VSTO
#I appreciate your recognition of the fact that we've seen this movie before and we've weathered these storms before, you're right about that.
In terms of the duration, I think it is interesting.
I saw their numbers mentioned previously in some write ups that were published.
This one I think is too early to call, I think it is too early to call the duration.
But we have seen durations in that 12 to 18 months as we've gone through these cycles and established whatever new norms are and figure where the bottom of the trough is.
This one we're into at about eight weeks now, following the election primarily, so we'll work our way through that.
And we'll be able to at some point in time, I think, do a better job for you in being able to call the trough and figure out exactly where the bottom is and identify what that new normal is.
This one is a little bit different, maybe just for a couple of reasons.
I think the pre-election inventory build compounds the problem.
This big inventory build that occurred in retail and wholesale in advance of the election compounds the problem at least in the near term as we need to work through those inventories.
There is a little bit of a difference there in that, that was a fairly significant shift prior to what has been a fairly rapid decline.
That may compound it at least in the near term for a little while.
The other thing I think that is interesting is that some of the cycles we have had ---+ we're coming off of what I call, the eight years of plenty under the Obama administration.
Being able to gauge exactly where that correction will be following a strong bull market in shooting sports for eight years is a little bit unique.
So it causes just a little more uncertainty in exactly being able to identify what the new normal is.
That said there is a lot of new shooters in the market.
There is a lot of new people that have come into the shooting sports and purchase firearms for the first time, or the second, or the third, or the fourth.
We know there is a larger installed base of people that consume our products which I think bodes well in the long term.
We know the demographics of new shooters is favorable, 18-34 age group has been where a lot of the growth has come and they are actively engaged in the sport, so I think that bodes well for us.
The demographics shifting most recently to 50% women participants, I think is a great demographic for the long term health of the shooting sports.
I think all of those things are variables, some challenges to think it could be more challenging, others frankly comfort us, but we think it might be a little less challenging.
I guess at the end of the day it's a little too early to tell.
We expect to be able to have more information as we get through our fourth quarter.
As we get into next year and we'll be trying to factor all of that obviously into the guidance which will give for FY18 when we have our standard May call.
That's a good question.
Obviously the retail sector in outdoor recreation supports the $63 billion industry that we have talked about and we have discussed in terms of this highly fragmented $63 billion market that we are operating in.
Obviously retail really impact that item and sell through those items as well.
We will not be immune to challenges from the retail market impacting all of our brands.
However what we have seen today with the exception really of golf, where we saw the golf consolidations and we saw some of our large golf customers either go bankrupt or consolidate.
That was unique to golf and causes some real challenges right around the end of the golf season in that July, August, September, October time frame toward the fall.
That was a specific and unique impact that has settled down a little bit now in terms of the impact of that.
The Sports Authority bankruptcy and the consolidation that occurred there did impact Camelbak, it did impact the Bell Giro business a little bit as those stores carried both cycle, snow, and hydration solutions in backpacks and bottles.
There was some impact we saw clearly from those retail consolidations.
But I haven't seen anything in general in retail which is heightening our exposure to those other outdoor product brands like we were seeing in the shooting sports side.
The only other trend, <UNK>, we have seen in certain categories, strictly in winter sports gear, there was a bit of an inventory overhang from the last season where retailers came into this snow season with more inventory on hand.
This is proving to be actually quite a good snow season and so we've certainly have seen improvement.
Replenishment did lag POS data in the winter market as we ---+ as the retail channel of our existing inventory.
There are also a few inventory overhang issues in the independent bike dealer channel.
All of those added together while they are not insignificant pressures but certainly lower pressures than we face in the hunt shoot market today.
The other thing we're very much focused on, I would just add one last common on the retail environment, we are not necessarily completely tied to brick-and-mortar and in fact our strategy is to continuing to allow us to have other outlets for our products through online distribution and online retailers.
As we see that shift from brick-and-mortar to online, we are very much engaged in taking advantage of participating in that shift.
We're working that [tech] strategy every day and working the sales every day to grow our ability to go direct to these consumer and to grow our ability to be able to go online to these consumers.
Some of our products, it's easier to do that than others.
But frankly, you can sell firearms and ammunition through numerous online outlets.
Traditionally that has not been the case, but that has grown significantly.
We are supporting our brick-and-mortar retailers, they are very important to us and we're working closely with them.
But at the same time we are working to ensure we have a balanced distribution network which allows online markets to become increasingly important for us as well.
Yes, we are very much aware of all the Winchester's earnings call and their anticipation that it takes a couple of quarters.
I'm not sure, and I don't think they are sure, and I'm not sure anyone is sure exactly how this is going to settle out because point-of-sale is also shifting on us.
But we suspect it will take us into the back half probably of next year to be able to be confident that inventory resets have occurred and that we got to where the new demand is balanced to a supply and inventories are being cleaned up.
I think as other companies report going forward that are in the shooting sports space, and you've got a couple more that are going to report here over the next few weeks, I think there will be a common theme around this inventory issue and clearing out that inventory and people trying to assess how long that might take.
We're in such a state of flux now it's difficult but we think the back half of FY18 will begin to work our way through this.
Sure.
The primary driver of the free cash flow guidance of the year of reduction.
It was not unlike, as you listen to my comments on our third-quarter cash flow year to date, where there was a significant working capital impact, particularly in inventory build in third quarter compared to the prior year.
As <UNK> mentioned, this really accelerated from Thanksgiving on.
At that point in time we had a fair amount of product on order or in manufacture at our own plants.
And we can turn on a dime on that output.
Therefore we had not had time to react to our level of inventory.
Adding to that, obviously, we need to collect cash in the quarter so only through the sales of the first half of Q4 even generate meaningful cash flow during the quarter and during the full fiscal year.
We would expect as we head into FY18, while we're not currently providing guidance, we would expect to be able to address a number of those issues.
In particular as I mentioned during my remarks, we have reduced our orders of finished goods and for those finished goods we sell.
We are also reducing the output of our own manufactured products across both segments to address the inventory balance.
We would expect that to work it's ---+ while <UNK> mentioned the inventory retail channels would be the back half of the year before we could work that out.
A lot of our own inventory challenges we would expect to fix certainly by the end of the first half of FY18.
Yes.
I would say that M&A is not our priority now.
Our priority is focused internally on margin improvement, cash generation improvement, driving innovation so it can drive revenue, and doing the kind of things we know how to do to take market share in down markets or up markets.
Our priority is going to be looking internally to drive execution improvement and improve our financials, including the cash flows discussions <UNK> just had with you about managing our facilities and our supply chain, and ensuring next year we have good solid cash generation here; we feel good about that.
We can't guide to that yet but we will when we can.
We're going to be working heavily on those things.
We will not turn a blind eye to M&A opportunities but I will tell you it's not our priority.
Let me take the first one and <UNK> can take the update on Orbital Lake City.
In terms of costs associated with our own internal inventory reductions, largely this will be really pulling back our order quantities in the supply chain and reducing order quantities which we are giving to our vendors on a lot of source product so there's no additional cost here.
Working through our factories, we have been working overtime in many of our factories.
We obviously will be pulling back off the overtime as we go forward, it will not longer be necessary; that's cost savings actually by not having to pay time and a half in overtime.
As we work through our overhead, as we work through other things there may be some additional costs here and there but it is not going to be a material driver.
We will be able to do this very efficiently.
<UNK> do you want to talk about OA.
Sure in terms ---+ as we mentioned before we are actively engaged in the discussion with Orbital ATK about future of long terms flag agreement.
Those discussion are ongoing.
Under that agreement there is a couple month negotiation period spelled out in that agreement.
We are in the middle of that agreement.
There is nothing to report at this stage, when and if there is we will certainly announce it.
Sure.
That is something that we have managed successfully for many years.
As we've told in the past, how we go about this is we exercise a process of looking at our manufacturing schedules and what our demand planning for our factories is going to be for consumption of raw materials, which are generally for us, heavily focused on lead and zinc.
Those are the elements of brass and lead in bullets.
Copper, zinc, and lead our three primary metals which drive our commodities as we buy those for brass and as we buy those for lead cores in our projectiles.
Our process is we are always buying well ahead of demand based on percentage of demand.
Based upon what we believe the market is going.
We have been locking in favorable pricing on materials and we've been locking that in for various periods of time.
Out ahead of us depending on whether it is zinc, copper, or lead.
And then going forward, of course, we as we do with the market we have been one of the leaders in using recycled metals and materials.
We began the process of using recycled lead in our projectile manufacturing many years ago.
And we led the market and we led the industry in thinking about recycled lead at a much lower cost.
We've been pretty good at this over the years and we will stay very focused on this, <UNK>, as we go forward.
Of course if the commodity markets all continue to rise you cannot beat the market forever but we have demonstrated in the past the ability to get certain segments of our ammunition capability even in flat markets where some pricing opportunities there.
We are going to be very focused on not dropping price, as we've said many times.
We are not the low price leader, we want to be the low cost leader.
You will not see us chasing price down or significantly reducing price.
We have lots of other levers we can pull to make our products more attractive in the retail environment.
But we are cautious about this.
We are watching that market and commodities very closely.
This will occur largely as you described, if you are looking at the dealer network, I think there will be some challenges potentially for small dealers.
Whenever you have a period of time like we've experienced where you have eight years plenty and demand is outpacing supply and you have hot category firearms which have been very interesting to consumers like the AR platforms and concealed carry handguns; that has allowed not only retailers and dealers, it has allowed manufacturers to come into this market.
Many small mom/pop manufacturers that have entered this market as well as small mom/pop dealers which have entered this market to take advantage of the favorable market conditions for almost a decade.
My experience has been that they will be ---+ they will find themselves under significant pressure, and many of them will not have the balance sheets and the cash flow and the wherewithal to remain in business.
I think not only on the dealer side, small dealers, but also small manufactures if, depending on the length of this correction that we are in and depending on where the bottom of the trough is and where it settles out, my personal expectation is it will heavily pressure small manufacturers, both of ammunition and of firearms, and some of the newer smaller dealers.
We will be working through that process to try and ensure that our dealer network is healthy, we have great relationships with functional wholesalers and with bigroups who service these independent dealers.
We had very good meetings with those suppliers of independent dealers at the SHOT Show.
We believe we are a premier supplier of choice and I think as we have said in the past, what you will see typically in a market like this is you'll see import products on the ammunition side begin to decline first, then you'll see the small mom and pop domestic manufacturers supply to the market begin to decline; and our goal will be to pick up all that market share and get a larger piece of what could be a smaller pie.
I don't know of anything right now which would cause material impact from the company from the scenario you laid out and in some cases we may benefit from smaller manufacturers which actually have to exit and we will pursue and take that shelf space.
Sure.
Certainly our objective as we've talked before, our goal was during good times and to keep that leverage ratio under three and recognizing that we are in a consumer profits market, which is by it's nature cyclical, as we know there is always the opportunity for cycles to recur and we're currently in one of those cycles, we certainly will be very judicious in our use of cash over the next twelve months.
We will be very careful, as <UNK> mentioned, our priorities for cash flow deployment and value accretion over the next twelve months.
A lot of it is focused on actions we can take internally.
We will work to reduce working capital, we will work to improve efficiency and gain market shares, markets that ---+ it's difficult to guide to an exact leverage basis when I have not given a cash flow guidance for next year, but we certainly do not intend to let our leverage ratio to grow excessively.
You're welcome.
That's a great question, <UNK>.
In fact I'm actually glad you came back around and asked that, I think that's an important question for our investors and for the analysts here today.
Let me just back up a minute here and lay the foundation of this question a little bit.
We announced that we were going to pursue a CapEx investment of up to roughly $100 million over the next several years to address bottlenecks in production, where we knew that if we could address those bottlenecks we actually would have additional capacity we could sell, and that also a large portion of this capital was ensuring that we could be a low cost leader across our categories of ammunition from shot shell, to pistol, to rifle.
We are very much still focused on that.
We are only in tranche one.
The off ramp in terms of what we might do in tranche two is right now, we are looking at those decisions right now of what we may do with tranche two.
The other thing I would tell you is the reconfiguring of capital is an ongoing analysis for us or where we should be investing to reduce bottlenecks and reduce costs and improve our ability to compete and win.
So this is not a ---+ even though we did this in tranches which allowed us to ensure we were not committing to the full $100 million of CapEx and that those tranches have windows, meaning that we are getting into the second tranche window right now for that decision, we also have a lot of flexibility in terms of how we applied this CapEx across our manufacturing facilities across the various components of our ammunition basis.
We are doing this very deliberately and very consciously and we will be making decisions in terms of CapEx spending which we will share with you when we do guidance.
We will talk more about the cash flow and what we will be doing on CapEx next year, but we are in the throes of those decisions now.
We believe very strongly that what we have done already in tranche one is critical and necessary for the long term competitive position of the business and to drive our cost down and to drive these positions of being able to be low cost leader.
We're very happy with how tranche one has progressed.
The team has one a great job executing tranche one so far.
We will be reviewing tranche two and then we will talk to you more about CapEx in general.
<UNK>, I would like to add that you should review the tranches as being synonymous with the years, and tranche one ---+ there are certain expenditures of the tranche one, which are in year two of the plan.
But also, you should be aware that tranche one, as we mentioned this several quarters ago, tranche one is really focused on a couple of types of ammunition which are still fairing strongly even today.
We do still do see some opportunity from tranche one, and as <UNK> mentioned, is also very flexible capacity.
If that demand were to change from that, we can certainly reconfigure those lines, but also they won't reduce our average cost for those calibers and types of ammunition.
We'll be receiving our first benefits from tranche one investments in the back half of FY18.
Those begin to materialize and will allow us to have the ability to capture additional revenue and market share.
You bet.
Well the rounds that are manufactured by Orbital ATK are very well understood.
Those same rounds are manufactured by Florida Induce who make a mill speck product and can be manufactured by us as well.
There is nothing unique necessarily about the configurations of the ammunition manufactured by Lake City but we've had a very productive relationship with them over the years.
They have access capacity which we have helped them get onto the commercial market in a win-win situation.
It seems like it's a good opportunity for both companies going forward.
In the event we couldn't get that supply from Lake City, certainly we could make those products and we would have to make certain investments to do that.
But there is nothing unique about the rounds we purchased from Lake City in terms of an inability to make those elsewhere.
Yes, I don't think we can get into that.
I think those are questions you would have to ask [away] about their own cost over whether they are think they're competitive in the market or not.
The fact that we've been able to have a productive relationship with them is what we are really focused on just seeing if that relationship can continue to be a win-win for both companies.
I wouldn't want to talk about their structures or where they are in terms of being cost competitive or not.
Thank you.
We thank you all for joining us.
I think that was our last question.
We look forward to talking to you again as we wrap up this fiscal year and will be able to give you guidance on FY18 when we do our next earnings call.
Thank you very much.
