Vista Outdoor Inc

NYSE:VSTO

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentleman, good day and welcome to the Vista Outdoor Fiscal 2020 First Quarter Earnings Call. Today's conference is being recorded.

At this time, I would like to turn the call over to Kelly Reisdorf. Please go ahead, madam.

[Kelly Reisdorf, IR]

Thank you, Gail. Good morning and thank you for joining us for our first quarter fiscal year 2020 earnings call. With me this morning are Chris Metz, Vista Outdoor Chief Executive Officer; and Mig 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 estimate and assumption 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 filing 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.

[Chris Metz, CEO]

Thank you, Kelly, and good morning, everyone. Thank you for joining us today as we discuss our results for the first quarter of our fiscal year 2020.

Since this is the first time speaking with many of you in our new fiscal year, I thought I'd start with a discussion of where Vista has been, where we are today and most importantly where I see us going in fiscal year 2020 and beyond.

As a threshold matter before we can dig into where we are and where we are going, it's critically important that we start with the current state of the market. First, as I'm sure everyone knows, the end-markets for our ammunition and Hunt/Shot accessories businesses remain soft, while we had a good quarter in general in our ammunition business, only being down 1.5% year-over-year versus the market that we estimate is down mid- to high-single digits.

We continue to face unprecedented challenges. Yet again, we absorbed the impact of another customer bankruptcy with a key distributor, Ellett Brothers, parent of United Sporting filed Chapter 11 in June. This move flooded the market with vastly discounted product in June affecting both our ammunition and hunt shoot accessories businesses in Q1.

We also saw a continued soft demand for rimfire putting even more pressure on our ammunition business. As a clear market leader in rimfire, the downturn in this ammo category is hitting us fairly hard.

That said, the team continues to do extraordinary things to mitigate these challenges and I fully believe that we are in a better position in our overall ammo business than our competition in terms of market strength, product innovation, and overall leadership positioning. I will talk a bit more about this in a minute.

Another headwind that we continue to deal with is the effects of tariffs on goods being shipped in from China. As you probably realized, much of the outdoor products industry sources goods or components from suppliers in China. Quite simply, it's still the most cost effective way to produce many of the highly engineered products that we bring to market.

In our first quarter, many orders from retailers were delayed or canceled as they took a wait-and-see approach to how the tariffs would impact the products they carry. We also know that consumers are becoming more cautious in their buying. We continue to work with our entire supply chain, including both suppliers and retailers to minimize the impact.

As many of you are now aware just recently the U.S. announced that on September 1st it will implement another tariff of 10% on approximately $300 billion worth of Chinese goods that are not already facing tariffs. This is considered the List 4 and unfortunately impacts Vista Outdoor’s brands and most of our competitors in a much more meaningful way than previous tariffs have.

The List 4 products include previously excluded products such as bicycle helmets and sporting optics, which have a larger impact upon our Bell, Giro and Bushnell brands. The tariffs will include components for water bottles, which will also impact our CamelBak business who has previously been unaffected. We testified in June as to why these products and others should be - should not be included in the tariffs.

The U.S. Trade Representative has yet to say if any products will be excluded. So, we are moving forward assuming all products on List 4 will remain on the list. We continue to work with our vendors and retail partners to find ways to mitigate these cost.

But ultimately this will impact our business and our results in the coming quarters. We've adjusted our guidance in response to the headwinds our brands face on tariffs and Mig will walk you through this in a bit more detail in a few minutes.

There are a few other factors that adversely affected our Q1 results as well. We had an unseasonably cold and wet spring, which limited the amount of outdoor activity and had a trickle-down effect on new purchases for our bike, hike and run products.

Additionally, the firearms market was very weak in the first quarter, despite NICS checks being up in April, May and June relative to prior years, sales of firearms were frankly terrible. Savage, which is part of the company for Q1, was down more than 40% year-over-year.

So with these challenges and headwinds as a backdrop, to the environment we are currently operating in, I want to share with you what we are doing to mitigate, as well as the progress we're making on our turnaround.

In our biggest business, ammunition, our business in fiscal year quarter one, we were only down 1.5%. This is the second quarter in a row of relatively flat year-over-year growth. While this has nothing to crow about, this is a leading indicator for the extraordinary effort our team is delivering. We believe the market is improving but still down mid to high-single digits and thus we believe we are taking share.

A good indication of our share gains is, in fact, our share of federal excise tax or FET which increase from 17.5% in the fourth quarter of calendar year 2018 to 22.5%t in the first quarter of calendar year 2019, up 5 percentage points quarter-over-quarter. While this is by no means a perfect measurement, it is a strong indicator of our share in the commercial markets.

Our gains are not just in the commercial space however. In fact, in the law enforcement and military space, we are increasing our industry-leading share position with a number of recent coveted wins. We just recently won the duty round contract with the LAPD or the Los Angeles Police Department who chose our Speer G2 round.

This is a huge win for us as it displaces our biggest competitor and will undoubtedly have a trickle-down effect on other police precincts who looked to the LAPD stamp of approval for their own department. This in accompanied with our NYPD win recently now gives us the two largest police departments in America. We also recently won a sizable contract with the KSA or the Kingdom of Saudi Arabia.

And finally, we just won the Army's recently awarded frangible contract award. These three wins were not forecast at the beginning of the year but will contribute greatly to our Q3 and Q4 and help offset some of the headwinds we continue to face.

Another focus area to help our AMLO top line growth is by partnering with leading firearms manufacturers to develop unique and innovative rounds specifically designed to meet with their products. This is one of the benefits our ammo team can now take advantage of with Savage no longer being a part of this to outdoor. We are already working with three leading manufacturers on such products, and you will begin to see this come to fruition in the back half of this fiscal year.

Given the unprecedented downturn of the ammo market, it continues to be what I would call a lumpy market. We feel like we see light to an upward trajectory, but it won't be linear. In fact, the way the business is looking to shape up for the rest of the fiscal year, we're going to have a very challenging second quarter for a variety of reasons, but feel very confident in the back half given the contract award wins I just mentioned, the orders we have already secured around Black Friday, and some new products that we'll be launching later this year.

I'm also very proud of the way our ammo team has reacted to the prolonged market softness and continued competitive price pressure. Our team has and will continue to relentlessly take out cost, improve factory efficiencies, procure better, and take advantage of the lowered commodity prices we are starting to see. In total, we have good confidence on our path to recovery on both the top line and margin line as we move through the back half of this fiscal year.

On the outdoor product side of our house, we're making good progress. As many of you know, we have spent the past year bringing in new leaders and helping our leaders reconstitute their businesses re-instilling a founder's mentality focused on product innovation and world-class marketing, and building a winning culture. We certainly have a ways to go, but I'm proud of the progress we're making. So, let me share a little on each of our key brands and our key business units.

In our hunt shoot accessories business, similar to our ammo business, we continue to face a very soft end market. However, in Hunt/Shoot, we also face the additional challenge of tariffs with a fair bit of our product being contract manufactured in China.

In Q1, the business was down 8% and holding its own. But the focus for this team over the past year or so has been to rebuild its profitability while developing a robust pipeline such that when we do launch new products, they are both innovative and accretive.

A great example of this is our new Golf Laser Range Finder which hit the market in Q1. It is the industry's first rangefinder that can capture the effects of humidity and altitude, both big deals for avid golfers. The new Pro XE is premium priced, high margin and we can't build enough of it.

Another great example in the Hunt/Shoot accessories category is in BLACKHAWK where we just launched a series of new patented holsters called T-Series that have been thoroughly researched with law enforcement agents, special forces and enthusiasts alike. The result is arguably the world's best handgun holster built in our own Montana manufacturing plant and a product that will be our best-selling and highest-margin holster in the company.

Our CamelBak business is showing signs of recapturing its footing. We know we have lost share over the last - over the past couple of years. But under an entire new leadership team, we just finished the best quarter we have had since our acquisition of the brand with profits in quarter one being up significantly year-over-year. Although one quarter certainly does not make a trend, we are seeing strong indicators from our team and expect continued momentum.

The team is marketing more effectively with its consumer base online and is winning space with key retailers and has a much more robust consumer research product road defined and as a more innovative product lineup coming out later this year. If you are attending our investor conference next month, I believe you'll be excited with the changes we're making a CamelBak.

In our Action Sports business, we were down 5% year-over-year. However, this masked the underlying trends and I'm encouraged by what we are accomplishing. Despite an unseasonably wet and cold spring while the Giro and Bell grew their specialty businesses which is you know the specialty dealer is the heartbeat of the brands.

In fact, it was one of the better first quarters we have had in years, both of these brands continue to develop unbelievably innovative product. In fact, in Giro's Snow, we moved ahead of Oakley into the number two market share position in snow goggles with our extremely innovative line of vivid goggles. This along with a very healthy snow season sets us up nicely for this coming winter season.

Unfortunately for Action Sports, our Bell Mask business did not have a good Q1 and this brought the rest of the business down. However much of the mask business decline was because of their largest customer deciding to stop ordering in June to manage their own inventories. We see this as a timing issue and have already begun to see orders come back in July.

Our Camp Chef business continues to be a star within Vista Outdoor. Despite a very hard year-over-year comparison, you may recall that we had a very successful grow guide campaign in quarter one last year. The team finished quarter one this year flat and on plan. We partnered with the iconic Guy Fieri and created an entire online and retail marketing campaign which we recently launched in our flat top stove system.

We will follow this up with another marketing campaign towards the end of the second quarter with a brand new pellet grill which should set the standard for all pellet grills. And although we launch at the end of this quarter, much of the impact will be realize in quarters three and four.

If you haven't seen the marketing videos I'm referring to, I encourage you to Google Camp Chef and Guy Fieri. You will be impressed. Guy has been a longtime Camp Chef loyalist and has been wonderfully generous with his time in support of our brand. We should continue to see growth from this terrific team and business.

In addition to building out and strengthening our brands, we're very focused on reducing our overall G&A structure while investing in support functions that add demonstrable value and revenue across our brands. We call these, centers of excellence. A great example of this is in e-commerce where we have quietly been building up a center of excellence to leverage across all Vista Outdoor brands.

The genesis for building our e-commerce is to ensure that our consumers can purchase our products in the way they choose, when and where they want, including directly from us. It's for this reason that we put such an emphasis on continuing to build up our e-commerce capabilities. Quite simply, we must provide our end users better experiences and get them access to our products when and where they want to shop.

In fact, just a few weeks ago, we launched a brand new, direct-to-consumer site for our Federal Premium ammunition. This is for our premium line of ammunition and it's in direct response to our consumers’ biggest requests of not being able to find certain premium rounds at their favorite retail stores.

However, a key reason for also creating this site is to gather consumer insights to help us create new products, help us forecast trends better, help us manage inventory, and product builds in a much better fashion, which ultimately allows us to share all of this information with our retailer partners and enable us to create better product assortment in both their stores and online. And we’ll be selling all of these products at full MSRP.

Across our hunt shoot accessories businesses, we have seen growth in U.S. e-commerce channels up double-digits in the first quarter. And our Bushnell, Bushnell Golf and Primos brands are off to a good start in direct-to-consumer sales, with five times growth over last year. Again, all of this is additive to what our retail partners are selling.

Primos recently launched an online Custom Mill Shop that allows hunters or their family and friends to order custom personalized high-performance Primos Box Calls directly from Primos Woodworks in Mississippi. Initially conceived as a graduation gift idea, the Primos team ran a special Father's Day promotion, which generated excellent engagement and contribute to over 30% of the product sales so far this year.

Additionally, our Eagle Industries’ Tactical brand, which is a leader in military equipment business, just launched their e-commerce website in July. To bring its top of the line duty gear to the commercial market. Product offerings include everything from carriers and rigs to packs, bags, pouches and more. We're very excited about expanding our consumer base with these top-tier gear offerings.

As a final example of our progress in e-commerce, CamelBak had an incredibly successful Amazon Prime Day, with nearly 47,000 units sold. This was a 57% increase in year-over-year sales. A particular note, a spotlight deal of our new eddy+ and Podium water bottles generated over 24,000 units sold.

As we continue to build on our relationships with our end-consumers, we have responded to their feedback, to be able to buy our products and the way they choose when and where they want.

All told since October of 2018, when we hired our Chief Digital Officer, Bob Steelhammer, we've launched 13 new e-commerce branded websites, where we either significantly improve the overall customer experience or enable the e-commerce where there was none. The new sites include Bell and Giro, BLACKHAWK, Bushnell Bushnell Golf, Federal, CCI, Speer Ammunition and Primos among others.

We've developed two strategic relationships that are helping us to accelerate our speeding growth in the direct-to-consumer channel. The first relationship is with sales force where we have partnered with them to provide both commerce and marketing cloud services. To enable this strategy via systems integration for e-commerce services is Lyons Consulting Group a part of Capgemini.

We continue to build the digital team and focus on this digital center of excellence. We're focused on three key areas. First, digital marketing which is about acquisition and conversion. Second, content and creative which is the user experience and third is development and operations.

We will leverage the center of excellence by allowing our brands to access resources that help them continually improve their velocity of change and connection with our end consumer. So as you can see, we're delivering on our promise to increase our e-commerce capabilities. We still have much more to do and more certainly already in the works but I'm proud of the brands for embracing this challenge and getting us closer to where we need to be.

Throughout our turnaround, we've continued to balance improving the business for now while simultaneously working on the future. Although our top capital allocation priority is and will continue to be paying down debt, we have also been thinking about and even looking at what might be compelling businesses to add to our existing businesses.

Simply said although we need to wait to consummate an acquisition until our debt is paid down to levels we have communicated previously, we cannot afford to wait to start evaluating where we will be behind the curve and will not grow our EPS as fast in outer years as all of us expect we can.

When we think of M&A in the future, you should expect to see a noticeable change in our approach. We'll take a much more disciplined approach in which categories we’ll evaluate, how much we'll pay, and the overall size of the businesses we’re willing to acquire. We envision a strategy that begins with thoughtful tuck-in acquisitions that bolster the position of the current portfolio we have and increase the speed at which these brands can achieve leadership economics. I can assure you that we will resist the temptation to jump into new categories too quickly.

In addition, there are potential opportunities that we believe could bring value to Vista Outdoor and our centers of excellence. As an example, there may be an interesting and compelling opportunities in technology platforms that could accelerate growth for all of our brands and leverage our model.

We truly believe that with an improved foundation and a more disciplined and strategic approach to M&A, we will grow a company for the long term and one that will consistently deliver shareholder value over time.

Now, before I turn the time over to Mick to go through the financials, I want to share one more important item. Because of the continued market headwinds and ongoing pressure which we face with increased tariffs, we're putting the final touches on a further reduction in G&A that we believe will not only reduce our total overhead and thus our costs, but also make us more nimble and effective.

We can't afford to continue to hope that the pressure goes away. We need to control our destiny by affecting what we can. Although we are not quite ready to announce the changes, we are close and we'll be able to share more detail at our upcoming Investor Conference and certainly on our next earnings call.

I hope this discussion has been instructive to give you a better idea where Vista is today and where we're headed in the future. We have strong growth strategies identified by our brands. We continue to build leaner but stronger functional support. We've got excellent brand talent that is getting better every day. We continue to challenge and take out unnecessary cost and we're instilling a winning culture that starts with achieving commitments.

While there will be lumpiness in our results as the market continues to shake out, we can certainly see the path to an upward trajectory and I'm confident that we can achieve real profitable growth across our brands in the coming quarters.

With that, I'll turn the remainder the time over to Mig to discuss the financials. Mig?

[Mick Lopez, SVP and CFO]

Thank you, Chris. Good morning, everyone.

Before going through the numbers, I would like to give some context as to what we've accomplished also as well where we're headed. We're pleased with the long and challenging sale process of Savage behind us.

The sale presents an inflection point in our portfolio in shaping now allows us to narrow our strategic focus of our organization but most importantly it is a big step towards that debt reduction goals. You will find on page 8 of the management presentation that we have provided a complete set of pro forma financials on Savage firearms to assist you in valuing our business going forward.

Building on the restructuring efforts from fiscal year 2019, the key CFO priorities for fiscal 2020 are strengthening our overall cash performance through improvements to inventory and capital expenditures and continued cost reductions through the simplification of our conversation. We continue to complete detailed monthly operating and forecast reviews as part of our profitability improvement efforts.

We started CFO team reviews for capital expenditures. And as a result, forecasted significantly less capital from last year without affecting innovation of new products. We are now focused on monthly CFO team meetings to optimize inventory that should improve customer service fill rates, inventory turns and ultimately our return on invested capital.

As the increased focus and inventory continues, we expect to see similar results in our capital expenditures optimization program thus far. Our first and foremost financial goal remains reduction of leverage by paying down our debt. As of the first quarter, we had approximately $738 million in net debt. Using the proceeds from the divestiture of Savage, we were able to reduce our debt by a total of $157 million our net-long term balance after it.

The divestiture of Savage is $581 million which is a major milestone as we have effectively cut our debt in half from our peak of $1.17 billion. In particular, please note that we have used the Savage proceeds to pay off the $95 million first term-loan and applied the remaining funds towards our asset-backed loan revolver. In order to maintain adequate financial flexibility, we will plan to maintain the $40 million junior term loan until our seasonal cash inflows allow ample liquidity which is expected in the third quarter.

As you can see on slide 3, our expected leverage ratio after proceeds from the sale of Savage is 5.9 times. Our fixed charge coverage ratio at the end of the first quarter was 1.3 seven times, which is above the 1.15 times requirement. We look forward to sharing more with you regarding our capital allocation strategy at the Investor Day that Chris mentioned earlier. Our goals remain to allocate capital to pay down debt and advance the organic growth initiatives that we see there.

Although there were multiple external revenue challenges in the first quarter, you will find the results a 14% year-over-year reduction to our adjusted operating expenses, which is 6% on an organic basis. This reflects a consistent, committed and disciplined level of execution to rightsize our company and in particular our corporate overhead in light of recent divestitures.

Let’s review our first quarter consolidated results. We have provided you today with both as reported and adjusted results on an organic basis in our press release to assist you in your understanding underlying numbers and comparison to prior periods. My comments today are going to focus on our adjusted results.

So, let's turn to Slide 4 in the presentation. The company reported first quarter sales of $460 million, down 13.1% from the prior year quarter or down 7.4% on an organic basis. The year-over-year decrease primarily reflects the deterioration in the firearms business and overall continued softness in the hunting and shooting accessories divisions of outdoor products.

Ammunition, as Chris said, was almost flat, had a decrease of 1.5% compared to prior year. On a GAAP basis, gross margin was $95 million for the quarter, down $113 million, down from $113 million in the prior year quarter. On an adjusted organic basis, gross profit was $95 million, down $9 million from $104 million in the prior year quarter. Of the $9 million decline, approximately $3.6 million was attributed to firearms.

On a GAAP basis, operating expenses were $100 million, down 35% from the prior year. Adjusted operating expenses for the first quarter were $89 million, down 14.1% from the prior year quarter. Adjusting for the sale of Eyewear, operating expenses were down a total of 6%. The primary driver in the decline of operating expenses is the result of cost reduction actions taken within our business segment.

As Chris mentioned, we need to make our corporate organization more efficient and you can expect to hear more about this topic at our upcoming Investor Day. Interest expense for the quarter was $11 million, compared to $13 million in the prior year quarter. The decrease was due to the reduction in our debt balance.

The average borrowing rate in our first quarter was 5.7% compared with 5.8% in the prior year quarter. The net debt balance at the end of the first quarter was $738 million. Subsequent to the first quarter, the total net debt balance was offset by the sales average by a total of $157 million for a new balance of about $581 million.

On a GAAP basis, our tax rate for the quarter was negative 5%. Our adjusted tax rate for the quarter was 10%. The adjusted tax rate was primarily affected by unfavorable discrete items for the quarter.

GAAP net income for the quarter was negative $16.6 million, resulting in a GAAP earnings per share of negative $0.29 compared with a negative $0.91 in the prior year quarter. We recorded adjusted net income of negative $4.7 million which is down from breakeven in the prior year quarter resulting in adjusted EPS of negative $0.08 compared to $0.00 in the prior year quarter.

Year-to-date free cash flow was negative $45 million, which is a difficult comparison with the $70 million in the prior year period. As a reference, prior to fiscal year 2019, our average first quarter cash flow generation has been historically negative $25 million.

As you may recall, the first quarter fiscal year 2019 free cash flow was unusually strong because in the fourth quarter fiscal year 2018 we took advantage of accounts payable discounts and prepaying interest. We also had the benefits of timing for accounts receivable and corporate-wide inventory reductions.

In the current quarter, we had the opposite effect as we built up inventory in anticipation of summer sales and to improve our customer fill rates. The result was similar to years prior to fiscal 2019 with higher inventory in accounts payable in the first quarter. We expect the moderation of cash outflows in the second quarter as well as usual seasonal cash inflows starting in the third quarter to achieve our guidance.

Turning to slide 5, we will now review operating segment results. Shooting Sports recorded first quarter sales of $238 million, down 8% from $258 million in the prior year quarter. Ammunition revenue decreased 1.5% compared to prior year as a result of continued softness in both rimfire and 223 556 markets offset by increased demand for centerfire ammunition.

Firearms revenues decreased by $17 million which is minus 41% compared to the prior year quarter. First quarter gross profit in shooting sports was $39 million down 12% from $45 million in prior year quarter. The year-over-year decrease was a result of lower sales volume partially offset by favorable overall commodity price.

Turning to Slide 6. First quarter sales in other products were $222 million down 18% when compared to the prior year quarter. On an organic basis, adjusting for the sale eyewear, sales were down 7% year-over-year. Organic adjusted gross profit was $56 million which is decrease from $60 million in the prior year quarter.

Gross profit declines are primarily volume driven as a result of lower demand for hunting and shooting accessories. We were able to hold the overall gross profit rate flat in the first quarter when compared to the prior year quarter. This was largely due to efforts focused on cost containment.

Turning to guidance on slide. As we think about the remainder of our fiscal year 2020, we have recalibrated our outlook to reflect the expected results for the full year adjusting out the Savage Arms business looking forward.

Our guidance reflects our ownership of the firearms business through the first quarter. In conjunction, with the set of pro forma financials included of Slide 8, we want to provide you with a picture of our retaining businesses going forward.

We have updated our full year fiscal 2020 revenue guidance from 1.4 - $1.94 billion to $2.03 billion down to a range of $1.7 billion to $1.8 billion. This simply reflects the loss of Savage Arms revenue for the last three quarters. We have lowered interest expense from a range of $45 million to $50 million to an approximate annual expense of $40 million.

This reflects keeping the junior term loan in place until the third quarter. We expect an adjusted tax rate of negative 25%, updated from 5%. We expect full-year adjusted earnings per share in the range of $0.10 to $0.25 which has been updated to reflect three match.

First, the Savage EPS impact was anticipated in our previous guidance at $0.10 to $0.15 for the full-year. First, we subtract the midpoint of $0.125, then we also subtracted the pro forma loss of $1 million or $0.01 because it was projected to be at least break-even for the first quarter for a total Savage Arms related decrease of $0.13. So the adjusted guidance we had before of $0.28 to $0.38 has decreased by a total of $0.13 to a range of $0.15 to $0.25, all solely due to Savage firearms.

Lastly, the recently announced list for tariffs on imported goods from China may increase cost up to $10 million beginning on September 1. While we are working to mitigate these tariffs, we have taken a fraction of the risk and reduced the lower end of the guidance by $0.05 to reflect this uncertainty. As such, only our lower-end guidance then moves from $0.15 down to $0.10. As the trade discussion continues, we will update our guidance as that information becomes available.

Looking to the subsequent quarters in our fiscal year 2020, there are a series of headwinds and timing issues we are facing particularly in our current quarter two. We anticipate more pressure in ammo sales and margins in the second quarter, as a result of accelerated Black Friday discounts and competitive pricing in pistol as a major competitor just announced a drop in market pricing on 9mm.

We have strong litigation plans in place that we are executing to offset these pressures and tariff uncertainty in the second half of the year. These actions include the following, first, a large G&A cost reduction to supplement business unit cost reductions already underway. The benefits of known commodity and currency tailwinds. Three, ammunition manufacturing efficiencies that are planned and being rolled out.

Four, sales volumes led by contracts Chris mentioned in law enforcement and military contracts we have recently won. Five, lower seasonal discounting. Six, improved product mix. And lastly, reduced interest expense from additional reductions to our debt balance.

From a cash flow standpoint, we expect better second quarter performance than the first quarter, with positive strong cash flows delivered in the back half of the year, as fall hunting and holiday season sales are collected. We would like to summarize our fiscal year 2020 guidance as follows.

Sales in a range of $1.79 billion to $1.89 billion, interest expense of approximately $40 million and adjusted tax rate of approximately negative 25%, adjusted earnings per share in a range of $0.10 and $0.25, capital expenditures of approximately $40 million, free cash flow in a range of $30 million to $40 million. We anticipate R&D spending to be approximately $30 million.

We would like to call out that the cost reduction initiatives. As a management team, we have purposely protected research and development dollars to continue producing an aggressive product innovation pipeline.

We expect full year EBITDA margins of approximately 6%. We also expect Shooting Sports gross margins for the full year in the mid-teens and Outdoor Products gross margins for the full year in the mid-20s. While the second quarter specifically with the divestiture of the Savage Arms business, we expect Shooting Sports gross margins to be in the low- to mid-teens and second quarter gross margins in Outdoor Products in the low- to mid-20s.

In conclusion, we have made much progress but there is still much more to do. We look forward to updating you on the evolution of our strategy, our financial model and industry dynamics in more detail at our Investor Day in September. Now, we will open the line and take your questions.

[Operator]

[Operator Instructions] The first question is coming from Scott Stember from CL King. Please go ahead. Your line is open.

[Scott Stember, CL King]

Thanks again guys for taking my questions. Just a question about the pricing environment, it seems the last couple of quarters until 1Q that things had been firming up and talking about the discounting, I guess, starting to abate a bit. Now, obviously with the bankruptcy that you guys talked about seems like things have started to decline again. Maybe just frame out for us where within historical range over the last couple of years where pricing is right now. Have we taken a step down further than where we were a year ago? And what you guys can do to potentially offset that?

[Chris Metz, CEO]

Yes. So, Scott, there's a number of factors that are affecting pricing. I mean the first one you mentioned which was the bankruptcy. We see this is not a long-term impact, but it certainly affected our first quarter where we saw the liquidation of a lot of our products and our competitors saw the same thing. That should be behind us.

The bigger concern is on a couple of the calibers within ammunition. So the 223556 continues to be a discounted product. And I would say year-over-year it's about the same. We continue to see about the same level of pricing. 9-millimeter, unfortunately, has come down. We've just learned on July 1 our biggest competitor has taken their pricing down. And so, we've had to adjust our business model accordingly.

So that's probably the only change that we see at this point from a pricing standpoint. Rimfire, although not a pricing issue, continues to be a challenge for us. We’re clear market share leaders. It's a good profit category, very good profit category for us and demand is continuing to be soft.

So what are we doing to mitigate it? I mean, these are all the actions that we try to outline is, first and foremost, is making sure that we're driving productivity and efficiencies in the factory. We're right sizing our overhead structure to accommodate the volumes. And the team is doing a wonderful job of that.

We've got a bit of tailwind for the first time with commodity pricing which you'll start to see read in as we move through the year. But our team is just banging away and creating some really, really nice wins.

I mean these commercial contracts that we haven't had before. Some of them are certainly going to help. And I think that's why you see us stabilizing the top line. And I mentioned some of the margins issues I mean the second quarter we've got some timing issues, we've got Black Friday discounts that we took in the third quarter last year, we're taking the second quarter this year. It just happens to be a timing issue and some other things that are hampering our margin line. But we continue to be price leaders and we'll stick the course there.

[Scott Stember, CL King]

And in the past you've alluded to the fact that you're considering the sale of the Action Sport business but it seems like you're making some headway there notably on the e-commerce side. Are we still thinking about potentially selling this business at some point?

[Chris Metz, CEO]

Scott, listen, we have something we continue to evaluate and what we said last time was that Bell, Giro was a business that we just felt like we could improve and drive better value for when we do eventually sell the business.

And our thoughts haven't changed but we continue to remain open and we've got some great folks in that business that are longtime industry veterans that really help us drive the innovation and the share positions we have in the marketplace. So we're - I wouldn't say we're pleased with the current performance, that's why we're holding onto and improving it, but we'll continue to evaluate it as we go forward.

[Scott Stember, CL King]

And just last question before I get back in the queue. On the second quarter I think you guys gave some good clarity on the gross margins for the individual businesses but just looking at that and some commentary about the sales. Just trying to frame out to make sure that we're all in alignment of where the second quarter will be.

And maybe just trying to frame that out versus the first quarter whether we would see an expanded loss in the second quarter with a sharp recovery in the back half of the year. Is that how we should be looking at it?

[Chris Metz, CEO]

Why don’t you start Mick and I'll add on?

[Mick Lopez, SVP and CFO]

Sure. So, we do have as I've stated some significant headwinds. We also have some timing issues that will have a not as good performance in the second quarter than the first. But yes, a strong recovery in the back half of the year.

We highlighted about seven things that we have already in place and are going to be helping us in the second half. As we all know, our profit is basically in the pennies, this is breakeven and we're just talking very small amounts in the millions of dollars, so $5 million, $10 million adds up $0.10, $0.20, very, very quickly.

[Chris Metz, CEO]

Yes. So, Scott, I think you framed it up correctly which is we -- despite the Savage decline in the first quarter. Internally, we largely hit our internal plan for all of our businesses in total absence Savage. What we see now in the second quarter if you look at them stack-on-stack is likely a worsening and we're trying to do as much as we can to offset that.

But we know a lot of the stuff we're doing is coming in the back half and I don't want anybody to think that oh boy this is -- we're uncertain about it or it feels like a hockey stick or what have you. I mean, there are absolute contracts that we've won that contribute to it. There are mitigating actions that we've already taken that are coming to fruition. There are commodity tailwinds that we are locked into.

So we can see a clear line of sight to it but what brings the second quarter down a bit more than the first quarter is frankly some of the pricing that we've had to adjust to recently. I mentioned the Black Friday, where we've got a really good Black Friday lined up.

I think we're not only going increase our sales and our margins on Black Friday, but from an accrual standpoint we've got a timing difference where we recognize most of the discounts in the third quarter last year. We're going to do it in the second quarter this year. So, we should see a bounce in the third quarter because of that.

[Mick Lopez, SVP and CFO]

And then we're taking action, Chris, right. We have already identified a cost reduction program, had corporate in particular but also these great efficiencies that we have identified in manufacturing plants and some commodity tailwinds that will help us in the second half.

[Chris Metz, CEO]

Yes. So, I mean, additional question. We talked before about another center of excellence being our procurement purchasing area. I mean the team is driving wonderful productivity year-over-year unfortunately it's being masked by a lot of the headwinds we're facing. Now, we know that's going to abate at some time and certainly we're not projecting at any time soon and that's why we're continuing to take even further action to mitigate it.

[Operator]

Our next question is coming from Jim Chartier from Monness, Crespi, & Hardt. Please go ahead your line is open.

[Jim Chartier, Monness, Crespi, & Hardt]

On the new contract, I know in the past on the international business there's been some volatility around timing for those contracts. On the law enforcement contract, how certain is the timing of those? And is there any chance it slips into next year?

[Chris Metz, CEO]

Yes. So, it’s a good question. I mean Jim we're actually already starting to ship against the LAPD contract so that is done dusted in and we're starting to see small shipments. Now, the trickle-down effect because this is this is a nice halo effect. There's a lot of other precincts that don't have the capability of doing all the testing and everything like that so they look to LAPD or NYPD for their stamp of approval.

We haven't seen any of that yet, but LAPD’s shipping. The army frangible, if it's not shipping, it's close to being shipped. And then the KSA is -- that's always the one that's more lumpy than others, but that's coming, and we'll be building it this quarter type of thing.

[Jim Chartier, Monness, Crespi, & Hardt]

And then on the tariffs, other companies have been impacted by 10% tariffs previously [indiscernible] they were able to largely mitigate the impact of the first 10%, some with currencies, some with concessions from vendor. So, how conservative are you guys being in the $0.05 impact from the tariffs for this year?

[Chris Metz, CEO]

Yes, Jim, it's a question that we debate. We debate it largely as we look to the guidance. So, here's how we framed it up. All the tariffs that we've seen to-date, I think the team has done a really nice job of mitigating those. And it's partnerships with our vendors and movement of some of the product outside of China.

So, we've done everything we largely can. This 10% on the List 4, we've sized it up as at about $5 million to $10 million of risk. Now, we put $0.05 into the lower end taking the lower end of the guidance down by $0.05. So, clearly, we haven't reflected the worst-case scenario, which would be $10 million. But that is absent as going out mitigating it.

So, what are we doing to mitigate it? Well, clearly, there's going to be some price increases and it's unfortunate, but the consumer's going to see that. Two, as the RMB or the won has continued to devalue, we're hitting our suppliers hard because they've just effectively gotten a big profit bump. So, we're working with them and that's all I'm going.

Thirdly, our suppliers have been very good partners with us. And so, we've been working, thinking that this List 4 was going to come to fruition at some point, so we're already working with some of our vendors and have been for many months now in moving their production to other locations. So 5% to 10% is the risk. 10% is the worst case. We don't anticipate that happening. We feel like we've guided to cover the tariffs as we know them today.

[Jim Chartier, Monness, Crespi, & Hardt]

And then just on the Prime Day and the Black Friday wins, I mean how do you guys manage to maintain or it sounds like you can increase profitability during those promotional events?

[Chris Metz, CEO]

Yes. I'll give you a little bit more color on Black Friday. Black Friday is a huge promotion for a number of industries. And what happens in particular to the ammo and the hunt/shoot accessories industry is we discount pretty heavily that product. So the consumer is getting a great, great deal and our retailers participated and it ends up driving a lot of traffic and what have you.

What's different this year than last year is not just the timing of the accrual but our business is going to be up quite a bit year-over-year. So with the discounted product that is kind of a good news, bad news. However, our margins are going to be up as well. So we feel pretty good about the fact that what we're executing this year is not only accretive to the top line but it's also created to the bottom line.

So we feel good about where we're at. Overall, it creates a great relationship with our retailers and it drives a lot of foot traffic so hopefully we'll see a trickledown effect to our other categories as well.

[Operator]

The next question is coming from Gautam Khanna from Cowen & Company. Please go ahead. Your line is open.

[Gautam Khanna, Cowen & Company]

Yes. I was wondering if you could talk the supply agreement with [indiscernible] - I think they’re waiting for the recompete now. What sort of - what kind of contract structure do you have in place? Now that guarantee supply at a given price for the Lake City Ammo?

[Chris Metz, CEO]

Well - so, the way to Lake City Ammo knows - you guys know, the contract is up. We should hear fairly soon the outcome of that contract. However there's ongoing supply of that contract for the next 12 months and we're locked into that price, we're locked into the volume. So, there won't be any effect even with an announcement here soon over the next 12 months.

But as we stated previously, we feel like we've taken the two best companies in the world, in GD from the arm side and the government contract side and Federal from the ammunition side. And we've got the dream partnership, that doesn't guarantee a win, but certainly we feel good about our position vis-à-vis the competitors. So, we'll wait and see and hopefully it - the ball bounces our way on that one.

[Operator]

Our next question is coming from Dave King from ROTH Capital. Please go ahead. Your line is open.

[Dave King, ROTH Capital]

First, on the second half improvement for ammo. How much of a benefit are you expecting from these new contracts? Versus how much is coming from new product benefits or possible industry improvement?

[Chris Metz, CEO]

Well let me start with the latter. We're not expecting any industry improvements.

I've gone - I've stopped trying to figure out when that industry's got to improve. But I do look at leading indicators all the time. So, we're looking at FBT. We're looking at Nix. We're looking at sell through. We're looking at a lot of things that have us believing that we definitely see light at the end of the tunnel.

Now that being said, we're trying to control our own destiny and that's what the Ammo team is all about. They're grabbing the things that they know are sure and they're driving those hard. So the contracts are real and we've been - and we work on contracts that are incremental every year. We just can't plan for all of them unless they're signed. And so we didn't plan for these. And fortunately we're going to get these contracts that I mentioned that will mitigate whatever headwinds continue to persist.

From a new product standpoint, the team has been sensational. I mean, we've introduced more new products over the past 12 months and will over the next 12 months than I think we've ever had in the company's history. I mean, it's a tremendous amount of new products and it's driving vitality with our consumer but it's also driving great relationships with our retail partners.

And you'll see some of this coming this fall but frankly some of the volume in the back half, as I mentioned, the Black Friday. Our sales are going to be up by quite a bit year-over-year, that's why we're expecting a good third quarter. And all that stuff has already contracted and agreed to. So there is a - - we saw a flatness in the last two quarters. We'll have a little bit of a tough quarter here in the second quarter with some of the reasons I mentioned. But as we move into the back half, you're likely to see ammo increase potentially year-over-year which is good for us.

[Dave King, ROTH Capital]

Maybe turning to outdoor. It sounds like part of the drop this quarter was due to weather. Do you have the monthly cadence for the quarter versus the sort of 7% organic decline, and then I guess just how should we be thinking about that business in the Q2, how is it trended in July and August so far?

[Chris Metz, CEO]

Yes. So, it's interesting. It's kind of a tale of two cities that I mentioned with the wet weather. I mean the wet weather affects a number of our businesses, right, that are outdoor, everything from cooking in Camp Chef, to hike bike run with CamelBak, to just pure cycling with the Bell and the Giro brands. Despite the cold wet weather, the team actually got off to a pretty good start in April and in May in total. What happened in June is we had a very large customer that we've built some inventory for, and then they shut the spigot off and it was kind of a double whammy for us. We're starting to see that come back in July, so a timing issue.

I think the other businesses we're seeing - the - we expect them to continue to improve as we go forward. I mentioned CamelBak where we're excited about the prospects for that business. But I want to temper it, right. I mean we're in the middle of rebuilding that team and reconstituting it. But what we see are definitely green shoots. Camelbak,

I mean, Camp Chef, we got some new product coming out. I mentioned in my scripted remarks that we've got a new pellet grill that we think that’s going to set the standard and a great campaign going with [indiscernible]. So, we'll continue the momentum. But some of the new products that these new - that the new teams are working on, you'll see - start to see come in as the ordering for spring season starts to come through here in the fall and winter time frame.

[Operator]

Our final question is coming from Mark Smith from Lake Street. Please go ahead. Your line is open.

[Mark Smith, Lake Street]

First, looking at the ammunition business. If we excluded rimfire, did we have ammunition business flat?

[Chris Metz, CEO]

We don't give that type of color for competitive reasons. We don't just dissect it down by categories. But I can tell you absent rimfire and 223 556, our business was really pretty good. I mean our shotshells - we had a very good business in shotshells, our centerfire, very good business. So other than the - but it just so happens to be that pistol, particularly 9mm and a lot of the Lake City volume, they’re very, very high volume categories. And they continue to show struggles from a margin standpoint, but 9 millimeter is growing like crazy.

I mean it's one of the hottest calibers out there and that's why people are trying to grab share of it. But yeah, absent rimfire, I mean we've done pretty well and we're not losing share, we don't believe in rimfire. It just happens to be we're such a big industry and they use such a big part of our business, that when it suffers, so does our whole business.

[Mark Smith, Lake Street]

And then looking at rimfire in particular, is this still hangover from - for so long people couldn't get a hold of rimfire - it was tough for consumers to find it on shelves. Did we just see a big build up and we need to work through some of that supply that's out there?

[Chris Metz, CEO]

Yes Mark, it's a good question and I wish I had a very solid answer for you but honestly, we don't know. We know shooting is not down. People are still plinking people are still shooting a lot of rimfire product. And as the market does eventually bounce back, we would expect this to bounce back strongly. There has been a lot of innovation on the - or lot of new introduction on the product side from firearms manufacturers.

One of the folks we're talking to now, we're talking to about developing a kind of a rimfire product for them. So there's a lot of interest always will be in rimfire and plinking and we expect it to bounce back.

[Mark Smith, Lake Street]

And then secondly for me, if you can just talk a little bit about some of the benefits of the Savage divestiture that may be are hard to quantify. First, REI is back online where is that out, what kind of potential impact could we see. And then secondly, if you can speak just a little bit more to potential impact from working with some of these firearm manufacturers for some specialty ammunition for the guns that they make?

[Chris Metz, CEO]

Yes, Mark. So those are clearly two big benefits for us. And so, REI, their new CEO, Eric Artz and I have an ongoing dialogue, great discussion. And they're excited to bring our products back in. I personally walked over a dozen REI stores and been kind of a blind shopper, if you will, mystery shopper. And I know when I ask about hey why are you guys not carrying CamelBak, Camp Chef, what have you. They're saying we want to, we're going to.

So Eric Artz has done a wonderful job of making sure that the REI associates understand the situation and the products are going to come back in. But the frank answer is, always going to take time, right. So they brought other competitors in and they want us back, but it's going to take some time. So it's not going to be an immediate boost to us but - and hence, that’s not the reason why we sold Savage but we certainly should see a boost from that.

Working with other firearms manufacturers, we've got three industry leaders in their categories that we're working with right now. On developing very special rounds for them which again is a great nod to the hustle and hard work that the ammo team is doing to take advantage of it.

[Operator]

The next question is coming from William Reuter from Bank of America. Please go ahead. Your line is open.

[William Reuter, Bank of America]

My first question is on your slide where you show leverage, you show the 5.9 times at the end of the first quarter. I don't think that was pro forma for this Savage sale. And then you show the debt reduction, was the Savage sale deleveraging on a net basis?

[Mick Lopez, SVP and CFO]

A very good question, Bill and since we sold Savage at approximately a six times, it doesn’t delever very much from a ratio perspective, right. So, we think the 5.9 will go down somewhat, but not significantly as a consequence of the final price that we received on Savage.

[William Reuter, Bank of America]

And then you mentioned that at this point you're going to continue to try and turn around the Bell, Giro business. Are there other asset sales that you would consider or do you feel like you want to move forward - the rest of your businesses at this point?

[Chris Metz, CEO]

Yes so what, I don't want to do is send a message that we're looking at - fire selling companies because that's not the way we operate. We feel like we've sold two assets that didn't fit well for us that would be in more valuable in other people's hands. We stated previously that we feel like Bell, Giro could be in that category and we haven't changed our thoughts on that, other than the fact that we think there's improvement to be had.

There may be some other smaller brands that people knock on our doors that we contemplate, but we're not looking in any other wholesale changes at this point in our portfolio mix.

[William Reuter, Bank of America]

And then just lastly from me with the underlying - I guess, with action sports continuing to decline. I know you have some exciting innovation that you called out and certain of those sub brands. Do we think - it would seem to me that the underlying growth rate of that category is not necessarily declining. I guess do you think that is correct that the action sports segment continues to grow as a category and that you guys could return to growth later this year?

[Chris Metz, CEO]

Certainly yeah, I mean that's - the way we see it lining up is - we don't see big growth from that business. If you look at the trends in cycling in general and you can look at all the bicycle companies or what have you, e-bikes are growing, mountain bikes has been a really, really strong category over the last number of years but that's flattened out and road cycling is frankly down. So, and skiing has got pretty good trends, but particularly for those at innovate like us in goggles.

So, we kind of look at it as a lower growth business, but something that should certainly return to growth as we move forward with the innovations that we have as well as coming off of a strong snow season which is always a harbinger for the next season because shelves are empty and they need to replenish.

[Operator]

Our last question is coming from Brett Andress from KeyBanc Capital Markets. Please go ahead. Your line is open.

[Brett Andress, KeyBanc Capital Markets]

Just one from me. Chris, can you help us with the variance in mix versus what I guess is actually happening in the firearms market. I mean, it's a metrically all track, but what do you think is causing that divergence. Is it just liquidated inventory flow into retail or is there something else at play there?

[Chris Metz, CEO]

Well Brett, if I don't fully answer your question, just hit me up again here, but I can tell you what's affecting the mix. So first of all with the liquidation from UFC Ellett Brothers that certainly affect the street price. And you see it in a lot of the hunt/shoot categories where there's lower pricing in some of these categories over the short-term than any of us would have expected.

Secondly, as I mentioned rimfire so, we were still benefiting a year ago in the first quarter by higher pricing in rimfire. That pricing has come down and so that's affecting our mix. I mentioned 9-millimeter which we've seen come down a little bit that's affecting our mix. Lake City, we promoted particularly the consumer level to try to drive that category, that's affecting the mix.

So there's a number of things that continue affected, but what again is being masked is a lot of the good stuff we're doing internally to drive manufacturing efficiencies and to drive cost out through better procurement initiatives or would be a lot worse to be honest.

[Brett Andress, KeyBanc Capital Markets]

Because I guess what I was getting at is in your prepared remarks you said that mix were up but the firearms industry underline was I think you called it horrific or horrible. I was just trying to bridge?

[Chris Metz, CEO]

Okay.

[Brett Andress, KeyBanc Capital Markets]

Bridge the gap when comes to.

[Chris Metz, CEO]

I'm sorry, Brett. I thought you were talking about mix rather than NICS.

[Brett Andress, KeyBanc Capital Markets]

Oh yes, sorry about that yeah.

[Chris Metz, CEO]

Yes so, the NICS data is - I think it's a little bit confounding, because it has been up. But remember that it's been so low for so long. I mean the firearms industry is - - we really started to see a downturn as I think our competitors did at the beginning of this calendar year. So, this isn't just the first quarter thing, I mean this has been going on now for a couple of quarters. And it's - NICS is a good indicator, FET is a good indicator.

There's a number of things that are good indicators, that all kind of point towards light at the end of the tunnel. But I don't know when that firearms business and how NICS is affecting it is going to come back I just don't.

[Operator]

That concludes today’s Q&A session. Mr. Metz at this time, I will turn the conference back to you for any additional or closing remarks.

[Chris Metz, CEO]

Thank you, operator and thank you to all of you for being on today's call. While we certainly have our challenges, I'm confident we've got the correct plan and the right team to execute it. As a reminder, we have our upcoming Investor Day, which we just announced will be held in New York City on September 10.

At this event, which will be webcast for those not able to attend, will share our vision of Vista Outdoor for the mid and long-term, as well as let you hear from our brand leaders on their goals and progress for fiscal year 2020 and beyond. I look forward to seeing you on September 10 and/or updating you on the progress during our next quarterly call. Thank you.

[Operator]

Ladies and gentlemen, that will conclude today's conference call. Thank you very much for your participation. You may now disconnect.