Good day and welcome to the Vista Outdoor Fourth Quarter Fiscal Year 2019 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Kelly Reisdorf. Please go ahead.

Thank you, Brandon. Good morning and thank you for joining us for our fourth quarter 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 that we have posted presentation materials on our website at vistaoutdoor.com, which supplement our comments this morning and include a reconciliation of non-GAAP financial measures. With that said, I'll turn the call over to you, Chris.

Thank you, Kelly, and good morning. Thank you all for joining us today as we discuss our fourth quarter and full year results. We have now completed the first year of the Vista Outdoor turnaround. I'm proud of our many accomplishments in fiscal year '19, and despite continued challenges, I'm optimistic about what the future holds for this company and its great brands. A company turnaround doesn't happen overnight or even in 4 quarters. We understand that and we suspect you do too, but we are well on our way and made great strides this past year. To that end, I would like to start today by taking a few minutes to discuss what we've accomplished this past year and why those accomplishments are so critical to our future and then let you know where we are going from here. From an accomplishment standpoint, probably most important is that we've delivered on many of the fiscal year '19 commitments despite a very challenging environment, and as promised, it has created a solid and sturdy foundation for Vista Outdoor that will allow us to get back to growth. Like all plans, ours has evolved due to changing conditions throughout the year, but we are on the same path and have the same end results in our sights. I'm pleased with several specific accomplishments this past fiscal year and want to talk about a few of the building blocks that we laid to create that solid foundation for growth. First, we've ripped out lots of costs within the company that have been weighing us down and stifling potential growth. We also significantly reduced corporate overhead to become a leaner, more focused company. Excluding the sale of our Eyewear business, this includes reducing SG&A by $44 million or 11% this past year through…

Thank you, Chris. Good morning, everyone. We have disclosed both as reported and adjusted results in our press release. You will also find a more detailed financial presentation of our fourth quarter and full year fiscal year 2019 performance on our website. On that presentation, let's start on Page 4 with the highlights in our fiscal year 2019 ending balance sheet that shows $211 million debt reduction or 23% as a result of asset sales and improvements made to working capital. Most of these working capital improvements came from reductions in accounts receivable and also in capital expenditures year-to-year. We have reset over $500 million in goodwill and intangible assets to better reflect their valuation. Also, notice on our long-term debt that we have been successful in obtaining a new credit agreement that is at a much lower cost with less strict covenants. Moving on to Slide 5. You can see that we have consistently lowered our debt, and consequently, our net debt leverage ratio at the end of the year was about 6x as defined by the terms of our credit agreement at the time. Now turning to our profit performance. Today, I will discuss adjusted results first for Vista Outdoor overall and then provide a little more color on our segments. Turning to Slide 6 and looking at the fourth quarter, we recorded sales of $515 million, down 10% compared to the prior year quarter. The decrease was primarily caused by the loss of $34 million in revenue from our Eyewear business, which we sold in the second quarter, which implies an organic revenue decrease of 4%. Ammunition sales for the quarter were flat compared to the prior year quarter, while sales in outdoor recreation, firearms and hunt shoot accessories were lower this quarter. The company achieved full…

[Operator Instructions] The first question will come from Eric Wold with B. Riley.

A few questions. I guess, one, I wanted dive a bit deeper into your comments around BellGiro to make sure I'm understanding your thoughts on those brands now. Would you characterize that as continuing to run it to improve valuation for an eventual sale? Or is this a situation where it actually could be factored back into the portfolio long term and not be sold?

Yes. So Eric, we -- our board and our senior leadership team evaluate our assets and our portfolio all the time. And as we sat down and reviewed the BellGiro asset, we came to the clear conclusion as a team and as a board that we're much better off holding this asset and continuing to improve it for a period of time, and that will be a multiyear period of time. We see that much upside in the business. So at this point in time, we're excited about holding it. We think it's the best thing to do for driving shareholder value, and that's what our intended plan is.

Perfect. And then on the Outdoor Products, with the guidance or comments for growth overall organically for fiscal '20, give us a sense of kind of where you see strength and weakness with some of the various product lines and brands. And kind of what -- the ones that are expected to be weak, what the major headwinds are for those brands?

Yes. I mean so starting first with Shooting Sports, in total, we still have not seen the bottom. We've seen signs that the bottom is near. We're certainly seeing signs of stabilization, but we're planning those businesses in our guidance to be slightly down in the fiscal year. So kind of low single digits, if you will. On the Outdoor Products side, in total, we expect that business to be up low single digits. And if we look across all of our brands, just about every brand -- in fact, every brand -- major brand is forecasting to be up, some more than others. And as we stated before, we've got brands like Camp Chef that continue to capitalize on the outdoor cooking space. We would expect them to grow a bit more than some of our other brands. But we've got some other brands with some really, really exciting new products that are coming on stream and some e-commerce direct-to-consumer marketing initiatives that -- and digital marketing initiatives that we're doing that we're very excited about. So we're very happy with the position were in to grow our Outdoor Products business this year.

Okay. And just final question from me, if I may. With the guidance for $55 million to $65 million of free cash flow this year versus $79 million last year, sales improving, margin is okay. What's the biggest factor kind of keeping -- driving that decline in free cash flow? And where could you see opportunities to bring that higher, besides the sale?

Yes. Look, thanks for that question and to allow a little bit more clarification. We've looked at our conversion of EBITDA into cash throughout the years. On a revenue basis, it's anywhere from 3% to 8%. On a EBITDA basis, it varies widely from 12% to over 170%. Just last year, the -- respectively the conversion rate versus revenue was about 4%, and we're being a little bit conservative in saying it's in that range, and the 3% to 4% range is what we're guiding to. So there's opportunities certainly on the inventory side. I think this year, we made great strides in our accounts receivable. We notice also that we were very judicious in our use of working capital. And whereas we've been as high as $80 million and actually had a run rate of about $60 million, we've brought working capital in way below that in $40 millions, mid-$40 millions. So very proud of that, and we'll continue to focus on high return on investments on our working capital and to start turning our inventories more is where we see the upside.

The next question will come from Gautam Khanna with Cowen and Company.

I had a couple of questions. First, any update on the Lake City supply agreement and the terms of that contract?

Yes. So we're deep into the process here, and all we're able to comment on is publicly available information. We mentioned last time that we're partnered with who we think is the best contractor in the industry, and we feel like we've got 2 #1 folks that are arm in arm and going down the process of answering all of the questions from the government for the contract. So there's going to be a best and final due here shortly. The government then will take their time to review the process through the summer months, and we'd anticipate an answer in the early fall time frame.

Got it. And just in the interim, has there been any change to the underlying pricing from Northbrook to Vista?

Yes. So I commented on the previous earnings call that we were hopeful that the Lake City organization would be more accommodating to help us go after some sales, and they have. And they've been very good to work with over the past 90 days, but the market remains soft. And we felt like we made the right decision to opt out of our exclusive contract as, frankly, the market has remained soft for a period of time and has continued to. But they've been more accommodating, and we're certainly appreciative of their partnership as we look to sell more of their product.

Last one for me just on supply issues mentioned in the Shooting Sports segment. Can you just elaborate on what specifically cropped up in the quarter? And has it been resolved as of yet?

Yes. So we don't want to get into very specifics of exactly what it was. But we can assure you that it was onetime in nature. It was an incident that we strongly believe will not recur, and we don't expect it to have an issue on our plan for fiscal year '20.

The next question will come from Dave King with Roth Capital Partners.

First on the $0.10 to $0.15 impact from the Savage sale. Is that based on the contribution to operating income? Or does that assume any reduction in debt and interest?

That's a very good question, Dave, and it would be a reduction of interest also to compensate for the sale of the asset.

Okay. And then on the revenue guidance, how do you see each of the quarters shaking out versus the down 1 to 5 you sort of laid out? It sounds like you're more optimistic on the outdoor side of the business. Should we be expecting improvement over the next couple of quarters or is that more second half loaded? And then sort of a similar question for Shooting Sports.

Yes. Pretty similar to what we've seen in this past year where we feel like our strong -- we're going to have a stronger second half. Our strongest quarter has historically been our second quarter from a Shooting Sports standpoint that drives our overall second quarter to be stronger. But last year, first quarter was fairly weak. We expect that to continue as we had some very seasonal products that don't sell as well in the first quarter. So we expect it to roll out from a quarterly perspective pretty similar to what we've experienced the past 4 quarters. And we'll certainly on the Outdoor Products side will build as the quarters move on and as the new leadership, general management team that we have in place starts to see the fruit from their labors come forward in new products and what have you. So that will certainly lean towards the back half. On the Shooting Sports side, again, it's going to be a weaker first quarter, stronger second quarter and will mirror a little bit of the -- what you've seen in the last 2 quarters in the back half.

Okay. That's great color, Chris. And then I guess lastly for me, on the production and supply chain issues, Mick, can you talk a little bit -- or Chris, can you talk a little bit about what drove those? And to what extent are those now behind you?

Yes. So we had some issues with some of our suppliers in terms of material. A little bit was forecasting and a little bit was, frankly, just some opportunities that we had that we were chasing down that came up and they were unable to supply in quick response the material that we wanted. So there wasn't anything that would be an effect long-term that we're concerned with, but certainly had an effect on our fourth quarter, and that held us back a bit.

Okay. But none going forward. That's good to hear.

No. Nothing.

The next question will come from Brett Andress with KeyBanc Capital Markets.

Can you help us understand the variables within the Savage sale process a little bit better? I guess is the time line being stretched out over price discovery, which, I guess, maybe that's what impairment is telling us? Or are there any legal hurdles? Any other complexities that we're not appreciating? Just any color there.

Yes. So Brett, I think the Savage process is on many folks' minds, and so I think it probably makes sense to spend just a couple of minutes explaining where we're at today. And what I think makes more sense is to start at the very beginning. What we said at the beginning of the process was that we felt it made sense to look to sell Savage because we thought it would be more valuable to others than it would be to us. We also said that we want to remain disciplined sellers and not give away the asset, we did not want to be part of a fire-sale. And we also said that there were more interested buyers, and therefore, we thought it was going to be a robust process. In the last quarter, 90 days ago, we felt as though we were far enough along that we deemed it highly likely that there would be a signed contract by the end of the quarter. Now where do we sit today? We still believe that it makes the most sense to unlock long-term value to Vista to sell Savage. We continue to have strong interest from multiple buyers and we're very far along in due diligence with one said buyer. Unfortunately, as many of you know, it's a -- the firearms is a very challenging industry, and our buyer due diligence has taken significantly longer than we thought. We being us, our buyer and our advisors ever thought it would take. So as we look forward, we're going to continue down the path to due diligence and the current process, and we'll update as -- update you as we know more. Now the silver lining is Savage is a prized asset within the firearms industry. It's got a great track record, it's got a great management team, and we feel like it's not dilutive to our guidance this year.

Understood. And sorry if I missed this one, but the increase in reserves for, I believe, customer credit risk and product liability litigation, I guess, where did that impact fall on the income statement? And just any more color on, I guess, what that is? There wasn't really any bankruptcies on my radar, but maybe I haven't been paying attention. So if you could elaborate on that?

Sure, sure. So let's take first the product liability risk, which we attributed $0.30 for that. There is an assessment at year-end we do with our legal team. We go through a general reserve, we also look at specific cases. And as a result of that, it was evident to us that we would take a cautious approach and that the right approach is to reserve for potential liabilities coming in the future, as we have done in the past. There was 1 particular case that prompted us to do the majority of the reserve, so it was 1 specific example. On the bad debt, you probably have heard that there have been no recent bankruptcies, but there are high potential for an impending bankruptcy. We have reserved that particular customer at 50%. And given recent developments that we have heard in the marketplace, we thought it would be prudent to increase our reserve to 90% as we have in the past only received about 10% recovery on these types of bankruptcies. So hopefully that adds sufficient color.

Yes. Just to put a finer point on it. We feel like -- it was a hit that we felt like all the evidence supported securing for that credit risk, and we feel like we're fully reserved now. As Mick said, we typically get a 10% recovery with 90% reserve. We feel like it was prudent to take this in the fourth quarter and be fully reserved walking into 2020.

And a last one. Chris, just any update on the pricing environment within ammunition? With commodity costs coming down across the industry, are you seeing any signs of irrational pricing actions? Or just any movement kind of over the last 90 days along that front?

So Brett, we're cautiously optimistic. But what's happened, what we've seen in our last 90 days is all of our major competitors have taken price increases which we find highly encouraging. And so we see the pricing market, in general, stabilizing for ammunition, and so we're encouraged by what we're seeing in the marketplace. And we think that's a harbinger for better things to come this fiscal year than this past.

The next question will come from Jim Chartier with Monness, Crespi, Hardt & Co.

Chris, on the Outdoor Products outlook for the year, could you just give us a little bit more color maybe in terms of backlog that you have or POS trends that you're seeing that gives you confidence that, that business will inflect to you organic growth this year?

Yes. So we -- there's no question that we've faced a challenging environment. I mean many folks have called it the retail apocalypse. And so there's been a lot of unnecessary -- well, not unnecessary, there's been a number of customer bankruptcies and what have you that have negatively affected a number of our brands. What we see more of here is the strength of some of our brands and the sell-through that we're seeing. So this past winter, we had terrific snow and we capitalized on that with some of our helmets and goggles. We grew to the #2 share position in our goggle line with our new VIVID technology. And things like that obviously lead to stronger growth the following year as our dealer base looks to refill and restock their inventory position. We've had a number of new products that have recently hit, I mentioned, Bushnell that, frankly, we can't build enough of them because the product is so hot right now. So we've had a number of product hits that we're encouraged by. And with the product road we've got in place and some of the traction we're getting online with our digital marketing efforts, we feel pretty confident that we've got some momentum that is sustainable. But again, it's -- there are still headwinds that are out there and that's why we're forecasting the low single-digit growth that we're forecasting. And we expect the Outdoor Products business to build as we move through the year and we start to see more of these products hit the marketplace.

Great. And then you put in place some new brand leaders, I think, close to a year ago. Just wanted to understand what changes they've made. And what -- are you starting to see an impact from the new leadership?

Well, we certainly are. And any time you bring in a new leader to some of the brands, it's going to take a bit of time before they start to get traction. And that's why we feel stronger and better about the -- about next year and as we move forward here because it just takes time for their initiatives to bear fruit. And so you mentioned the time frame. So the first general manager we brought on was probably about a year ago right now. The others were brought in, in the last probably 6 to 9 months. The General Manager of our Bushnell business has been in place now for about a year, that's where we have seen the biggest impact because, frankly, he's been in the seat the longest. We implemented initiatives such as MAP pricing, which is minimum advertised pricing, and we didn't do quarter-end deals. And at first, it hurt us but our customers started to realize that as they ordered our product, we weren't going to give it away. And so we became much more disciplined in our pricing. And by the way, this also helps our customers because they don't want to get behind product that doesn't have MAP-ed pricing because they won't make money either. So it's a win-win. And they're appreciative, but it's taking some time to work through the system. It's had immediate effect on the product road, as you've seen with our laser rangefinders and some of the other products that are starting to hit the marketplace right now. So we're excited about that. We've got new leaders in place at BLACKHAWK! and CamelBak, and we're really, really encouraged by what we're seeing there. Obviously, we don't want to give away any competitive intelligence here, but trust me, they're having an impact on their teams, and we're highly excited about what we're seeing.

I would also like to add that they're very disciplined operational leaders besides bearing -- have a lot of prowess on their marketing and sales side. And we have seen detailed reviews of inventory reduction in SKUs, moving some of the excess and obsolete, which is evident in some of their particular inventory numbers. So I think these leaders are great general managers. And if I combined, as Chris mentioned, contribution, that will yield more and more fruit as they build their teams out. Some of them are just recently filled to the teams.

Yes. And so to add on that point because I think it's important for everybody on the call to understand, you're seeing in our guidance here no real growth in the sales line as it's -- Shooting Sports has offset the growth that we're going to see in Outdoor Products. But you're seeing margin lift, and that margin lift is coming from the efforts that Mick talked about. And so we sat down and partnered with each of our general managers and really gone after the complexity that sits in the business, and that means less SKUs, less inventory and taking action on stuff that gives us clear line of sight to the profitable products and where we can make the most money.

The next question will come from Scott Stember with CL King & Associates.

Could you guys give us maybe an update on what you're seeing the personal stockpiling angle? I know it's very difficult to ascertain, and I know that about a year, 1.5 years ago, you guys conducted a study. And do you have any updated findings of when we could be seeing a turn there? Is that baked into your expectations that the market, I guess, will be flattish to down a little bit? Or do you still think that there could be some weakness on that front?

Yes. So what we've seen from our surveys is the underlying health of Shooting Sports in general is -- it continues to be very healthy. What we've seen from our conversations with distributors, buy groups, dealers as we went through all the winter shows was more optimism, frankly, than we've seen in a long, long time. They all feel good about the inventory levels that they're carrying, the conversations they've had with customers. Our range customers and folks that operate ranges feel good about where they're at. But nobody really honestly knows how the fickle consumer demand turns into stockpiling or what have you. We really feel good about the inventory position in the underlying Shooting Sports, but what we're predicting is just a more normalized environment this year. We're not expecting any big run up. We're not expecting any stockpiling. We're just expecting normal replenishment of inventory, and that's what we've guided to. And in fact, maybe a little bit down, as we said.

Got it. And just going back to leverage situation and throwing the potential sale of Savage Arms in there, operating at 6x right now. And I know that it sounds like you still expect this deal to get done, but in the event that, let's just say, this doesn't get done, at least with this 1 customer, maybe talk about -- or potential buyer, again, just remind us whether the demand or the excitement about this is still existing with other potential buyers? And also how comfortable are you operating within this 6x leverage ratio range in the near term?

Yes. Sure. We are in the process right now with a buyer. We're in exclusivity. So we're hopeful that we can consummate the deal as agreed to. But there are other multiple buyers out there and we're willing certainly to reopen it, certainly once it closes. From a leverage perspective, I think we have addressed this in the past but would like to reiterate that Savage is a very profitable brand that yields a significant amount of cash flow and EBITDA, and we expect it to continue to do so. And actually, the leverage, as a consequence, will be approximately the same whether we keep Savage or not. We do hope to continue doing improvements to our reduction in debt through working capital management, as we had done last year, not just on asset sales. So we're confident that we are on track to going below 6x throughout the year.

Yes. So let me also add on to that. I think it's important to note, in the slides we've provided and -- that Mick referenced in his scripted remarks, Slide 5 talks about an inflection point that we hit. So for the first time in over 7 or 8 quarters, we actually saw our leverage ratio declined. Obviously, that did not include the impact of the sale of Savage. It points more towards the efforts that we're making in the business to generate better earnings and, frankly, working capital improvements. So as we go forward here, with or without a sale of Savage, which nobody is forecasting anything other than finishing the process that we're in right now, is a continued reduction in our leverage. And that continued reduction in our leverage is going to come from a combination of asset sale as well as continued improvement in working capital and earnings growth.

That's right.

The next question will come from Karru Martinson with Jefferies.

In the past, you guys talked about wanting to focus on the Savage Arms divestiture, get that out of the way and then kind of review the portfolio. With the delay here in the process, I mean, have you given some additional thought to other assets perhaps that you would want to monetize?

Well, it really goes back to the previous question of how comfortable are we with the current leverage. And as we stated before, we want to continue to drive down our leverage ratio. We'd feel much more comfortable in that 2x to 3x leveraged position, and we're going to continue to work to get down there. We, as I mentioned before as well, continue to dialogue actively with our board to discuss the best way to unlock and drive shareholder value. And if we felt as though there is another asset sale that would contribute to that, we'd certainly be open to it. But at this point in time, we feel like the best way to drive shareholder value and continue to reduce our leverage ratio is to improve the businesses that we're running right now.

I'd just like to add that our new credit facilities are just perfect for us. Our rates are fairly low. As of March 31, the average interest rate was 4.8% on the revolver and 6.2% on the term loan. We certainly have a much higher rate on our second lien, which is north of 10%, but that's only $40 million. So our overall rate is lower. That is reflected in our guidance for next year of lower interest expense. And then when we look at the covenants associated with our debt, they're much more lenient. We do have a FCCR, fixed charge coverage ratio, that we're confidently way above right now. So there's no concern there from a liquidity standpoint either.

Yes. To add on to Mick's point, we spent an awful lot of time last year working with our lenders. And it was a big initiative of ours knowing that we're in a transformation of the company that we locked down a long-term credit facility that would give us the ability to finish what we're doing. So all of our debt has a 4-year plus maturity on it. So we feel highly confident operating in the current leverage ratio that we're in right now as we work to get it down.

Yes. We constantly talk to our financial partners at Wells, JPMorgan, BMO, Cap One, Fifth Third, and they're very confident of where we are. And again, as Chris mentioned, we have our next maturity in 2023 and feel that our liquidity position is perfectly fine right now. And we will continue to drive our leverage ratios down as we increase our EBITDA and contribution margins.

Okay. And notwithstanding the pricing pressures that you're seeing in ammo, it does seem like the Shooting Sports gross margin is bottoming out. Is the right way to think about that is that we have a lower margin here in the first quarter but we sequentially build each quarter for the full year?

Listen, it's a very good question. Although we're not here to call the bottom on the sales growth. Although we've seen, as I said before, stabilization in the marketplace, which we're encouraged by, we do feel like we've hit that inflection point on margins. The activity that we have going on in our facilities, the commodities, little bit of a tailwind year-over-year. For a variety of reasons, we've troughed out in ammunition margins and you're going to see an improvement this year, not just year-over-year but sequentially as we go through the quarters. We feel good about that.

This concludes the Q&A portion. I'll now turn the call back over to Christopher Metz for closing remarks.

Thanks, again, for everyone's time today and being on the call this morning. I'm proud of what we've accomplished for fiscal year '19 and eager to prove what we can do in fiscal year '20. I believe we have a solid plan, a strong team and the right mindset to accomplish our goals for the fiscal year. We've built a strong foundation in the first year of our transformation and that gives me great confidence for what we can achieve in the future. I look forward to updating you on our progress in August. Thank you.

Thank you, ladies and gentlemen. This concludes today's event, you may now disconnect your lines.