Liz Sharp - VP, IR James Debney - President & CEO Jeff Buchanan - CFO

Cai von Rumohr - Cowen & Company Scott Stember - C.L. King Greg Konrad - Jefferies James Hardiman - Wedbush Securities Steve Dyer - Craig-Hallum Rommel Dionisio - Wunderlich Securities Ronald Bookbinder - Coker Palmer

Good day ladies and gentlemen and welcome to the Q3 2017 American Outdoor Brands Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to turn the call over to Ms. Liz Sharp, Vice President of Investor Relations. Ma'am, you may begin.

Thank you and good afternoon. Our comments today may contain predictions, estimates, and other forward-looking statements. Our use of words like anticipate, project, estimate, expect, intend, believe, and other similar expressions is intended to identify those forward-looking statements. Forward-looking statements also include statements regarding revenue, earnings per share, non-GAAP earnings per share, fully diluted share count, and tax rate for future periods, our product development, focus, objectives, strategies, and vision, our strategic evolution and organizational development, our market share and market demand for our product, market and inventory conditions related to our products, and our industry in general, and growth opportunities and trends. Our forward-looking statements represent our current judgment about the future and they are subject to various risks and uncertainties. Risk factors and other considerations that could cause our actual results to be materially different, are described in our Securities filings, including our Forms 8-K, 10-K, and 10-Q. You can find those documents, as well as a replay of this call on our Web site at aob.com. Today's call contains time-sensitive information that is accurate only as of this time, and we assume no obligation to update any forward-looking statements contained herein. Our actual results could differ materially from our statements today. I have a few important items to note with regard to our comments on today's call. First, we referenced certain non-GAAP financial measures on this call. Our non-GAAP results and guidance exclude intangible expenses related to acquisitions, acquisition related deal expenses, corporate rebranding expenses, one time insurance recoveries, debt extinguishment cost, and the tax effect related to all of those adjustments. The reconciliations of GAAP financial measures to non-GAAP financial measures whether or not they are discussed on today's call can be found in today's 8-K filing, as well as today's earnings press release, which are posted to our Web site or will be discussed on this call. Also, when we reference EPS, we are always referencing diluted EPS. For detailed information on our results, please refer to our 10-Q for the quarter ended January 31, 2017. And with that I will turn the call over to James Debney, President and CEO of American Outdoor Brands Corporation.

Thank you, Liz. Good afternoon and thanks to everyone for joining us. With me on today's call is Jeff Buchanan, our Chief Financial Officer. Late during the call Jeff will provide a recap of our financial performance as well as our guidance for the fourth quarter and full year 2017. Today, we are pleased to report our fiscal third quarter results, which include a strategic acquisition in the rugged outdoor space, several new product introductions, revenue growth that was on target, and profitability that exceeded the high-end of our guidance range. Consumer firearm purchasing at the beginning of the quarter was strong, but towards the end of the quarter began to cool leading us to lower our guidance for the balance of our fiscal year. This underscores the value of remaining focus on the inorganic components of our great strategy, which is to continue growing and balancing our business across the shooting, hunting, and rugged outdoor enthusiast markets. Let me begin with some highlights from the third quarter. Total company revenue of $233.5 million was inline with our guidance, reflecting growth of 10.8% versus the year ago period. In our firearm segment, revenue was supported by promotional programs, new product launches and a consumer preference for our strong M&P branded firearms. Distribute our inventory of our firearms increased by 54,000 units to a total of 243,000 units at the end of Q3. At this level, our weeks of sales in the channel were above our targeted eight weeks threshold. This build-up coincides with the softening of the consumer firearms market. Adjusted NICS background checks during our fiscal quarter as compared to a year ago declined to 9.6%. While our firearm unit shipped into the consumer channel for the same period declined by just 1.3%. This year-over-year NICS decline in the quarter was not entirely unexpected given the strategic news events in the prior year. However, while we did not anticipate was the 19% NICS decline in handgun as compared to long guns, which declined just 2.7%. The decline in handgun related NICS occurred mid to late quarter, 30% in December and 29% in January. These declines demonstrated a reversal of the recent trend of handgun NICS outperforming long gun NICS. Given the handgun comprised approximately 80% of our firearm shipped in Q3, that change in consumer purchasing is impactful for us. Going forward, we plan to exercise the flexible manufacturing model that as hurt as well in the past periods of demand fluctuation. That model is designed help us align our production mix and inventory levels over time to better match in consumer demand. We will also focus on taking market share utilizing our strong brand portfolio and our [Redbox] [ph] new product pipeline. And our outdoor products and accessory segment, we completed the acquisition of Ultimate Survival Technology or UST, a provider of high quality survival and camping accessories and our first business that gives us a foothold in the rugged outdoor space. UST fits perfectly in our accessories division and was accretive to our non-GAAP earnings. We believe the UST next distribution network will over time create incremental growth opportunities for our existing accessory product line. As a result of our expanded strategic focus on the rugged outdoor market net sales for our outdoor products and accessory segment represented nearly 16% of our total sales in our third quarter compared to just under 8% for the same period a year ago. Over time, we believe that building our outdoor products and accessories businesses will continue to benefit our long-term revenue expansion and profitability. We extended SHOT show in January, our industry's largest annual trade show, where we displayed a strong line up of new products across all of our businesses. Our firearms new product rollout was headlined with the launch of our new full size M&P 2.0 polymer pistol in the three most popular pistol calibers, 9 millimeter, 40 S&W and 45 auto. Designed for both consumer and professional use the M&P 2.0 pistol delivers an entirely new platform introducing innovated features in nearly every aspect of the pistol including the trigger, grip, frame and finish. We also launched supported version of our M&P shield in 45 caliber, both were extremely well received. We introduced over 200 new products and SKUs from our outdoor products and accessories business including a new coldwar magazine charge for pistols and three new products from our electro-optics group including several new laser guard models. In executing on our strategy, we are growing from our one operating unit to multiple operating businesses that serve a large addressable market and represent more than 18 highly respected consumer brand. So on January 1, with overwhelming shareholder approval, we rebranded our holding company as American Outdoor Brands Corporation. Our firearms business continues to operate as Smith & Wesson Co. leveraging it's legendary roots and customer loyalty in the firearm space. We believe our new holding company name better represents our strategic direction, our increasingly broad range of product offerings and our plan to continue building on our portfolio of strong American brand. As a part of this ongoing great strategy, we announced that we hired Brian Murphy to serve as a President of our new outdoor recreation business. Brian joins us from Vista Outdoor, a provider of outdoor sports and recreation products. In establishing this new business, Brian will focus on markets related to rugged outdoor pursuits such as camping, hiking and fishing all of which strongly resonates that many of our core firearm consumers and retailers. This focus is perfectly aligned with our vision at American Outdoor brand to be the leading provider of quality products for shooting, hunting and rugged outdoor enthusiasts. We plan to continue investing in our company both inorganically and organically as we consider inorganic opportunities, we will continue to carefully manage and leverage our balance sheet to make targeted acquisitions of reasonably sized businesses that fit within our strict criteria but include strong brands and product that serves the needs wants and desires of our core consumers. A market leadership position with plenty of runway for growth. A return on investment that exceeds our hurdle rate balanced with an acceptable level of risk. And the opportunity to build upon our record of solid execution and long-term shareholder value creation. That said, investing in our organic growth is our first priority. We demonstrated this yesterday when we announced our intent to establish a distribution center in Boon County, Missouri. When complete, it will serve as the central distribution facility for all of our American Outdoor Brands products allowing us to more efficiently serve our existing customer base and harvest some synergies from businesses we may acquire. We are still finalizing the incentives package and details of financing various agreements and other due diligence, once those items are completed and we break around, we expect it will take approximately 18 months to build the anticipated 500,000 square foot facility. The full multi-space execution of this project will occur over several years. This investment will serve as well as we grow and diversify our business across the shooting, hunting and rugged outdoor markets. We also invest in our organic growth through capital expenditures much of which is dedicated to IT and new product development throughout our company. Much of this investment is in our core firearms business. Despite the recent softening in consumer firearm activity, I outlined earlier, we maintained a very favorable long-term perspective on the firearms market, a newly released consumer analysis by the National Shooting Sports Foundation sports our belief and provides the following key insights. First, personnel and family protection remains the strongest motivator for consumers purchasing firearms. Second, target shooting is the most popular recreational activity amongst firearms owners. And third, in the last 16 years, the pool of firearm consumers continue to grow and diversify. Today 35% of firearm buyers are young and ethnically diverse, while 38% are female. We believe these are positive long-term trends that are well-matched with our existing firearm and accessory products. And our new product development plan. Our firearm business has proven over time to be a tremendous generator of cash, which has allowed us to strategically invest in growth and diversify our company into new markets. With that, I will ask Jeff to provide more details in the third quarter financial results and provide our updated guidance.

Thanks James. Revenue of $233.5 million for the quarter was up 10.8% over the prior year. Revenue from firearms was $198.1 million. Revenue from outdoor products and accessories was $39.4 million and inter-company sales eliminations were $4 million mostly related to Crimson Trace sales to our firearms business. Revenue in outdoor products and accessories was more than double last year due largely to our acquisitions of Taylor Brands, Crimson Trace and UST. Without those acquisitions organic growth in outdoor on products was 4.8%. The gross margin for the quarter was 42.5% as compared with 41.1% in the prior year. Firearms gross margin was 41.3% and the outdoor products gross margin was 49.1%. The increase in gross margins was driven by a higher fixed cost absorption, better purchase price variances and favorable inventory adjustments in firearms as well as higher standard product margins in outdoor products. These positive factors more than offset increased manufacturing spending and promotional costs. And looking at our non-GAAP operating expenses, we were $8.5 million higher this quarter than in the prior year. But, that increase mostly relate to the SG&A expenses of the three newly acquired businesses. Our EPS for Q3 came in at $0.57 as compared with $0.56 in the prior year. Our non-GAAP EPS was $0.66 as compared with $0.59 last year. Adjusted EBITDAs of $67.6 million in Q3 was $6.1 million higher than the prior year and as a percentage of revenue was roughly the same as last year at about 29%, majority of that increase relates to the newly acquired businesses. Turning now to the balance sheet. Operating cash flow in the quarter was $48.2 million and CapEx spending was $5.6 million, resulting in free cash flow of $40.1 million. In addition, during the quarter, we spent $33 million on acquisitions and paid off the $25 million balance on our line of credit. At the end of Q3, our cash balance was $54.3 million, were outstanding long-term debt was $170.6 million, leaving a net debt position of $116.3 million. We had no borrowings on our $350 million banking line of credits which is expandable to $500 million. Now turning to guidance. Taking into account, the softer retail environment, we are expecting net sales in Q4 between $200 million and $220 million, GAAP EPS between $0.26 and $0.36 and non-GAAP EPS between $0.32 and $0.42 because of our flexible manufacturing model, we expect that this guidance will still meet our stated goal of having an EBITDA margin of at least 20% and a gross margin in the range of 37% to 41%. For the full year, we are revising our guidance and now expect net sales between $874 million and $894 million. GAAP EPS between $2.01 and $2.11 and non-GAAP EPS between $2.33 and $2.43 all of these estimates are based on our current fully diluted share count of 57.2 million shares, a tax rate for Q4 of 36% and a tax rate for a full year of 33%. Finally, I will note that we have an unused $50 million stock buyback authorization which is available to access for potential stock repurchases. James?

Thanks Jeff. With that operator please open up the call for questions from our analysts.

[Operator Instructions] And our first question comes from Cai von Rumohr with Cowen & Company. Your line is now open.

Yes. Thank you very much. So, give us some color in terms of what you are seeing in channel here in -- the big boxes are having some trouble. Ganders having some trouble. Some of the smaller dealers are having financial difficulties, what are you seeing and what do you think it means for you?

Hi, Cai. Yes, I mean we are hearing some of the same things, I have to be very honest. I mean some of it is just rumor, so I'm not going to comment on any types of rumor. But, sternly what we think is, but traffic has slowed, it's a softer period in retail. We saw that sequential drop in adjusted NICS from December to January. And that's just following the very robust period running up to the Presidential election. So we have been through this before. We have navigated it very, very well. Very flexible manufacturing model helps to do that. So, I'm really talking about our right outsource capacity there. Now, one of our primary goals is, never to idle any of our assets internally, so that we have an overhead absorption issue. So with that said, I think a number of retailers did make some bets on a different outcome, the presidential election. So they call that wrong. And I think that's left somewhat of an inventory overhang over there, which when you combine that with -- my foot traffic commented earlier, I think there is some inventory to bleed off, which it will over time. Also in February and March or generally as you think about seasonality, I have to say I think we are all seeing some normal seasonality and adjusted NICS check now. But, as you look at February and March is generally an up tick. Some of the consumer purchasing is heard by people receiving that tax refund. So firearms remain extremely popular. So we will be looking for the adjusted NICS results for February soon and seeing if that's showing true. As you look at another NICS related metric as well, which is permit check, they were very healthy. You saw an up tick for January, so it's good. So overall, I believe some firearms is very much about the long-term as we said before. We are very confident about that research that I referenced earlier in the prepared remarks supports that as well outside the National Shooting Sports Foundation, I encourage people to look at that research, it really is very good. The main motivators remain personal protection that's good and it’s great to see that exciting change in the demographic of our own consumers as well. So, all in all, yes, there is definitely some headwinds out there in the channel as I'd mentioned. But, we remain positive about the future.

I just want to add about Gander Mountain. There are news articles out there about potential bankruptcy. So our guidance actually like takes that into account. So, it's a known weather that would actually occur but if it does, there is no risk to our Q4 guidance.

Okay. And you mentioned and you did in the prior downturn do a terrific job and kind of managing with the flexible manufacturing. Maybe give us some color into your inventories look a little bit higher. Where do you hope to get your inventories by year end, and your distributors' inventory and your CapEx was lower, I assume. Yes, I think you are looking for $50 million before, what are your current thinking about CapEx?

Okay. I will take the internal inventories, James can talk about the external inventory. On internal inventories, I would -- I pointed out that it's not really up that much, most of the increase in this quarter is related onto the acquisition of VTI. So, it really was only up a couple of million dollars. But, we do say in the Q that as a result of the softness in the consumer market that we expect internally inventories to rise during Q4, although we don't give a precise number. A full year CapEx, we are looking at around $40 million.

Got it. And just the last one, you expect your internal inventories to go up in the fourth quarter that's usually abnormal because summer is your slowest period, is that correct? How come your inventories would go up in the fourth quarter? Is that year-over-year or is that sequentially?

No. That's sequential. Well, I mean as James talked about and we mentioned, we have a flexible manufacturing model in which we can use outsourcing or reduce outsourcing in order to match our production with like the demand. But, that is not an overnight switch. It takes time to -- slow it down. So I don't think there is going to be a huge inventory build, but I do think the inventories are going to rise as a result of that.

Cai, similar short-term impact to last time when we experienced a slowdown in the consumer sales. But, I also want to caution everybody. I mean we only have one data point so far that's January and that's why I say we are eagerly awaiting adjusted NICS results for February. But you are absolutely right, normally we would expect inventory to come down in Q4. We do not believe that is going to be the case this time. But, as Jeff said, we did increase inventory because of an acquisition of UST, which is part of the BTI team. And that was certainly an impact in Q3.

But then, so you would look for cash flow in the final quarter should be near breakeven or certainly diminimus?

I mean if you run the numbers, taking a look at that our D&A and stuff, you can get to a point, the cash flow is still positive.

Great. Thank you very much.

Thanks Cai.

And our next question comes from Scott Stember with C.L. King. Your line is now open.

Good evening. Thanks for taking my call, my questions.

Hi, Scott.

Maybe you could just talk about somewhat obviously softer sales coming up with slower foot traffic. Trying to parse out the what we are expecting firearms versus the accessories business. Maybe talk about which one gives you the most concern or the one that with allow you to sleep at night, just knowing what's going on in the customer channel with bankruptcies and inventory consolidation, really just talk about those two, just parse it up? Thanks.

Sure. I think the one that obviously causes us the most concern is the firearm segment, it remains by far the biggest piece of business that we have and biggest generator of our revenues. So, of course, given my comment on adjusted NICS, so to say that's our biggest concern at the moment, and we are working hard as I described to understand the market and what's happening as you know we are not scared of promotional activity. We are very good at it. So, and I've said before we will be out promoting as necessary to match the market environment that we are experiencing, so that's one thing that we are focused very intently on. But, at the same time, keep part of our financial metrics is remaining in that range, the gross margin of 37% to 41% and have an EBITDA that's north -- an EBITDA margin that's north of 20% as well. So, what I will say is, we are well equipped to navigate that softer environment, but definitely that's our bigger concern. I think it's encouraging that we grew the other segment organically in this type of market as well. So, I really don't want that to go unnoticed.

And to that point, maybe you could just talk about what you are seeing on that side definitely impressive that you are able to grow in this environment when there are other publicly traded companies talking about significant declines there? So, maybe you could just flush out what's going in there, the share gains or anything else that's going on?

I think team is doing a great job and everybody should be aware that they also went through an SAP conversion as well. But, I got a pretty challenging time recently. So, yes, they are doing extremely good job with the distribution. Most impressively of new products. Those new products are gaining distribution, they are extremely well received at the SHOT show. So we are excited about that. As we will know, the health of -- the future health of any good consumer product company is around their new product introductions and managing that and balancing that with your existing strong product portfolio. So, I'm just very encouraged with that part of the business.

Great. And just last question, maybe from your perspective, talk about why we are seeing outside strength in long guns versus handguns, intuitively one would think with a lot of fun and sporting rifles being sold during the last year or two. But, that would fall off, just maybe talk about from your perspective from your business why you think that long guns are holding up still?

I think it's really interesting, I have to say that I don't think we fully understand it ourselves yet, certainly there seem to be a swing away from handguns obviously that's demonstrated by adjusted NICS check to more traditional long guns. So as we said, we did not anticipate that at all. So that was a big surprise that let to us lowering guidance. But, I don't have enough intel yet given that I think that inventory of long guns in the channel as well to really understand the consumer demand here and the mix of that. But, I will say we are working hard to do that.

Got it. That's all I have. Thanks again.

Thanks Scott.

And our next question comes from Greg Konrad with Jefferies. Your line is now open.

Good morning, sorry good afternoon.

Hi, Greg.

But just questions in terms of the overall M&A environment, just kind of some of the challenges in the market. Have you seen any change to sellers' expectations or multiples that you are seeing the market?

I will start with the sort of a technical question about the multiples. We passed on a lot more than we have acquired because we haven't yet seen a lot of change in the purchasers or in the sellers the desires with regards to a multiple and we are very -- as James mentioned we are very strict about meeting our hurdle rate which is our WAC. And of course, the multiple that you pay is dependent upon really the profitability in the growth rate with risk factor added in. And so far, recently we haven't been able to find out -- to find acquisitions that meet all those. But, we continue to talk a lot of people we have a new guy that is doing like nothing but looking for businesses for his division. So, we are in the midst with talking to a lot of people. We have talked to everybody in the industry. I think there is things out there that like we are going out…

Yes. I agree what Jeff said. I think just make a few comments. I think we are extremely well positioned to understand all the opportunities out there. And we are also very targeted that we are reaching out to businesses, own as a businesses that may not be on the market currently. But, we think may have the potential to match our very strict criteria. On the start, as we think about these businesses, do we believe that they would strongly resonate with some of our core firearms consumers and really we go from there to understand those businesses, if the sellers at all interested in selling.

Thanks. And then, maybe some of the business that you acquired recently Crimson Trace, UST, how was growth in those businesses versus prior to when you purchased them?

Well, we don't like breakdown path the segment, but just in general in the accessories business, we see good growth, we also see good synergies with the company like UST. We've talked about it in the past that they were very strong with Walmart as an example. And BTI is very strong, with Amazon and that they could each benefit from the sales and personnel. So with the synergies I think we are fairly optimistic about those divisions. At Crimson Trace is more firearm related and therefore could have some of the headwinds that the firearms business has. But, as the leading brand in that space, that's where you want to be. James you want to add to that?

Yes. And just on Crimson Trace as you know the platform for our electro-optics division and we have broadened that outlook in terms of the different product categories and markets that they should be exploring simply by calling electro-optics division and giving them the objective to grow in that manner. So we are excited about that, there is no doubt that there is a plenty of synergies there and let's say collaborative efforts between the electro-optics division and the firearms division.

Thank you.

And our next question comes from James Hardiman with Wedbush Securities. Your line is now open.

Hi. Good afternoon. Thanks for taking my call. I was hoping you could just maybe walk us through the times since the election, it's really hard to tease out, how much of what we have seen in the industry is a difficult comparison versus something else, obviously a broader drop in demand. Obviously, you had the election, November numbers were actually pretty strong. We saw a drop-off in December, but it sounds like maybe that was largely as you would have expected and it was more January that was really an outlier. But, maybe talk about what have you've seen in -- potentially in the context of what we have seen in terms of pricing, it sounds like maybe prices dropped immediately after the election and maybe that stimulated some unit sales, but then, maybe as we have -- as time have proceeded, we had more issues beyond that.

Yes, James. I think it's difficult to comment beyond what I have already said. I mean you are looking at obviously the same adjusted NICS numbers I'm looking at. And as I have said before, we have only got really the January data point, just appears normal seasonality in play. We get a lot of feedback from our retailer customers that same as to foot traffic. Definitely there is a lot of promotional activity out there before we said that there would be at times like this. And we are very, very strongly positioned to participate and we do exactly that. And we have got plans laid out and to take us ride the wave through the slow summer period as we always do. There is not really much difference there. And we have always tried to be very consistent with our approach with that part of the business.

But to be clear wasn't until -- obviously December was down a bunch, it wasn't until January that sort of made you revisit how you were thinking about the rest of the year and your guidance?

As I said, in the prepared remarks it really started in December when you look at the reduction and handgun NICS checks. The same -- pretty much the same result in January. So that was the big surprise for us to be honest because the recent trend had been for handgun adjusted NICS to have from long gun but you've seen that basically flip flop. And as a predominantly handgun business in our firearm segment, that impacted us and we built that all into our guidance going forward. That's not to say we are weak in long guns, we just have a much smaller part of the business in the firearm segment.

Got it. And then, on the channel inventory comment, you said that it was a little bit above your -- was you said it was above the 8-week threshold, I guess a standard way to size that, give us in order of magnitude how much ahead of that threshold you are and ultimately, again, you've only got one data point and I get that. But, how long should we expect, it should take before that gets back in line? Should we expect that right sizing to pick up a significant chunk in fiscal 2018?

Again, I don't want to comment make forward statement beyond what we said in our guidance everything is built into guidance. Obviously, the inventory that we can clearly see and the channel is built into our guidance. I know our guidance doesn't go obviously beyond the end of our fiscal year. So we've got two months to go from this point onwards. So, as you know we take a keen interest in the level of inventory in the channel and we work very hard not to let that inventory build up too much. Obviously, we are disappointed its about the 8-week threshold but it is what it is. And we have got the deal with it. And again, we have experienced that before when we dealt with it very effectively. So, we have got as ever a very robust new product pipeline things like that will help us. We demonstrated that we can be very good in the firearm segment at launching new products as well as in the outdoor and accessories segment as well. So there is not much more I can say James at the moment.

Well, maybe let me ask a question this way. Obviously, you have pretty good insight into where you are channel inventories are, how does that from what you are aware compared to maybe some of your competitors, obviously you guys have been pretty responsible in terms of being conservative with respect to the stands you take on inventory. Are you going to be fighting an even greater uphill battle if you think about other manufacturers that have maybe not been as responsible?

There is always the potential though, if you are not well represented in terms of inventory in the channel that you could lose market share as retailers open to buy dollars are tied up. So we've also been thinking about that and made sure that we remain in good distribution. So we believe less than some of our major competitors and that's one public peer that you can go and look at their inventory and understand their inventory at two step distribution. So, I think that's a good comment for you to do not for us to comment on this call. And I think its probably prudent for me to leave at that.

Got it. Very helpful. Thanks.

Thanks James.

And our next question comes from Steve Dyer with Craig-Hallum. Your line is now open.

Thank you. good afternoon.

Hi, Steve.

There seems to be, I guess some kind of not an understanding that firearm sales won't be as good as 2016 and potentially are better than they were I guess of the pre-2008 or pre-stand hook or sort of before this most recent elongated surge. I guess, give me a chance to weigh in a little bit and let us know sort of how you are thinking about it. Does it split the difference, what's sort of your early instinct say?

Again, difficult to comment beyond what I've already said Steve. We are at that point in time that we are closing on the end of a fiscal year and once we report on the full fiscal year, we will be giving our guidance for the next year. So everything is built into guidance.

But, I will just add that we believe as James said in the script, we believe in the long-term health of the firearms business. We believe in long -- there will be a long-term growth in the firearm business. We have had these up and down cycles like before. It's just one of the reasons why we are expanding into other markets that aren't quite as volatile. But, we have navigated those ups and downs. And we think that we will be just fine about all of that.

Okay. And then as you think about the channel and inventory and what you can and can't control, I'm wondering if, for example are you letting the channel cancel orders or would you take any different approach with a situation like the Gander Mountain where, are you stopped selling to them any different approach?

We are not going to comment you know on anyone customer. Just on your point, your question about broader cancellation, we have never said that a customer cannot cancel their orders. That's been one of the big ways that we have always run our order book in terms of how we thought about our backlog because when you get periods where your backlog is spiking, we are always hunting out where we think those fake orders are and filtering them out. So, we prefer the customers cancel to be honest because it gives us a better read on what we should be doing in the future, short and medium.

Yes. Again, I just want to emphasize that regardless of what happens with Gander, there is no risk to our Q4 regardless of what happens whether they file back bankruptcy are they don't.

Okay. That's very helpful. And then, as recently I guess, this fiscal 2015, you guys were a little below sort of the targeted margin range. So, I'm guessing, I'm wondering if you could maybe remind us going forward how much OpEx flexibility and I know you have flexible manufacturing, but is there a certain level where that's not an achievable margin sort of goal anymore?

Well, I would say that, that our outdoor products and accessory businesses running at 50% gross margins. So that certainly helps with the -- target even if like firearms goes like below that. This quarter we have got a couple of -- almost a couple of points additional on gross margin as a result of outdoor products. So as that grows, the 37 to 41 on it, even easier to maintain. And we have been way ahead of the EBITDA margin like most of the time. So, at this time, we are only giving guidance for Q4 but we are certainly not changing our goal that we have stated over and over again, in the last -- couple of years of those targeted ranges.

Okay. That's great. Thank you. And then, one last question for me I guess. How do you think about capital deployment, you mentioned you still have part of the buyback authorization remaining, obviously a very dynamic end market, how should we think about where you are looking at returns going forward?

Well, as James said, we have always like to invest in ourselves first. So, stock buyback is investing in ourselves. And you can certainly compare on a peer return basis purchase of your own stock versus acquisition. Fortunately we have enough available capital right now but it doesn't really have to be a either or choice. We can do both. And we have historically bought our stock win, our PE multiple was pretty low and it’s pretty low like right now again.

Okay. Thank you very much.

Thank you.

And our next question comes from Rommel Dionisio with Wunderlich Securities. Your line is now open.

Yes. Thanks. Good afternoon. The question on the recent launch of the M&P 2.0, I realized it's just a couple of months in the SHOT show action, you didn't come for months. But, I wonder James you can just discuss how does it doing in the marketplace initially? And perhaps also what degree you might be seeing some cannibalization, I know you are hoping for some incremental sales, but you can just chat about the initial reception to that product both amongst distributors and consumers? Thanks.

Sure, Rommel. Again 2.0 has been extremely well received in the SHOT show, well received by the trade. And we believe in the third quarter well received by the consumer as well. So we are extremely excited about that. I mean I will say it's a significantly superior product to the first generation M&P, so that gives us a new platform to start expanding the product family from again. So, it gives us a lot of runway for growth as we think about our new product pipeline and we look forward. In terms of cannibalization, over time of course, we would expect 2.0 to become and remember this is currently really just full size version of the polymer pistol. So, we would expect that to take something away from the 1.0 over time. But, at the moment, they continue to co-exist pretty successfully at different price points at retail.

Great. Thanks very much James.

Thanks Rommel.

And our next question comes from Ronald Bookbinder with Coker Palmer. Your line is now open. If your phone is on mute, please unmute it.

Good afternoon.

Hi, Ron.

Hi. When we look at the inventory glut of several years ago, like three years ago, the spring, how do you categorize this or compare the situation that the industry is in today compared to several years ago?

I think it's definitely in the respect that several years ago, you were coming off forward, you can call it a surge environment, where the consumers panic buying because of fair regulation and plus pay for their own personal safety. Over a pretty short period, okay, I think here as we look back over the last 12 months, we don't really see what we would call a third, but we do see -- there was some robust periods of consumer purchasing a firearm. So I think that we are still a consumer out there that was a making a thoughtful purchase for that firearm, the rationale purchase rather than as I have said before panic buying driven by two different types of fear. So, as we come in to the environment that we face now, I think that pretty similar to the post surge environment that was still the same, the slowing in consumer purchasing and those inventory in the channel. We got to let that inventory corrected. So, to what degree, we don't really know. As you know, we work very hard to navigate these software environments and we keep an extremely close eye on our own inventory. So as Jeff said, we have large amount of capacity and it takes time to intelligently dial that down should we need to dial it down, the same when you need to dial it up as well. As you know, we are extremely flexible, you can dial up and down pretty quickly to match what consumer demand is. So, I think that's where we are. Certainly, we are excited by the research that I mentioned earlier. We will know that there is many more owners of firearms than there ever was before and that demographic changing for the better, it's good to see younger people interested in the shooting sports, more females never before. And the strongest trend still exist, which is for personal protection whether it's self, family, friends that exists very strongly and we worked very hard to develop firearms that meets the need one can desire of those consumers who want to protect themselves. So extremely well placed there. And we will continue to bear that in mind -- in the forefront of our mind as we build on new product then.

And when it comes to being promotional versus maintaining market share especially having just put out new products as you are still. How would you categorize your emphasize. Would you rather maintain that market share despite margins or would you like to -- would you be more promotional? How should we think about that?

Really, I think it comes back to saying within our 37% to 41% gross margin target range that's very important to ourselves. So we can set our promotional plans for example, we are doing a lot of modeling, financial modeling, how much low you do, financial modeling on an acquisition for that debt to understand the impact of the promotional activity and generally there is multiple promotions going on simultaneously as well, so you got to aggregate the impact altogether. How is that going to impact our margins going forward? And really, really consider the unintended consequence to those promotions as well. So, we do a lot of that work. We do a lot of modeling to really understand what it means to stay within that as you know, we are extremely precious about market share. We monitor it monthly, we have a pretty robust process that we run for a number of years now and we think we understand our share to a pretty good level of detail. So that's a key metric as for the success of the business going forward. So, I hate to lose market share. And we will react if we see that we are losing market share. But, always we have 37% to 41% gross margin right in front of us. And we are not going to compromise that.

Okay. And the manufacturing services division, how big is that, and in this environment would you have more of an emphasize or love to growth that, what kind of margins desk manufacturing services provide?

Yes. If you are going outside of -- because obviously that primary -- [Cluster One] [ph] by far the biggest customers and an internal one which is the firearms division. If you are looking though to their other piece of business, so that they have the B2B business, that's still pretty small. It's pretty diverse as well I would say. We are never going into the details, I'm being a little cautious here. But, we know that's bigger that we will have to provide more detail on it and that's one of our objective is to grow that piece of business. So we have more different technologies within our own control that may just exit in our supply chain at the moment help us mitigate supply chain risks. So as you think about M&A activity around vertical integrations that's still a consideration and we clearly said that going forward. Now, so that -- but there still remains even though if you grow inorganically at firearms, we can grow it organically as well. And our objective there again is, let's not have any fair capacity, we own the best overhead absorption possible coming through firearm. So we want to sell that capacity if it's not being consumed internally by the firearms division.

But, I guess specifically I'm talking about, if you were to get a contract in the aircraft industry or something like that given the amount of money you have invested in your factory. And with your precision going -- what kind of margins is that revenue? Is that basically a 100% gross margin or…

I don't -- I like it to be obviously, I think we all would but I think again to be competitive you are coming back to a similar range of 37% to 41%, I think those are feasible gross margins that you can achieve in that type of B2B business whether its medical, aerospace, whatever it maybe. Now, if we were to guess, a descent contract then, very likely what could happen and again, I'm just speculating because we haven't had this experience yet. But, if we've got an aerospace contract, yes, we could bring that in-house. We have the technology. We could service that contract. And if you meant we didn't have enough capacity, well, we would likely then just relax our outsourcing capacity which is just dedicated to firearms manufacturing at the moment. That as a fairly limitless supply, it's only cap constraint by the number of people that we can find the one to work but does they have the same C&C machining technology. So we have got a lot of flexibility as we think about the manufacturing services division. And that type of business, that type of business that we are looking forward for manufacturing services, it's never going to be huge but we wanted to be extremely predictable and level, okay? So not prone to demand fluctuation.

Okay. Thank you very much and good luck in the new quarter.

Great. Thanks Ron.

And we do have a follow-up question from Cai von Rumohr with Cowen & Company.

Thank you very much for taking this. So, inventory you mentioned that you felt the channel was over the 8 weeks of covered targets, can you give us some color in terms of how much its over?

No, Cai. We cannot we have never disclosed that level of detail. Again, like demand fluctuates, inventories fluctuates. So, it's not like a hard metric that if we bust through like we are panicking, we are looking at the inventory profile going forward over the medium to long-term and obviously and we want to correct it and get back below the 8-week threshold. It really comes back to matching consumer demand with our capacity plus whatever inventory we would like to reduce, if that's the situation that we are in.

Got it. And you mentioned you expect the inventory to be up in the fourth quarter over the third, which is very atypical. But, so what kind of strategy as you go into next year, if you want to cut the inventory and presumably you will want to cut your own inventory as well as the channel inventory. Are you in -- consider basically cutting production to get there or would you use discounting just sort of continue to produce but use discounting to move the goods through the channel?

I think it will be a combination of the two. I think but I like the word discounting, I think promotionalized services, a better way of describing it because it covers the whole depths and breadth of activities that you can deploy there. But, yes, it's a combination of two, but I want to emphasize that with our outsourcing that capacity on the outside that we would be reducing should we feel it necessary to do that. And then, the capacity internally, okay? That we would reduce for just being our assembly part of the plant. The expensive assets that run 24x7, our objective there is, they are never ever impacted.

Cai, we have plenty of capital. So, in looking at the promotional activity, as James mentioned before we go through a detailed financial analysis assessing how everything impacts the income statement. And so, that's really the focus not -- there is never anything in that analysis about how much inventory we have and we need to do a discount like to move inventory. So, it's just, as I mentioned before the only reason the inventory is going to build, just because it takes more than one day to right-size the outsourcing and…

Right. So, I guess, and then, there is a follow up on that in terms of cash flow, and the cycle before you took over James, one of the issues was the inventory kind of got out of control and you ended up having a balance sheet issue. What kind of priority do you put, because if you put a priority on getting the inventory back to where it should be in theory, even if the earnings go down quite a bit next year with the depreciation, one would think that the cash flow would continue to be relatively healthy. Is that an important priority for you?

Absolutely, absolutely. I mean the whole strategy of the company is that firearms through its ups and downs is a great producer of cash, always has been. There maybe a quarter or two here where there is a hiccup but year-after-year it produces a lot of cash, and we take that cash and we are investing in outdoor products and accessories. So, cash flow is extremely important to the company. And we are confident about our cash flow in the future.

Thank you very much.

Thanks Cai.

I would now like to turn the call back to Mr. James Debney for any further remarks.

Thank you, Operator. I want to thank everyone across the American Outdoor Brands team for delivering another excellent quarter. Please note that we will be attending ROTH conference on March 14 in Orange County, California as well as the Morgan Stanley conference March 29 in New York. We hope to see some of you at these events. Thank you again for joining us. And we look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.