Vista Outdoor Inc (VSTO) 2018 Q2 法說會逐字稿

Good day, and welcome to the Vista Outdoor Q2 Fiscal Year 2018 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Michael Pici, Director of Investor Relations. Please go ahead, sir.

Thank you. Good morning, and thank you for joining us for our second quarter fiscal year 2018 earnings call. With me this morning are Christopher Metz, Vista Outdoor Chief Executive Officer; and Stephen Nolan, Chief Financial Officer.

Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to the risks and uncertainties that face Vista Outdoor and the industries in which we operate. We encourage you to review today's press release and Vista Outdoor's SEC filings for more information on these risk factors and uncertainties.

Please also note that we have posted presentation materials on our website at vistaoutdoor.com which supplement our comments this morning and include a reconciliation of non-GAAP financial measures.

With that said, I'll turn the call over to you, Chris.

Thank you, Mike. Good morning, everyone. I want to start by thanking our Chairman and Interim CEO, Mike Callahan, for leading our company over the last 90 days. I also want to thank our entire Board of Directors for the opportunity to lead Vista Outdoor. I am honored and humbled to be leading the employees of this great company. My vision walking in is to be the largest and best platform in outdoor sports, nurturing authentic, exciting brands that can be scaled by providing strong, centralized support and expertise, leading to best-in-class shareholder returns. And I've seen nothing in my first few weeks to deter me from this vision. And I realize, we have much to do. We must make significant changes, we must act decisively and we must move quickly. However, before I get to my initial observations and our plan of attack, I want to share a bit of my background so that you understand why the board and I believe that I'm well-suited to lead Vista Outdoor.

When I was first contacted about the CEO role, I'll admit I wasn't familiar with the name Vista Outdoor. However, when I saw the brands in the portfolio, I quickly realized that I knew the company very well. I personally own over a dozen of the company's brands, in both the Outdoor Products business and the Shooting Sports business. I'm an outdoor enthusiast and spend much of my free time with family and friends biking, skiing, hiking, camping, hunting and fishing. Outdoor sports is a passion of mine. What really piqued my interest in the role was when I dug deeper and began to see the challenges and opportunities within the business and how well they matched with my career experiences.

I saw 3 areas that were compelling to me. First, at its core, Vista Outdoor is a branded consumer products company that must develop leading, innovative products to thrive; and must to do this with the best distribution outlets, whether they be big-box, retail, functional wholesale or online. I spent 13 years at Black & Decker and DEWALT, arguably the preeminent brand, product innovator and broadest distributor in the consumer durables space. I grew from assistant product manager to president within 7 years of joining the company. And I learned the craft of building and nurturing great brands through innovative products and terrific customer partnerships. Brands, products and being customer-centric and savvy is at the core of my DNA.

The second thing I saw at Vista Outdoor is a collection of brands, 51 to be exact, creating the ultimate portfolio of different companies in terms of size and capability. The job requires a leader who understands the complexity and challenges of leading in this environment to be able to extract the value. After 13 years, the last 6 as President of Black & Decker, I decided to join a small private equity firm, Sun Capital Partners, as an operating partner. During my 9 years at Sun Capital Partners, we grew the organization from $1 billion of committed capital under management to approximately $9 billion when I decided to leave and take on my next challenge. At Sun Capital, we grew into the world's preeminent turnaround firm in the private equity space, taking once-great companies and brands who lost their way and transforming them into top quartile-performing consumer products companies. We grew to greater than 85 portfolio companies, and I learned how to lead and prosper in a very fast and challenging environment when every portfolio company was in a different state.

I learned to be very strategic and tactical. I learned how to lead through many unique and challenging situations. And ultimately, I learned how to maximize shareholder value regardless of circumstances. This experience with portfolio company management is the second compelling reason that interested me in the opportunity to lead Vista Outdoor. We need to understand better where to invest, where to divest and how to best allocate our precious capital.

And finally, the third compelling reason to join Vista Outdoor is to leverage my vast experience in operating in challenging situations and transforming a company who may have lost its way a bit. At Sun Capital, I was looking for a new challenge and this led me to Arctic Cat. Arctic Cat is an iconic brand with a very passionate loyal following. However, the business faced several challenges when I arrived, including industry declines due to lack of snow and currency devaluation. Arctic Cat was highly concentrated in both snowmobiles and in Canada. During this time, the stock price dropped by almost half, mirroring the biggest competitor in the industry. It quickly became apparent to me that despite pulling together one of the industry's most talented management teams and a very compelling business plan, the obstacles Arctic Cat faced were insurmountable within a reasonable time frame.

Within the industry, our plans and initiatives were getting noticed. Textron approached the company and we ultimately sold Arctic Cat at a significant premium to the then current price and a significant premium to the stock price 12 months prior, which unlocked shareholder value. This certainly was not the plan as I walked into Arctic Cat, but leaders can't stick their heads in the sand and ignore changing conditions. I've always prided myself on adapting strategy and execution to allow the business to win regardless of circumstances.

So what I see at Vista Outdoor is an opportunity to leverage my deep expertise in brands, products, varied channels of distribution, customer relationships and turnaround in portfolio company management. And to be able to do this in an industry that I'm passionate about and with categories I know very well is exciting. I thought it was important enough to spend a few minutes on my background because 25 years in similar circumstances will help me immensely as we look to transform Vista Outdoor.

I've been here 1 month now, long enough to establish thoughts that will lead to immediate changes, but clearly not long enough to put a finer point on all the things I'm looking to do. I will commit to you that we will share more details during the next earnings call. However, as we highlighted in this morning's press release, actions are already under way in certain areas. To ensure that I'm grounded in the actions we will take, I've worked tirelessly the first few weeks, visiting many of our locations, meeting with hundreds of employees, speaking with various investors, customers and constituents. Through these conversations, I've concluded that over the past 12 months, the markets we participate in have faced real pressure and substantial headwinds, especially impacting our Shooting Sports business. Some of the recent performance decline is driven by this pressure, while some of it points to a need to carefully reboot our operating model. Significant changes are needed to reposition and stabilize the company, and we will take an aggressive position on profit improvement through both margin expansion and cost reductions across all areas of the core business. One of these changes includes the elimination of the Shooting Sports segment president position. I've chosen to make this change to help reduce cost, but also to strengthen the organization with leaders who have deep industry experience.

We will also be looking to make changes that will allow these leaders to be able to own their businesses, drive change faster and react more quickly to opportunities in the marketplace as they will now have clear line of sight to the goals at hand.

I want to take a moment to thank Bob for his leadership and contributions at Vista Outdoor. As the shooting sports industry has struggled this past year, Bob has offered great leadership and improved communication within our segment. We wish him well as he pursues new opportunities beginning on November 17.

With the elimination of this position, our current leader of Firearms, Al Kasper and Jason Vanderbrink, who many of you know has led our sales organization for years, will now lead Ammunition. Both will report directly to me as key leaders within the Shooting Sports segment. Al joined Savage Arms in 1996 as CFO and became its President and COO in 2001. Jason has served as Senior Vice President of Sales since January 2017. However, he joined Vista Outdoor in 2005 and has 17 years of increasing leadership experience in the outdoor recreation segment. Jason is a consummate professional who is highly regarded, and I'm pleased to put him in charge of one of our most important assets. I have confidence in both of these fine leaders as well as Dave Allen, who leads Outdoor Products. I look forward to working with the 3 of them going forward.

We will also be announcing shortly critical changes in our organizational structure around the key customer-facing activities of sales, marketing and product development. Until some of these changes are announced, Jason will also continue to lead our sales organization as the company's organizational structure is evaluated. These and future organizational changes will allow us to drive accountability down to the lowest level. I look forward to updating you as we make additional decisions.

We're also in the process of completing a portfolio review of our brands to divest assets where we see potential to unlock shareholder value or where we are not the natural owner. An example of this is our announcement to immediately seek a buyer of our Bollé, Cébé and Serengeti brands. Stephen will share more details in just a moment.

As I mentioned previously, our vision is to be the largest and best platform in outdoor sports and recreation, nurturing authentic, exciting outdoor brands that can be scaled by providing strong, centralized support and expertise, leading to best-in-class shareholder returns. We need to reposition the business where we can invest in the exciting brands we retain as well as new brands we intend to scale. Successful will mean expanding on our distinct set of capabilities to build new businesses that leverage our scale and reach. We will use this new model and target a portfolio of strong brands to chart a path to increased profitability in the next year.

I'm excited with the opportunity to lead Vista Outdoor and I'm proud of our employees' commitment and passion for our products. Stephen will now walk you through our second quarter results and future outlook. After that, we'll be happy to take your questions. Stephen?

Thank you, Chris. We're very glad to have you here at Vista Outdoor.

Good morning, everyone, and thank you for joining our second quarter earnings call. Before I share information on the overall financial results, I'd like to update you on the market. In our Shooting Sports market, we saw a continuation and, in some cases, a worsening of many of the challenges we faced since the third quarter of fiscal '17. We, like many in the industry, continued to experience prolonged market contraction, high inventories, especially in the wholesale channels, which represents less than 0.25 of our company sales, and significant pricing and promotional pressures at retail.

As discussed on the first quarter earnings call, we took a number of ammunition pricing actions ahead of the second quarter, which negatively impacted the reporting period. However, during the second quarter, we took additional significant pricing actions, which impacted the period and which will also have an even more significant impact on the remainder of the year. As a result of these actions, we are holding share and, in some cases, even opportunistically gaining share. But we are not yet seeing the recovery that we had expected to see.

Looking forward, Shooting Sports has always been a cyclical industry with periodic downturns lasting anywhere from 12 to 24 months. While we may not be at the bottom as of yet, we believe that we are very close and we anticipate that the market will show return to growth over the next 18 months.

Today, we announced that in our Outdoor Products segment, we recorded an impairment of intangible assets of $152 million, of which $77 million relates to our Hunting and Shooting Accessories business and $75 million related to our Sports Protection business. The impairment was triggered by increased downward pressure on sales and margins as a result of challenging market conditions that have persisted longer than previously expected. These challenging market conditions have been exacerbated by additional bankruptcies and consolidations at significant customers compounded by the inventory liquidations that have flooded the market.

We also announced this morning our intention to exit a number of brands within the Sports Protection business unit. Specifically we intend to, over the next few quarters, divest the Bollé, Serengeti and Cébé brands, which have a total revenue of about $130 million, and that were acquired as part of the Bushnell transaction in 2013. Much of the focus of those brands is on fashion, prescription and safety eyewear, all 3 of which rely on different distribution channels than do our other products. We have determined that these brands represent a noncore asset.

Now turning to our second quarter results. We've disclosed both as reported and adjusted results in our press release to assist you in your understanding of the underlying numbers and how they compare to prior periods. You will find a more detailed financial presentation of our second quarter fiscal '18 performance on our website.

Today, I will discuss the adjusted results. First from Vista Outdoor overall and then I'll provide more color on the drivers for the segments. As we talk about results from the Camp Chef acquisition, I would note that we're referring to the operations of Camp Chef only for periods in which they were not part of Vista Outdoor in the comparable prior year periods.

The company reported second quarter sales of $587 million, down 14% from the prior year quarter. The year-over-year decrease was caused by lower organic sales in both segments, partially offset by additional sales of $12 million from our Camp Chef business, which we acquired on September 1, 2016. Sales were down 16% on an organic basis.

Second quarter gross profit was $139 million, down 25% from the prior year quarter. Our second quarter results include $3 million of gross profit from the Camp Chef acquisition. Organic gross profit was down 27%, with reductions in both Shooting Sports and the Outdoor Products.

Our operating expenses for the second quarter were $105 million compared to $109 million in the prior year quarter. This decrease was primarily due to reductions in selling, general and administrative costs as a result of our cost-cutting initiatives, partially offset by costs incurred within the Camp Chef business. We reported operating profit of $34 million in the second quarter, a decrease of 56% from the prior year quarter due to lower gross profit.

Interest expense for the current quarter was $13 million compared to $10 million in the prior year quarter, resulting from a higher borrowing rate in the current period, partially offset by a lower average balance.

Our adjusted tax rate for the quarter was 8.7% compared to 33.3% in the prior year quarter. The decrease in the rate from the prior year quarter is primarily driven by the true up of prior year tax returns resulting in larger-than-expected carryforwards to our tax return and favorable stock-based compensation. For the second quarter, we recorded net income of $20 million, down 56% from $44 million in the prior year quarter, resulting in EPS of $0.34 compared to $0.74 in the prior year quarter. The reduced EPS was driven by lower net income partially offset by lower share count.

Year-to-date, free cash flow generation was $77 million compared to free cash flow use of $48 million in the prior year period, an overall favorable change of $125 million. The increase in free cash flow was driven by improved working capital management, primarily tied to our inventory reduction initiatives, which has improved year-over-year partially offset by lower net income. While we continue to use our free cash flow to pay down the balance from our revolver and reduce our overall net debt position, our leverage ratio continues to be subject to significant headwinds caused by our declining trailing 12 months EBITDA. We finished the second quarter with a net debt-to-EBITDA ratio of 3.95, which is well below our credit agreement covenant of 4.75. While we do expect that ratio to continue to increase in the third quarter, we also expect to generate significant free cash flow to keep us under our covenant ratio limits.

Now turning to our business segments where we report sales and gross profit. Second quarter sales in Outdoor Products were $292 million, down 9% from $321 million in the prior year quarter, including approximately $12 million of sales from the Camp Chef acquisition. Organically, the segment was down approximately 13% from the prior year quarter due to lower sales across most product lines.

Gross profit in the second quarter for Outdoor Products was $76 million, a decrease of 10% from $84 million in the prior year quarter. The recent Camp Chef acquisition contributed $3 million of gross profit. Organic gross profit in the segment was down 14%, primarily as a result of lower organic sales across most product lines.

Shooting Sports recorded second quarter sales of $296 million, down 19% from $364 million in the prior year quarter as a result of persistent lower demand across most product lines, mainly in centerfire ammunition and firearms. Second quarter gross profit in Shooting Sports was $63 million, down 38% from $102 million in the prior year quarter. The year-over-year decrease was a result of lower volume, additional promotional activity and unfavorable changes in product mix. We also just completed another workforce reduction to better align production with demand.

Returning to the company level. The trends I mentioned earlier will have more of an impact in the second half of the year than they did in the first half, including the full impact of the pricing actions which we took in the first and second quarters. While we have taken actions to reduce costs, these initiatives have been more than offset by persisting market conditions. As a result, we are revising our fiscal '18 financial guidance for the following areas: we now expect sales in the range of $2.24 billion to $2.26 billion; an adjusted tax rate of approximately 25%; adjusted EPS in a range of $0.50 to $0.60; capital expenditures of approximately $65 million; free cash flow in the range of $155 million to $175 million; interest expense at approximately $50 million, consistent with prior guidance; and R&D also generally in line with our prior expectations at approximately $30 million.

We expect EBITDA margins in the 8% range for the full year, with Shooting Sports gross margins in the low-20s, and gross margins in Outdoor Products in the mid-20s. The decline from our previous EPS guidance was primarily driven by impacts of close to $0.50 from reduced volume and associated absorption losses and approximately $0.50 from pricing reductions, primarily in ammunition. These were partially offset by benefits of roughly $0.20 from cost reductions and roughly $0.10 from a reduced tax rate.

Due to normal seasonality and the split of both sales and operating expenses between the third and fourth quarter, and the somewhat higher adjusted tax rate in Q4 relative to Q3, we do not expect an even spread of profitability over the remainder of the year. Instead, we expect to deliver modest positive EPS in Q3 followed by a modest loss in Q4. As we continue to look toward the future, Vista Outdoor is making progress on our strategic initiatives, including driving new product innovation and improving our operational performance.

During the quarter, we generated strong free cash flow as a result of improved working capital. We reduced company inventories year-over-year and sequentially, and we significantly reduced headcount to align our workforce with demand.

We are focused on generating long-term growth and shareholder returns. We believe these initiatives, along with continued investment in innovative new products, will position us for the future.

With that, I'll be happy to open it up for questions.

(Operator Instructions) And we can take our first question from Greg Konrad with Jefferies.

I was just hoping to start on the portfolio review. Can you maybe give just kind of a time line on when you expect to complete that and maybe if there's any targets for the amount of businesses that you could divest or sell?

So Greg, thank you for the question, and this is Chris. We have started that the day I walked in the door. And what I've communicated to the team is, I would like to get much of this completed over the first 100 days. And so what we tried to do is communicate as much as we possibly can this early on so that you have a feel for the pace that we're going to drive this at. Frankly, it may take a bit longer than that, but certainly we're working down the stream very quickly as evidenced by the first communication on the first sale. So we'll continue to evaluate it, we'll be able to give you a lot more color here on the next earnings call. But we're going to be very thoughtful and strategic about it.

And then just any sense in terms of Shooting Sports, when we think about promotional activity versus volume, kind of the impact of those 2 versus what we see in the sales results?

Well, so Greg, I'll take that and Stephen can chime in. I mean, in the short time that I've been here, I've talked to a lot of our folks and customers and folks in the industry to try to get a feel for kind of where we're at. And I would say, it's a continuation of what we've seen over the first couple of quarters -- over the last couple of quarters. And that continuation is very promotional, price reductions to support sell-through. And our volume, as evidenced by our margin line, is down.

Yes, and Greg, certainly, so we have engaged and joined our competitors in that promotional activity in order to maintain our market share. We believe we have been maintaining or growing market share in most of the ammunition segments. As we look forward, a number of our competitors have talked about price increases in calendar 2018. So we do see the end of the promotional intensity that we've seen of late on the horizon, but we're certainly not there yet. We do not expect that recovery in pricing to have a significant impact on fiscal '18. We'd look for benefits from that in fiscal '19 and beyond.

And I'll just add, I guess, one more comment on that. The one thing that I'm excited to see when I walked in the door is the 2 segments in our Shooting business have got their foot on the accelerator as it relates to maintaining share position as well as continuing the investments that we're making in the facilities, which is a -- it's hard to do. But for the really good firms that do that, it pays dividends when you come out of the trough. And so -- and it's a good time to do it, too, because as volumes were down, we're able to make some changes in our facilities that will enable us to really participate strongly as the market returns.

And we can take our next question from Scott Stember with CL King.

Can you maybe just talk about the ammunition side and the inventory in the [two-step] channel? Obviously, this is -- we've talked about how this has been one area that's been problematic for the industry. Can you maybe just talk about where we are versus a quarter ago, whether you're where your sense is, where the inventories are at and the time line to getting that to reasonable levels? And then secondarily, maybe just talk about the impact of consumer stockpiling. And I know it's hard to gauge, but your sense of where that stands and how we can get some relief there as well.

Sure. Absolutely, Scott. Thanks for the question. So in terms of the inventory within the channels, as you know, a quarter ago, we talked about our disappointment in the speed with which the inventory was clearing out at the wholesale channel. We had indicated that it cleared out of the big box retail channel more quickly than we had anticipated, but there remained stubborn inventory in the wholesale channel. Over the last quarter, we have seen improvements in the wholesale channel. We are still not back to normal, but the extent to which inventories exceed normal in the wholesale channel is much, much lower than it was even as recently as 3 months ago. We indicated last call that we expected by some time toward our fourth quarter, maybe end of our fourth quarter, we would have seen those inventories fully stabilize within the wholesale channel. And finally, it's always difficult to projecting exact dates. The trends we have seen in the last quarter would certainly support the expectations which we expressed 3 months ago. In terms of the personal stockpiling, as you know and as we've discussed several times on these calls in the past, we don't have good insight into the level of stockpiling that has occurred in people's basements and in their closets. What we do know is still anecdotally everything we hear suggests that consumption remains robust. So we still believe that consumption is roughly in line with where it was prior to the election. We do, however, still see significant reductions in POS data at retail. So consumers have not yet started buying, suggesting they have not yet burned through those inventory stockpiles in the way we hope they will. It is difficult to project exactly when that will occur, which is why I indicated in my script that while we think we're nearing the bottom, we can't pull an exact date at this point in time.

Got it. And just lastly, Chris, maybe you can just talk about your initial assessment of the company's opportunities from an online perspective, whether it's omnichannel or just going straight online. Maybe just talk about where you see that going, a time line, and how you can better attack that angle?

Sure, Scott. And as we've mentioned previously and as everybody's seen the trends, e-commerce is a big initiative of ours and it's going to be a continuing focus as we go forward. So as I walked in, the first thing you really look for is do we have the strategy in place and do we have the resources in place to execute against the strategy? And I'm happy to tell you that I believe we've got the right leader of e-commerce, the strategy that I've been through, I think, is very sound, very thoughtful. And then from there forward, it's really about building the resources to support that strategy as well as building the IT infrastructure and the architecture, if you will, to support our initiatives. So as we go forward, you're going to hear more as it relates to, one, supporting our current customers. And the biggest need our customers have right now is, frankly, building out the content to support their e-commerce efforts. So we are marshaling the resources to be able to provide that content to be able to support our customers' efforts. Secondly, there's a big opportunity to support our customers' efforts in what we call B2B. B2B is simply supporting their efforts to make it as easy and as seamless for them to take an order from a consumer, fill that order and have us replenishment -- replenish it in real time, because they all don't carry a wide, wide virtual amount of -- they have a virtual amount of inventory, but they don't have a physical amount of inventory. And the better we are at B2B, the better we can help them with that initiative. And then, of course, the other component of it is building up our own sites and being able to make sure that the our direct-to-consumer efforts are as sharp as they need to be. So a lot of resources and IT work needed to execute against the thoughtful strategy that I believe we have in place. And you'll be hearing more as we go forward on that.

And just one last quick one on the balance sheet with the EBITDA levels expected to come down, and that falling faster than your debt repayment. Just talk about the cushion that you'll have from your ceiling of 4.75x over the next couple of quarters. And that's all I have.

Thank you, Scott. So certainly, as I indicated in the call, we expect it to increase from the current level. As I've mentioned on the call, it has risen in the past quarter and we're up around 3.95 on a covenant basis, the calculation used for our covenant purpose. We'll certainly [crest] over 4. We do expect to have positive cushion, though, at the end of both our third and fourth quarters. But that cushion is certainly smaller than we would have liked and smaller than we had indicated 6 months ago when we put that in place. But there's certainly positive cushion there. I'm not going to project an exact number, but you can certainly see our free cash flow generation. Our guidance is still for strong free cash flow during the quarter. And that will certainly help for the overall -- for the full year to keep that down under our covenant level.

And I'll add on to it from an inventory standpoint. One of the things that made me happy walking in is the amount of rigor and focus on inventory. And some people might argue that maybe we started a little later than we should have, but always difficult to pick the bottom and easy to play armchair quarterback. But I can tell you, there's an enormous amount of focus on building the right stuff and getting rid of inventory that's in place. And you see it impacted in the EBITDA, in the margins. But it's the absolute right thing to do. We're getting in a better inventory position and it's going to continue for the next couple of quarters. And I'm happy to see the effort as I walked in the door.

And we can take our next question from Gautam Khanna with Cowen and Company.

A couple of questions. First, I was wondering, Chris, any changes to the management incentives that you anticipate implementing?

So that is something that I've got a very strong focus on right now because some of the structural changes we're making is to ensure that people have real ownership of their businesses. And so we're going to simplify some of the matrix structure that we've got in place that I think is slowing down decision-making and not allowing our key people to be as decisive and quick and as action-oriented as we want. So a lot of the customer -- consumer-interfacing functions were really going to be standing of the brands and our company's up on their own, if you will. And of course, that's going to affect the incentives and that's something we're giving a lot of thought to in terms of how we align the incentives to really drive the behavior that we expect. So good question. And please note that we're on it and we're going to make sure that it's perfectly aligned.

Okay. And how are you incentivized?

Well, I'm incentivized to make sure that we're driving shareholder value, that's why you're seeing us take the actions that we're taking as quickly as we can. I mean, I've been working for 25 to 30 years. So I didn't walk in for salary and cash compensation. I walked in to drive the stock price.

Okay. Can you give us some color on the cash flow profile of $130 million of sales you plan to divest? What does that take away from annual cash?

We are not disclosing any of the operating details of that business at this time since we're just engaged in a process. And as you can expect with a carve-out business, there are many ways to measure cash flow in terms of contribution and/or cash flow after various overheads. And I would rather not put a number out there, which might differ from numbers we would use as we go through that sale process. But it is not a material driver of our cash flow for the year. So I would not expect any significant change in our overall company cash flow as a result of the divestiture of those businesses.

In your slides and in your comments, you guys talked about mix being a negative impact at the ammo business, and also price. Are you seeing a trade down to kind of bulk nonbranded ammo? What actually is the mix dynamic [separate] from the pricing?

Yes. So there's certainly been a change in, as you said, certainly the bulk side of it in terms of the packaging configurations at which we're selling it towards lower-priced, higher-volume packaging of people taking advantage of the discounting that's out there in the market, those who are buying. That's the primary driver. We've seen small shifts from premium to promotional as well. But -- it's a mix of both, but I think the former would be the larger of the 2.

And what gives you confidence that you'll actually get pricing power back? I mean, it seems like there's 0 fear of gun regulation or any restrictive regulation under the new administration. So what is the catalyst for getting prices back up? Is it a supply constraint? Or what do you think will actually drive that recovery?

We certainly expect to see an uptick in demand. As we've mentioned, POS remains depressed based on people burning through personal stockpiles. As that starts to recover and as the inventory clears out its remaining channel, the demand for industry products will be much higher than it is now. And as I've mentioned earlier, we are already seeing several of our competitors signal that there will be pricing increases in calendar '18. And I think you will see an end to the very low margins that the industry has been willing to accept over the last 1 to 2 quarters.

And we can take our next question from Dave King with Roth Capital.

On the guide for breakeven-ish earnings in the third and fourth quarters, which are typically seasonally strongest, if your markets don't improve, is that the right way to think about the first half of '19 then as well? And I know it's early for you, Chris, Chris, but higher level, what's the risk of a return to pre-2008 levels of Shooting Sports sales given the sort of backdrop?

Yes, so Dave, I'm sorry to disappoint you, we're not providing guidance for fiscal '19 at this point in time. That said, as I indicated, we are seeing a return to more normal pricing levels in the ammunition market, which certainly should be beneficial to us. We are currently going through the process of completing our fiscal '19 strategic planning. And when we have those numbers and we understand what the year looks like, we will be happy to share those with you. But it would be premature to do so at this stage.

Understood. Just high-level though in terms of end market. Is there risk of a return to a pre-2008 sort of environment? Or is that sort of just not in the cards?

No. So to answer that broad question, no, I don't think we see that. Certainly, as I've mentioned in my script, we expect to see it return to growth within the next 18 months. We think we're close to bottom. The inventory channels -- or the inventory in the channels are getting close to cleared out. POS data, while still down at some point, those channels -- those stockpiles will have been depleted and we will see a return to growth. And consumption level still remains strong, well above what we saw back in pre-2008. We've mentioned before the huge growth that we saw from 2006 to 2014 roughly in the number of gun ranges in the country, those gun ranges remain busy. There remains a high volume of activity at that. So the basic consumption level we see in the market in ammunition is significantly higher than I think we saw prior to 2008.

And the one thing I'd add to that, too, Dave is I did obviously my own research walking in, and one of the things that excited me was the general trends in Shooting Sports. So you can look at some of these at the state level and even some of these high school club sports, I mean, trapshooting is one of the fastest-growing sports in a number of states. So I think the trends long term are strong for the industry.

Okay. That's really good color, guys. And then, Stephen, on the DSOs, it looks like they're at a record. Are you giving any projected terms in the current environment? If so, to who? And then on the covenant, how much of the $75 million to $100 million in back half free cash flow you guided to do you expect to generate in the third quarter? And then in terms of the cash generation, does that assume getting any of the asset sales completed?

Yes, so let me start at the tail end. All of our projections are for our organic business, so they do not include any impact from any of the proposed asset sales. So any cash we generate from that sale would be over and above the guidance we've provided for the year. In terms of quarterly split of cash, we don't get into quarterly split. In fact, we don't typically provide quarterly guidance at all but, obviously, given where we are, I wanted to give you guys a little bit of color in terms of the split between Q3 and Q4 work. In terms of our working capital overall, there are a number of things going on. There are certain customers -- as we've discussed before, there are certain customers to whom we offer extended payment terms and that has not changed in the current environment. So there are several of our ammunition customers, in particular, per tradition we've offered extended payment terms; largely on the wholesale channel and to a much smaller extent in the retail channel. And that's not materially different this year than it was last year, but there is certainly a significant sum of extended receivable out there, which in dollar terms is not up materially but as a percentage of our revenues, probably up compared to last year. And that (inaudible) on our payables. Again, payables swings a little at the end of every quarter. We do not typically try to manage payables towards the end of a quarter, we just pay things as they are due and we frequently might have slightly higher or lower payables balance at the end of an intra-year quarter. And so there's nothing materially different, certainly from a payables perspective. We are engaged in activity in particular in the Outdoor Products side to work with our suppliers. As you'll recall on the Outdoor Products side, most of what we sell are sourced finished goods as opposed to our own manufacturing on the Shooting Sports side. And we are working with our supply chain on the Outdoor Products side to extend the payment terms there, to reduce our working capital by increasing our accounts payable balance.

Okay, that's helpful. And then I guess, just one more quick one, in terms of the e-com opportunity, Chris, is that more your own B2C? I think, historically, Vista hasn't had much in the way of drop-ship to even support Amazon, let alone in-house direct-to-consumer. I guess, what are the opportunities there? And then how quickly do you think you can get some of that ramped?

Yes, so Dave, we're working hard on that right now. And I think you're going to see a lot from us over the next couple of few quarters. And so as I alluded to before, our first effort is really supporting our customers who are online, where we see immediate opportunities. And so you mentioned drop-ship, that's certainly one of them. I'd add a little bit of color on how we can support their dotcom efforts with content and what have you. And I also mentioned the business-to-business or B2B efforts, where we can really make things more seamless for them. And then, of course, you're going to see us refresh, rebuild a number of our own websites to be able to support our efforts directly as well. So it's going to be a combination of efforts and it's well under way.

(Operator Instructions) We'll now go to Jim Chartier with Monness, Crespi, Hardt.

Stephen, you talked about some opportunity for price increases next year. Raw material costs have been rising, I think that's a big factor why people are looking to raise prices next year. So what do you think the ability for the industry to raise prices above and beyond what raw material costs are rising next year as well as recapture some of the promotional activity from this year?

Yes. So certainly, raw materials are up. Copper, in particular, we've seen significant increases this year over the average price we saw during last year. And it is probably one of the drivers of the depressed margins we're seeing across our industry. The pricing increases we're talking about next year, I would rather not signal the level of price increase we are intending to put in place, given competitive concerns. But we certainly would endeavor to at least pass on the impact of those raw materials that we're likely to see next year compared to this year. As you know, we engage in forward purchases of a lot of our raw materials. So we've not seen this year necessarily the full impact of the price increases -- or the cost increases really in raw materials during the first quarters of the year. It starts to hit us here in the back half of the year partially, and next year more completely as we lap all of those forward purchase agreements we have related to those raw materials. And we would certainly at least expect to see the ability to pass along those price increases to our -- or cost increases to our customers. But beyond that, I'd rather not engage in specifics about the extent to which we believe those price increases will exceed the input cost increases just for competitive reasons.

Okay. And then, Chris, you mentioned some focus on some more cost-saving initiatives. What should we think about in terms of the timing of when those cost-saving initiatives will be rolled out and the impact on the P&L over the next few quarters?

Yes, so Jim, we're spending the time that I've walked in and going forward over the next couple of months identifying those cost savings. And so I would anticipate that the changes that we want to make, you'll see rolling out here towards the latter half of this fiscal year and into our next fiscal.

And we will take our next question from Brett Andress with KeyBanc Capital Markets.

Can you give a little bit more color on the pricing actions that you took this quarter? I guess, how large was that magnitude on kind of a retail list price? And then I guess, does the '18 guide really imply any more pricing actions from here? And the second part of that is I'm really trying to think about normalized price on ammunition. Can you -- is there any way to frame up, I mean, how much price has gone up over the last 5 years or 10 years? Just kind of trying to -- I guess, any color there would be helpful.

Sure. So first, in terms of the price actions we've taken. During the quarter, we took certain price actions primarily in pistol and rifle ammunition, centerfire rifle and then largely what we would term more small rifle, so this would be in the 5.56, .223-type calibers rather than the larger-caliber hunting rounds. During the second quarter, we saw some additional pricing actions, partially in some of those same areas, but also some pricing reductions in the rimfire area. Rimfire is a market that has been very robust for many years, and we've seen some softening of that market this year. We have not seen a material impact on our revenue year-to-date. As I've discussed, the primary drivers of the reduction in our revenue this quarter was centerfire ammunition and firearms within the Shooting Sports segment. But the market for rimfire is down fairly significant year-over-year. We are the market leader in rimfire. We took pricing actions required to make sure we maintained our share in that market so that we can enjoy the rebound as the market recovers. As Chris indicated earlier, the market -- our brand preference in ammunition tends to be somewhat sticky. It took us a long time to gain our market share that we have right now. We grew from roughly 30% to 40% over the last 15-odd years. We are loathe to see that during a period of challenging pricing because it's going to be very difficult to get back if we cede that market share to our competitors. So we've engaged in the actions required to maintain that leading market share within rimfire. In terms of the price -- the scope and size of the price reductions, it really varied significantly from product to product, so it's difficult to give you a single answer. But in many categories, it would have been in the high single-digits percentage points of price reduction, but it really varied. In several categories, it was much smaller than that. So I don't have an average number for you across our portfolio, particularly since there were some categories where we didn't take any pricing action. Over the last 10 years, let's say, the price increases we've seen, they have roughly -- if you look like over that time period, kept pace with inflation with the exception of probably rimfire, where the pricing increases that we've seen over the last 10 years have significantly exceeded inflation pricing. The price of a rimfire round today, if we just look at retail, is significantly higher, probably double what it was a little over 10 years ago. But again, even in the current environment where sales of rimfire are down, the level of sales of rimfire rounds is significantly higher than it was 10 years ago. The number of firearms out there is significantly higher, the level of consumption is higher. So even in the current environment where we're seeing depressed sales because of the stockpiling in channel inventories I mentioned earlier, we're still seeing a level of sales of rimfire rounds much higher than we saw prior to the run-up we've seen in the last 10 years or so.

Okay. And does the updated guide imply any more pricing actions from here, or I guess in the back half?

No.

And we can take our next question from William Reuter with Bank of America Merrill Lynch.

I'm sorry to keep adding on all these questions about pricing. But can you help me to understand when you communicate these price decreases, whether they're kind of promotional in nature just for your customers to clear their inventory? Because I guess, I'm trying to figure out how you're taking price reductions now and then you expect to increase them next year and how you think your customers are feeling about that?

Yes, so it's really a mix of all of the above, Bill. As you look at some of what we've taken have been actual changes in our list price of products, where some of them have been rebates, for example, consumer rebates on .223, 5.56 ammunitions that's currently in place in consumer retail. You can walk into in any shooting store across the country and look on the shelf at a Vista-branded .223 and 5.56. And you'll see a hefty consumer rebate I believe right now on the order of $0.05 a round of consumer rebates. So that's clearly a limited time duration and that will expire, certainly in this calendar year. And so things like that are limited duration. But even on some other rounds, we take a price reduction right now because it's a heavily competitive environment. But even if some of those rounds where we are taking, if you like, permanent price reductions, so they changed the list price, those are still some of the same rounds where we have communicated out to our customers that we expect some price increase in the next calendar year. So there's an expectation that price will remain low through the balance of the calendar year, but then start to increase where it will have an impact in fiscal '19. And while unusual at one level, it's quite common for this industry to see those shifts where prices drop with an expectation they'll increase again on a [date] certain.

Okay. And then just my follow-up before I pass it on. You talked about it's primarily focused on pistol and centerfire rifle. Would you say that -- were units still down absent the price increase? Or was the decline in revenue almost entirely due to the price decrease?

Units were down significantly, which is what drove our significant hit. But we've had 2 levels -- we've had 2 types of headcount reduction this year. We have taken out costs to support a reduction in SG&A. As I mentioned in my script, the -- on the walk on our change in EPS guidance, I talked about a $0.20 benefit. That was largely an SG&A cost improvement where we've taken out people in SG&A to drive $20 million, $0.20 of improvement. However, the bulk of the headcount changes we've seen this year in Vista have been factory related in our production facilities as we've taken down production significantly. When we spoke to you last year, at that point in time, we were running at roughly 100% of our production capacity, and we're down now significantly below that, somewhere north of probably 80%, but down in that range of production capacity. And as a result, we've had significant workforce reductions.

And ladies and gentlemen, we do appreciate your questions, however, due to time constraints, we'll be addressing one more questioner. Today's final questioner is Karru Martinson with Jefferies.

When you look at the price increases that others have kind of signaled for 2018, historically, does that pull forward sales into that fourth quarter? Or how does the industry kind of handle it when they know that pricing is on the horizon?

It can, but around the margins. Particularly right now where there's significant inventory in certain parts of the channel, it is less likely to because some of those dealers are unlikely to take on that extra inventory even though it's at a slightly favorable price to what they may pay next year. But we traditionally haven't seen meaningful shifts in revenue from one quarter to the other as a result.

Okay. And just as you guys look at the asset sale divestitures and other parts of the portfolio, what's the kind of timing for these types of sales? How quickly do you feel you can get them done? And how will the proceeds be applied?

So the evaluation is going on right now. And we can't put a time frame as to when they will actually occur. But we are spending the better part of the next month or 2 really evaluating the portfolio in total and being -- identify if there's more strategic assets that we want to divest of. But I can tell you that I see more opportunities in building our core assets than selling off noncore assets. I mean, I think what we've announced with the eyewear business is a good example of a very good business, a business in the right ownership hands will be a terrific add to them. But for us, it's just not core. But we've got many, many, many more core businesses that, as I see them in my short time here, really create the opportunity to build value. So I don't want anybody to walk away from this phone conversation thinking that there's going to be a fire sale of assets or what have you. We're going to be very thoughtful of this and I want you to understand that there's going to be very little of asset sales. But -- we don't want to comment on how much, but more of the opportunity, frankly, is building the assets that we have. Clearly, the need for -- or the capital allocation question that you had is supporting taking our leverage down and paying down our debt. That's our top priority at this point in time. And we feel like where we're at from a, as Stephen mentioned, from a coverage ratio, we feel very good about it but we want to be able to build the cushion bigger so that we have all the ability to go rebuild the businesses like I believe we can.

And this does conclude our Q&A session. I'd like to turn the program back to our presenters for any closing remarks.

Thank you, operator, and thank you all for joining us today. As you can see, we're making significant changes to reposition and strengthen the company. A lot more to come, and we will update you as we go forward. I look forward to speaking with you again in the next quarter. Thank you.

Thank you for your participation. This does conclude today's program. You may disconnect at any time.