Elizabeth Sharp - VP, IR James Debney - President & CEO Jeffrey Buchanan - CFO

Cai Von Rumohr - Cowen & Company James Hardiman - Wedbush Securities Scott Stember - C.L. King Steve Dyer - Craig-Hallum Ronald Bookbinder - IFS Securities

Good day, ladies and gentlemen, and welcome to the American Outdoor Brands Second Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference, Ms. Liz Sharp, Vice President, Investor Relations. Ma'am, please go ahead.

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, net debt to adjusted EBITDA ratio; 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 in 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 filing, 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. Our non-GAAP results and guidance exclude acquisition-related costs including amortization, onetime transition costs, a change in contingent consideration liability, fair value inventory step up and backlog expenses, discontinued operations 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 October 31, 2017. And I'll now turn the call over to James Debney, President and CEO of American Outdoor Brands.

Thank you, Liz. Good afternoon and thanks everyone for joining us. With me on today's call is Jeff Buchanan, our Chief Financial Officer. Later in the call, Jeff will provide a recap of our financial performance, as well as our guidance for the third quarter and fiscal year. Our results for the second quarter were within our guidance range, despite challenging market conditions. Lower shipments in our Firearms business reflected a significant reduction in wholesaler and retailer orders versus the prior year, but were partially offset by higher revenue in our Outdoor Products & Accessories business. Total Firearms revenue for the quarter faced a challenging comparison to last year when we believe strong consumer demand was driven by personal safety concerns and pre-election fears have increased firearm legislation. With that, let me provide some details from the quarter. In Firearms, NICS background checks for handguns declined 15.4% in Q2, while our handgun shipped into the consumer channel declined approximately 50%. Despite the disparity of these numbers, the market information that we gather monthly reaffirm that we remain the market leader in handguns and modern sporting rifles. We believe that our unit sales relative to NICS results indicate that channel inventory reduction efforts by wholesalers and retailers remained strong in the quarter. In long guns, NICS declined 15.6%, while our long gun shipped into the consumer channel declined just 13.3%, reflecting our ability to take market share in the hunting rifle category with our TC Compass bolt-action rifle. Gross margins in the quarter were impacted by the highly promotional environment for firearms that has persisted for the last several quarters and for longer than we originally anticipated. Successful promotions in our M&P and Thompson/Center product lines were carefully designed to defend or take market share as appropriate. We believe orders in the quarter were impacted by the already heightened retailer inventory of multiple manufacturer's products, including ours. However, despite those heightened retailer inventories, distributor inventory of our firearms actually decreased 8% versus the end of Q1 to a total of 212,000 units at the end of Q2. Even with this favorable decline, our weeks of sales at distribution remains above our targeted 8-week threshold at the end of Q2. We continue to expand our M&P branded Polymer Pistol family, which is extremely popular with consumers. We launched the M&P M 2.0 Compact Series, our next-generation M&P Polymer Pistol and our first head-to-head competitor with a very popular Glock 19. We also launched our exciting new M&P SHIELD and 2.0, available with or without an integrated red Crimson Trace laser. This pistol, popular for concealed carry and personal protection, delivers an exceptional value and is the only pistol in the market featuring an integrated laser in a slim, compact single stack. Both of these new M&P Polymer Pistols are being well received by the market despite the high overall channel inventories I referenced earlier. As expected, our internal inventories peaked during the quarter as we prepared for a number of new firearm product launches. Since then, we have reduced our internal production rates and our outsourced capacity to help lower inventories over the balance of the fiscal year and better align production to consumer demand. In the quarter, we completed our acquisition of the assets of Gemtech, a provider of high-quality suppresses for the consumer and professional markets; and this business is now part of our Firearms segment. Even though it appears that Hearing Protection Act will not be passed into law in the near term, Gemtech is still a great fit with our long-term growth strategy. It's strong product development capability combined with our brand management and manufacturing expertise, should allow us to organically grow this business overtime. Now turning to our Outdoor Products & Accessories segment, which includes our electro-optics business. Revenue grew 23.2% year-over-year; all of this growth is due to acquisitions we completed in fiscal 2017. Organic revenue after intercompany eliminations was generally flat versus the prior year, a relatively positive result given the challenging environment for retail. Gross margins in Outdoor Products & Accessories of over 44% in Q2 validates our strategy to aggressively grow this segment and continue to diversify our business beyond firearms. During the quarter, we also completed the acquisition of Bubba Blade, a premium knife brand that is widely recognized among outdoor fishing enthusiasts. This business is now part of our Accessories division. While Bubba Blade represents our first entry into the sizeable fishing accessories market, it also fits very well within our existing strong cutlery and tool business and broadens our offering of highly regarded brands. Now turning to the current environment, which we believe remains challenging in the near-term. Since our second quarter concluded, November adjusted NICS results have been issued and they reflect year-over-year declines as expected. However, Black Friday NICS background checks numbered over 200,000, a new record for a single day. This result reinforces arguably that firearms have moved it even more strongly into the basket of Black Friday shopping goods that consumers have come to expect. Accordingly, we believe promotions have, for the moment, replaced fair based buying as a primary driver for consumer purchases. And the promotional environment for consumer firearms looks as though it will continue for the foreseeable future. As a result, during the second half of our fiscal year, we will take the following actions designed to best position our company for whatever market landscape the future deliveries. We will work to further optimize our internal manufacturing resources and reduce costs where we can; continue to analyze our operating expenses to ensure that those expenses are in line with our operating margin goals, especially as we focus on harvesting synergies from our recent acquisitions; prioritize our spending, conserve and generate cash, and focus investments on the organic growth initiatives; participate in promotions as appropriate in order to defend market share; introduce a number of meaningful new products throughout the balance of the fiscal year in an effort to take market share and rebuild margins to our long-term targeted levels; and lastly, we will continue to work on establishing our new distribution center, a longer term objective that is well underway and an important element in consolidating our warehouse footprint, harvesting synergies from acquisitions and better serving our wholesale and retail customers. We broke ground on this initiative in October, and we plan to complete the facility within the next 18 months. Our overall strategy is designed to drive future organic and inorganic growth, better balancing the two segments of our business to mitigate this cyclical impact of the Firearms segment overtime. And while we still have a lot of runway for this focused strategy, our progress-to-date is clear. We have seen our Outdoor Products & Accessories segment become a larger part of our business overtime, delivering over 32% of our revenue and 40% of our gross profit in the second quarter. We believe our strategy will generate long-term shareholder value. With that, I'll ask Jeff to provide more detail on our financial results and our guidance.

Thanks, James. Revenue for the quarter was $148.4 million, a decrease of 36.4% from the prior year but within our stated guidance range. Revenue from our Firearms segment was $101.4 million, a decrease of 48.1% and revenue from Outdoor Products & Accessories was $50.8 million, an increase of 19.9%. Within those total revenue numbers, inter-company's sales eliminations were $3.8 million. Total company gross margin for the quarter was 34.2% as compared to 41.8% in the prior year. Firearms' gross margins were 29.1%, and Outdoor Products' gross margins were 44.9%. The total company gross margin decrease was mainly driven by the Firearms segment, which had lower production volumes, increased manufacturing spending percentages and heightened promotional costs. GAAP operating expenses in the quarter were $42.8 million compared to $45.5 million in the prior year. Second quarter operating expenses included $4.6 million of costs relating to the acquisitions we have completed over the last three years including amortization expense for our Battenfield, Taylor Brands, Crimson Trace, UST, Gemtech and Bubba Blade. On a non-GAAP basis, which excludes those acquisition costs, operating expenses were $38.2 million as compared to $39 million in the prior year. Our non-GAAP operating expenses included increased costs relating to the UST, Bubba Blade and Gemtech acquisitions which were offset by lower organic costs, including reductions in accrued incentive compensation and profit sharing. Our EPS for the second quarter came in at $0.06 as compared with $0.57 in the prior year. Our non-GAAP EPS which excludes acquisition-related costs was $0.11 as compared with $0.68 last year. Adjusted EBITDAS in Q2 was $23.1 million or a 15.5% EBITDAS margin compared to $72.4 million, a 31% margin in the prior year. Turning to the balance sheet, operating cash flow was a positive $3.8 million and capital spending during the quarter was $5.2 million. Excluding our distribution center under construction, we have reduced our expected capital spending this fiscal year down to approximately $25 million. And as I have noted before, the distribution center will be financed primarily through capital lease construction, although we will have some cash outlays for IT and equipment. As of the end of Q2, our balance sheet remains strong with cash of $68.2 million and total net debt of approximately $223 million. We pay a blended interest rate of 3.61% on our debt which includes approximately $125 million on our line of credit, $75 million on our senior notes, and $91 million on our bank loan -- bank Term Loan A. At the end of the quarter, our trading 12-month net debt-to-adjusted EBITDAS ratio was approximately 1.5, and we don't expect that ratio to rise much above that for the remainder of the fiscal year. As James stated, in the second half of the year, we'll be focused on activities that have a positive impact on cash such as reducing inventories. Our expected positive cash flow on the second half of the year should help us to maintain our cash balances while reducing our debt by approximately $75 million. So turning now to our guidance; as noted by James, we expect the challenging environment in Firearms to continue with high promotional activity and excess inventories in the channel. Thus, we are updating our full year fiscal '18 revenue estimate into a range of $650 million to $675 million. At that revenue range, we expect full year GAAP EPS of between $0.33 and $0.43, and non-GAAP EPS of between $0.57 and $0.67. For the third quarter, we expect a revenue of between $170 million and $180 million. We expect GAAP EPS of between $0.01 and $0.04, and non-GAAP EPS of between $0.07 and $0.10. In both, our third quarter and full year fiscal numbers, our non-GAAP EPS excludes amortization and costs related to our acquisitions. All of these estimates are based on our current fully diluted share count of 55 million shares and an expected tax rate of 37%. James?

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

[Operator Instructions] Our first question comes from the line of Cai Von Rumohr with Cowen & Company.

So your G&A was down in the quarter, the 19 6. Is that likely to spike up in the second half? And if so, why?

Actually, in the second half of the year, though we do have SHOT Show and distributor shows, a bit more spending -- just talking about OpEx in general, we expect it to remain relatively flat, should go up a bit in Q3 as it always does because of SHOT Show, which is a major expense. And then might come back again in Q4.

And I didn't catch it. I mean, you talked about inventories starting down on this quarter and then again in the fourth quarter, which is seasonally strong. Did you give us a cash flow number for the year? I might have missed that.

Well, I basically did because I said that we would maintain our cash balances, and we would reduce our -- we expect to reduce our debt by $75 million in the second half of the year.

Got it. Okay. So that's -- okay. So that would assume...

And what I'm going to say is, don't forget we still have CapEx in the second half of the year. So you put that altogether, you can get pretty close to the cash flow for the second half of the year. And the cash flow -- in the second half of the year in Q3 is -- a lot of it is going to come from inventory reduction and in Q4, it'll come from a better bottom line.

And that inventory reduction in the second half of the year is typical as we move through the wholesale of buying shows and the buying group shows as well.

Good. And then you mentioned that the distributor inventories were down a bit in the second quarter sequentially. Can you give us any color in terms of what the dealer -- inventories at the dealer level might be? And have we seen a continuing decline in the distributor inventory since the end of the quarter?

I can't update on the distributor inventory. But just talking about retailer inventory and over the period of Q2. And yes, our dealer checks have told us that people are bringing down their inventory. I mean, as we've discussed before, there was a significant amount of inventory that actually builds up at retail. But the busiest season is upon us, that's obviously helping these dealers bring down their inventory and free up some cash which they can then use to participate in the wholesaler and buy group shows.

Here's what I'm going to add, we believe that the dealers are probably reducing their inventories to lower than historical norms because products are readily available. So there is no need to carry a lot of inventory at the stores.

Our next question comes from the line of James Hardiman with Wedbush Securities. Your line is now open.

Help me understand the timing of what changed in your thinking over the course of the quarter? Obviously, you came in at the high end of the guidance for the second quarter but then you cut your full year and the implied guidance for the second half pretty dramatically. Was it late in the quarter before you sort of realized that things were worse than you were previously thinking? Or heading into a quarter, is it pretty much you're going to shift what you're going to shift, and it's hard to adjust until a few months out? How should I think about that?

I think, even though we're seeing some favorable movement in inventory at retail, an important point to note and that is, our belief, and really we can see it, is that if you add all the capacity and all the manufacturers together, it clearly exceeds current demand. And it appears that other manufacturers are not dialing down their production rates fast enough to better align with that demand; and that clearly is going to be an issue if people continue to share for the higher rate than demand. And to move that product, there's going to be more discounting and promotional activity. So as we said in the prepared remarks, we believe that promotional activity is going to continue longer than we anticipated; in some areas -- some product categories we actually saw it strengthened. So we know that to defend market share we're going to have to continue promoting at a higher level than we originally anticipated. So we want to defend market share, we're not going to use promotional activity to take market share, we think at the moment that diminishing returns for that I think we just got to defend our position and weather the storm ultimately until there is a better balance between those production rates and the consumer demand. And over that period, of course, we'll be doing our best to really understand where is the market going. Is it resetting itself at any level? It's just not clear yet, there is a lot of noise out there. So, there are some encouraging signs, we were encouraged by the number of NICS checks -- adjusted NICS checks in November, even though clearly down over last year, which is a very different period.

That's helpful. I guess let me ask the question this way. I think for the last couple of quarters, The Street would have loved to see you just rip the Band-Aid off this year to better position yourself headed into fiscal '19. Is that what you're doing here or is demand is that much less than you previously thought? And I guess another way to ask that question, I mean, versus your previous guidance, do you expect to finish now in a better distributor inventory position to end the year than the previous guidance would have suggested?

I think you've just run through the points in the prepared remarks. You talk about ripping the Band-Aid off; I'd say yes, we're looking at -- have some stronger actions compared to what we considered before, just from our last call. So certainly taking that all into account, and as we've talked continually, we've dialed down outsourcing capacity. Now we're really looking at our internal capacity as well and making sure that's better aligned. I think you can safely say that we're looking to get our internal inventories down dramatically. And what we don't want to see is any sort of build up at wholesale or retail of our inventory either. So they really go hand-in-hand, but we don't control the market. I mean, it is what it is and that consumers is the most powerful force out there.

Yes. And we recently have -- I mean, very recently, worked on our promotions for the typical period in early winter. And it just appears that the way we do those is we give away on free goods with packages of purchases. And it just appears that we're going to have to give away more free goods than we originally thought even a couple of weeks ago.

That's helpful. And I guess last question for me; you've talked about how you don't want to see a build up at the distributor channel. I guess given what's going on with demand, it would seem that you would hope to bring down those inventories pretty meaningfully. So I guess, obviously going forward, there are seasonal trends but should we expect that to come down more so than the normal seasonality would suggest? And why should we, as investors, care about sort of the market share, right? Wouldn't it make sense to just scale things back such that regardless of market share, the next couple of quarters, things are just cleaner heading into next year? Thanks.

Yes, just talking about the market share. As I said use promotions to defend market share but don't forget at the same time, we're introducing meaningful new products and we have just introduced some very meaningful products in the last 60 days. And going forward, for the balance of the fiscal year we continue to do that as well. And we hope those products will take share, at minimum, they will help us defend share as well. So we're not going all out to do everything through costly promotional activity, we really don't think that makes sense. Then just talking about wholesaler inventory; I really don't think people should get too hung up where wholesaler inventory is if you just look at it right now, you know, it isn't going to go down further, people are asking. Well, to be honest, it really doesn't matter; it's a relatively small number. That's just over 200,000 units spread across 15-or-so wholesalers. They need a number of units to make sure that they can provide satisfactory customer service levels to the 10,000 plus retailers, independent retailers that they serve. So as ever, the biggest concern is what is the inventory at retail. And that's what we have good information on when it comes to some of the larger retailers. But it's no difficult as we sample the independent retailers and we obviously do that using our sales team and are calling on those accounts as best we can but that's a very fragmented bunch of retailers.

Our next question comes from the line of Scott Stember with C.L. King. Your line is now open.

Just trying to drill down the difference once again in the declines in units that you shifted for the channel versus NICS. Is this just simply a case of you guys being more diligent than most in cutting down on the amount of shipments dramatically trying to bring your inventories down or is this something else to look into there?

I think it's simply what I said in the prepared remarks, as retailers are working hard to get their inventories to the levels that they want them at. And they've been doing that for the last, I would say strongly, for the last 6 to 9 months for sure, particularly through the quieter summer period for retail sales. So it's encouraging, as I said, when NICS was in November, in particular, the results for Black Friday because obviously, they sold a lot of firearms; so we're seeing that inventory further reduce. So the big difference that we saw between handgun NICS, for example, and our results, again, it shipped into the channel. For us, it's a good thing because we know the inventory has got to be coming down because consumers want our product, they're following that product through retail now. So hopefully, we're going to see some tension in that supply chain again between ours and the retailer, they get our unit shipments much more closely to the dynamic that we see at the counter with adjusted NICS checks.

And if you look at the Black Friday numbers, then you look at the month as a whole, just trying to correlated the two, obviously, Black Friday was really good. Could you just talk about what was different from your perspective, from a promotional standpoint versus what you had been doing prior to Black Friday? And if you did amplify your promotions on Black Friday, have they kind of leveled off a little bit back to what they were before Black Friday? Just trying to gauge how that's...

We didn't do anything special for Black Friday. We have some promotions in play already, some consumer rebate promotions at a lower level than we've done previously. So most of the promotional activity that was enhanced on Black Friday was retailers executing their promotional plans. And you'll see those promotions in terms of their generosity to the consumer increase over Black Friday obviously, and then they'll back away again. I go back to say that, yes, NICS for November, adjusted NICS, was encouraging but you can look at Black Friday NICS and say yes, that's really encouraging, that's a bright spot; wow, that's a record day. And it is encouraging in that respect but you'd also look, those consumers waited, they waited for the day because they wanted to get the best possible deal. So the positive take from that is yes, there is still a consumer there that has an appetite to buy a firearm, but they're willing to wait until they can get the best possible deal. That helps us, from our belief, that this promotional activity is here to stay and like it or not, as it compresses our margins, reduces our revenue, we're going to have to participate to some degree. But the best thing we can do is, while we do that, is accelerate on new product development and get those meaningful products out there that we don't have to promote so hard and have a much more favorable financial benefit to the company and obviously, deliver way more shareholder value.

And on that new product that you talked about, the Compact M&P 2.0. Could you maybe just talk about how that is initially doing in the market? You did talk about that briefly. And if there has been any cannibalization of any of your other higher end M&P products from that?

Yes, it's been very well received. It's going to take some time to understand if there has been any cannibalization. Too early to say obviously how it's going to perform, it's really been launched into the peak, and we had inventory prepared. It was one of the reasons for our inventory build and as long as a preparation for the launch of the M&P SHIELD 2.0 as well. So we put inventory out there, it's in distribution, we've got very favorable editorial, very favorable feedback on the product. So it's doing well but the headwinds for new products right now really is inventory, as retailers are still opening up those dollars so they can buy the next new product. So I think it's a lower bit of a wait and see I think when we get round on our next call, we'll have a much better take on it for you.

Got it. And just last question; just trying to frame out what's the number of units in the channel that would make you comfortable? I mean, just so we can kind of gauge how long it could possibly take to get things down to where they need to be?

The only finite number we can really talk about is the one we've always spoken about which is the number of wholesale. And as I said earlier, I think that's not really a number to be too concerned about right now, we're just over 200,000 units. We have around 15 wholesalers, so it's spread across those wholesalers and they need a certain amount of inventory to be sure that they can provide the service levels they need to 10,000-plus independent retailers that they serve. So I'm not concerned about that number after all right now, it's the numbers that we can't figure out in its entirety because we can't sample the entire population and that is what is at retail, the independent retailer.

Our next question comes from the line of Steve Dyer with Craig-Hallum. Your line is now open.

With respect to all the promotional activity, what is your sense as to the role that plays in actually driving a firearm sales? In other words, does $75 up of firearm actually make somebody's who's not going to buy one, go buy one or is it primarily deciding on one manufacturer versus the other?

Yes, I mean, $75 is a very generous consumer rebate. And really, for us in our experience, we did that on our M&P SHIELD first generation. The reason we did those because we wanted to reduce inventory at retail and wholesale in preparation for the launch of the next-generation of SHIELD which we've spoken about, the SHIELD 2.0, and both, non-laser and laser version. So it's a big meaningful launch for us as we are following big footsteps you could say with the SHIELD being the number one selling handgun for many years. So that really did drive the need or we think as $75, it really did convert people from perhaps thinking about buying a SHIELD or thinking about buying a handgun for personal protection to actually getting to the counter and buying one, or even actually purchasing one on the Internet and then having it delivered to their Federal Firearms licensee that was local to them for pickup. So yes, they were but as we all know, they're extremely costly, and you cannot sustain them. So we believe that overtime, people will reduce their capacity, they'll dial down their production rates and their level of promotional activity will reduce accordingly.

Yes. I guess where I'm going with that is, the overall demand, I mean, excluding last year which was certainly an outlier but excluding that, I mean,, overall demand is still very solid. My perception is, we've seen a little bit better-than-normal seasonality this fall. So I guess what I'm trying to figure out is, do you feel like absent these crazy incentives, are we at what you feel like is a fairly normalized run rate for sales, in which case that kind of takes you back to -- excluding the non-Firearms segment, kind of takes you back to a $650 million, $700 million run rate? It is that -- am I thinking about that right or do you still think that we're in an elevated period of sales because of promotions?

Yes, I think it's just too early to tell. It's too noisy out there with the level of promotional activity. Our belief is yes, and we all know this happens, there was some fear-based buying that would take place from time to time and there is no fear-based buying right now. And we believe the level of promotional activity at the heightened level of it is has really replaced fear-based buying as the primary driver for a consumer who wants to acquire a firearm. So it's going to be interesting as these promotions diminish, which they will overtime, they have to, they're unsustainable, where do we settle out in terms of the size of the market. And we just don't know.

Got it, okay. What do you see I guess happening in the competitive environment if sort of the current conditions persist? Do you think people exit the business? Are there some that are -- just trying to kind of get a sense for people's wherewithal to kind of stay at these levels of promotions?

I mean, nobody of any scale, and those are really the ones that we pay attention to, has gone away. Everybody is still in business. Some that publish their results, you can see they're not doing so well. How long they can sustain themselves, we just don't know. We hope that we are starting to do a sensible thing and dial down that capacity, and that's going to be key going forward.

Got it. And then lastly for me; it sounds like it's sort of conserving cash mode [ph] but as you start to generate cash again in the back half of the year, both from working down inventory, as well as just things getting a little bit better in the core business, how would you sort of rank your capital allocation via debt repayments, buybacks? It sounds like maybe M&A is off the table here for the time being. But how do you think about that as cash starts coming in the door again?

I think right now debt repayment is top of the list, we want to match our debt with our results. We are conservative, we don't really want EBITDA to debt multiples over 1.5 right now in this environment. So I think that's probably a first. After that, I'd back up. The first thing we're spending our dollars on is CapEx and certainly, our DC in Missouri; so that is -- that's number one on the list. And then again, we think we've already have our CapEx scheduled out for the rest of the year. And we also have expect to reduce our debt by $75 million. After that, it depends between like M&A and buying back our stock, it just -- it depends on the market at the time of our -- the return on buying back our stock versus the return on doing M&A. The problem with M&A, it's not that we're out of the market because we don't want to, the problem with M&A right now is that the prices that are expected are quite higher than what we're willing to pay. So as long as that continues, then we're not going to be in the market but it's certainly still is a long-term growth strategy of the Company on the Outdoor Products & Accessories segment.

[Operator Instructions] Our next question comes from the line of Ronald Bookbinder with IFS Securities.

In the past, you had talked about not wanting to introduce new products in a promotional environment that you would introduce a product when the product was ready, you had all the accessories to go along with it and the market conditions were right in the industry. Why has that changed? Why would you introduce the new product when it's so promotional out now?

I have to correct you, Ron. It's not what we said in the past, we've said that we won't introduce a new product in a surge environment. So when there is fear-based buying going on because it's just not worth it, it will go unnoticed relatively, let's say. So this environment, which is way more challenging, is the perfect environment to be launching a new product and activating those products appropriately because you want those new products out there. As I said before, these are the products that are exciting the consumer, meeting their needs, wants and desires, and they require less promotional activity, less discounting, consumer rebates, and so on because the consumer is attracted to them. So that's the subtle difference.

Okay. And would retailers working their inventory down, they're going to be wanting to put the inventory risk on to the wholesalers and the inventory carrying costs. And wholesalers would be doing the same thing, trying to put that carrying cost and risk on you guys. So wouldn't you expect this promotional environment as the manufacturers continue to try and maintain their market share as this inventory is coming down. Wouldn't this promotional environment continue for a long time to come, not just this next quarter or the quarter after that?

The short answer is, Ron, we just don't know and it's really what I was explaining earlier. I mean, certainly as we said for the foreseeable future, we see this heightened level of promotional activity continuing. What happens is we get past the end of our fiscal year, I don't think we have enough data on that. So I think, again, it's going to be a wait-and-see.

And other areas of retail, we've seen the consumer end up getting trained to wait for promotions because of promotional environment that continued and continued. Do you see a possibility of that happening in the Firearms space?

I think it already has, Ron. If you go back to my comments on Black Friday in both the prepared remarks and the Q&A earlier on. I believe the consumers were waiting for Black Friday to get the best possible deal on the firearm they wanted to purchase.

But you'll expect that not just that it was a one-time event, that they have now been trained that without a promotion, they are willing to wait?

I think they've been trained -- I think they have been training themselves for many years. It's not the first time we found ourselves in this environment. If you go back to our fiscal '15, it was somewhat similar in many ways. I wouldn't necessarily compare the level of promotional activity and say that they were the same. I think it's at a heightened level versus then. But certainly, they're aware, it's a buyer's market.

Lastly, you've talked in the past about working with the aerospace industry with your production capacity and your expertise in precisely cutting metal. Now that we're in this -- heavily into this environment, have you been picking up any space there to help increase your utilization of the factory?

That's a great question and you're right, that remains a clear strategic initiative for our manufacturing services division but there is no update there right now, Ron. So in this environment though, we would definitely look to accelerate that initiative for the simple reason that we want to make sure that there is minimum risk of having to idle any of our assets and have an overhead absorption issue and are further squeezing our margins which are already being squeezed as you can see by this promotional activity that we've been participating in.

We have a follow-up question from the line of James Hardiman. Your line is now open.

A couple of follow-ups for me. So I wanted to talk a little bit about the psychology of the consumer for lack of a better term. We've talked about fear-based buying; I guess historically, I think about fear-based buying -- I guess there are two kinds of fears, right, there is fears that there's going to be regulation and people won't be able to get their guns and then there is personal safety-related fears. I guess I get that the idea that fear of regulation has sort of gone out the window with the current administration. I guess I'm a little bit surprised that there doesn't seem to be any personal safety type fear which hasn't gone anywhere, the best I can tell over the course of the last year. I don't know, do you guys have any insights on that?

Difficult because research tells us that, yes, personal protection, the desire to protect oneself whether on a person, in the home, in your vehicle, still one of those primary drivers, okay, to actually consider buying a firearm, okay? So that still appears to resonate with somebody who is looking to acquire a firearm. Now where that's gone right now, I don't know. We'll be in the process of refreshing that research as we do in our next attitude and usage studies of the handguns. So we're yet to do that and that will give us way more insight that perhaps at appropriate that we can discuss in a future call. But right now, I'd -- it's very difficult to gauge in this noisy environment with this level of promo activity. I think it masks a lot of things that are happening out in the marketplace.

Okay. And then you'd made a comment earlier in the call about how the -- I guess, one of the comments was that promotions are going to be elevated for the foreseeable future but then you made a comment that those promotions are unsustainable. I guess, why -- fast forward, why is this unsustainable? It seems like you guys could sustain this, obviously, at a lower profitability rate but you could survive at this level of profitability forever. Why for the industry is this unsustainable? And how does it unwind itself?

It's unsustainable at a certain level. So when you see a competitor who is offering a consumer rebate of $150 off a modern sporting rifle, you know for sure, we know for sure, we understand those costs very well, that that is unsustainable. That's pretty much moving product at cost. So for us, strategically, we've deployed fairly rich and generous consumer rebates before such as the $75 off the first generation SHIELD. But that, as I said, is strategic; we wanted to try and reduce the channel inventory at both, retail and wholesale as much as possible in preparation for the launch of the next-generation of SHIELD which we just did in the last 60 days. So our experience of that $75 rebate tells us that is unsustainable, they are very successful, unsustainable. So there are other examples we could talk about, the handgun $75 level and the long gun $100-plus level that we know is just unsustainable; so they have to be dialed back at some point, people's pockets are not that deep. And for us, we fear you could continue with it, it's ultimately just going to further erode the performance of the business.

That's helpful. And then last follow-up, if I may. I apologize. You've made the point a couple of times on this call that we shouldn't be as focused on the distributor inventory number at that sort of the base level that they need and we should really be focused on dealer inventory levels which are a little bit hard to quantify. I guess how do you work, though it seems like it's pretty obvious that given the promotions that they're probably too high, I guess how do you work those down? And is that a major goal of yours to lower the dealer level inventories? It seems like it's more -- the messaging seems to be more meeting demand than working down those inventories so that we can return to a normal promotion environmental; but maybe I've got that wrong?

I mean, no. It's our desire to see inventory at retail -- independent retailer reduce. We think that's important moving forward. Now we think with all the actions we're taking to whether that it is promotional activity, dialing down our capacity to better match demand and so on; overtime, it will correct itself. The difficult thing right now is to quantify how much time because as I've said, it's tough to understand how much inventory is actually out there. But we know intuitively and just your basic math that what we're doing will work, but overtime.

We are not showing any further questions at this time. I'd like to turn the call back to Mr. Dabney for any closing remarks.

Thank you, operator. I want to thank everyone across the American Outdoor Brands team for their commitment and dedication to excellence. We wish you all of you a happy and healthy holiday season. Thank you for joining us, and we look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.