Smith & Wesson Brands, Inc. (SWBI) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 and Full Fiscal Year 2018 American Outdoor Brands Corporation Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce Vice President of Investor Relations, Ms. Liz Sharp. Please go ahead.

Thank you and good afternoon. Our comments today may contain predictions, estimates and other forward-looking statements. Our use of words like anticipate, project, estimate, expect, intend, believe and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding revenue; earnings per share; non-GAAP earnings per share; net debt-to-adjusted EBITDAS ratio; fully diluted share count and tax rate for future periods; our product development, focus, objectives, strategies and vision; our strategic evolution and organizational development; our market share and market demand for our products, market and inventory conditions related to our products and in our industry in general; and growth opportunities and trends. Our forward-looking statements represent our current judgment about the future, and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause our actual results to be materially different are described in our securities filings, including our Forms 8-K, 10-K and 10-Q. You can find those documents as well as a replay of this call on our website at aob.com. Today's call contains time-sensitive information that is accurate only as of this time, and we assume no obligation to update any forward-looking statements. Our actual results could differ materially from our statements today. I have a few important items to note with regard to our comments on today's call. First, we reference certain non-GAAP financial measures on this call. Our non-GAAP results and guidance exclude acquisition-related costs, including amortization, onetime transition costs, a change in contingent consideration liability, fair value inventory step-up and backlog expenses, recall-related expenses, tax reform and the tax effect related to all of those adjustments. The reconciliations of GAAP financial measures to non-GAAP financial measures, whether or not they are discussed on today's call, can be found in today's Form 8-K filing as well as today's earnings press release, which are posted on our website or will be discussed on this call. Also, when we reference EPS, we are always referencing diluted EPS. For detailed information on our results, please refer to our annual report on Form 10-K for the year ended April 30, 2018. I will now turn the call over to James Debney, President and CEO of American Outdoor Brands.

Thank you, Liz. Good afternoon and thanks, everyone, for joining us. With me on today's call is Jeff Buchanan, our Chief Financial Officer. Later in the call, Jeff will provide a recap of our financial performance as well as our guidance for the first quarter and fiscal year 2019. In reflection, fiscal 2018 was a year characterized by lower consumer demand for firearms, heightened levels of inventory in the consumer channel and a host of aggressive industry-wide promotions. Despite those challenges, we achieved a number of accomplishments in the year that marked important progress towards our long-term strategy of being the leading provider of quality products for the shooting, hunting and rugged outdoor enthusiasts. Let me recap our accomplishments for the year. In our Firearms segment, we added several exciting products to our next-generation M&P 2.0 polymer pistol family, which we launched in the prior fiscal year. In fact, new products, which we've defined as new products launched within the last 12 months, accounted for 29% of our firearms revenue in fiscal 2018. Strong adoption rates across our growing M&P 2.0 family helped us retain our leadership position in the consumer market for handguns. During the year, we also made significant progress on market penetration with our T/C Compass bolt action hunting rifle. Lastly, we also expanded our Firearms segment inorganically in fiscal '18 with the acquisition of Gemtech, a leading provider of high-quality suppressors and accessories for the consumer, law enforcement and military markets, giving us access to new technology for use in our future new product development processes. Our Outdoor Products & Accessories segment generated 26% of our total revenue in fiscal 2018 compared to just 14% in fiscal 2017. Our Outdoor Products & Accessories division launched nearly 150 new products across categories, including shooting, hunting, cutlery, tools and survival products. Our Electro-Optics division, Crimson Trace, also launched several new products in fiscal '18 and entered the large and diverse flashlight category. We were very pleased with the organic growth we achieved in the Outdoor Products & Accessories segment given that it was a challenging year for the outdoor retail industry overall. I would also note that our new product launches, namely handheld flashlights and our Outdoor Products & Accessories division and firearm mounted lights from our Electro-Optics division, demonstrate that we have the ability to enter new markets organically using multiple brands. In fiscal '18, we supplemented that organic growth with revenue from acquisitions, including the acquisition of the popular Bubba Blade fishing tool brand in our second quarter. Both of our acquisitions in fiscal 2018 helped us expand into new markets that resonate with our core firearms consumers. Many of whom also have a passion for the rugged outdoors. Overall, our long-term strategy remains focused on being the leading provider of quality products for the shooting, hunting and rugged outdoor enthusiast. Continued growth in our Outdoor Products & Accessories segment will help us better balance our overall revenue by somewhat mitigating the volatility we have experienced in recent years in our Firearms business. Turning now to the fourth quarter. Adjusted NICS results measure the background checks conducted by licensed firearm retailers when a consumer purchases at least one firearm. The number of background checks is generally considered to be the best available proxy for consumer demand. We follow this metric for the same reason, even though it's important to note that we do not sell directly to consumers. We sell only to law enforcement agencies and federally licensed firearms wholesalers and retailers. That said, in Q4, background checks for long guns increased 7.3% year-over-year, while our units shipped to distributors and retailers declined about 22%. We believe the higher demand for long guns reflected in the NICS increase was largely addressed from existing inventories at wholesale and retail locations. In Q4 background checks for handguns declined 4.1% year-over-year, while our units shipped to distributors and retailers declined 29.6%. We believe this result is due mostly to our tremendously successful M&P SHIELD and M&P BODYGUARD 380 promotions last year, which drove significant volume and created challenging comps for us, combined with successful channel inventory reduction efforts by wholesalers and retailers in the current quarter. Our monthly market analytics lead us to believe we maintained our leadership position in the consumer handgun market in the quarter. We are pleased that distributor inventory of our firearms decreased to a total of 98,000 units at the end of Q4 versus 175,000 units at the end of Q3. Since then, distributor inventories have moved up from that level, and our current weeks of sales of distribution are now above our 8-week threshold, driven primarily by decreasing sales velocity in the channel. This is to be expected as we move into the slower summer months. Our internal firearm inventories also declined sequentially from Q3. The reduction in Q4 was largely driven by the sale of inventory built to support new product launches, combined with increased pull-through from -- of our firearm products in the consumer channel. Looking ahead, however, we anticipate that our internal firearms inventory will increase in our first quarter of fiscal 2019 because of the following: firstly, the typical seasonal summer slowdown in consumer shopping activity; secondly, our planned inventory levels leading up to the full hunting and holiday shopping seasons and to support new product launches; and thirdly, our intent to build incremental inventory to reduce the risk of negatively impacting customer service levels as we prepare to ramp our new logistics and customer services facility in Missouri. Turning to new products. Product innovation to support our organic growth strategy remains the highest priority across our entire business. Within each of our divisions, creative new product development teams focus on innovating for the consumer to meet their needs, wants and desires. As a result, we launched numerous new products in Q4. In our Firearms segment, we introduced the following: the M&P380 Shield EZ, built for personal protection and everyday carry and designed to be extremely easy to operate; the M&P M2.0 Compact 3.6-inch pistol, an expansion of our M&P M2.0 Compact series, to include a smaller frame that features a 3.6-inch barrel and a 15-round magazine capacity in 9-millimeter for better concealability; and the M&P BODYGUARD 38 revolver, now available without an integrated laser at a retail price point that provides consumers with a great value. In our Outdoor Products & Accessories segment, which includes our Electro-Optics business, we launched a number of new products at SHOT Show in January and throughout Q4, including from our Outdoor Products & Accessories division the stable table light and the Accumax premium bipod line, 2 innovative portable and lightweight shooting accessories for use in the long-range target shooting at the range or in the field. We also expanded our handheld flashlight category with a broad line of M&P-branded flashlights, including the most compact 12,000-lumen handheld flashlight on the market with 7 light settings, a rechargeable battery, an integral light -- battery light meter and is tripod mountable. And from our Electro-Optics division, Crimson Trace launched 2 new Laserguards, 1 for the popular Sig P320 and 1 for the Ruger LC9. Both feature instinctive activation, a master on/off switch, user adjustable windage and elevation and several additional features. Lastly, we continue to make good progress in the quarter towards completing our logistics and customer services facility in Missouri. This is a long-term objective that we announced just over a year ago, which will ultimately allow us to better serve our customers. While we plan to start up initial operations in the new facility sometime in Q3 of this fiscal year, the exact timing is not critical. This new facility and its systems are an evolutionary step towards achieving our long-term strategy to better serve our wholesalers, retailers and consumers. We obviously already have in place established facilities, operating systems and processes, all of which currently serve our customers well. Because of that, we have the ability to plan for a gradual and intelligent ramp-up of the new facility, which we believe will take customer service to the next level. This may slow our capture of logistics synergies a bit, but we feel it is important to move only as quickly as will allow us to preserve existing customer service levels. As such, timing will take a second place to getting it right. In addition, we have made wise use of tax incentives and capital lease opportunities to reduce the financial investment required on our part. We have assembled an extremely capable team who are responsible for executing this project. The building has been constructed, and we are on track to start ramping operations this December. I look forward to sharing our update in September, by which time, we will have started the installation and testing of our material handling systems. Now turning to our outlook. Going forward, we plan to operate our business under the assumption that fiscal 2019 will deliver a flattish consumer market. At the same time, we believe that several dynamics we currently see in the parts of the industry, such as consolidations, bankruptcies, mergers and political posturing, may continue to drive uncertainty in the sporting goods channel for some time. Combining these market dynamics with our plan to increase our focus on profitability, we have made the strategic decision to limit our promotional activity to that which is designed to sustain market share, not gain market share. Market share gains, therefore, will be expected to come solely from new product innovation. The resulting increase in profitability will allow us to achieve our primary objective of reinvesting in our company with a focus on the start-up and ramp of our new logistics facility in Missouri, increased incentives and profit sharing to attract and retain top talent, new product innovation and enhanced marketing initiatives. Market contraction, combined with our decision to limit promotional activity, will likely yield a slight decline in our total top line revenue for the year. However, our increased focus on profitability, combined with the benefits we will receive from tax reform, should deliver earnings per share comparable to fiscal '18 whilst adequately funding the numerous investments that I just outlined. On a segment level, we expect firearms revenue to decline slightly for the year. Accordingly, we will focus on ensuring that our manufacturing capacity allows for optimal flexibly and absorption of overhead expenses while we prepare for those new product launches. In our Outdoor Products & Accessories segment, we expect revenue to increase slightly for fiscal 2019. Accordingly, we will continue to focus on product innovation. Our product development teams in this segment are extremely creative and are outdoor enthusiasts themselves. Their passion for innovation combined with some new and sizable markets that we are exploring has us very excited about the future of this part of the business. While we explore those organic growth opportunities, we will, of course, remain alert to inorganic opportunities in the outdoor space that are a match with our strategic objectives and aligned with our core consumers, who are outdoor enthusiasts. Lastly, overall, we will maintain our focus across the entire organization on reducing costs and generating cash to further enhance our ability to continue investing in our business. With that, I'll ask Jeff to provide more detail on our financial results and our guidance. Jeff?

Thanks, James. Revenue for the year was $606.9 million, a decrease of 32.8% from the prior year. Revenue from our Firearms segment was $452.5 million, a decrease of 41.7%, and revenue from Outdoor Products & Accessories was $171.7 million, an increase of 22% and representing more than 1/4 of our total revenue. Within those total revenue numbers, intercompany sales eliminations were approximately $17.6 million. Revenue for the quarter was $172 million, a decrease of 24.9% from the prior year. Revenue from our Firearms segment was $134.3 million, a decrease of 29.3%, and revenue from Outdoor Products & Accessories was $43.6 million, a decrease of 1.5% from the prior year. Within those total revenue numbers, intercompany sales eliminations were approximately $5.9 million. For the year, the total company gross margin was 32.3% compared to 41.5% in the prior year. The Firearms gross margin was 27.4%, and the outdoor products gross margin was 45.9%. The numbers were similar for the fourth quarter, although the Firearm gross margin was nearly 30%. The total company gross margin decrease was driven by -- was driven mainly by the Firearms segment, which had lower production volumes, increased manufacturing spending percentages and heightened promotional costs. For the year, GAAP operating expenses in the quarter were $168.7 million compared to $175.3 million in the prior year. On a non-GAAP basis, which excludes acquisition-related amortization, operating expenses were $146.7 million as compared to $152.1 million in the prior year. In the quarter, GAAP operating expenses were $41 million as compared to $45.7 million in the prior year. On a non-GAAP basis, operating expenses were $35.4 million as compared to $39.6 million in the prior year. Although OpEx as a percentage of revenue increased, actual dollar expenses were lower as a result of significant reductions in accrued incentive compensation and profit sharing. Some of those reductions were offset by increased promotional and advertising expenses as well as administrative and selling costs related to newly acquired companies. EPS for the year came in at $0.37 as compared with $2.25 in the prior year, although it should be noted that $0.16 of the current EPS was a onetime $8.7 million tax adjustment resulting from tax reform. Our non-GAAP EPS, which excludes acquisition-related and other costs such as the tax adjustment, was $0.46 as compared with $2.58 last year. For the fourth quarter, EPS came in at $0.14 as compared with $0.50 in the prior year. Our non-GAAP EPS, which excludes acquisition-related and other cost, was $0.24 as compared with $0.57 last year. In fiscal '18, adjusted EBITDAS was $89.5 million for a 14.7% EBITDAS margin compared to $266.3 million or a 29.5% margin in the prior year. Adjusted EBITDAS in the fourth quarter was $33.4 million for a 19.4% EBITDA (sic) [ EBITDAS ] margin, a significant improvement over the yearly number but down from 26.4% of Q4 of last year. Turning to the balance sheet. For the year, operating cash flow was $61.6 million and capital spending, including patents, was $19.1 million for free cash flow of $42.6 million as compared with $90.8 million in the prior year. In the quarter, operating cash flow was a very strong $65.9 million and CapEx, including patents, was $4.7 million for free cash flow of $61.2 million in Q4 as compared with $8 million in the prior year. We reduced inventory levels for a second consecutive quarter. Our finished goods inventory of firearms units decreased during the quarter by over 30%, contributing to our positive cash flow, while distributor inventory units decreased sequentially by over 44%. Looking forward to next fiscal year. As we transition to our new logistics facility in Missouri, we will need to maintain extra inventory as safety and buffer stock. In fiscal '18, we managed our capital spending down to approximately $18.5 million, primarily related to the new logistics facility, IT and new product development. In 2019, we expect to spend about $45 million in CapEx, which includes a $21 million relating to the new logistics facility but does not include an additional $45 million for that facility that will be financed through capital lease construction. At the end of Q4, balance sheet remains strong with approximately $48.9 million of cash and $138.8 million of total net bank debt. I would note that we paid down $25 million on our line of credit in Q4, and since the end of the quarter, we have paid down an additional $25 million on that line, resulting in a current 0 balance. That means we have paid down $125 million on the line of credit since August of last year. Thus, as of today, we currently have outstanding balances on our long-term bank debt as follows: a 0 balance on our $350 million line of credit, which is expandable up to $500 million; $75 million on our senior notes due in 2020; and $88 million on our bank Term Loan A also due in 2020. We currently pay a blended interest rate of approximately 4.5% on our long-term debt. So now turning to guidance. For the first quarter, we estimate revenue will be between $130 million and $140 million. We expect GAAP EPS of between $0.03 and $0.07 and non-GAAP EPS of between $0.10 and $0.14. For our full fiscal '19, we estimate revenue to be in the range of $570 million to $600 million. At that revenue range, we expect a full year GAAP EPS of between $0.12 and $0.22 and non-GAAP EPS of between $0.40 and $0.50. With regards to pacing during the year, please note the following: First, we believe that revenue for our first 3 quarters will be relatively flat to slightly up sequentially from Q1; Second, we expect the gross margin in the first and fourth quarters to be 2 to 4 percentage points higher than the second and third quarters for 2 reasons. One, in Q1, we have substantially reduced our firearms promotional activity; and two, in Q2 and Q3, we expect lower fixed cost absorption because of a planned reduction in firearm production volumes. Finally, we expect operating expenses will increase throughout the year ending up in Q4 at about 10% above the Q1 level. That increase reflects the ramp of the Missouri logistics facility in the back half of the year and increased sales and marketing costs in the second and third quarters. In both our first quarter and full year fiscal numbers, our non-GAAP EPS excludes amortization and costs related to any acquisitions. All these estimates are based on our current fully diluted share count of 55 million shares and a tax rate for the year of approximately 29%. James?

Thank you, Jeff. With that operator, please open up the call for questions from our analysts.

[Operator Instructions] And our first question comes from the line of Cai Von Rumohr with Cowen and Company.

So if you could give us some color, the outdoor products were down in terms of organic growth rate. Why were they down that much? And given they were down that much, why are you looking for an increase in fiscal '19?

Sure, Cai. Well, first, they were mostly down because of optoelectronics. The Crimson Trace sort of follows the same selling pattern as firearms, so that would be expected that the Crimson Trace would be down. Second, we did have some supply chain interruptions in Q4 that we didn't expect that probably were worth another 1% to 2% of sales down. So if you just look at the outdoor products business, excluding Crimson Trace, then it probably would have been up around 4% or so. And so looking forward to next year, we -- there's a lot that's going on great in that organization, a lot of new brands, a lot of new products. James can talk about that. And also, we expect a good recovery in -- at Crimson Trace because of the new products that they have also.

Yes. We're continuing to invest heavily, as I said in the prepared remarks, in new products innovation, and there is real focus in the Outdoor Products & Accessories segment for sure. Large addressable markets to play in and we're very focused on the exploration to really unleash value as best we can there as quickly as we can in an intelligent way. So as I said, we have multiple brands that we can use to enter new parts of the market. We're really excited about that opportunity.

Okay. Just a follow-up. I mean, did you say -- maybe I misunderstood that optoelectronics were down in the fourth quarter following the firearms pattern? Firearms usually are very strong in the fourth quarter, so...

Well, I'm just -- I'm comparing like year-on-year. So obviously, firearms are down in quarter 4 versus the prior year. So I'm talking organic growth year-over-year in optoelectronics was down. Did you hear that?

Operator, can you hear us?

Yes, I can hear you loud and clear. I'm not sure what happened with Mr. Von Rumohr's line. Our next question comes from the line of James Hardiman with Wedbush Securities.

So pretty sure you've answered all I'm about to ask, but it was -- we're doing some of this on the fly, so maybe expanding on some of this a little bit would be helpful. So 3 months ago, we talked about a flattish revenue environment going forward, the next 12 to 18 months. Things seemed like, if anything, they've gotten better the last few months, but yet guidance is for a little bit of a revenue decline. I know you talked about this. But can you run through the reasons for that again? And then in the context of the guide, Jeff, at the very end there, you talked about firearm production volumes or fixed costs absorption being down in Q2 and Q3. I guess, I couldn't figure out if that meant that sales were expected to be down in Q2 and Q3. I didn't think that was part of what you were saying. So can you just clarify those couple items?

Sure. I'll take the last question first, and then James can talk about just the overall outlook. So no, I did say that in pacing that we expected a flat to up in Q1, Q2 and Q3 on revenue. I did say that we expected less production in Q2 and Q3 and therefore, less absorption. So that's because the sales that we -- or because the products that we manufacture in Q1, we can sell in Q2 and Q3. There's also some product mix issues going on into -- in Q2 and Q3, where we're making more products that require less work. So for example, revolvers are down a bit, and revolvers generally absorb a lot out of the factory because there's a lot of work involved in making a revolver. So it's a combination of a little bit of product mix in Q2 and Q3 and a little bit of a reduction in manufacturing because of what we're building now -- what we built in quarter 4 and what we're building now. And then if that fully answers your question, I'll ask James -- I'll turn it over to James to talk about the flattish concept for next year.

Yes. I'll just go back to the first part of your question, where you were saying, versus 90 days, things looked a little bit more favorable. I think as you think about NICS in the fourth quarter, I think there was definitely some fear-based buying, and as we've talked about before, there's 2 types of fear that consumers can buy under. One is the fear of increased gun legislation. The other is fear for their safety, their personal safety. So they go out and buy a firearm for that reason. And if you do rough math, you can look at Q4 adjusted NICS and see that possibly there was a small surge. We used that term before. And maybe there were 250,000 to 300,000, and I emphasize this is my rough math, of additional NICS checks that took place in that Q4. So yes, I think, in a very short time, things may have looked a little bit more favorable, but if you go straight into May's results, you really can see how things have slowed down. They slowed down in April. They certainly slowed down in May, and May's comp versus a year ago was down 8.5% and handguns down 11.6%. And just as a reminder, over 75% of our firearms revenue comes from handguns. So as we think about the market and I will stress, in the long term, we do believe it will return to growth, slow growth over time, we do believe that. But with that belief for us, we still see the market correcting in everything we're seeing and all the dynamics out there, a lot of those dynamics that I mentioned in the prepared remarks. And it can take up to 2 years for that correction to take place so certainly still some market contraction we see on the horizon. When you think about inventory, so I'll just go on, just the other dynamics, our inventory has definitely come down at wholesale and retail. We can see that very, very crystal clear in our wholesalers, a significant reduction there. But we don't see any reason why people will go back out in this environment and rebuild that inventory, and therefore, we would benefit from that inventory build on the top line. I don't see that at all certainly in dialogue with wholesalers and retailers. That is the message that I am receiving. And then go back to my comments about our strategic decision to reduce somewhat the aggressiveness of our promotions. That is a reality. We have taken actions in the form of promotions before for strategic reasons, and that's one of the reasons we did the big M&P SHIELD consumer rebate last year, was to really reduce the inventory in the channel or our internal inventory as well of the 1.0 version of that product to make way for the 2.0. But obviously, that's created extremely challenging comps going forward. Most of that benefit, we felt in Q4 of last fiscal year, but in Q1 -- sorry, in Q4 of the year before the last one, but we felt some of that benefit in Q1 as well. We don't intend to repeat that strong a promotion that we'd actioned out then. So you're not going to see us driving the top line, but at great cost in the P&L.

That's really helpful. And maybe just a quick follow-up to the last point about some of these rebates. It's sort of -- I guess, first, maybe talk a little bit about ASP trends in the fourth quarter. But then, with respect to the outlook, it seems like things are, from everything that you're saying, going to be much cleaner, much fewer rebates and promotions in the channel. It would seem that given -- following big declines in ASP last year, there would be an opportunity to -- for that to be a benefit this year. So is the assumption that the unit numbers are going to be down significantly more than what you're guiding to in revenues? Or how should we think about the revenue guide from a unit and ASP perspective?

I think, when you think about the market in terms of units, think about adjusted NICS. So I'm saying market contraction, so that says, well, adjusted NICS must be going to decline again year-on-year. I would say that's what we believe as we go through the last period, let's say, of market correction. Definitely it's a less noisy environment as you think about promotions, and it is our intent, as I said, to do less promotions. We will promote. You will see us promote. You will hear us about promoting but not to the same level that we have promoted last year. We have to do that to compete. And as you think about some of the average sale prices that we've seen from our competitors, they definitely come down, sure, and we have to deal with that to sustain our market share but as I quite clearly said, not to grow our market share. We've got to be smarter about taking market share, and that's going to come down to innovation. That's it. So we'll be innovating more. I was very pleased with the amount of revenue that was generated from products that we've launched in the last 12 months. I think 29% is a very impressive metric. So I'm pleased with that. We've got great teams in place in both new product development and marketing, product management that will continue to generate those new products for us to launch in the coming fiscal year.

And our next question comes from the line of Scott Stember with CL King.

James, maybe you could talk about -- you did comment that your inventory in the channel has gone back up, I guess, above that 8 weeks threshold, your comfort level after May. Maybe just talk about -- to the magnitude that, that has happened. And if indeed there is a possibility for NICS to continue to weaken in the months ahead, what are the chances that your plans to pull back on promotions might not be able to be attained?

Okay. Just on the promotional activity, as I said, it's a careful balance was really what I'm trying to say. So we're just going to use our promotions to sustain our market share. And for sure, the market we see is contracting. I think I go back to the adjusted NICS result for May. It was pretty significantly down at 8.5% versus prior year. So that trend continues, yes. Then, absolutely, the market is contracting. So that's the way we're planning our business right now. I'll just go back, as I -- that's why product innovation. When you see this weakening market, yes -- and I do stress, in the long term, we believe the market will return to growth, but it is going through a period of correction. Plus, I'd just to stress again, product innovation is the way that we're going to take market share. It is the most profitable way that we can take market share.

Got it. And maybe just, Jeff, on the guidance again. Could you just give us an idea of maybe gross margins, a range? I don't know, sometimes you give that when you're giving out your initial guidance. And what's the tax rate again? I think we -- you previously mentioned, I think, 27%, I think I have. Maybe just go through that again?

Right. Sure. The tax rate is 29% for next year. I didn't actually -- I didn't specify a gross margin because by giving sort of the top line and bottom line for Q1, I thought you could sort of infer a gross margin. But I mean, in general, in Q1, we expect a gross margin that is going to be like somewhat comparable to the current quarter. But then if -- like I said, it's going to drop like 2 to 4 percentage points for a couple quarters and then back up again in Q4.

Okay. And I missed -- what was the organic sales decline in the outdoor products group in the quarter?

I think it was 1.5% quarter-over-quarter, but again -- so most of that was -- or all of that was really -- I'll say it. Most of it was related to optoelectronics. If -- again, if we didn't have Crimson Trace, it would have been 1.5% up. And then if we didn't have this sort of unusual supply chain interruption where we were expecting product for some major customers that didn't arrive in time and we sort of missed the window, that probably would have been good for another 1% or 2%.

Okay. Just the last question on the capital deployment. You talked about the Missouri facility and it seems like the CapEx was going up pretty sharply. But you talked about an additional $45 million of spending. Maybe just go into a little bit of the entire spend what you're looking for from Missouri again. And that's all I have.

Sure. Yes, So it's total -- the total spend from Missouri is between $70 million and $75 million, okay? About $45 million of that is on a capital lease. So basically, no cash out of pocket for us. We build it or revise it, and you immediately basically lease it back. The rest of that $25 million to $30 million is cash out of pocket, some of which we've already spent. And so what I said, about $21 million left of Project Ascent. The rest, the $24 million balance of the cash out of pocket this year is the maintenance CapEx, the stuff that is typical, which is IT -- it's mainly IT and new product development with a little bit of equipment maintenance.

And our next question comes from the line of Steve Dyer with Craig-Hallum.

I guess, as you look at EPS guidance for fiscal '19, I guess I'm trying to square the gross margins, which seemed to me like low-30s for the year and even the middle 2 quarters sort of below 30. And I'm trying to square that with commentary around much lower rebate activity going forward. I mean, I sort of view fiscal '18 as a pretty stressed time, very high rebates. Everybody's trying to work down inventory. And it would seem to me like that would rebound some this year. And it doesn't sound like that's going to be the case. So I'm wondering if -- are you anticipating costs in moving into your new facility? Are you seeing raw material pressures? Or why wouldn't that rebound more, especially in a more normalized environment without so many rebates?

All right. Well, I mean, actually, as I indicated, Q1 and Q4, we have pretty good company gross margins, but the issue with Q2 and Q3 is more absorption issues. So I mean, Project Ascent at this point is all in OpEx. There's nothing up in cost of goods sold. So that -- and again, it relates to -- as I -- we talked about -- I think we've talked about, in the past, incremental and decremental margins in the business, in the Firearms business when sales are up or down. And on either side of, let's call it, a normalized rate of the overall company rate is at 35% or something, it's pretty sharp both -- in both directions. I mean, you've noticed when we -- like this quarter, when we exceed our guidance, we get a pretty good pop on gross margin. It's the same when it goes down. And this is exacerbated in Q2 and Q3 by the product mix that we are planning on. So again, less revolver manufacturing because of less interest in revolvers means that, that's the product that probably absorbs the most out of the factory. And therefore, less sales of that means more of those fixed costs are allocated to other products. And so that -- Q2 and Q3 is really -- it's mainly a story about firearms manufacturing and not the promotional activities. However, I would say that James did not say there would be no promotional activities. He said we will do the typical promotional activities. And typically, we do promotional activities in the summer because of the velocity, the reduced velocity of sales and in the late fall, all related to hunting and holiday buying. So there is promotional activity in Q2 and Q3 that is not necessarily in Q1 and Q4, again, impacting gross margin.

Yes and that's helpful color. And I guess, a couple questions. One, are you just anticipating that there's going to be lower demand in some of your higher-margin products, revolvers and so forth, kind of October and January quarter, and that's sort of what you're anticipating? And then, I guess, secondly, all things considered, that still puts you at sort of a 31%, 32% gross margin for the year, which I think, given a more normalized inventory environment and a fairly stable flattish sales outlook, I think people would generally expect you to see some relief from the year you just had.

Yes. So I mean, you're right. We are expecting lower revenue from those products, and so we'd rather, at this point, take 2 or 3 percentage point -- I said 2 to 4 hit -- versus building inventory that has to sit around. We want to deploy capital on the things that James mentioned, the new products, Project Ascent. Our inventory built up quite a bit last year. We were able to get it down, and we want to sort of keep it down. Now it is going to go up as it typically does over the course of the next several months, and it's also going to go up because of Project Ascent in the back half of the year. But in general, yes, we do expect -- we're planning on, let's put it this way -- planning on reduced sales in certain products.

And can you just remind us, sort of once you make that cut over to the new distribution facility, is there a noticeable improvement in margins, I think, in the long term? Or what's sort of the rationale in the P&L for that?

Okay. There -- I mean, there's definitely not going to be a noticeable percentage change for a while because, as James emphasized, there's going to be a slow changeover in order to ensure customer service levels are maintained. So in fact, our cost could -- it's not in gross margin but in OpEx our costs could get a little worse because you're sort of running 2 things at once. I mean, in -- in the long run, where the expected benefit in -- is a change in distribution costs, lower state income tax rates is one of the principal drivers of the strategy. As we've mentioned before, we think that the lower income tax rate can sort of pay the -- lower state income tax rates can sort of pay for the costs of the distribution center. But that means, on the P&L, you may see eventually a lower tax rate but higher distribution or OpEx costs. But I wouldn't plan on that for '19, that's more of a long-term look right now. And I just -- I should say one other thing real quick. The distribution center is also designed to help us be more competitive in acquisitions because the problem with the company as it was -- is currently structured, the facility in Missouri, the Battenfeld facility, the accessories facility is full. So doing acquisitions, it takes a long time to go ahead and close down the warehouse of the new -- of the acquired company and move it. And you got to change SAP, et cetera. If you have a distribution center, there's no change. Immediately everything is shipped out of that center, which allows us to model more synergies faster, which would allow us to be more competitive in competing in acquisitions, which is, as we said before, the prices are still high. And so it's still hard to find an acquisition that meets our hurdle levels.

I guess, lastly, for me then, just it sounds like overall expectations for this next year from a demand perspective, you're sort of banking on flat inventories are in fairly good shape. So any kind of panic buying for whatever reason into the midterms, fear of the legislation or whatever would presumably be upside because it doesn't sound like inventories need to be whittled down anymore. It should be closer to a one for one.

I think that's fair.

Yes, we would agree.

And our next question comes from the line of Cai Von Rumohr of Cowen and Company.

Apologies. That was -- the earlier dropout was my problem. So your receivables were down nicely to 30 days. How come down so much? And where should we look for them going forward?

Receivables are down because, again, in the past, the promotional activities also included extended terms. We basically -- we're out of any extended terms right now. So we basically enforced our terms, which are generally 20 days. Occasionally, it's a bit longer, but we've had basically good enforcement of our existing terms. So that's the level that we'd like to have it at.

So if we look forward, I know you get a little seasonal uptick in DSOs, I believe, in the first quarter. By year-end '19, should they be about same level the $57 million or a little lower?

Yes. I mean, yes, I think they would be approximately the same. And you're right. There is a little summer uptick in the hunting market, especially there's dating programs in which you ship early and then it's not paid until the hunting season is well underway. So that does affect DSOs. But I mean, that's something that's always been done in the industry as far back as I've been here.

And then refresh my memory. So inventory, normally, there might be some opportunity to continue to pair it, but then you have the issue of buffer inventory for the new facility. I mean, is there room to get those inventories down all-in year-over-year in '19?

No, no. As a matter of fact, I think we're really at the level that is going to be more typical. In fact, I think it's going to go up here from this current level, again, for the 2 reasons that we talked about. One is -- so at the end of Q2, it'll be up because the summer is slow -- I mean, excuse me, at the end of Q1, it'll be up because the summer is slow. And by the end of the year, it'll be up because, at that time, we will be probably shipping from 2 places, the logistics facility and most of the shipments, for example, are out of Springfield. And so in order -- James again emphasized, we're taking that cautious and slow to make sure that service levels are not in any way interrupted. We're basically putting in an SAP system in the logistics center. So we will be building buffer stock and safety stock for all divisions.

Okay, great. And then I was a little confused with all the elements of CapEx. Is it basically $45 million, $21 million of logistics of the facility to go and $24 million? So it's basically a $45 million number is the total [indiscernible]

Yes. Actually, I'm sorry, it's basically a $90 million number. So it's $21 million of logistics cash outlay, $24 million of, let's call it general CapEx, that we always have, IT, new products, et cetera, and $45 million for the building, but there's no cash associated with that. So I...

Right. But so in terms of your cash flow, it's $45 million.

Cash flow is $45 million, yes.

Got it. Got it. And then does depreciation go up much, depreciation and amortization?

It will by the -- either the third or fourth quarter depending on when the logistics facility technically is placed in service. You can do some testing, et cetera, without placing it in service. But once you do, then all of that -- all that CapEx, the cash and the noncash is depreciated.

Right. I mean, all in, it would look like the net income is down; depreciation, up a little bit, but CapEx in the cash flow was up fairly significantly. You continue to use working capital because of the inventory that -- the cash flow, I mean, as I model it, it looks like $20 million to $25 million. Is that broadly speaking that it's positive but it's [indiscernible]...

Yes, absolutely. I think that's a good quick analysis. I think you're definitely in the ballpark. We definitely are not planning on taking down anything on the line for working capital needs. We always can generate good cash in this business, and we're basically -- intentionally work down the line, so we can hold that off to the side not for any working capital needs but for acquisitions if they should be available.

Right. But it looks like your inventory at the end of fiscal '19 will be, I don't know, 26%, 27% of sales. And you had been running, if we go back 16, 17, 15% to 18%, so I would assume, once the new facility is up and operating, the inventory will go down fairly substantially relative to sales. Is that a fair assumption?

Yes. I mean, that's one of the reasons for having the distribution center, but again, I'd emphasize it's going to take a long time.

A year out. That'll be a year out, Cai.

I mean, a year out from the end of this year.

Right, fiscal '20. Okay, that's terrific.

And our next question comes from the line of Chris Krueger with Lake Street Capital.

Just had one question, more of a longer-term outlook type of a question. I believe, a couple of months ago, there's a lot of -- some news that the regulation of international small arms sales is going to shift from the State Department to the Commerce Department, and the chatter was that will open up overseas opportunities for companies like you. Just wondering what your thoughts are on that if there really is an opportunity. And if so, how big could that be?

I mean, the $1 million -- just in case other people don't know it, if you shipped more than $1 million outside of the country of firearms, you had to get a permission from Congress. And they're going to change that. And I mean, it hasn't caused a problem for us before. Sometimes it makes you a little bit less competitive in your ability to react quickly versus a competitor that is out of the country. Of course, it so happens that a lot of our competitors on the business that we are bidding for around the country are in the United States, so a lot of them have the same restrictions as we do. So I wouldn't count it as a big mover for anything.

Right. I mean, it certainly removes an administrative burden. We can be more nimble and more timely, as Jeff said, in our delivery. So I would say, in the long term, that has to be favorable as we better service our partners on a global basis.

And our next question comes from the line of Ronald Bookbinder with IFS Securities.

You've talked about that you're looking for NICS to be down slightly for the year or units to be down slightly for the year. Most typically what we see over the last couple of years of the former administration, we saw a heightened buying environment that brought a lot of new consumers into the market. And they typically would then come back in to buy a second [indiscernible] or all the way up to the average of 8 to 9. Are you not seeing [ business for it ] coming back for additional firearms? Or is it sort of the core market that sort of is just full on their personal inventory?

Both are there, the core and the first time buyer who's coming back to buy for the second and perhaps even the third time. But it's just the softer environment that we see going forward. And I just want to reemphasize again, is we don't see that as a long-term dynamic. We think the market will return to growth. But when you do come out of periods of very robust buying, and we've certainly seen that over the last few years, you can expect a correction, and that can take up to 2 years. So as we enter -- our belief, as we enter the next fiscal year, so what would be fiscal '20 for us, then that's when the market we anticipate would be returning to that longer-term growth. Now obviously, this is all in the absence of any fear-based buying, which we know can occur from time to time. But we certainly see a good and viable market for firearms here with the consumer in the U.S.

Okay. And on Crimson Trace, are they still producing for competitors? And is there any new entrants coming into their market? I know Crimson's like the leader of the market and a name that you can put on your product, whether it's your product or a competitor's. But how is that evolving for Crimson?

Actually, I would say that it's doing fine. When we first acquired them a couple years ago, we lost -- actually, I'll back up. Crimson Trace sells its products in 2 different ways. One, it sells it direct to consumers. So for example, James mentioned an accessory for a Ruger or Sig. Those are sold directly to consumers who can buy...

Via retail.

Yes, via retail, who can buy those and attach those on the firearm. They also sell to OEMs who then deliver a gun that already has a built-in laser. So when we first bought them, they lost 1 OEM customer who was a firearm OEM customer, but they didn't lose any others. And I believe they may have gained 1 or 2, but we sort of keep that part of the business as a black box run by the President of that division because the other firearm companies would prefer that we not really know what is going on in their new products. But in general, I would just say it's a favorable -- it's doing better than we thought.

Yes. And there's no new entrants, as far as I'm aware, right now for them to compete with for sure. And they play in a large addressable market that, as I said earlier, they are busy exploring in a way that they haven't explored that before. So there's many avenues for them to organically grow by leveraging the very strong and well-recognized Crimson Trace brand. And that's exactly what they're busy doing and executing right now.

Okay. And on the absorption in Q2 and Q3, is there any shift in your summer break? Is it going to be longer? And are there any major differences in your quarterly days of production year-over-year?

No, no, change there, Ron. The normal summer shutdown will take place, which is 2 weeks, and 1 week falls into the first quarter; the second week, obviously, falling into the second quarter so no change there. So manufacturing days, which I don't think we've disclosed, but I would just say roughly the same.

Okay. And lastly, it seems like your goodwill has -- didn't come down. So it doesn't look like you've written down any of your acquisitions. Am I reading that correctly that you guys are quite pleased with your acquisitions and the value that you gave?

That is correct. There has been no impairment of any of our acquisitions.

And our next question comes from the line of James Hardiman with Wedbush Securities.

Just a follow-up for me. I'm going to ask the margin question in a slightly different way because I think there's a decent amount of confusion out there. I guess my question is I heard you say a couple of times that promotions are going to be coming down, but you'll still have promotions. The promotional environment is going to be pretty normal. I guess, if that's the case, why are your margins going to be so much shorter than normal? And I guess, put in the context -- obviously, the last couple of years have been -- last few years have been a roller coaster. But if we look back to sort of fiscal '14 or '15, at similar sales levels to what you're guiding to for this year and yet the gross margin at least seems like it's going to be, I don't know, 6%, 7%, 8% worse than those years, so have you just built up so much of the fixed cost over the last few years? And if so, should we sort of rethink the long-term margin target here?

Yes. Look, as I mentioned before, the difference between back in '14 and '15 and now is heavily influenced by the product mix. Again, what we expect down this year in terms of manufacturing is our products did absorb a lot. So you could almost -- you can keep the overall sales but -- of a product like a revolver versus a pistol, which the revolver requires taking a block of steel and doing lots of machine operations to turn it into a revolver, then your -- that normally would take a lot of the fixed cost overhead. And we're just making less of those things that require fixed cost overhead. So until we adjust our fixed costs, we're going to have this period in Q2 and Q3. If it continues, then we'll have to work on how our fixed costs exist if that part of the business is permanently down. Now...

Yes. It comes down to consumer preferences. I mean, 6, 7 years ago, we would see, for every 1 revolver that was sold here in the U.S., there were 3.5 polymer pistols sold. That number has increased to over 6 now. So definitely consumer preferences have drifted away from revolvers. Now there's still a good market there for revolver, but by far, our focus has to be, going forward, on that M&P 2.0 platform and building out that family because that's what that consumer wants. So at the same time, we're looking hard at our manufacturing configuration, and we've got to learn to produce in-house certain components that we currently produce on the outside as in we procure them. Now that project, though, will take some time to execute, but over time, that will help us deal better with this absorption challenge that we currently face. All of that is built into our current guidance. But as I said and I stress, it takes some time to do that. But that's certainly something we are actively looking at.

So I guess, how quickly is this going to happen? I mean, it sounds like the lack of revolvers is what's making your margins significantly worse than they have historically been. If revolvers don't come back, in fiscal '20, what would this margin number look like? I mean, how much are you changing with respect to your manufacturing to address this specific issue? Because I don't know -- or maybe we should or shouldn't have any expectations that will return back to a place where revolvers represent what they used to.

Well, everything we have in play right now we still believe in our long-term range of 37% to 41% for our gross margin. And Jeff's just quite right when he talked about revolvers. That, you could say, is the root cause somewhat of our absorption issue right here in the Springfield facility. But as I say, we're actively working to mitigate that. So over time, revolvers don't need to make a comeback in terms of consumer demand. We'll have mitigated it by just reconfiguring our manufacturing to produce those components that we currently procure in-house. So it is somewhat a temporary issue, but with everything else that we've got going on with new product developments, a lot of innovation going on both segments of the business, that leads -- and as well as the logistics facility that we're building in Missouri, which is going to bring us cost synergies as well, everything that we have going on, we can see that we can beat our way back to that 37% to 41%. But it's going to take some time, James. That's all. So short-, medium-term issue, next fiscal year, you'll see some improvement there.

Ladies and gentlemen, that concludes the question-and-answer session for today. So with that, I would like to turn the call back over to President and CEO, Mr. James Debney, for closing remarks.

Thank you, operator. I want to thank everyone across the American Outdoor Brands team for their commitment and dedication to excellence. Thank you, everybody, for joining us, and we look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.