Vista Outdoor Inc (VSTO) 2016 Q3 法說會逐字稿

Good day, and welcome to the Vista Outdoor third-quarter FY16 earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Michael Pici, Vice President of Investor Relations. Please go ahead, sir.

Good morning and thank you for joining us for our third-quarter FY16 earnings call. With me this morning are Mark DeYoung, Vista Outdoor Chairman and Chief Executive Officer; and Stephen Nolan, 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, Mark.

Okay, thank you, Mike. I appreciate that. Welcome everyone, good morning. Thanks for joining us for our Vista Outdoor third quarter call this morning.

It's been one year since we launched the Company, and I am very pleased with our tremendous progress and our accomplishments over the past 12 months. As we prepared to launch Vista Outdoor we shared with you our strategy, we discussed our mission, we laid out our plans for creating a leadership position in the individual outdoor recreation market, and we have done exactly what we said we would do. We've expanded our portfolio with adjacent capabilities and top brands, we've leveraged our customer relationships and distribution network for growth, we've revitalized our innovation engine, we've delivered against balanced capital deployment strategies, we've hired top talent to the organization, and we've created shareholder value.

In the past quarter the Company again recorded sequential and year-over-year organic growth. Third quarter results reflect a year-over-year increase of 17% in revenue, with 7% sequential revenue growth. We achieved third quarter year-over-year increases in gross profit of 25% and adjusted operating profit of 15%. Adjusted EPS was also up 15% year over year. As a result of our strong performance and improvements in the marketplace, we've raised our full-year guidance for sales and adjusted EPS. Stephen Nolan will share more on the market conditions and our outlook in just a moment when he provides more detail on our financial results.

In our first year as Vista Outdoor we've executed $138 million of our two-year $200 million share repurchase authorization program. We have built an industry-leading executive team, including a new President of the outdoor product segment, Kelly Grindle. Kelly comes to us from Johnson Outdoors, and he is leading a diverse segment encompassing eight global product lanes and 31 brands. Each product lane and each brand within Vista Outdoor has a defined strategy and road map, with clear accountability for projecting the unique character of the brand and for delivering profitable growth.

We have established a very talented M&A team that has helped us close on two strategic acquisitions in the outdoor recreation space this year, Jimmy Styks and CamelBak, both of which are performing as expected and enhancing our ability to leverage our product portfolio with new and existing customers. This M&A team continues its full-time work with a disciplined focus on strategic acquisitions. I obviously can't comment on specific targets, but I can tell you that we have evaluated and pursued a number of strategic targets this year, and we will continue to do so. The targets we need to offer need to be a good strategic fit, and they need to be at the right price. If our M&A criteria are not met by a specific target, we move on to other opportunities.

I'm confident this disciplined process is right for the Company and our shareholders and supports our strategy for creating a leading outdoor recreation branded portfolio that will deliver long-term profitable growth. We have strengthened our product development process and launched award-winning new products this year. These new products have been well received by the market as evidenced by feedback we heard at several sales shows, including the Archery Trade Association show, the Outdoor Retailer Winter Market, the Shooting and Hunting Outdoor trade show, and the PGA show.

I would like to highlight a few of our new products. For the second year in a row, CamelBak has won the ENDURO magazine's Design and Innovation Award for our Skyline mountain bike pack, which is the pinnacle pack within a new low rider collection. These packs are focused on maximizing stability with a lower center of gravity for the rider.

Our revolutionary solution to the 17 HMR rifle was the Savage semi-automatic A17. During the quarter the gun was named Rifle of the Year by Gun and Ammo magazine, which said, quote, the rifle amazed us with reliability that we have never seen, end quote. The magazine also recognized our complementary ammunition, designed specifically for this new firearm and offered in our CCI brand. The optimization of the ammunition to enhance the performance of the A17 rifle is a prime example of the innovation and collaboration possible within our strong and diverse portfolio of brands and capabilities.

Bushnell's elite binoculars and Trophy XLT rifle scopes won OpticsPlanet's Brilliance awards. These awards were determined by consumers who voted on the best of the best in the birding binocular and air gun rifle scope categories. OpticsPlanet also bestowed its Brilliance awards to Blackhawk for the best holster brand, the best tactical vest, and the best soft pistol case.

At the Archery Trade Association's show in early January, we launched our new Pierce arrow with a micro diameter composite shaft that provides deeper penetration and less wind drift while maintaining Gold Tip's superior reputation for extreme durability. Also during the Archery Trade Association show, Primos won our Reader's Choice Gold Award from Bow Hunting magazine for the Primos deer call, turkey call, elk call, and our hunting blind. Primos also received the Member's Choice Gold Award for 2015 from bowhunterplanet.com.

At last month's Shooting, Hunting, and Outdoor trade show, or the Shot Show, the Company launched more than 100 new products, including the Savage A22 Magnum semi-automatic rifle, which builds on our A17 success, a new lineup of semi-automatic Stevens shotguns, a technically-advanced polymer encapsulated bullet known as Syntech that delivers cleaner, consistent shooting at the range. We offered optimized trail cameras, versatile and comfortable holsters, advanced state-of-the-art gun care products, and a variety of sporting optics.

At the PGA show we unveiled our new Tour V4 family of golf rangefinders. The new Tour V4 and Tour V4 Slope edition are faster than their predecessors, 30% smaller, and increase the ease and accuracy in acquiring yardages. We also launched a new golf GPS watch, which is Bushnell's lightest and thinnest golf watch. It has been designed and redesigned, and comes pre-loaded with 35,000 courses in over 30 countries.

Our heightened focus on innovation is resulting in new product offerings across our brands and is being recognized and rewarded by both customer and user groups. We'll continue to invest in research and development and the introduction of new products, and I am confident following our success in these recent shows that we are off to a good start in 2016.

In January we launched our standalone Company-wide benefit programs and completed the transition services agreement associated with the spin. With the exception of some ongoing long-term tax issues, we have completed the transition services agreement, and I'm proud of the Vista team and our leaders across the Company for the great work in standing up new systems and capabilities to ensure we operate effectively and efficiently as a standalone independent company.

Our safety and environmental performance remains at outstanding levels, and our contributions to the conservation of wildlife and wild places continue to support our commitment to being a steward of the environment and a good corporate citizen in the communities where we live and work. Vista Outdoor is focused on bringing the world outside. As you continue to observe our implementation of this mission, you will notice that we have not only articulated a compelling vision, we are executing it. I am pleased with our progress the past year; I'm proud of the Company and our employees and our products.

Stephen will now provide more detail on the financial results for the third quarter and the outlook for the rest of FY16. Stephen?

Thanks, Mark. Good morning, everyone, and thanks for joining our third-quarter earnings call.

We've disclosed both as reported and adjusted results in our press release to assist you in your understanding of the underlying numbers and to assist in comparison to prior-year periods. You will find a more detailed financial presentation of our third-quarter FY16 performance on our website. Today I will discuss the adjusted results, first for Vista Outdoor overall and then for the segments.

The Company achieved third-quarter sales of $593 million, up 17% from the prior-year quarter. The year-over-year increase is due primarily to an organic increase within the shooting sport segment and $41 million of sales from our recent Jimmy Styks and CamelBak acquisitions. Third-quarter gross profit was $168 million, up 25% compared to $134 million in the prior-year quarter, including $17 million of gross profit from the recent acquisitions as well as increased organic gross profit in the shooting sports segment, partially offset by declines in outdoor products. Our operating expenses for the third quarter were $92 million, compared to $68 million in the prior-year quarter. The increase reflects additional expenses as a result of acquisitions, standalone company costs, stock-based compensation, and additional R&D selling and marketing investments. We reported operating profit of $76 million in the third quarter, an increase of approximately 15% from the prior-year period. The increase was driven by our gross profit performance, partially offset by the increased operating expense that I just discussed.

Interest expense for the quarter was flat at $8 million. Interest expense in the prior year was based on the allocation to Vista Outdoor from Orbital ATK, while the current year reflects interest on our actual debt balance. The tax rate for the quarter was 36%, compared to 33.4% in the prior-year quarter. The higher tax rate is primarily caused by the true-up of prior-year taxes, which typically occurs in the third quarter and was more favorable in the previous year than in the current year.

For the third quarter we recorded net income of $44 million, up 13% from $39 million in the prior-year quarter, resulting in EPS of $0.70 compared to $0.61 in the prior-year quarter. Year-to-date free cash flow was $51 million, compared to $80 million in the prior-year quarter. The year-over-year decline in free cash flow was largely driven by our investment in Wharton Capital and income tax and interest payments in the current year.

Company repurchased approximately 1.4 million shares for $61 million in the third quarter under our existing $200 million two-year share repurchase program. Since the end of the third quarter, we have repurchased approximately 360,000 additional shares for $16 million. Since the program's inception, we've repurchased approximately 3.1 million shares for $138 million, which is nearly 70% of the overall program. I am very pleased with our execution of the program, which has been in place for less than one year. The Company will continue to opportunistically repurchase shares under this authorization.

Now, turning to our business segments where we report sales and gross profit. Shooting sports recorded third-quarter sales of $356 million, up 15% from $309 million in the prior-year quarter. Shooting sports had 5% sequential growth in the third quarter, continuing the recent trend of quarter-over-quarter growth. The year-over-year increase was seen across all product lines, indicating the market has now stabilized and has returned to modest growth. Third-quarter gross profit in shooting sports was $104 million, up 28% from $81 million in the prior-year quarter. The year-over-year increase was driven by volume, profit mix, and raw material procurement favorability. Gross profit grew sequentially by 13%.

Third-quarter sales in outdoor products were $236 million, up 19% from $198 million in the prior year quarter, including approximately $41 million of sales from acquisitions. Organically, the segment was down approximately 2% from the prior-year period, but up 3% sequentially. The organic decrease of $3 million was caused by overall unfavorable foreign exchange impact and lower sales in tactical products, partially offset by increased promotional activity and increases in golf and shooting accessories. Absent the unfavorable foreign exchange impacts, we would've delivered positive organic sales growth in the quarter. Gross profit in the third quarter for outdoor products was $64 million, an increase of 17% from $54 million in the prior-year quarter. The increase includes $17 million of gross profit from the recent acquisitions. Organic gross profit in outdoor products was down 14% as a result of unfavorable foreign exchange impacts, the decrease in revenue, and unfavorable product mix.

Turning back to the Company level, we've experienced a recovery in the shooting sports market, driven at least partially by a marked response to the current political environment. The benefits from this were tempered by overall weakness at retail and the warm fall weather, both of which led to our higher level of promotional activity for certain products, which is continuing into the fourth quarter. In the fourth quarter we will continue to ramp up our operating expenses toward the expected long-term level, while also making previously disclosed investments in our business which are back-end loaded, leading to higher operating expenses for the balance of the year.

Given our strong performance year to date and our current expectation for the balance of the year, we are raising our overall sales and adjusted EPS guidance for FY16. We anticipate our EBITDA margin to be around the midpoint of our previously disclosed 14% to 16% range. Additionally, we expect to continue investing in working capital to support both increased inventory availability and promotion-related payment terms, resulting in modestly reduced expectations on the high end of our free cash flow range. We now expect sales in the range of $2.24 billion to $2.26 billion, adjusted EPS in the range of $2.40 to $2.50, capital expenditures to remain flat at approximately $45 million, free cash flow in the range of $150 million to $170 million, and an effective tax rate of approximately 38% consistent with our previous guidance. I want to remind you that our adjusted EPS and free cash flow guidance include adjustments that are detailed in the Company's press release and investor presentation.

With that, we will open it up for questions.

(Operator Instructions)

Gautam Khanna, Cowen and Company.

Good morning and great results. I was wondering, Mark, if you could comment on what you're seeing in the shooting sports ammo business? Are you starting to see surge levels returning, and any comment on either both the volume and the backlog as well as pricing dynamics that you're seeing?

As we entered into the holiday season -- the holiday season, as we mentioned, we were concerned might be slow because of the slow retail environment. That was accelerated in the back half of December by some social events that occurred, including the San Bernardino issues and political discussions that began in late December. That has created, to use your term, a bit of a surge in the last six weeks or so. It is unlike prior surges, however. I think this surge is much more modest and it is more muted in terms of overall demand across the variety of ammunition products. But it definitely has increased demand, and we have seen that and been able to capture a lot of that with additional sales in the last six weeks. The ammunition continues to be most focus and demand in pistol ammunition, which is consistent with some trends we had seen previously in times like this, and also 223 and 5.56 ammunition demand has begun to increase.

In terms of pricing we've seen no broad pricing changes, neither significantly up north, significantly down by the competitive set in the market. So general stability in pricing. With promotional activity, which was begun around the holiday season and then continues through the show season, which is typical of some promotions in the end of our third quarter and beginning of our fourth quarter. So nothing truly atypical with the exception of that increased demand.

Okay. And with respect to the Savage Arms business are you now seeing substantial growth in that business after the lull we have seen? Obviously the NICS data looks pretty favorable the last couple of months?

Yes, the long gun NICS have recovered as you mentioned, and so Savage Arms has been part of that recovery. We have also brought employees back in. As you'll recall, we had some employee reductions we did back in the summer. We've now been back in the hiring mode as we return back to higher levels of production at Savage largely focused on centerfire rifles.

But in Savage we've also introduced a full new line of shotguns in the Stevens brand, which we're very excited about. One of our strategies for Savage Arms was to expand the capability of that brand and the product offering within that brand, and we're seeing some very good success as we make moves to organically expand our offering, which we think will help future revenue and growth as well. But it is seeing an increase in demand as you mentioned following those NICS checks.

One last one. Your comments on the M&A pipeline, can you characterize what you're seeing? Is it seller expectation still high, is it a lack of available properties? How would you characterize the likelihood of a transaction over the next call it six months?

I think I can only answer that as best I can without giving detail I can't give in terms of specific targets or actions that might occur in the future. I think as we've used the term in the past, and I would say it remains robust. We've used that term in the past. We have a dedicated, as I mentioned in my initial comments, we have a dedicated team. They work full time only on M&A in terms of mining opportunities and seeking targets and beginning discussions with targets.

I think there are lots of targets in this market, as we mentioned when we launched the vision and mission for Vista Outdoor. We talked about a $63 billion market and the domestic market in individual outdoor recreation. We explained to the investment community and to others who were interested in listening that this is a very fragmented market with lots and lots of opportunity. That has not changed.

I think some of the expectations in that market, at least we have determined in our efforts through our M&A team and work by the executive management team, we've determined in some cases the pricing is elevated above what we believe the appropriate and responsible price for Vista Outdoor would be. And we will walk away from those Canada companies if the price is not right and if the strategic fit is not right.

But at the same time I think we've demonstrated that we can find value. We found value with Jimmy Styks that made sense, we found great value with CamelBak that made sense, I'm confident we'll find other value and be able to talk in the future about our efforts in M&A paying off. But our key is to drive a disciplined process and stick to our guidelines and principles in M&A in terms of strategic fit and price. And that will pace the number of acquisitions which we are able to talk about with you.

Thanks a lot, guys.

Greg Konrad, Jefferies.

Good morning and great quarter. I want to take a longer-term view. When we think about your 6% to 8% long-term growth target, how should we think about ammunition in terms of price and volume growth? And where does capacity stand today versus what would be required to get to that rate?

It is always difficult, as you know, to look out into the future and predict what might happen with volume or what might happen with pricing. Pricing for us is a competitive issue and its market driven, as is product mix. It's very important to those margins and to our growth rates, depending on where consumers go and the kind of products that are in demand. We think we are very well-positioned for that.

Stephen mentioned investments in working capital have been important to us, making sure we have the right products available for shipment. We've had some missed sales opportunities because we didn't have the right products in inventory, both in outdoor products but also in our ammunition categories. And so our investments in working capital are helping ensure that we don't have lost revenue and profitability because we can't deliver products. So that is part of our working capital investment plan in inventories. And we mentioned in our road show almost a year ago that we needed to invest in inventory to ensure that we could capture demand. So we'll focus on that to support growth.

I think in the near term Stephen mentioned in his remarks that the ammunition market had stabilized, and we're seeing a return to modest growth in the low-single digits. It looks to us like that will likely continue a trail toward improvement over the long term. There are a lot of new shooters that have come into the market; the demographics are good of those new shooters. We've talked about that in the past. A lot more diversity in the shooting sports in terms of female participation. A younger demographic of shooters continues to come into this market. The shift toward target shooting from hunting consumes more volume in ammunition, which benefits our factories which run more efficiently obviously when we have higher volumes.

So the indicators are good I think for the future of the ammunition market. I think over the long term, we don't see anything today that is inhibiting our ability over the long term to get back to those mid-single digit growth numbers. And I believe we're just beginning to get back on that course with these low single digit growth numbers.

And Greg, to your question about capacity, as we look forward as we've discussed before, we've invested in a consistent basis in our ammunition factories. And -- but at a relatively modest level, and we continue that year in, year out.

We've added additional capacity every year for the last 14 years, and we will continue to do so. Obviously if we saw more sustained higher growth rate at some point we might revisit our levels of capital investment in those businesses, but right now we're continuing those steady investments, adding additional capacity particularly in those markets which have been hotter over the last few years, which has really been rimfire and pistol over the last couple of years.

We've made significant investments in those areas, and those will continue to support capacity growth. And obviously as we've discussed before, we also do outsource a portion of our ammunition to the Lake City Army Ammunition Plant, which may offer us increased capacity flexibility as we go forward in selected calibers.

So I think Stephen's point is important. If we are running our factories today at near capacity levels and if the market continues to grow as we believe it will, it will require additional investments in capacity so we can maintain and grow our market share. We are very mindful of that, we are focused on trying to ensure we understand that long term. I think what Stephen and I are both telling you is it appears to be favorable.

Thank you. And then just on outdoor products there is some pressure on the margin; some of that was mix, some of that was foreign exchange. Is that something that you would expect to work itself out? Did this mix return to more favorable? I know you've also made quite a bit in terms of productivity, whether it be facility rationalization or with Bushnell. How should we think about that gross margin going forward?

As you heard in my remarks where I listed them in order of significance, the most significant driver was the unfavorable foreign-exchange impact. It is very difficult obviously to predict that. If I could predict with any certainty I would quit my current job and become a full time foreign-exchange trader. We obviously see that in the year-over-year basis lessening its impact, but in terms of absolute gross margin level, it may take awhile to work that out of the system.

We're obviously working with our supply chain to get better pricing. We have discussed before the supply chains initiatives we have under way in Asia, and those started even before we faced these foreign currency headwinds. So we will continue to work with those suppliers to try to reverse some of the impact of that. Those efforts take awhile. They don't happen overnight. We are not going to fix those challenges overnight.

The unfavorable product mix, that really varies quarter to quarter. It is in fact even somewhat seasonal during the year. There are certain seasons where our mix is less favorable than others, given mix between our various products, whether they be winter sports, golf, and the like. We can't project that at this stage, the exact mix in any given quarter, but obviously expectations of reasonable performance are embedded in our fourth-quarter guidance -- our full-year guidance that we've provided today.

One last follow up to that. You mentioned promotional activity. Is that something that slows down as we exit your fourth quarter, or is it tied to holidays and weather? How should we think about that going forward?

The bulk of it occurs around the holiday events in our third quarter and the show season in the fourth quarter. As we go through the show season, we mentioned some of the shows already, whether it be Shop Show or ATA or the PGA show, and there are a lot of wholesaler shows in which we participate. The bulk of the promotional activity is during those two quarters. So it is usually somewhat less than in the first and second quarters of the year.

Thank you.

Brian Ruttenbur, BB&T.

Thank you very much. I wanted to ask about raw materials. Is that helping you at all as a tailwind right now, with copper and other things, or is it really not that big an impact?

No, Brian, it is important to us. We mentioned in the past that we manage our purchasing of commodities in also a very disciplined way. We try to mitigate risk in how we purchase commodities. We don't run our business to try to make money on commodity volatility. We run our business to try and create stability in our cost line so that we have predictable low cost products that we can price profitably in the market.

So we continue that disciplined approach to commodities, but it has been very helpful. I remember when copper pricing was almost $4.50 a pound, and those are tough times. So it is a bit of a relief valve for us to be able to be in a market where pricing is good and commodity pricing is also good. We're taking advantage of that and it's contributing to our margin performance.

But within shooting sports, Brian, as we lifted the drivers of our gross profit performance, the improvement year-over-year, they were volume, product mix, and then material favorability. So that is not the primary driver of our gross profit performance, but it's certainly a significant driver.

And then along -- I know there are a lot of cleanup questions here, but the capacity utilization right now on your ammunition side, you mentioned pistol is ramping up, that your demand is ramping up. Rifle is coming back, centerfire. Can you talk about your capacity? Are you hitting capacity in any of those?

I would characterize it as we are near capacity in a lot of our ammunition lines. If you look in general at ammunition, in the third quarter shotshell was very strong, rimfire was very strong, pistol ammo started out a little bit weak in the beginning of the third quarter, but got consistently stronger. Particularly in the last two weeks of December it strengthened. Centerfire rifle ammunition, you're in the hunting season in the fall. So it was I would say modestly up in terms of demand, but that's also seasonal around centerfire rifle for hunting.

I mentioned that the Lake City product was seeing some increased demand in the very tail end of the third quarter, where it had been a little bit weaker earlier in the year. So broadly across the ammunition segment in the third quarter as a whole, including what occurred in the last two weeks of December, things were generally healthy and modestly up, and we continue to operate our facilities at near capacity levels across most of our ammunition categories.

Our utilization was similar to that which we've described the last few quarters. Obviously as we've also disclosed we continue to bring on new capacity every year by eliminating bottlenecks, by increasing the efficiency of our existing lines, but our utilization rate is relatively unchanged from prior periods.

Okay. And then last question in terms of your guidance, I assume that your guidance assumes demand on your shooting sports continues strong in this first calendar quarter, fourth fiscal quarter. Is that correct?

Yes, we see what we saw happening in the end of December and occurring through our show season. Again, Stephen mentioned our show season is a time where we have promotional activity which can create volume, shipments, and deliveries. We believe we are going to have a relatively strong ammunition quarter, and that is reflected the guidance.

Great, thank you very much.

Jay Sole, Morgan Stanley.

Good morning. Mark, you mentioned that ammo sales have really accelerated over the last six weeks. It seems like based on NICS checks and some of the industry data that the gun sale acceleration has lasted a little bit longer than that.

How do you think about the lag between ammo sales and gun sales and what is happening in the industry right now compared to previously? And what implications do you think that has for the amount of ammo being stockpiled in people's homes out there?

There's been some work done on trying to correlate NICS checks to ammunition. There is a correlation with the lag. So there is a correlation to what happens with NICS checks representing as a surrogate for firearms sales. There is a lag, and that lag can be up to three quarters or so tracking. There is a correlation between NICS gun sales and about a three quarter lag for recovery in ammunition sales. So they are correlated.

I think that the impact that we've seen recently with increases again in the purchase of firearms will lead to some increased demand in ammunition. It is difficult, because of the point you made, in that we have said and we've publicly stated that we are concerned that some shooters have accumulated inventory at home or their own personal inventory and may be stocked up. That could impact that correlation going forward, depending on what those inventories are, and it's very difficult for us to have any kind of insight or data on the inventory levels that shooters may have accumulated. But as we said our guidance reflects I think what will be a good fourth quarter. As we look into next year we'll be giving guidance in the May timeframe for next year, and we can talk more about what we expect then.

Got it. Thanks so much.

Jim Chartier, Monness, Crespi, Hardt.

Thanks for taking my questions. On the outdoor products, the organic decline, is that primarily weather related? I know last quarter you talked about weather impacting the hunting season. So I was just curious if that was primarily a weather issue for you?

So as I went through my script and tried to list the major drivers. The primary driver was actually the foreign exchange impact, was the largest single impact. Also there was some decline in tactical products, some of which is potentially weather related.

These are accessory streams, both for target shooting and also certain hunters use them as accessories, and then some softness in other product lines. I wouldn't think this is primarily weather related. The overall softness in retail, as we mentioned and weather, had an impact on our business, but it was somewhat secondary to those other drivers I listed.

Okay. And then on the ammunition business, do you believe that your sell in is equal to sell through, or are your retail or distributor customers increasing their inventory to meet future demand?

In our conversations, which we've had recently over the past several months, I met personally with every major customer in the last couple of months in terms of whether they would be retail or wholesale distributors. I think what we heard from them is that sell through was good, that the order season in the November to January period had been strong, that was going to allow for a sell through of products without a lot of accumulation of inventory in the distribution channel. As I mentioned on a couple of prior calls, I don't believe we have ever on a call talked about stuffed distribution channels impacting our financials as a Company. I know other companies have had those conversations with you perhaps, we have not. We are careful to manage that and ensure that our products are selling through and that we're not just stuffing the channel.

I think we have very good self through of our products, particularly toward the very end of the third quarter, that really helped I think with some of inventory levels in distribution and retail. Because that surge in demand pulled a lot of inventory through the system and off the shelf. When I'm in retail outlets looking at inventory stocking levels, it's still very difficult to find some of our ammunition products in stock. Rimfire ammunition remains scarce. Some pistol ammunition is picking up again and coming off the shelves nicely. I think for the most part our products are selling through.

Thanks and best of luck.

Robert Sassoon, RF Lafferty.

Thanks for taking my call. In terms of the retail trends, you say that the recovery is more muted. Do you think this is actually a sustainable trend? You mentioned that there's been an acceleration maybe a reaction to, on the shooting sport side, a reaction to the San Bernardino tragedy.

Based upon the demographics in the shooting sports and consistent with what we've said in the past, we believe this is a long-term growth industry. The shooting sports has a track record going back into the early 1980s through today of growth, with cyclical perturbations around geopolitical events. You'll see those cyclical perturbations whether it be Y2K, whether it be presidential elections or whether it be other issues that occur that create spikes or valleys in that. The long-term trend is a growth trend.

We believe over the long term that this is not just a surge. We believe over the long term that this is still a growth industry, and we believe that will be manifest through increased purchases of ammunition. And we've mentioned that we're seeing that growth, as Stephen mentioned in his remarks. Organic growth is beginning to return, stabilization in the markets is beginning to manifest itself.

We do see continued growth. We don't think this is just a spike. However this is an election year, 2016 is an election year. Election years tend to be good years in terms of purchases of firearms and ammunition. So we would expect that geopolitical event around a national election will help. But again, speaking of the long term, we do believe this is a growth market.

When you talk about your long term organic sales growth of 6% to 8%, what is -- can you qualify what that period is? Is it three years?

We have not laid out a period and said that number is tied to two years, three years, five years. Our crystal ball is not that clear, but what we do know based upon the demographics of more shooters, younger shooters, a better demographic of shooters, ranges being open, consumption of ammunition appearing to be healthy, that all those indicate to us that we have a long-term opportunity to see continued growth. And we have not quantified that into years.

Your guides on the free cash flow, it's basically a little lower than top end of the range, the previous range. And I noticed that your operating cash flow guidance has come down a bit. What is the main reason for that?

There are two main drivers for that. If we go back to about nine months ago I guess we had our first earnings call as Vista Outdoor. It would have been our fourth-quarter FY15 call. We did discuss how at the time inventory was particularly low and was lower than ideally we would like it. As we've discussed a few times today here, we've been increasing inventory to support better fill rates from our customers.

Mark mentioned that there have been points in time where we could have had higher sales but for the lack of inventory we had in specific products. And this was not just within the typical ones we talk about, whether it be rimfire or certain rounds in pistol. It was also in several portions of our outdoor products segment where quite frankly we had lower inventory than ideal. So we are ramping up our inventory to support that.

The second driver is promotion-related payment terms. As we've discussed before in these calls, that is a staple -- it's a standard feature of our market where certain customers are given extended payment terms. And there is a little bit more of that going on. And still both of those in conjunction are just tempering the top end. We still think it's a very strong cash generating year. We're not concerned about our cash generation capabilities, but we're unlikely to hit the higher end of our previous range, so we took the top end down slightly.

You mentioned that the EBITDA margin guidance for the current year is in the midpoint of your -- you're likely to be in the midpoint at least, the range 14% to 16%?

Yes, we previously on the prior call talked about it being at the lower end of that range. I think now in conjunction with the EPS raise, we're now more towards the middle of that range and very pleased with our EBITDA performance and very pleased with the improvement that we're able to share with you today.

Gautam Khanna, Cowen and Company.

I was wondering if you could comment on 5.56 and 223 ammo which had been weak. Are you seeing a pick up in that demand yet?

That has also begun to see a little bit of a pick up occurring in the very end of our third quarter. Back looking again, this call is about the third quarter. We began to see some of that in December, it picked up in the second half of December. We think that we're going to be able to get back to a little bit of a more stable view in terms of 5.56 and 223.

We've been whipsawed a little bit by demand being peak demand and then demand really softening on us. And that's what you're referring to, is we've talked about that in the past, that it softened through the summer. It appears to be coming back, and we're anticipating hopefully some stabilization from the softening we saw in the summer to the pick ups we've seen in the last few weeks.

And that was the summer of 2014 when the real softening began that Mark is referring to.

Right.

Mark, are you seeing evidence of double and/or triple ordering as you have in prior surge periods, where you worry about -- you fill the first order and the other ones get canceled?

We put a very focused effort, Gautam, on that to make sure we had better visibility into that. We put forth right at the launch of Vista, about the time of the spin, in that very first quarter we did a very concerted effort to work with our customers, to go back through and open up all open orders and ask them to go in and scrub those orders with us to determine the quality of the orders versus what might have been panic ordering for quantities which of course were way overstated.

We think we did a good job of getting that cleaned up at the first of the year. We've monitored that throughout the year with our sales team, and we believe our orders now are good quality of orders and that phenomenon that we saw that really began a couple of years ago largely has subsided, and our orders now are much better quality. And our backlog position is a much more reliable backlog position, and we are actually managing our factory schedules and deliveries against that. And we've had very good success this year because the quality has improved.

Okay. And that also extends to OA's Lake City facility? They are on time, there is no issues now that you don't own that asset?

They've struggled a little bit to deliver against some of the increasing demand, and so we have had some challenging situations trying to work with Lake City. As you know they went through their own cycles with military ammunition in their company and have restructured some of what they've needed to do at Lake City on their prime contract. And we have been impacted by some of that.

I met with them recently, the executive leadership of OA, just actually a few weeks ago, and they are quite confident that they have brought stability back into that factory and that will improve the reliability of their orders. We are feeling better about that, but we did have some challenges in the last year in getting the quantities we wanted in the time frames we needed them. But we're feeling better going forward that the improvements that they've been making at Lake City will lead to stability for us as well.

Can you renegotiate that contract? I can't remember, was it three years?

It has a three-year term. So the contract has a three-year term, and then it has renewal provisions based upon the length of time in which OA is offering that facility. But it is open for discussions as we approach the end of the initial three-year term, which has two years remaining, for revisiting terms and conditions within the contract, yes.

Okay. Last question. R&D tax credit, is there any impact on a go-forward basis on your tax rate?

There is an impact, but it is really immaterial in the grander scheme of things.

Okay. So we should be using what going forward?

We guided for our year 38% as our tax rate for the year. And we reaffirmed that today. There is no change in our projected tax rate for the year.

I'm just saying, when we project out to 2017, that's what we'll use?

We haven't guided 2017 yet. We will provide guidance for our tax rate in 2017 as part of our overall guidance in May.

Okay. Thank you very much.

There are no more questions at this time. I would like to hand it back over to our presenters for any additional or closing remarks.

Thank you all for joining us today. We had a terrific quarter and it's a pleasure to be able to report our progress over the first 12 months as Vista Outdoor. Thanks for joining us and we look forward to talking to you again in a few months.

This does conclude today's conference. You may now disconnect and have a wonderful day.