brett, first of all as it relates to inventory and buying patterns, two things. One is the inventory we think is largely clean, and we’ve said this on our previous call, clean at the buying level, clean at the distributor level, and clean at the retail level, and it’s taken us the better part of 18 months peak to trough to get there.

What we do see, though, from all of our customer constituents is more caution as it relates to buying, and this is natural. Coming off of the high inventory levels, they’re more prone to order a little bit lighter than they have in the past.

As a result of that, in some of our key customers we’ve seen some stock-outs, and we’re looking to work with them to make sure we keep this at a minimal level and replenish on a more normal level. As it relates to rim fire, the weaker volumes, we had a big run-up, so last year we had a good first half.

We don’t see the underlying shooting trends in rim fire decreasing; in fact, they’re as strong as they have been. There’s a bit more capacity in the marketplace because of the run-up in years past, but we’ll have softer comps as we move into the back half on rim fire, and we expect rim fire purchasing and ordering to more normalize..

Got it. Can you talk about the implied multiple that you received for the eyewear business? Maybe I was using different numbers from the 10-K.

Where did that land versus your initial expectations, and maybe how does that make you think about the demand level for the rest of your assets?.

Brett, good question. We look at the same outside set of peers that you or others might, and what we’ve been told by our investment advisor is there’s a pretty broad range when we walked into the process.

They said it could be anywhere from 9 to 10 to 11 to 12 times EBITDA, so we purchased Bushnell at a 10 times EBITDA and you’ll see, as we released our Q, that we sold this business at about a 12 times EBITDA, so we were highly pleased. I think this is a result of the brands that we went to market with as well as the significant interest.

We had dozens of parties that were interested, it was a highly competitive process, and I think the buyers, the winners of it are going to end up with a very good asset they’re excited about and can’t wait to get their hands on. I think it resulted in a true win-win.

As it relates to our other assets as we go forward, we also believe that there’s going to be significant interest and we’re already seeing that with inbound inquiries..

Got it, thank you.

If I could squeeze one last one, and maybe I missed this, but what are the expected after tax proceeds from the eyewear business?.

Sure Brett, I’ll take that. We noted that it’s a sales price of $158 million.

There are going to be some usual adjustments for banker’s fees, lawyer’s fees, and other transactional types of fees plus working capital adjustments, and as we have said in the past, they would be somewhere in the neighborhood of $150 million, of course subject to all these adjustments in final deliberation..

Thank you..

Thank you. Our next question will come from Dave King with Roth Capital..

Thanks, morning guys. I guess first off on the eyewear business and the guidance, it sounds like you said that in taking down the revenue guidance by $105 million, that eyewear was $100 million of that.

I was under the impression that it was doing like $130 million annually, so what’s the delta there? Is that just reflecting early in the second quarter sale for it, or is there something else I’m missing?.

Yes, thank you for your question. To clarify, it is an adjustment of $100 million for this fiscal year. Of course, there are already a quarter and several months that we will have revenue on our books, the rest post-closing that $100 million will be the adjustment. I hope that clarifies your--.

Sort of.

I guess what I’m wondering is it sounds like maybe it’s a fairly meaningful seasonal contribution then in the back half out of that $130 million, then? Is that what was sort of driving that?.

What we noted in our commentary is that in the second quarter, we have large sales for our fall events and pre-holiday season events, so from a profit perspective, you will see that profitability impacts more in the second half.

You might want to look in the web slides where we have, for the benefit of our investors, put in quarter by quarter type of adjustments for your models..

Just to be clear, I’ll just add onto Mick’s point here, you were roughly right in the range of sales, and we’re not reflecting just the first quarter, we’re trying to reflect when we think the sale will actually close, so it reflects both some of the second quarter sales being on our books and some of the second quarter sales being on the acquirer’s books.

As Mick said, it is a little bit of seasonality in the business with the second quarter, particularly the months of August and September being larger volume months for that eyewear business, some of which will be on our books and some of which will not..

Okay, I think I get it now. Thanks for that. Then in terms of the business transformation expenses that you added back, I think it was, like, $7.5 million in the quarter.

Is that severance or is that mainly reinvestments in the core product categories as part of your strategic plan, I think some of the drop ship stuff, Chris that you mentioned, and the DTC stuff? Then how are your lenders treating those expenses in their leverage covenant calculations?.

Let me address the first part and then I’ll let Mick chime in. These costs are one-time in nature and non-recurring, and that’s why we wanted to be clear with you and show you what an adjusted ongoing expense rate might look like.

They vary in nature - there are some that are severance related and there are some that are fees associated with helping us implement some of the operational excellence initiatives that we have.

All the expenses that we have outside of severance, but probably including severance as well, all have outstanding return on investments associated with them and strong payback..

In the past quarter, we did have, as Chris mentioned, a strategic supply chain efficiency initiative with assistance from a third party consulting firm. As we have told you before, we’ve also had a strategic review of our portfolio, and these are truly one-time type of consulting costs. They will certainly not be incurred again in the future.

As such, our lenders do recognize that these will not be repeated, nor do we have the intention of repeating those..

Okay, perfect. Good to hear.

Then lastly for me, where are we in terms of the other assets sales at this point? Is Bell-Giro getting marketed yet? If not, why not? Is that simply a function of wanting to get eyewear out of the way first and then focusing on firearms, or are there other reasons to hold off? Then in terms of, I think it’s a 10% EBITDA margin, if I’m doing my math correctly for eyewear, do the Bell, Giro and Savage businesses have similar margins or are they more similar to the corporate average? Thanks..

Sure, so first of all, we don’t publicly disclose within our business units what the EBITDA margins are, but I can tell you that from just a work output and what we’re capable of doing and doing well, we believe that approaching the sales in a sequential manner makes the most sense.

We had identified eyewear late last calendar year and had a very robust process. We’re now turning our eyes and are well into the market on a sale of our Savage firearms business, and that will come before Bell-Giro, although we’re getting interest in both. The Savage firearms business sale is attracting, frankly, very good interest.

We’re excited about it, and we want to support it in the same robust manner that we did with eyewear, and we feel like this is the appropriate approach..

Okay, great..

Thank you. Our next question will come from Scott Stember with CL King..

Good morning, and thanks for taking my questions. .

Morning Scott..

Can you maybe talk about the commodities environment? I know that it played a big role in the profitability, notably for ammunition. What are you seeing as far as your costs - have they flattened, and maybe just talk about the pricing environment, your expectations of your ability to be able to adjust prices upwards in future quarters..

Scott, it’s an interesting story because of the background noise of the tariffs that are sending the price of our metal inputs to high-high-highs and low-low-lows, so it’s been interesting.

You still recall, though, that as we walked into this calendar year, we had effectively signaled that we had $0.40 of pressure as it relates to input commodity costs, and so it is still the most significant impact on our gross margins this year.

That being said, we’ve been able to be opportunistic with some of the lower prices that we’ve seen in commodities, and we’ve locked into some of that. Unfortunately though, some of that good news we’re seeing in commodities has the potential to be offset by tariffs, which frankly at this point are an unknown.

But in total versus 90 days ago, we feel better about the outlook for commodities as it affects our business..

Maybe to just dig a little bit deeper into the tariffs, I know you’re saying it’s an unknown, but beyond the indirect impact from rising commodity costs, have you seen any impact from any legislation that has gone into effect at this point?.

Not yet, Scott. They had a first round and we participated.

You know, we’ve got some great resources internally to have very good relationships on the Hill, so we were part of the hearings to fight some of the potential legislation or regulations that were going to be put in place, and it resulted in a favorable ruling for our products, particularly for the optics category.

The first round was, I’ll say, net-net neutral for us - we came out okay. As we start to move forward here, it really is a moving target, so we’re going into the second round and I believe the hearing is going to be later this month.

We’re going to participate again, and some of those products, in fact the majority of those products happen to be in a category of helmets which I’m led to believe that just about everybody in the world sources their helmets from the country of China and everybody would be affected.

But helmets is one of those categories where it’s a safety category and it’s hard for us to believe that our government would want to put regulations and tariffs on a safety product.

We’ll be communicating our position as we go to the hearing, but it’s a moving target and it’s anybody’s guess as to what the administration is going to do in terms of the amount and the categories and what have you.

We’re going to continue to fight them, and of course we’ve got a number of things that we can do to offset that, but clearly as every other company in the U.S. is reporting, it’s a risk to the business..

Got it.

Last question, you gave some good color on expectations in the second quarter, but just to help us calibrate a little bit better, I guess on an absolute earnings basis versus the first quarter, are you guys expecting a profit in the quarter or similar types of breakeven-ish results in the second quarter?.

Thank you for asking.

I think it’s fair to assume that we have some ins and outs in the second quarter, particularly the eyewear sale as we noted is going to be impactful; but we have continuous improvement in our business such that it will be more of a similar quarter net-net, second quarter to first quarter, and we are very hopeful that our strategic initiatives and our new product introductions will lead us to better profitability in the second half..

To add on to Mick’s point, second quarter is a tough quarter for us. It does look to be, as Mick said, more like the first quarter, and that’s consistent with the way we’ve guided the annual guidance.

You know that we don’t give quarterly guidance, but clearly the impact of our initiatives, the normalizing of the market for some of our important segments looks to be a stronger second half sequentially quarter-over-quarter. I think looking at the second quarter as more akin to the first quarter is a safe bet..

Got it. That’s all I had. Thanks..

Thank you. Our next question will come from Jim Chartier with Monness, Crespi, Hardt & Company. .

Good morning. Thanks for taking my questions.

Could you just quantify how much expenses shifted from first quarter to second quarter?.

Really, I would say that we don’t quantify that as much, and given what we’ve told you so far, you should be able to understand more or less the dynamics of our first and second quarter. We do expect to have more improvement in expense reductions in the second half of the year and in our cost initiatives for lower gross profit in the second half..

Okay, and then in terms of the improved margin outlook for the year, is it more about the initiatives progressing faster than expected in terms of reducing costs and improving gross profit, or are you more optimistic on what these initiatives can ultimately yield for you?.

Jim, I would say yes to both. Certainly as we move forward, the improvements we’re going to see quarter over quarter sequentially are the result of our intense focus on operational excellence and cost reductions, but this will not just be a one-year thing.

We’re going to see continual improvement as we move through our longer range plan, and that’s why it’s important to note, as we stated in our last call, this is a year of transformation for Vista Outdoor.

The inordinate amount of our focus is on improving the underlying profitability, less so than growing the top line unprofitably, and that’s not to say that we’re not focused on the top line because we’re putting an intense focus on new product development, which has a longer gestation period.

However, I’m excited that some of the contributions, many of the contributions in the first quarter are the result of breakthrough new products which are industry leading, and we’re going to see more of that as we go forward.

But we’re excited about what we’re doing from a profitability standpoint, and I’ll even put a little color on some of the degradation in sales, not a lot but some of it, was the fact that in the first quarter for the first time, we stopped giving quarter end discounts.

It just didn’t make sense, and so some of our customers held off and I think are waiting to see our resolve. But we stopped discounting on larger orders at quarter, it’s just not good for our business, frankly it’s not good for our retailers, and it results in a lot of lumpiness that doesn’t help our plants and our suppliers..

Great. Then you talked a lot about the innovation, and it sounds like you have some good products this year and in the pipeline.

Overall, how do you characterize the innovation pipeline today versus where you think it should be going forward?.

Well listen, that’s a very good question, Jim. I think as we get better and better, we put it under frankly a light, a bright light, I think it’s going to get better. I already see it in our operating reviews.

We’re getting our team very, very focused on who we call the end user, the consumer, and we’re starting to see innovations in our pipeline that I’m pretty excited about.

But if you look at some of the products--I mean, I mentioned golf, we’re the leaders in GPS and laser range finders, so to introduce a product and within 90 days take 7% market share is, frankly, astounding. We’ve got some really neat products. We didn’t even talk about a brand-new cycling helmet for our Bell-Giro called Ether.

Ether’s launched into the marketplace right now, and frankly we can’t build enough of it. It’s not a huge volume, but it will be the clear leader in price point and in MIPS technology and really create a great halo for the Giro brand. And Camp Chef that I mentioned is growing just a great, robust product line of new products coming..

Great. Thanks, and best of luck..

Thank you..

Thank you. Our next question will come from Gutam Khanna with Cowen & Company..

Thank you. I was wondering, have you guys seen any--you mentioned the quarter end discounts are now abating.

Have you noticed improved price discipline among the ammunition suppliers, or is it still kind of tough?.

Yes, listen - I wish I could say yes. Unfortunately, no. I mean, we are leading the industry. We took price increases, as we’ve mentioned previously, in January and again in April; however, our two main competitors did not follow.

We think it’s crazy and, frankly, personally I think it’s reckless that given the pressures we’re seeing in commodities and potentially tariffs, that our competitors are not following suit.

One of our competitors just came out of bankruptcy, the other one has historically been disciplined but has just recently taken some price decreases, and I think it’s fool’s gold because it won’t lead to long term share gain. So we’re going to continue to remain disciplined in our pricing; that being said, we’re not going to lose share.

I mentioned we took share in the first half, so if we have to take a, no pun intended, rifle shot approach on certain calibers and certain SKUs with certain channels of distribution, we certainly will, but we’d like to see a return to more rational pricing and we’re certainly going to do our efforts to lead that..

To your point on market share, why don’t you think it will--I’m just curious, how price sensitive are the customers in the channel? Is it something where you feel like there are certain accounts you’re walking away from our losing business from because of the price aggressiveness of competitors, or does it not matter because the brand recognition is what it is and people prefer the Vista product over the competitors?.

Well, listen Gutam, we’ve said before that historically, and we see nothing to see this changing, the product category of ammunition is very sticky and people are brand loyal.

Now, clearly there are different price points, there are different categories, so when you get down into very opening price point categories, you may see a shift in buying habits from one buy to another, and that’s where we need to be competitive.

As you start to move up the continuum, people are extremely brand loyal, and that’s why we think inherently discounts don’t really matter. Consumers are going to shop, they’re going to buy the ammo they’re comfortable with, they’re going to buy the ammo that they’ve historically shot.

You might see a little bit of switch here and there with lower prices on some of the calibers, but in total we’ve been able to maintain share because we are looked at as the best broad range supplier and, frankly, loader in the industry.

We work with a number of our competitors who we happen to have very good relationships and we load some of their bullets into our rounds, and we continue to have wonderful relationships..

Thank you very much..

Thank you. Our next question will come from Rommel Dionisio with Aegis..

Thanks very much. Chris, I wonder if you could just provide a little more granularity on the market share gains in ammo. Obviously new products are a key factor there.

Are you taking share from the imports or from your domestic competitors? Is there a sales mix shift coming into retails you’re stronger with? Lastly, maybe just an update on the .224 Valkyrie - that’s obviously an innovative new product. Is it large enough now to move the needle in terms of your overall business? Thanks..

Sure. The share gain itself, I prefer not to talk specifically to where our competitors are.

I think that they should be able to provide their color and their clarity there, but I can tell you that our share gains are really coming from the deep, deep relationships that we have across all of our channels and all of our customers, and the breadth of our product line we’re able to offer, different offerings, maybe sometimes the same offerings to our channels to help them compete.

Our new products are having an enormous impact. You mentioned Valkyrie, which I’ll talk about in a second, but the TSS waterfowl and turkey load, we can’t build enough of it. It’s a terrific, terrific new product.

We’ve got a packaging change that we’re rolling through in the marketplace right now which we think is making it easier for consumers to shop our product.

We’re also putting in place a replenishment plan with our key customers to make sure that product is available where and when our customers need it, so there’s a number of things that we believe have led to our share position that we enjoy today. The .224 Valkyrie is easily the best story we think in the ammunition industry.

It has far exceeded our expectations. It’s a terrific round to shoot, and we’re starting to see more and more gun manufacturers start to introduce product to support this .224 range, and we think it will have an impact and continue grow this particular caliber, so we’re highly excited about it..

Great. Thanks very much, Chris..

Thank you. Our next question will come from William Reuter with Bank of America..

Hi, I just have two quick ones. First one is with regard to previous commentary about a 10% adjusted EBITDA margin goal at some point, what is it going to take or what does that path to get to that margin look like? My second question is you’ve talked about a two to three times leverage target.

Is that where you see yourself pro forma for the existing eyewear sale as well as the other sales that you’re identifying now? Do you plan to operate within that leverage range going forward, or is that just where you want to be short term?.

William, first of all on the 10% EBITDA margin, we, as you know, don’t give long range guidance, we give annual guidance. I think it’s safe to say that since we’ve raised the 7% annual guide this year up a bit, we are on that glide path to get to 10%.

We’re excited, we’ve got an internal plan to get there, and it’s largely executing the plan, the transformation plan that we’ve laid out, which is a combination of operating excellence and cost reductions as well as new product innovation that naturally brings higher margins. We’re highly confident that we’re on the glide path to get to 10% EBITDA.

As it relates to 2 to 3% leverage pro forma, I’ll let Mick address that..

I’ll take it as two to three times leverage. We have that set as a target. It is from a risk profile very appropriate for cyclical consumer-based companies like ours.

Right now, as we said, we are not at that level, but with improvement in our EBITDA and reductions of our debt, we should be able to get there post some of these divestitures, not immediately after the eyewear divestiture but certainly on track to get there..

Great, that’s all from me. Thank you..

Thank you. Gentlemen, there are no further questions in the queue at this time, so I would like to turn the conference back over to Chris for closing remarks..

Thank you, Operator, and thank you everyone for joining us today. I’d like to restate that we are pleased that our results exceeded expectations in the first quarter, but we also acknowledge some of the challenges facing us for the remainder of the year, including a soft shooting sports market, commodities headwinds, and potential tariff impacts.

To help offset some of our headwinds, we’ll remain sharply focused on cost management as well as new product innovation. Finally, we are on track with our transformation plan and we look forward to closing the eyewear transaction this quarter. We appreciate your time today and look forward to speaking with everyone again on the next earnings call.

Thank you..

Thank you. Ladies and gentlemen, this concludes today’s teleconference and you may now disconnect..