Liz Sharp - Vice President, Investor Relations James Debney - President and CEO Jeff Buchanan - Chief Financial Officer

Cai von Rumohr - Cowen & Company Steve Dyer - Craig-Hallum Rommel Dionisio - Aegis Greg Konrad - Jefferies Scott Stember - C.L. King Ronald Bookbinder - IFS Securities

Good day, ladies and gentlemen. And welcome to the First Quarter 2018 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 be given at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, Liz Sharp, Vice President, Investor Relations. Please go ahead, ma’am.

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 then 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 website 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. 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. Among other things our non-GAAP results and guidance exclude intangible expenses related to acquisitions, acquisition-related deal expenses, transition costs, change in contingent consideration 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 Form 8-K filing, as well as today’s earnings press release, which are posted on our website 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 quarterly report on Form 10-Q for the quarter ended July 31, 2017. I will now turn the call over to James Debney, President and CEO of American Outdoor Brands Corporation.

Thank you, Liz. Good afternoon and thanks 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 second quarter and fiscal year. Our financial results in the first quarter reflected lower than anticipated shipments in our Firearms segment, consistent with the softening in wholesaler and retailer orders, partially offset by increase revenue from our Outdoor Products and Accessories segment, which grew organically at 11.4%. Firearms revenue for the quarter also faced a challenging comparison to last year’s hiking level of firearms demand, which we believe was driven by concerns for personal safety and the potential for increased firearm legislation. Now expanding these challenges in the market we remained focused on executing our long-term strategic growth objectives, which support our vision of being the leading provider of quality products for the shooting, hunting and rugged outdoor enthusiast. Now let me provide some details from the quarter. In Firearms when compared to the same period last year, adjusted NICS background checks declined 11.2% in the first quarter, within that number NICS related to handgun purchases declined 7.1%, while NICS related long gun purchases declined 16.8%. Despite the year-over-year decline, adjusted NICS checks this quarter was still 5.8% higher than two years ago, a good indication of long-term consumer demand for Firearms. Turning to units, when compared to the same period last year, our Firearm units shipped into the consumer channel in the first quarter declined by 39.1%, within that results our handgun unit shipped into the consumer channel declined by 34.6%, while our long gun unit shipped declined by 57.1%. We believe that our handgun shipments were impacted by an extremely successful promotion on our M&P SHIELD pistols that we initiated in April during our prior fourth quarter. That promotion well-exceeded our expectations and we believe it pulled forward our shipments into the fourth quarter as wholesalers and retailers stocked up in preparation for the strong consumer demand they believed would occur and actually did occur over the ensuing 90 days. As a result of our promotion, our monthly market analysis indicates that we gain significant market share in the first quarter as a large number of consumers purchased the SHIELD pistols that we have previously shipped into the channel in Q4. In fact our research indicates that we grew our SHIELD share of the total handgun market by more than 5 percentage points, an incredible result. In the overall market, we believe the heightened channel inventory at retail locations from multiple manufacturers, including us, also contributes to lower orders in the first quarter. However, despite those heightened channel inventories, distributor inventory of our Firearms actually decreased slightly versus the end of Q4 to a total of 231,000 units at the end of Q1. Even with this favorable decline, our weeks of sales at distributors remained above our targeted eight-week threshold at the end of Q1, since then sales weeks have increased, which is typical during the slow summer months, when sales velocity usually settles at the lowest level of the year. During the quarter, we agree to acquire the assets of Gemtech, a provider of quality suppressors for the consumer and professional markets and this business is now part of our Firearms division. Gemtech’s strong product development capability, combined with our brand management and manufacturing expertise should allow it to harvest many synergies over time. We view this acquisition of somewhat opportunistic, allowing us to enter the suppressor category plus potential favorable changes in legislation and at the time when the market is particularly soft. These elements combine to make Gemtech an excellent fit with our long-term strategy. Now turning to our Outdoor Products and Accessories segment, which includes our Electro-Optics division. Organic revenue growth was 11.4% year-over-year, reflecting the benefit of our strategy to expand our offerings in this segment. As I pointed out earlier, revenue in this segment more than doubled inorganically due to three acquisitions during fiscal 2017. During the quarter we announced that our Accessories division would acquire Bubba Blade, a premium knife brand that is widely recognized among outdoor enthusiasts to some of the finest knives for fishing, hunting and kitchen use. Bubba Blade products are a natural fit with our Accessories division, which already have strong knife and tool business as a result of our Taylor knife acquisition last year. I’m excited about Bubba Blade because its products deliver features and benefits that are very popular with consumers and are protected by strong intellectual property. This also represents our exciting first step into the sizable fishing accessories market. Both Gemtech and Bubba Blade transactions closed after the end of the quarter for an aggregate purchase price of $22 million and we expect about $7 million of revenue from those businesses in the current fiscal year. Now turning to the current environment, the summer months are always a seasonally slower period in our industry as the historical NICS trend lines clearly demonstrate. This year, however, the impact of that seasonality on our business has been compounded by elevated channel inventories and a heightened promotional retail environment closing headwinds in the first half of the year. As I communicated on our last call, while these conditions may be challenging in the short-term they are not new to us. We expect the current situation to continue through our second quarter followed by what we believe will be improved channel conditions during the second half of our fiscal year. During that time we believe channel inventory will normalize as we move through what is historically the busiest retail period of the year, the fall and winter shopping seasons. By way of an update, August adjusted NICS results were published just a few hours ago, with a sequential increase from July of 12.6%. This resulted in an encouraging indicator that the normal seasonality we have come to expect will play out in the second half of our fiscal year. Looking forward, we will take the following actions. First, new products are key to driving demand in the consumer market and we have several meaningful new product launches in the coming months, beginning in the fall and continuing into the new year we will bring to market an exciting volume and array of new products, spanning handguns and long guns, which we believe will truly excite our consumers. Second, we intend to build inventory to support the new product launches, the busy shopping season and the wholesale and buying group trade shows that occur in January and February. Third, we will continue to offer market-leading products at attractive price points that provide our consumers quality and value. We believe consumers right now are seeking compelling promotions and we fully intend to participate as required to protect and grow our market share. Fourth, we will continue to carefully prioritize our spending to preserve our cash and ensure that our investment support our growth initiatives. And lastly, we will continue to move toward the establishment of our new distribution center, a longer term objective and an important element in enabling us to consolidate our warehouse footprint, harvest synergies from past and future acquisitions, and better serve our wholesale and retail customers. We plan to break ground in the current calendar year and complete the new build by spring of calendar 2019. As we take these actions, we will hold to our strategy and continue to invest in our company to drive inorganic and organic growth. Further expansion in the $30 billion plus rugged outdoor market should over time help to mitigate the cyclical impact of the Firearms business. We plan to carefully manage and leverage our balance sheet to make targeted acquisitions of small reasonably sized businesses and/or investments in major organic growth initiatives that fit our strict criteria that’s include strong brands and products that serve 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 balance with an acceptable level of risk and the opportunity to build upon our record of solid execution and long-term shareholder value creation. Before I turn it over to Jeff, I have an important announcement to make, earlier I referenced some exciting and meaningful new product launches that we have planned. Well, right now, I’m very excited to share with you the first of these new product announcements. Earlier this calendar year we began shipping our next-generation M&P M2.0 full size polymer pistols, creating a brand new platform that has gained significant traction with consumers. I’m very pleased to announce that we have new addition to the 2.0 family. Tomorrow we will begin shipping our new M&P M2.0 compact series pistols. Our 2.0 pistols represent a growing family of products that are the result of listening closely to our professional consumer customers and delivering the performance and features they desire, personal protection remains a number one reason that people purchase a firearm and the 2.0 compact series is a strong match with that need offered in both 9 millimeter and 40 S&W, the compact series features 15 or 13 round capacity and a 4-inch barrel, a popular and versatile size that optimizes the balance between suitability and concealment. The 2.0 compact series bridges the gap for those who want a single firearm for professional use, personal protection carry or practice at the range. We believe the new M&P compact will be a hit with professionals and consumers whose primary choice in the category is currently a Glock 19 or 23. We fully intend to take market share from Glock with our new M&P 2.0 compact series pistol. Stay tuned for our next exciting new product announcement planned for November 1st. And with that, I will ask Jeff to provide more detail on our Q1 financial results and our guidance. Jeff?

Thanks, James. Revenue for the quarter was $129 million, which was a 37.7% decrease from the prior year. Revenue from our Firearms segment was $99.4 million, a decrease of 48.5% from the prior year. Revenue from our Outdoor Products and Accessories segment was $32.5 million, an increase of 122.6% over the prior year. And intercompany sales eliminations primarily related to sales of Crimson Trace products to Smith & Wesson were $3 million. Total company gross margin for the quarter was 31.5%, compared to 42.3% in the prior year. Firearms gross margins were 27.4% and Outdoor Products gross margins were 44.8%. The total company gross margin decreased was mainly driven by Firearms with lower production volumes, increased manufacturing spending percentages and heavy promotional costs. GAAP operating expenses in the quarter were $43.8 million, compared to $35 million in the prior year. This quarter operating expenses includes $6.4 million of cost, primarily relating to the acquisitions we have done in the last three years, including amortization costs for Battenfeld, Taylor Brands, Crimson Trace and UST, and one-time acquisition costs for Gemtech and Bubba Blade. On a non-GAAP basis, which excludes those amortization or one-time costs, operating expenses were $37.4 million, as compared to $31.1 million in the prior year. The increase OpEx primarily relates to the acquired companies, offset by lower organic costs, which include reductions in accrued incentive compensation. Our GAAP EPS for the Q1 came in at a $0.04 loss and our non-GAAP EPS was $0.02 positive. Last year GAAP EPS was $0.62 and non-GAAP EPS was $0.66. Non-GAAP adjusted EBITDAS in quarter one was $12.9 million or a 10% EBITDA margin compared to $65.8 million or a 31.8% margin in the prior year. Turning to the balance sheet, operating cash flow was negative $34.5 million, mainly because of the $29.4 million increase in inventory and a nearly $25 million decrease in accounts payable and other accruals including incentives. Our internal inventories increased in Q1 and it will continue to increase in Q2 as James discussed earlier. CapEx spending during the quarter was $4.7 million, excluding the distribution center project that James mentioned we expect our CapEx spending this year will be approximately $30 million, primarily relating to tooling for several important new offerings in various IT projects. We expect to finance the distribution center primarily through the sale leaseback of the facility. As of the end of Q1, our financial condition remains strong with cash of $43.4 million and total net debt of approximately $199 million. We pay a blended interest rate of 3.56% on our debt, which includes roughly $75 million on our Line of Credit, $75 million on our Senior Notes and $93 million on our Bank Term Loan A. At the end of the quarter our trailing 12-month net debt to adjusted EBITDA ratio was less than 1. Based on our guidance and current cash flow forecast, we expect that the trailing 12-month ratio will not exceed 1.6 at the end of any quarter in this coming year and it should be below 1.2 by the end of the fiscal year even when considering any additional borrowings that might occur for acquisitions currently under consideration. So turning to our guidance, for the second quarter we expect revenue between $140 million and $150 million, with about one-third of that revenue coming from our Outdoor Products and Accessories. We expect GAAP EPS to be between zero and $0.05 and non-GAAP EPS to be between $0.07 and $0.12. For the full year we are adjusting our revenue estimate down to a range of $700 million to $740 million. This estimate takes into account the challenging environment we have outlined for the first half of this fiscal year and based on historical trends are continuing I believe from the strong improvement in that environment for the second half of the year. The August NICS result that James just mentioned would seem to support those trends. For the full year we expect GAAP EPS to be between $0.77 and $0.97 and non-GAAP EPS to be between a $1.04 and $1.24. With regards to cash flow, we are forecasting neutral operating cash flow for our second quarter and strong operating cash flow in the second half of the fiscal year, with a full fiscal year expected to deliver positive operating cash flow of $70 million to $90 million. In both our second quarter and full fiscal year numbers our non-GAAP EPS excludes amortization and cost relating to our acquisitions, all these estimates are based on our current fully diluted share count of 55 million shares and expected tax rate of 36%. James?

Thank you, Jeff. With that, Operator, please open up the call for questions from our analysts.

Thank you. [Operator Instructions] Our first question is from the line of Cai von Rumohr of Cowen & Company. Your line is open.

Yes. Thank you very much. So, maybe give us some color on channel inventories. Do you feel the extent to which they rose and where you see them going in the next couple of quarters?

Hi, Cai. Yes. Looking back, obviously, we knew going in really into the fiscal year that we were in a heightened level of inventory and what’s really happened and surprised us and surprised retailers to be honest is that our inventory has not come down as fast as people initially what thought it would. One of the reasons for that is the promotional activity itself. You have some very rich promotions coming through from many manufacturers, ourselves included and what that forces the retailer to do, they just really sometime buy more inventories to support those promotions, they don’t have that inventory already in stock that that promotion is targeting. So more if you like what we would call full promotion than ever before and we said that a full promotion as well as the focus is on the consumer drive awareness with the consumer. They are getting the direct benefit in terms of that consumer benefit. But we also know that seeing some push promotions and push comes from manufactures when they offer lucrative deals that sometimes retailers whatever the environment that they face surprisingly sometimes don’t turn down, okay. Some of them are very wise not to turn them as well because they are so lucrative. So again pushes more inventory into the channel. So, I think, as you look at over moving pieces there that I have just described, we can understand why it hasn’t come down as fast that it has and then obviously we are in the slow part of the year demonstrated by adjusted NICS checks, but we know we are coming through that now and our expectation like Jeff and myself said in the prepared remarks is that we are able to see a return of normal seasonality, so you got that sequential acceleration, also traffic coming through retailers doors and we already hear that in parts of the country, it’s happening right now. So with that return of the consumer we are going to our busy period of retail and that’s when we should see that inventory really come down to what we believe is a more normal level, and therefore, much stronger pull-through should test off safely from retail through wholesale to the manufacturers such as ourselves, and obviously, us will be one of the largest manufacturers with the most popular products, the strongest brands, we should hope that we would feel that first before anybody else.

Great. And you said it hasn’t come down as fast as expected, has it come down from year-end?

Yes. Yes. It is -- our distributor inventory…

Your distributor inventory has, but the channel inventory, has it come down?

Well, we…

Yes. Because you have independent retailers and large retailers as well acting smartly and mostly being cautious about taking in more inventory and very focused on as I described operating in that promotional environment to convert their inventory back to cash, gets them open to buy dollars as they go forward and a lot of those guys have eyes on the wholesaler show, they will be coming up in January and February or as we will know their independent retailers are invited by wholesalers whether it’s a virtual share or physical share to participate in certain incentives to take -- for them to take inventories. So I know there will be a lot of preparation for that and those retailers are thinking smart about that as well. But again it’s a cautious environment like -- like us, an independent retailer, a larger retailer wants to see a return of seasonality that increase in foot traffic as we go through the full hunting period into the busy gift giving period as well. So, it’s -- we are seeing signs. So we are very encouraged.

Great. And inventory, you said it would be up in the second quarter, when do you expect it to turn down and where might it be by year-end?

Well…

I can start with that one, Jeff.

Okay.

So, our expectation, if you think about, what -- how I just characterized our new product pipeline and over the next eight months we have several meaningful new product launches. We have just given the details on one. There is going to be another one that we will talk about in November. There will be several in January around these wholesaler trade shows and SHOT show. There will be one, maybe two in February and then as we go towards the NRA Annual Meeting, which will take place in early May, there will be at least two there. Those are all meaningful product launches and to execute and activate a meaningful new product introduction, you need inventory, because you’ve got to optimize your distribution at the earliest possible movement in parallel as you are spending those marketing dollars to raise awareness with the consumer. So that’s exactly what we will be doing. So we are very new product intensive. And therefore the ways, as we look behind us at what’s been happening out in the marketplace, pretty much everybody has just been promoting the same old set of products that they have had for some time, no little refreshment of peoples product portfolio and we tend to correct that, because that statement that I just made applies to us as well. We have a whole new platform that we’re building out in terms of the 2.0 pistol, building on our first generation success. So we are very excited to be doing that and we think is just what the market needs right now.

Thank you very much.

Thank you. Our next question is from Steve Dyer of Craig-Hallum. Your line is open.

Thanks. Good afternoon, everybody. James wondering if you could address market share a little bit, you have historically sort of compared NICS to your sell-in to the channel, which would suggest, I guess, using the same math that I am not sure that’s the best math to use, but that that you have lost some over the last six months, but that doesn’t seem to beat sort of your perception. Could you give us little more color there?

No. I think you characterized it correctly. It’s really not relevant to compare our shipments into the channel to what’s been happening with NICS, just because of those changes in inventory levels that we have been seeing out there and as the inventory has risen over time it’s starts to deceive people on the same when it starts to deplete over time as well that can deceive you. So it isn’t a good comparison and what we have always said is we spend a lot of time doing our own independent market share analysis. We go out and sample retailers and we get all that POS data and so on ours and our competitors and we really understand our share from that statistically relevant sample and then working with one of our other key wholesalers, one of our key partners in two steps distribution, we also get access to other POS data as well, which we use to validate all internal analysis. And that tells us the -- we have been good at share gain, particularly through the promotional period and I talk mostly about M&P SHIELD promotion, but at the same time, we’re also promoting, for example, our Bodyguard 380 and we saw share gain in there as well. But I really wanted to highlight the M&P SHIELD market share, 5 points of share gain in the total handgun market here in the U.S. is really impressive.

Yeah.

So where possible with our share position, I have always said, we will look to defend it, first priority, but we always want to make market share gains and we were very successful there. So as you think about market share going forward, we have this very strong product pipeline that we will be launching products from several products as I just described earlier over the next eight months, nine months that we believe will help us take share and some of those are existing product categories where we are already strong, some of those will be new product categories.

Great. Along those lines, is there any risk in your mind that the customer or even the channel pauses a bit kind of given the new product just waiting for those or is that not likely to happen in your view?

Well, I think, adjusted NICS and again, it’s obviously a lagging data point tells us that the consumer is there that are willing to buy that just got eyes on what is the most compelling promotion we believe right now, so they are very promotionally driven. But one of the things that you have don’t really need to do the same level, I never say you would not promote the new product, but it’s exactly that, if new products out there, generally do not require as much promotion as long as that shopper is going through the door. And again coming back to adjusted NICS that tells us the August results, tells us that the shopper is starting to return as one would expect at this time of year. Now there is always risk. I can’t predict the future. I have got a crystal ball that’s not that great though sometimes. So as we think about September, October and November, those are three key data points, okay, for adjusted NICS checks that will really tell us the strength of the return of the shopper.

Yeah. That’s -- that, I guess, segues into my last question just around visibility, so you guys reported Q4 and guided with just a month left to go in the first quarter and it seems like things either dropped off very significantly just in the month of July or there is an air pocket. What sort of visibility do you feel like you have under the channel at this moment?

Fairly good. But I would say, to be honest, pretty much the same level that we had at that point when we last gave guidance. It’s very fluid. It’s a very dynamic environment right now. You do not know what a competitor is about to do next in terms of their promotional activity. You walk into an independent retailer or some of the bigger box stores right now and sometimes it’s tough to see the top-of-the-glass counter because of the so many promotion cards out there. That drives a lot of confusion with the consumer, obviously, which nobody enjoys. So as those -- that level of promotional activity diminishes, we are doing analysis on our competitors promotions, once that we have visibility to focus on the consumer all the time. And we see most of those come to an end -- that have come to an end at the end of August. So that level of activity definitely coming down. It makes it easier to understand the market and what we believe is going to happen next.

And I point out that, as I noted, about a third of the revenue in Q2 is coming from Outdoor Products, which means that our forecast, our guidance for Q2 for Firearms is about the same as Q1 and that is with the new product that James was talking about. So Q2 is seasonally high point for Outdoor Products & Accessories especially in the knife and tool industry.

Got it. Thank you.

Thank you.

Thank you. Our next question is from Rommel Dionisio of Aegis. Your line is open.

Thanks. Good afternoon, everyone. Could I have a question on the Outdoor segment, obviously, 11% a very solid organic growth in the quarter, despite some of the retail store closures that you’ve seen in that channel, I know, you mentioned Outdoor -- some of the strong new product launches, but is there something else, have you guys been aggressive with promotions or anything else to really drive that strong organic growth in the quarter? Thanks.

No. The out -- when we talk about at the promotional atmosphere, we’re primarily confining that to the Firearms business. I -- there are a lot of promotional activities that we’re engaged in other than I would call the typical activities on the Outdoor Products side of the business. I think that the growth is just because of the good product offering of what we have and good consumer acceptance with those products.

Okay. Thanks, Jeff. And just one follow-up, switching gears to Firearms, could you just give us an update on the performance of the 2.0 in the marketplace, how that’s going, to what extent you are seeing some, obviously, you will see some cannibalization on the prior lineups of M&P pistols. I wonder if you could just give some initial color on that, please?

Sorry, Rommel, the line is not great. So were you asking about how M&P 2.0 full size have performed to-date?

Exactly. Yeah. To what extent -- there might have been some cannibalization, obviously, there’s probably some, but I wonder if you could just give a little more color on that, James?

Sure. I mean the 2.0 platform we introduced early this year -- early calendar year has performed extremely well. It’s been extremely well received by the consumer and professionals alike. So we are very pleased with that. People have recognized that it is significantly enhanced generation of the M&P pistol versus the first generation, which still exist. So they are coexisting right now, which is not unusual in the industry. But certainly we are seeing a lot more traction and a lot more excitement with the consumer when it comes to the 2.0 and that gives us that solid platform to build out as I was describing earlier with the introduction of the compact series and no doubt there will be other introductions that I have hinted that going forward.

Great. Thanks very much.

Thanks, Rommel.

Thank you. Our next question is from Greg Konrad of Jefferies. Your line is open.

Good evening. On the last call you said that you expected gross margins to stay kind of within your targeted range even if it’s at the lower end. Does that kind of still holds when we look at the rest of the year?

Yeah. Like for the year we expect the -- at the midpoint of the guidance we expect to be in the range of our guidance -- our gross margin target which is 37% to 41%. Obviously that’s going to vary by quarter especially this year.

Thanks. And just to go back to Outdoor Products, if I look at that business sequentially and kind of the outlook that you laid out for Q2. Is that mainly seasonality why it recovers a lot in Q2? Is there anything else that went on in that segment in Q1?

That’s mainly seasonality. Again in that segment the summer is tend to be -- there are a lot of shooting supplies in that segment, so the summer again it tends to be low and again the build in for the holiday shopping season much stronger in that segment than even in Firearms.

Yeah.

So, yeah, this is the high quarter.

Retailer load in…

Yes.

… in this quarter that really keep it that down.

Thank you.

Thanks.

Thank you. And it looks we have a follow-up question from Cai von Rumohr of Cowen & Company. Your line is open.

Yes. Thank you very much. So, as James as you’ve described your new products slate, clearly you’ve got some execution challenges, I mean, you’ve got enormous number of new products coming. And you also mentioned that kind of the demand visibility isn’t that great now. So does it make sense to really continue to do acquisitions in that kind of the situation and how do you look at acquisitions, is this really the time to buy because prices are cheap or is this the time to be a little bit more cautious?

Well, again, if I had to look at the question, think about the question you just asked, Cai, I mean, it’s very much in the context of Firearms. And I think, we think clear that much of our inorganic focus is outside of firearms and is, in fact, in the rugged outdoor space, even though we have opportunistically just picked up a suppressor company, as I described earlier. So going back to that as we think about the rugged outdoor then in terms of more acquisitions then of course we are always going to look at the rest of the business to see the health of that business and what we need to do in that business, if it isn’t healthy to make it healthier before we would then go look at acquisitions. Our priority is our current business. We want that to be healthy and generating a great return before we then go back I think to inorganic.

And I will just emphasis that the James in his prepared remarks talked about, we do have a cautious approach in acquisition, very measured, looking at smaller deals, smaller transactions that meets our hurdle rate and that we consider what we would call easier integration. So you take something like Bubba Blade which was a very simple acquisition where you acquire no people, you acquire merely the brand, the products that have been developed, the supply chain and you give those products to your salespeople that are already selling knives, then it’s a relatively easy acquisition and not difficult on the rest of the company.

And those get easier once the DC comes on stream as well.

Right. Right. So and follow-up to Greg’s question about, so if your gross margin for the year at the midpoint would be within the 37% to 41%. I mean if I do the math it looks like you’re talking about a 25% operating expense ratio? And so how should we think about that, I mean, it looks like acquisitions transaction that’s going to be up given what you’ve been doing, but I mean, is sales and marketing which was up last year, going to be level, how should we think about the key drivers there? Thank you.

Sure. Well, I think, that OpEx might be just a bit high, but it is high because we haven’t really like fully engaged, fully integrated the acquisitions and so we are able to sort of reduce that as G&A expense. The DC will really help us focus on reducing that SG&A and that that’s one of the primary reasons for that division. The -- it’s good when we acquire companies, again go back to Bubba Blade which would be called these tuck-ins, because they don’t add as G&A, but platform companies do. So we are certainly realize that long-term success of the company, you can’t have 37% gross margin, 25% OpEx. Our goal on the operating or the EBITDA ratio is still is at 20%. So definitely our focus on the spending and what we can do.

Thank you very much.

Thanks, Cai.

Thank you. Our next question is from Scott Stember of C.L. King. Your line is open.

Hi. Good evening, guys.

Hi, Scott.

Just trying to maybe a little bit better to get a sense of how much inventory [Technical Difficulty] (43:32), you said it was [inaudible] (43:37) into this quarter, if not mistaken. What was that number at the end of the fourth quarter?

Unit inventory at the end of quarter.

Unit inventory in the Q4.

I don’t know, Scott, we are going to look -- we will quickly look that up.

Okay. And you also made commentary about, you think that a lot of deplete promotions in the industry seeing to have come from end at the end of August, is that why you are saying, obviously, the next few months of NICS will be very important because it will be driven more by product, I guess, or just by the customer demand that what the market is looking for?

Yeah. I mean, yeah, just on the -- on promotional question, yes, probably, [Technical Difficulty] (44:25) cost, retail sales are really going to be driven by a return of the consumer to that retail footprint, okay. So and with the introduction that we are making with several new products we think that there will be minimal promotional activity required on our part to convert those consumers to buying those products.

Got it. Okay. And Jeff, just a question…

And…

Okay. Go ahead.

Scott I would add, at the end of Q4 is 232,000, at the end of Q1 is 231,000, just approximately.

That’s pretty flat.

So…

Okay. Got it.

Okay.

Got it. Okay. And just last question, I didn’t get the chance to look at the numbers 100%, what were the implied tax rate on a non-GAAP basis you get to the $0.02 or was it a tax benefit?

It was the -- it was about a 36% on the non-discrete items. We had some non-tax items that actually quite resulted in a higher tax rate when we are looking at GAAP.

Okay.

All right. But…

Got it.

…in general our tax rate and the tax rate you should consider going forward is still at that 36% -- 36% to 37%.

Got it. Okay. That’s all I have. Thanks guys.

Thanks, Scott.

Thank you. [Operator Instructions] Our next question is from the line of Ronald Bookbinder of IFS Securities. Your line is open.

Good evening. Thank you for taking my questions.

Hi, Ron.

Hi. So I was having trouble hearing, are you saying that the -- you expect the promotional environment to have ended last month August and that’s why you want to introduce the products -- new products now?

I would not say ended, I would say it’s diminishing, is our belief, from what we concurrently see out there, we believe it’s diminishing. Now that being -- that can reignite itself at any moment. So that’s…

Because you…

… a current status. But it’s not our intent to go out and spend a lot of dollars heavily promoting brand new products that we believe meet the needs wants and desires of our core Firearms consumers. That’s really the statement that I am making.

Would that mean the same as you’d be currently willing to give up market share versus margin on new product areas?

Well, our new product introductions are always designed to drive market share gains. So you know my views on losing market shares, but I will always take the necessary action to defend the market share to preserve the company for the long-term.

Okay. And on the rugged outdoor segment, it has taken over as one of your larger segments. It’s larger now than long guns and looks like it will be larger than long guns for the full year. Where do you see this segment growing to or what is the long-term goal for rugged outdoor as a percentage of overall corporate revenues?

We’ve never really defined a goal for the size of let say the outdoor part of the business. We obviously are exploring a market that is much larger than the Firearms market overall. So if you put everything in relation to each other than over time, long time you would expect that the outdoor side of the business should become bigger by a significant factor then the Firearms side of the business.

Okay. And right now you’re focused on small acquisitions, given the growth of the Outdoor segment for you guys, would you start looking at larger ones such that they continue to move the needle, especially once you get the new distribution center opened?

Difficult to say right now, again, it comes back to a question earlier, you’ve -- we have -- our first priority is always the health and wealth, the return on the investments we’re getting from our existing businesses that the level of performance that we are seeing there and that return on the investment really the large influence on our appetite to make acquisitions that would be larger than what Jeff described earlier we really call it tuck-in as Jeff described it. So, I think, as we look forward with the DC, if we are not comfortable that we are getting the best out of our core business than a medium to large acquisition we would not look favorably at because we would believe that there is an inherent risk there that we need all of our bandwidth to mitigate going forward and some of that better dedicated still really to the core business then we will very likely pause.

Okay. And the acquisitions that you have done in the past couple of years. Have they pretty much all been accretive to earnings and that’s it -- that’s the question.

Yes. They have.

Okay. All right. Well, thank you for taking my questions and good luck in the new quarter.

Thanks, Ron.

Thank you. And that does conclude the Q&A session for today. I would like to turn the call back over to Mr. James Debney for any further remarks.

Thank you, Operator. Please note that we will be attending the C.L. King Conference in New York City on September 14th and hope to see some of you there. I want to thank everyone across the American Outdoor Brands team for their dedication to excellence each and every day. Before closing and on behalf of all of our employees, we send our thoughts and prayers to all of those who have been affected by the tragic weather and wildfire event throughout the United States. Please be safe. With that, I again thank you 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 does conclude today’s program and you may all disconnect. Everyone have a great day.