Vista Outdoor Inc. (NYSE:VSTO) Q2 2021 Earnings Conference Call November 5, 2020 8:50 AM ET
Kelly Reisdorf – Vice President, Chief Communications and Investor Relations Officer
Chris Metz – Chief Executive Officer
Sudhanshu Priyadarshi – Senior Vice President and Chief Financial Officer
Conference Call Participants
Daniel Flick – Cowen and Company
Rommel Dionisio – Aegis Capital
Jim Chartier – Monness, Crespi, Hardt
Scott Stember – CL King & Associates
Ryan Sundby – William Blair
Eric Wold – B. Riley, FBR, Inc.
Disclaimer: *NEW* We are providing this transcript version in a raw, machine-assisted format and it is unaudited. Please reference the audio for any questions on the content. A standard transcript will be available later on the site per our normal procedure. Please enjoy this timely version in the interim.
[00:00:03] Today and welcome to the Vista Outdoor second quarter fiscal year 2021 earnings call. Today’s conference is being recorded at this time. I’d like to turn the conference over to Kelly Reisdorf.
[00:00:19] Thank you. Good morning and thank you for joining us today for our second quarter fiscal year. Twenty one earnings call with me this morning, our Chris Metz outdoor Chief Executive Officer and studentship, Sudhanshu Priyadarshi 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 provision 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, faced with the outdoor and the industries in which we operate. We encourage you to review today’s press release and the outdoors FEC filings for more information on these risk factors and uncertainties. Please also note that we have posted a presentation materials on our website at EBITDA, outdoor Daxam, which supplement our comments this morning and include a reconciliation of non gas financial measures. With that said, I’ll turn the call over to you, Chris.
[00:01:38] Thank you, Kelly, and good morning, everyone. Thank you for joining us this morning. Before we started, let me begin by thanking our employees. Our teams have been working tirelessly to keep pace with record demand, fulfill essential orders for government customers and staying safe and following pandemic protocols. Their work is truly inspiring, and they deserve the credit for the performance we have shown in the first half of the year. The resiliency of our people and the nimbleness of our operating model enabled us to not only weather the pandemic but frankly thrive in the toughest of circumstances. The staff were delivered outstanding results across the business in the second quarter, where we saw a growing consumer demand for all of our key brands. Sales were up 29 percent year over year to five hundred and seventy five million. And gross profit was up 78 percent to one hundred and sixty two billion. Our sports segment was up 26 percent year over year to 380 million and our outdoor products segment was up 35 percent. Two hundred and ninety five million.
[00:02:45] Our EBITDA margin was sixteen point two percent, which is nearly a thousand basis points improvement year over year, our adjusted EPS was Balaton versus a Break-Even level last year, and we achieved the year to date free cash flow of one hundred and ninety million. The strategic work we’ve done over the past two years to improve performance, efficiency and profitability turned our increased sales into significantly higher margins and dramatically better free cash flow. We improved our leverage ratio to one point four times in the quarter, enabling us the financial flexibility to weather global uncertainty, invest in critical internal initiatives, brands, and again look at tuck in acquisitions as a further lever of growth. Last month, in support of our strategy to create a powerhouse of passionate outdoor sports and recreation brands, we completed the acquisition of the iconic Remington brand. The Republican brand is one of America’s best-known and oldest ammunition brands with a rich heritage and passionate and loyal customer base. We are thrilled with this highly synergistic acquisition, which includes ammunition and accessory assets, the Arkansas manufacturing facility and the legendary Remington Brand and IP. Our improved revenue in the quarter was the result of several factors our drive to enhance our e-commerce capabilities, increasing our marketing efforts and meet consumers where they shop, which is increasingly online. The ongoing shift in consumer preferences toward outdoor activities that can be enjoyed and safe and socially distant ways. Several new successful product introductions by Bushnell’s winchman GPS enabled speaker, CamelBak Spirits and drink beer line and the introduction of our Bushnell redesigned and repositioned line of optics.
[00:04:37] The response in the channel. And with consumers, our innovation has been strong and was well-timed. Also increases in recreational shooting, sports participation in part inspired by safety and personal protection and growth in the sales, hunting related ammunition and accessories driven by a strong fall hunting season. Our team at this hour was able to meet these demands under challenging circumstances. We’ve thrived as we watched the economy go up and down. Politics permeate even further into everyday life. And we’ve adjusted our processes to account for enhanced safety for all of our employees. Overall, we see the second quarter is marked by excellence in strategy, execution, well-timed new product introductions in the marketplace, a brand portfolio of market leading brands focused on outdoor sports and recreation, and a resilient business model now delivering significant profitability to fund the next leg of distance market leadership. I’d like to thank our entire organization for the enthusiastic welcome of the Remington team and products to Vista Outdoor since day one, there have been over and above levels of coordination and work taking place during these demanding and uncertain times combined. Our portfolio is stronger and is made better through our scale and our centers of excellence and the culture we built. Turning to four execution highlights, first, I’ll start with Remington. Remington furthers our strategy of building market leading brands aligned to outdoor sports and recreation.
[00:06:10] We were able to buy an annual run rate of roughly 200 million in revenue with roughly fifty one million in cash on hand and 30 million from our revolver. Importantly, this deal provides us with much needed manufacturing capacity to meet consumer demand without adding any additional capacity to the industry. We also believe the iconic Remington brand provides us a valuable and untapped future licensing business in key product categories because of the synergies we see. This is truly a once in a lifetime acquisition opportunity. We couldn’t be more excited about the potential and look forward to restoring the profitability of this business, using our manufacturing strengths, distribution and marketing capabilities in our Centers of Excellence model. We believe it will take us a couple of quarters to fully integrate the integration, and we’ve modeled our financial guidance accordingly. A second execution highlight is navigating the cozied 19 climate. We’re the first to recognize that we were aided by tailwinds resulting from consumers excited to get outdoors and recreation safely, however differently from others. We were able to leverage skills and assets we began building prior to going on e-commerce and direct to consumer sales to help build and fulfill demand for products across the portfolio. This included demand for both our core products and shooting sports. The ability to serve consumers directly in today’s climate has helped address shortages at retail and helped drive consumers to this disaster. E-commerce sites. Once consumers landed on our sites, we met them across promotions and engaging digital content.
[00:07:52] E-commerce Center of Excellence, led by our Chief Digital Officer of Steel Hammer in collaboration with our business unit leaders, delivered approximately 20 percent of our total company’s revenue in Q2. We doubled this business in the quarter when compared to the prior year. We’re excited about the trajectory and growth potential for this channel as we look ahead. On the operations and finance side, we continue to manage our people and processes with the utmost care and attention given the ongoing spikes and surges in covid-19. We’re like all Americans who want to get back to normal. But until conditions improve and government regulation solution, we will manage our workforce and operations prudently and with safety is the number one priority. We know that the last six months have been favorable to our business and we acknowledge that changes in the pandemic or government regulations could change some of these advantages that we’ve seen. A third execution highlight is leveraging our infrastructure, our core anchor in the this our strategy is to help our portfolio of brands be better than they could be on their own. Internally, we call this better together. The second quarter demonstrated the power of this model on the commercial side as our shooting sports segment was executing well in every aspect of the business. This success has been driven by consumer demand, but optimized by our decision to combine the sales forces and channel marketing for ammunition and onto business units.
[00:09:24] Each unit, in most respects serves the same customer and consumers are better together. Approach has led to improved top and bottom line growth through efficiencies and scale, and our teams get better with each passing month. With Remington ammunition and accessories now in the portfolio, we’ve added even more firepower for a talented team to deliver for the good of consumers and Vista Outdoor, like we were rightfully known for our strong brands and commercial strength. However, our operations team also demonstrated the power of better together in Q2 as well, with heightened consumer demand that no one could have accurately predicted. Our operations team work collaboratively and tirelessly to bring in more of the right materials and the right inventory. Although we couldn’t meet all of the demand in outdoor products and shooting sports. I feel confident that we not only grew our revenues, but also took market share in the key categories we compete in. And the fourth execution highlight, I’d like to mention is working capital kudos and thanks to our team for the continued stellar work on the balance sheet this quarter, working capital improved and contributed to free cash flow due to a combination of focus on accounts receivables and inventory management. We have to do two with a multi-year low in day sales, outstanding DSO and days inventory, outstanding audio performance. Our cash conversion cycle has improved by roughly 24 days when compared with the prior year and by roughly eight days compared to our first quarter with inventory in our retail partners also at multi-year lows across many of our categories.
[00:11:05] A key focus area for our team is making strategic investments in fast moving inventory to support the growth we expect rest of the year. Now let’s move to a review of the brand portfolio, we experienced incredibly strong growth across costs for our products and shooting sports segments that were highly relevant products address consumer demand for health, recreation and personal protection because people spend more time at home and outside and shooting sports. We anticipate this heightened level of demand fueled by many factors, including civil unrest, a heightened desire for personal protection and increases in recreational shooting activities to continue into the future. One area of continued growth in demand is hunting. We experienced a strong spring hunting season and fall hunting season is trending the same way, with continued covid-19 restrictions and social distancing. More and more people are looking to spend time in nature and in the woods. For example, in the state of New York, hunting license sales tripled. Twenty team sales on opening day. In Michigan, license sales are up 28 percent, with a large increase in the coveted 18 to 34 year old demographic. These trends are in line with internal demand for hunting ammunition and bode well for the hunting heavy Remington brand. A secondary continued growth are ammunition hunter teams continue to secure domestic and international government contracts, which, as we all know, leads to a predictable multiple year revenue stream.
[00:12:40] These government contracts hedge against the volatility of the commercial market and create a halo effect for our brands. Consumers realize that if the brands are good enough for national security or law enforcement officers, then they are certainly worthy of consumer discretionary dollars. Recent wins with the U.S. military and European countries for ammunition, as well as optics and other accessories, victories here and abroad were among some of the highlights from the quarter or ammunition business, as you know, has been constrained in the current high demand environment. I’m frequently asked to describe what is different from this current time compared with the surge four years ago. Twenty sixteen. Although I’m not going to speculate on the sustainability of the surge in demand, I will simply share how we view the five key differences between then and now. Number one, significantly more new shooters. According to data from the NSF, there are six point two million new shooters in Twenty twenty. This rate is more than twice the number of new shooters in the former surge. Anecdotally, there is no shortage of reports of sold out shooting ranges and backlogged firearm safety classes around the country. No, too much more diversity in new shooters than the industry has seen before, this has led to an increase in participation as they learn and enjoy their new purchases. Data from the NSF indicates these shooters are more diverse, with large increases in both women and people of color entering the sport.
[00:14:15] Number three, more accessories are being purchased to support participation categories such as gun cleaning kits, slings, spotting scopes, Ismir protection, all of which we sell, are all comping in the low 40s 50s as your every year percentage increase over the prior year quarter. Number four, we’ve cleaned inventory in all retail and wholesale locations, despite us producing flat out for six months. There’s no buildup of inventory at any of our customers. In fact, every one of them would like significantly more simply because consumer demand continues to outpace our ability to supply. The number five backlog. We currently have over a year’s worth of orders for ammunition in excess of a billion dollars. This is unprecedented for our company. With demand far outstripping supply and inventory levels in the channel at all time lows, we see strong demand continuing. And this metric informs our viewpoint on what a recovery or normalization could look like. Now, while I don’t intend to provide updates on this metric every quarter or even every year, I did want to provide additional context in these extraordinary circumstances to convey an underlying strength and strong foundational element to our business. We plan to leverage the consumer volume of interest and cash flow advantages of this period to further our competitive positioning across the portfolio. This includes investing in accelerating our new product innovation, further building out e-commerce and cross promotions, and focusing on digital marketing within our brands, moving to our products covid-19 and acceleration of remote work and migration away from cities continues to provide positive influence on outdoor recreation and hydration.
[00:16:08] CamelBak continues its high customer brand affinity and its focus on personalized pursuits of staying healthy. The brand is thriving despite continued covid related supply chain issues, primarily in Asia as well as Mexico. We’re working on secondary suppliers and are targeting this brand for increases in R&D and Centers of Excellence Resources. With L.A., we continue to benefit from the surge in people riding their bikes again. Sales have been strong across the portfolio, from specialty retail to mass. We’ve also seen more consumers getting back on their motorcycles, with many of them buying a new helmet themselves or for family members. Market research indicates that the demand for bikes and related accessories will continue well into the future and capture. The surge in outdoor cooking continues as there’s a record level of brand awareness in this space. Sales during the quarter on the camshaft platform were up significantly year over year, which is driving brand awareness and gross margin improvement. Our new Wi-Fi pellet grill, launched ahead of the pandemic, not only has hit a new MSR price point at over a thousand dollars, but it’s selling like crazy online in a retail campaign. History shows that the first purchase leads to a prolonged and productive relationship with the consumer. So we believe the surge today will continue to pay dividends tomorrow and beyond. And Bush sold off the U.S. golf industry has rebounded from a punishing start to the golf season.
[00:17:40] What began as record reductions in rounds this spring has turned into a significant increase as more Americans look to recreate outside and stay in socially distant ways. This trend has driven top and bottom line growth for Bush. No golf brand. But the real story for golf has been innovation, the category creating winchman. It’s the first of its kind golf audio geeks product. And the exciting story here is that in this category, we literally started from the zero percent market share in GPS devices and grew to 15 percent inside of the quarter. Its market share gain is incredible and unprecedented. Year to date, we’ve sold five times more than we initially anticipated, as the channel and consumer response have been much stronger than anticipated. Again, kudos to our obscene for chasing the demand winchman sound and GPS capabilities that expanded the market for Bush Navar and contributed to better than expected earnings. Together, our two segments clearly highlight our business model, strength and diversity. The growth rate in shooting sports was a tremendous 27 percent in the quarter. At the same time, our growth rate in outdoor products at 35 percent was even greater as cash flow continues to grow. We will invest in targeted brands as leverage to further our growth in the outdoor industry. We will also explore other categories within our core products that are attractive and adjacencies that we can currently don’t participate in. In total, this outdoor will be seizing the opportunity across our portfolio and the industry, smartly deploying our cash flow to fund the next phase of our growth.
[00:19:23] During this period of growth, you can expect us to focus on five key strategic areas. First, maintain and expand our industry leading positions, including the prioritization of first or second place positions for our brands. Second. Innovation, we’re measuring the contributions of new products and we like what we see in terms of both top and bottom line contributions. We will continue to pragmatically increase our R&D and capital spend to invest in our new product pipeline and also looking harder at changes in demographics and user participation. Third, grow our digital infrastructure for e-commerce to achieve our vision of connecting our portfolio of purpose driven brands and products and ways of bringing people together and drive revenue. Or we will continue to look for strategic synergistic tuck in acquisitions with a near-term accretive profile, such as what we expect to see with a highly synergistic recent acquisition of the Remington brands and ammunition assets. And finally, we look to build up our dry powder with cash on hand. We know that the seasonality in our third and fourth quarter traditionally can be softer than the front half. And our planning activities have signaled that calendar year twenty twenty one may have. Many of the uncertainties in pandemic caused disruptions experienced in twenty twenty, and I’d like to hand it over to Sudan to provide more detail on our financial results and our outlook.
[00:20:54] Thank you, Chris, and good morning, everyone. Our second quarter results accelerated. This financial strategy of growth in these past six months has provided the company with an opportunity to gain share, grow revenue, reduce debt and build cash. They have provided you with both as reported, and it’s just a result on an ongoing basis in other vessels and flights. My comments today are going to focus on our atrocities, though the company reported second quarter sales up twenty nine percent over the prior year. There are a few key drivers that ultimately results exceeded our expectations for the quarter. Contributing to greater than expected sales were overall increased momentum in consumer demand across all categories, greater than expected factory optimization, in addition, resulting in increased volume, exceptional growth in concept as consumers saw outdoor cooking experiences, strong consumer demand and personal goals, and greater than expectations in nearly all categories consumption. Contributing to greater than expected earnings were mixed price and increases in e-commerce across all brands. Also contributing several cost saving initiatives and a select few charities here effective in the bottom of our economic business, which is direct to consumer retail accounts and dropship, more than doubled compared to the prior year, quarter to date. This business contributes roughly 20 percent of total company sales, gross profit increase, 78 percent, 262 million for the quarter compared to the prior year quarter. Gross profit margin increased by nearly seven hundred seventy basis points to 28 percent from 40 percent in the third quarter. Increases reflect overall improvement in pricing makes and operating efficiencies across nearly all of our brand.
[00:23:07] Operating expenses are 15 percent of sales, compared with 18 percent of sales in the prior year, EBITDA increase to 78 million from 10 million in the prior year quarter, margins of thirteen point five percent was an increase of more than 2000 basis points compared with the prior year quarter EBITDA million increase in 2000 basis points to sixteen point two percent in the second quarter. Into for the second quarter won six million, down 36 percent from the prior year, second quarter tax extends for seven million, compared to one million in the prior year. The adjusted tax rate was nine percent, reflecting IRS regulation changes. Adjusted net income was 65 million, resulting in adjusted EPS of Bill Clinton compared with Break-Even in the prior year quarter. Key drivers improve gross margin in both segments, growth of e-commerce, operating efficiencies and reductions from the prior year. The difference between gottliebsen dollars, thirtyfold and adjusted EPS of dollar 10 is the result of a tax valuation alliance and a money related transaction expenses. Our balance sheet has been strengthened by delivering 170 million in free cash flow this quarter, the two hundred ninety million to. We had a strong working performance driven by good collection from demand and an overall reduction in inventory from market demand and a certain amount of school related supply chain disruptions and also had lower capital expenditures. Turning to page 10 at the end of the quarter, we had own in nine million in net debt leverage ratio improved to one point four times.
[00:25:13] Our balance sheet continues to get stronger and we continue to have ample liquidity to fund our book. With the success and strong cash flows, our capital allocation strategy remains focused on three years. Organic growth. We believe in total investment in our brand centers of excellence, R&D, reliable and efficient ways to generate shareholder returns on capital spending. Fucking acquisitions, as demonstrated in our contract and Remington acquisitions, we are focused on brands in which challenges are readily available to our operating model, can add any good value and meaningful earnings and growth represent. And lastly, debt management and cash reserves, the other stated, we will keep our leverage ratio in the range of roughly two to three times the long term, and we will utilize capital that needed. Given uncertainties and challenges in the global economy, we will hold some cash to guard against unexpected slowdowns or with. Want to check the results shooting first reported second quarter sales of two hundred eighty million, up twenty six percent from the prior year quarter. We continue to see strong demand for ammunition and hunting, shooting accessories, the strongest ammunition categories, the rifles and pistol ammunition. We also saw trends in the channel and in films as consumers have been gearing up for what is expected to be a strong fall hunting season, second quarter gross profit dollars in shooting sports, one hundred and five million up, four hundred and ten percent from the prior year quarter. Gross profit rate for the quarter on 28 percent, which is more than an improved 2000 basis points then compared with the prior year quarter.
[00:27:16] Improvement came from mix writing and operating efficiencies, shooting sports, EBITDA improvement in the quarter, but nothing short of outstanding dollars, up three hundred and forty percent over the prior year, and the rate improved by more than 13 hundred basis points. Turning to other products, second quarter sales for in 95 million, up 35 percent over the prior year. We saw some new demand for resurgence in outdoor activities and exceptional e-commerce performance across all brands. Gross profit was 57 million, up 39 percent from the prior year. Gross profit margin improved by roughly 100 basis points. The race would have been higher were it not for increases in air freight charges and other expenses incurred as a result of attempts to offset causes, related disruptions within hydration and called. What highlighting the segment delivered 165 percent year over year increase to EBITDA and EBITDA margin rate increase to thirteen point five percent from seven percent in the prior year. To reduction and cost savings initiatives on the primary drivers behind the improvement. Turning to our outlook today, we are providing guidance for our third fiscal quarter. Sons are one continued sense of demand for commercial ammunition to continue ordering in the channel for a strong fall hunting season. Three retail stores remain open and we see continued trends in our e-commerce business for that, fracturing and supply chain remain largely uninterrupted. These factors are offset by the typical expected technology in each of our segments in the third quarter, most notably our undercooking and gold product lines, and reflect the impact of the distribution agreement with Lake City, which began October one, we anticipate each business unit being built near our shooting sports segment showing a higher growth rate than other products.
[00:29:44] But insurance for most of the fans will come from demolition, although we do expect to continue to see positive growth in. While we expect our product to be up year on year, we are factoring the growth rate to be influenced by these corporate outbreaks as we are closely monitoring what is happening in Europe and here in the States. In terms of normalized seasonal sales in the segment, the summer spike in sales we saw in the first and second quarter was due to people taking their summer vacations at home and taking sports and recreation products in record numbers. We created this phenomenon is unlikely to be repeated in the winter months. Consumers don’t typically take as many vacation days and winter months and other product portfolio is more related to warm weather products. And lastly, the anticipated increase in tax expenditures spending at at the halfway point in fiscal twenty one sales taxes, spending wilkommen slightly above offset last fiscal year. We are increasing our investment towards our organic growth initiatives and we’ll be investing in R&D spend is expected to be flat from prior year. The experts, the interest expense to be significantly less than the prior year. Our tax rate for the third quarter to the suspected to be in the mid single digits. We expect our leverage ratio to stay below two times in the third quarter.
[00:31:28] We expect to see continued strength in our end market within our organic business, which will result in strong debate and free cash flows offset by planned investments in marketing and working capital. Remington has resigned from bankruptcy, interrupted operations. We expect free flow in the third quarter to be below the prior third quarter. Therefore, our third quarter fiscal year 2011 guidance, which includes Hemington, is as follows the expected revenue in the range of five hundred and ten to 530 million, which the present twenty to twenty five percent growth over the prior year, quarter earnings per share in the range of 55 cents to sixty five cents. Additionally, third quarter sales guidance includes approximately 10 million in sales from Remington, revenue will be modest this quarter as we work to reestablish the relationship and processes and ordering cycles which were sold into bankruptcy. While we have work to do to ramp up this business to our standards, we are proud to be able to revive one of the industry’s oldest and most iconic sporting pages, dance to the greatest it once had. We anticipate the revenue run rate to normalize by mid next year. As we continue to ramp up and optimize operations in the business, we expect the sales contribution to increase. And lastly, as the stated to the FDA, we expect this acquisition for transition to be accretive to earnings in our fiscal year, Twenty twenty to. Thank you, everyone. And now we would open the line and take your questions.
[00:33:20] Thank you, if you would like to ask a question, please, press star one on your telephone keypad, if you are using a speakerphone, please make sure you mute function is turned off. Light your signal to reach the equipment. Again, that is star one for questions. Prefers to be on Daniel Flick account and company.
[00:33:39] Hey, guys, good morning and congrats on a really great quarter.
[00:33:44] Thank you so.
[00:33:47] I was under the impression that the two hundred million sales figures for Remington was backward looking, so curious what the capacity and price and opportunity is that I go forward basis, given the end of garment, has changed pretty substantially. And then also how the Remington portfolio with the product and Martin Mix might differ from from the outdoors mix as well.
[00:34:14] If the two very good questions and let me let me take that, this is Chris. So the first question is the Remington sales projections.
[00:34:24] So what is publicly available is a couple of years ago, they hit a rate of three to four hundred million of sales. And although we haven’t measured their capacity, we believe that that three to four hundred million on an annual run rate with the right demand is certainly achievable in terms of the portfolio mix. One of the neat things about what Remington offers is really two things. One, it provides us a little bit of buffer from our late city contracts to the extent that we want to serve the small rifle ammunition demand. But secondly, and probably more importantly in this environment, is they have got an absolute state of the art nine millimeter pistol factory, which gives us a much needed capacity in a category that is not only super strong, but is growing dramatically. And this is the predominant caliber that is shot on ranges and gets consumed and not stockpiled, if you will, as much.
[00:35:40] Awesome. That’s very helpful. Because was also curious how the acquisition would impact pricing power in terms of negotiations with customers, and then just a small question to kind of scare away the net debt. It looks like it increased on slide 10. Sixty nine million after the acquisition. But the fact that the price was 81 million, just curious what the difference was that.
[00:36:11] Ok, you want to dress in that, then I’m talking about.
[00:36:15] Yes, so let’s get you paid EPS one million dollars for an income, but we have to pay twelve and a half billion dollars to deposit. That happened in last quarter. So that was part of the secret cash. If you add eighty one million and then take 12 and a half million out, you get to the number Performa number.
[00:36:39] And as it relates to the pricing question, we don’t see this changing pricing at all in the marketplace. It’s a very, very competitive industry, as you all know. And what we’ve been fortunate to be able to do is as our commodity input costs have increased, most notably copper, as well as our overtime rates with our factory workers to support the increased demand and as well as some just general inefficiencies as well as we’re producing flat out. We’ve been in a position where we’ve been able to pass that along to our customers, who in turn then have passed that along to consumers. So it’s a it’s a balanced marketplace. And we view the Remington acquisition as really the gives us the ability to dramatically increase our capacity while not increasing any capacity whatsoever in the industry.
[00:37:43] So there should be no long term hangover effect, if you will, from what happened in the past, which was added capacity to the entire industry in total.
[00:37:56] Awesome, thanks so much.
[00:38:01] We’ll go next to Rommel Dionisio at age of.
[00:38:06] Thanks. Good morning, Chris. He’s obviously had a lot of experience turning around companies wherever you from our cat as well. But as you look at Remington, you know, this is a company that their former parent was investing capital to, seeing some financial challenges for a while. So would you say is the lowest hanging fruit in terms of aspects of their business that maybe had not been under invested in in these last few years as a group that, you know, had some financial challenges ahead? Could you just give us some granularity and what you plan to target sort of initially in terms of, you know, getting that business running as efficiently as your current as the rest of your portfolio? Thanks.
[00:38:51] Yes, Iran will have a very insightful question, because you’re even prior to our encounter, had a lot of experience in looking at organizations that, for one reason or another were dramatically underperforming and turned it into a turnaround situation. The really, really exciting thing about Remington is it wasn’t that long ago that they demonstrated top quartile performance. So the brand is and the company is certainly capable of doing that. And as you well know, it’s one of the iconic sporting brands in the world with two factors that I see that I would suggest are low hanging fruit that are very typical of a lot of turnarounds. It is, number one, just very undercapitalized as in as companies start to deteriorate their performance, their balance sheet follows really quickly. They can’t invest in inventory. They can’t invest in raw materials. They can’t invest in the people to handle the surge capacity, what have you. And it really becomes a just a self-fulfilling prophecy. And that’s what’s happened here, is they went through bankruptcy so immediately. And that’s what you’re seeing some investments in our now quarter three. We’re spending a lot of time reinvesting in the supply chain and Ruddington, all stuff that is normal course for us. It’s very easy to do harder to do if you didn’t have a strong balance sheet like we do now. So everything in our projected guidance supports us heavily investing into the Remington brand.
[00:40:27] And that’s why you see us putting their really small sales numbers, frankly, in Q3, because we’re not focused on sales. We’re focused on rehiring literally seven to eight hundred employees for that facility, retraining all those facilities, going through and working through their processes, bringing back online systems and then reintroducing the supplier network to them. So a lot of hard work there. But what I would call low hanging fruit for a talented team like like I know we have an animal. You know, the second piece of low hanging fruit is really the underinvestment that I think we’re seeing is in new products. So I think it’s been a while since the Remington brand has introduced innovation into the industry, if you will. And you’ve seen just a slew of innovation from our ammunition team over the past few years. And we’re going to bring that same mentality and makeup to the Remington brand. So super, super exciting. Now, what’s not necessarily low hanging fruit, but a long term opportunity for us is because of the iconic nature of the brand. We believe there’s opportunities for licensing. We believe it’s a brand that can extend itself into the orientation cheese. And as we look out over the mid to long term, it’s exciting. It’s an exciting potential revenue and royalty stream for us.
[00:41:59] It is very helpful. Thanks very much.
[00:42:02] You’re so moved next to Jim Chartier at Monness, Crespi, Hardt.
[00:42:09] It’s more difficult question. And unremitting, I’m just curious, are you forecasting the acquisition to be deleted this year as you invest in the business in the second half of the year? And then any sense of where kind of current EBITDA margins are for the business? And is there anything preventing you from getting that business, you know, in line with your current ammo segment, which is tracking think close to 20 percent this year.
[00:42:43] Yes, what we have guys is, is that we we believe with a fair degree of confidence that it’s going to be created in our first year and we haven’t guided beyond our third quarter for a number of reasons.
[00:42:57] And I’ve just alluded to the fact that we’re going to invest in our Q3 here to support the ramp up of Remington. We believe that looking at both the top and the bottom line, that there’s there’s no reason why it shouldn’t perform over the long term, like our our current ammunition business.
[00:43:18] Now, certainly over the short term, next year or so, I would not model in 20 percent margins for that business. It’s a business that we think we can move up into the double digits in terms of EBITDA as we start to stabilize the business, get it back and running and start moving into our next fiscal year. But there’s some things that, you know, talk about low hanging fruit that we’ll be able to jump on. But there’s some other things we’re going to take some time to really implement and all stuff that is taking us time to do in our business right now to demonstrate what I think is probably the best margin profile in the industry. And it’ll take some take a little bit of time to get Remington in there as well.
[00:44:04] Great, thanks. And then talk about the Lake City impact on third quarter sales and earnings.
[00:44:14] Yes, you know, that Lake City, we ended that contract of old and disassembled. Now, what we’ve done is, is we signed a contract with Lake City. So we’ll continue to get supply from that Lake City facility, not as much as we had before. But as I mentioned, with the Remington acquisition, we have the ability to produce not only our our own factories prior to the acquisition, but now in the in the factory in Roanoke to also support small rifle to the extent that that we deem it necessary. But what we really like about where we’re going from the Lake City contract is the Lake City product, which is a very volatile mix. And in good times it performs very well and in bad times it performs very poorly. What we try to do is set our business up for a more stable and more predictable revenue and profit stream.
[00:45:23] So we’re excited that we’re going to remix our portfolio into smaller handgun calibers like nine millimeter. We’ve also put a concerted effort on contracts and increasing our our work with the government, as evidenced by the very, very coveted when we just had with Customs Border Patrol, which we’ve already begun to shift. So, you know, we’re excited like we’re doing with all of our household products. Businesses is frankly, we’re going in with with a business mindset and looking to remix the portfolio to not only meet demand, but also to be smart about our margin profile so we can fuel future growth.
[00:46:05] Great, thanks. Best of luck to you. Thank you.
[00:46:12] We’ll go next to Scott Stember at C.L. King.
[00:46:17] Good morning and congratulations again on a great quarter and thanks for taking my questions.
[00:46:26] Obviously, e-commerce is great for you guys in the quarter. Could you talk about how the traditional brick and mortar chain performs?
[00:46:34] Sure. So it’s a brick and mortar as we came out of the recoded environment and we, you know, kind of we’ve seen a lot of American consumers and really consumers across Kazakhstan, European countries, and what have you start to pull out of the work from home or shelter in place, if you will.
[00:46:54] We saw our brick and mortar retailers performing well and frankly, our brick and mortar retail partners, e-commerce business performed very well. And we’ve got some retail partners that are very, very good at e-commerce. And that’s really our first priority. As we look at the first, e-commerce is supporting our retail partners where we can.
[00:47:15] Now, the exciting thing is, is as we ramped up and dramatically increased our sophistication in e-commerce, you know, pockets of the country or in pockets of products where we’re not as representatives, we think we should be we’re under penetrated. We can really dial up our own e-commerce efforts. And so, you know, for the first time, we posted a number of 20 percent roughly of sales contributed there in total by e-commerce.
[00:47:45] And we did that because we wanted folks to know that it’s a material meaningful part of our business. But the exciting thing is, is we grew it over 100 percent the last 90 days. And I don’t know too many companies that have grown at 100 percent. But I think the more exciting part about it is we look at the top quartile performers in e-commerce and we feel like top quartile performance is twenty five to 30 percent of revenues. And clearly, as the channel grows, we’re going to raise that bar. But if you look at 25 to 30 percent versus where we’re at 20 percent, you know, we look at a hundred to two hundred million dollar revenue stream as we go forward into the future from e-commerce. Now, clearly, all that’s not going to be incremental, but we like the margin profile and we like the potential for growth in that channel.
[00:48:35] And on the supply chain side, you talk about the CamelBak submissions. Just wanted to see if that was affecting other pieces of the actual products business and if you could quantify potentially, you know, how much sales at the end of the day, did he go out the door because of the supply issues?
[00:48:57] Yes, it’s got to be simply put, it’s affected a number of our businesses and it’s frankly just a a product of demand, we could have sold a heck of a lot more bike helmets and accessories. If we had them in supply, we could have sold more huntoon optics and all the accessories we have if we had them in supply.
[00:49:19] We highlighted CamelBak because CamelBak just suffered more from some of the suppliers that were affected, more so by the corporate environment. But, you know, the exciting thing about outdoor products is despite the shortages and supply driven by demand, we grew that business by thirty five percent and it was a credit to our team to be able to continue to chase demand.
[00:49:46] And I mentioned, winchman, where we have sold our forecast by five times and our supply chain team was super nimble and agile and it really went after chasing that demand. So we’ve already greenlighted a month or two ago for our outdoor products teams to strategically invest in inventory. And that’s what’s supporting the guide that we’re giving here in Q3 of up 20 percent in total.
[00:50:12] And and hopefully as we go forward, we’ll we we anticipate these trends are going to continue and we’ll see a continued growth in the top line.
[00:50:22] And just the last question to answer, you talked about some tariff exemptions and helping out in the quarter. Can you talk about that a little bit and then that’s all. Thank you.
[00:50:35] So we did get some exemptions from the tariffs. That was part of the phase one, so we got those benefits in Q2. Obviously, that will not that helped us in our Q2 earnings and that might help us in basically next year when we go. So we just talked about Q3 sars-cov-2.
[00:50:57] Ok, that’s all I have. Thank you.
[00:51:00] And we’ll go next to Ryan Sundby with William Blair.
[00:51:05] Good morning and congrats on the quarter. So, look, I know you guys are for some reason, I think he just told you anything, but also your leverage ratio is still kind of down along with below your target. We just talked about how the acquisition pipeline was changed as we move through the year, because I would imagine that until 19, we try pretty hard to kind of get into conversations with some of but now with the impact of a pandemic. So you get better understood today before the election. How is that pipeline changed and what the public policy like today?
[00:51:46] Sure. So let me touch on that just real quickly here, as you might imagine, given the strength of our balance sheet, which is unfortunately really taking a hit, strong change for the good over the past couple of quarters and frankly, some building over the past three years or so. But we’ve got it down to a point where over the last 60 days, our team has spent a lot more time internally looking at potential targets that we think would be would meet our criteria.
[00:52:21] But I think the first thing that’s important to note, Ryan, is our overwhelming focus will continue to be driving organic growth. We talked about e-commerce. We talked about new product innovation. We talked about potential licensing opportunities. We we we’ve got to really bend down the Remington acquisition and prove that we can integrate and make that very accretive.
[00:52:49] Our focus is going to be what we have in hand because we feel like there’s so much value to be driven by the existing portfolio of products that we have now. That being said, you know, we’ve laid out some criteria because we will have the capital that where there’s an opportunistic opportunity like Remington, we want to be able take advantage of it. But it’s going to likely be smaller. It’s going to be potentially nearly adjacent to or in the categories we compete in today. It’ll be accretive and we certainly won’t go beyond our stated leverage. And in fact, we anticipate we can’t really see a scenario and in the near future that we’re going to go beyond two times 11.
[00:53:44] That makes a lot of sense. And then you mentioned margin in the other side would have been higher in the quarter without some kind of such a or supply chain disruptions. Is there any way you can possibly quantify what margin would have been if we could have taken those things away?
[00:54:08] So we won’t go into detail about what was the air freight charges and all, but declined to meet the demand from the consumer that helped us deliver 25 percent of private investments in bringing product airfreight and other corporate related costs. And that helped us in the margin in Q2 and also because it was 25 percent in Q2. But we don’t go into details about what the exact charges were.
[00:54:38] Thank you.
[00:54:42] We’ll go next to Eric Wold. Riley Securities.
[00:54:46] Thank you. Good morning. A couple of questions on this one. We know that you currently have a billion dollars of annual backlog over the next year. Is that inclusive of Rimmington or.
[00:55:02] That’s exclusive.
[00:55:05] Ok, and then with Wennington expected to generate about 10 million of revenues in the current quarter, and you’re so kind of working through that. Is there a sense of right now and what level of revenues you need to get to on an annualized basis because that doesn’t concern accretive?
[00:55:28] Yes, we haven’t decided on Remington, but we’ve given you the size of a breadbox, if you will, in terms of what we think the business is both historically done, what we think their most recent performance is in an area where the market demand is right now.
[00:55:46] I think it’s safe to say that, you know, there’s enough information out there without us fully guiding that the revenues in the short to medium term shouldn’t be an issue to make it to.
[00:56:03] Got a lot of questions and, you know, we’re talking about the 25 year end of the German e-commerce doubling your year. Can you talk about how that’s changed or engaging with those consumers in terms of experience of return purchases from the initial visit to the sites ability to kind of cross from them and give them the additional products from other brands into their baskets, which is the leverage came to.
[00:56:34] Yes, and one of the really exciting things that we have been talking about over the past couple of years is we built what we call a center of excellence for e-commerce, and it always gets a bit more credence and believability when you start to post good numbers like we have this past quarter. But we’ve been investing in this in the last couple of years. And a lot of what we’ve been doing is laying the plumbing and the pipe, really the infrastructure of all the systems so that we can cross promote. We can start to share trends within businesses. We can start to look at potential loyalty programs with our retail customers. We can start to do some things because in total and this is how this becomes better together, we have millions and millions of followers and we’re marketing to these folks in an increasingly bigger way online, much of it in partnership with our customers. And so we’re super excited about the potential to start to perform in a in a, I guess, more world class manner as we take advantage of some of the investments that we’ve made.
[00:57:53] Thank you.
[00:57:57] And that does conclude today’s question and answer session at this time. Like, turn the conference back over to Chris Metz, please. Go ahead.
[00:58:05] Thank you and thank you, thank you to everyone for taking the time to be on the call this morning, I know it’s a very, very busy week with a lot going on in our country. And and I know there’s there’s other calls that many of you attended as well.
[00:58:22] But in closing, the quarter for us is marked by execution excellence on the strategy, a well positioned brand portfolio focused on the great outdoors and a business model delivering significant free cash flow to fund the next leg of this outdoor market leadership. As we look ahead, Twenty twenty has taught us to frankly expect the unexpected. The world has been reshaped. It’s turned upside down and forever altered through the many events that have played out this year. Continued impacts of covid-19 and this week’s election are the potential turning points that can alter or challenge the status quo as we know it today.
[00:59:01] But if there’s one message I hope you all take away from my remarks and CNN’s news and Kelly’s remarks as well, it’s this that this outdoor park transformation is about our ability to control our own destiny. We’ve built a company that can adjust, respond, and when, amid uncertainty, we realize that external events impact what we do. But we have transformed the company so that we can thrive and not be defined by external events that we cannot control. We are focused solely on building a company that is more forward thinking, strategic and impactful. It ultimately more prepared for the unexpected than, frankly, we believe anyone else in our immediate space.
[00:59:43] We cannot predict the future and realize we must always be ready for further challenges or change with the performance we’ve delivered amidst these extraneous events demonstrates our newfound strength, our nimbleness and our adaptability.
[00:59:55] So thank you again to our teams, to all of our employees. I’m excited for the future of your company. Thank you all.
[01:00:03] And that does conclude today’s conference. Again, thank you for your participation.