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Edited Transcript of VSTO earnings conference call or presentation 7-Feb-19 2:00pm GMT

Q3 2019 Vista Outdoor Inc Earnings Call

Clearfield Feb 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Vista Outdoor Inc earnings conference call or presentation Thursday, February 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher T. Metz

Vista Outdoor Inc. - CEO & Director

* Miguel A. Lopez

Vista Outdoor Inc. - Senior VP, CAO & CFO

* Rocky Krivijanski

Vista Outdoor Inc. - VP of Strategic Communications

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Conference Call Participants

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* Brett Richard Andress

KeyBanc Capital Markets Inc., Research Division - Associate VP

* David Michael King

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

* Rommel Tolentino Dionisio

Aegis Capital Corporation, Research Division - MD of Equity Research

* Scott Lewis Stember

CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Vista Outdoor Q3 FY 2019 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions)

At this time, I would like to turn the conference over to Rocky Krivijanski.

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Rocky Krivijanski, Vista Outdoor Inc. - VP of Strategic Communications [2]

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Thank you. Good morning and thank you for joining us for our third quarter fiscal year 2019 earnings call. With me this morning are Chris Metz, Vista Outdoor's Chief Executive Officer; and Mick Lopez, our Senior Vice President and Chief Financial Officer.

Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to the risks and uncertainties that face Vista Outdoor and the industries in which we operate. We encourage you to review today's press release and Vista Outdoor's SEC filings for more information on these risk factors and uncertainties.

Please also note that we have posted presentation materials on our website at vistaoutdoor.com, which supplement our comments this morning and include a reconciliation of non-GAAP financial measures.

With that said, I'll turn the call over to you, Chris.

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Christopher T. Metz, Vista Outdoor Inc. - CEO & Director [3]

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Thank you, Rocky, and good morning, everyone. We're sorry, to not have Kelly Reisdorf, our Vice President of Investor Relations, on the call with us this morning. Unfortunately, Kelly slipped on the ice this past weekend near her home in Minnesota and broke her ankle. However, she's well on her way to recovery and you'll be hearing from her soon. And of course, she'll be with us on our next quarterly call.

I appreciate you all joining us today for our third quarter call. We're now 3 quarters into our portfolio reshaping and we continue to see tremendous progress. We continue to deliver on our commitments quarter-over-quarter, and we remain focused on our transformation plan. There's a lot to report today, including continued headwinds within our business and the industry at large. But I want to start my remarks this morning by summarizing our progress in the quarter, primarily related to our transformation plan and then offer more detail.

At the end of the day, our transformation is the most important aspect of our business, and I'm confident it will provide the ongoing results we expect. Our primary focus for the entire year is to reset our foundation, getting stronger as a company and crystallizing our long-term strategic plan for future success. To that end, we again made great strides in reshaping the company in the third quarter, including the following highlights.

First, after successfully closing the divestiture of our eyewear brands and refinancing our existing credit facilities, we quickly launched into the sale process of our Savage brands. This has been a major focus for all of us this quarter. The process has been very competitive, and we are pleased with the current status of that transaction. I'll talk a bit more about this later, but I'm pleased to report that as we forecasted, we expect to be in a position to make an announcement on this transaction before the end of the fiscal year.

Second, we continue to make great progress in creating a leaner and more-focused SG&A structure. Through a combination of cost-cutting initiatives and restructuring, we are quickly building a better foundation for our company, which will support a more disciplined strategy for profitable growth in our core categories.

Third, since our announcement last quarter that we entered into a sublease for our former corporate headquarters in Utah, we have now officially exited that facility, transferred our employees to other existing corporate locations and considerably consolidate our corporate footprint by eliminating our most expensive piece of corporate real estate.

Fourth, we delivered our first quarter sequential quarterly growth in our organic gross profit rate, growing from 19.4% in Q2 to 20.2% in Q3. Now this might not sound like much on the surface. However, when you take into account that our revenue fell 11% during the same period of time and the competitive pricing pressure we saw in Q3, this is no small feat. Our operations team has been laser focused on reducing our input costs, reducing our indirect overhead and leading -- leaning out our factories, and this is starting to pay dividends.

Fifth, we announced last quarter that we hired a new senior executive to lead our e-commerce and digital initiatives. E-commerce is one of our top corporate priorities and a growth engine for future success. In just 1 quarter since announcing this critical hire, we're seeing -- we're already seeing returns on that investment. We now have a new mission, vision and strategy and go-forward plan to attack the e-commerce market across all of our brands.

In addition, as you may have seen in a public release we issued in December, we added a new member to our Board of Directors in the quarter, Mike Robinson, who brings an incredible breadth and depth of experience in e-commerce and digital marketing. Mike is a seasoned and highly respected retail executive, and we anticipate tapping into his extensive experience in e-commerce. As we have admitted before, we relate to the e-commerce game, but are more confident than ever that we now know how to win online, and we have created the right toolkit to make e-commerce a growth engine for Vista Outdoor in the future.

Finally, it was a great quarter for brand and product news. We just completed another successful winter show season with Archery Trade Association, SHOT Show, PGA Show and winter Outdoor Retailer show. Our brands launched scores of award-winning and innovative new products across these shows in the media, and importantly, our customers are excited about the contributions each will make to their revenues this coming year. I will provide more color on the brand and product highlights later in my remarks.

In summary, despite continued headwinds and challenges, we remain focused on driving profitability and cash flow across the organization. While revenue growth is something we all want and, frankly, expect to achieve in the near future, every decision we make is channeled towards our focus on EBIT, operating margin and return on invested capital.

I believe we have turned the corner and are on a path to continue delivering consistent and incremental improvements to our profitability. It may likely take a few more quarters to begin to show sales growth, however, our company is now in a much better position to control our own destiny, enabling us to grow our profits even in a challenging environment like we're facing today.

Let's now -- let me now discuss in a bit more detail some of the results and more detailed accomplishments in this past quarter. From a results perspective, there are 2 focus areas that are positioning us for success, bottom line profitability and strengthening the balance sheet. I told you previously that these 2 areas would be our focus for this fiscal year, and we are demonstrating our ability to follow through on that commitment.

First, we have made significant progress in our efforts to drive profitability this quarter. I'm proud of our EPS results, which demonstrate our commitment to profitability. In Q3, we have delivered our third straight quarter of sequential increases in earnings per share, with EPS growing from breakeven in Q1 to $0.05 in Q2 and now $0.09 in Q3. We achieved our profitability growth in several ways, but one of those was through cost reductions. Quite simply, we have ripped cost out of the business. This was a deliberate, intentional focus to reduce costs by eliminating unnecessary layers, waste and redundancy. This is never easy, but we acted quickly and decisively, and we are delivering.

I believe in leading by example, this past calendar year, I personally spent almost 200 nights on the road, getting to know our brands, businesses and leaders much better. This gave me a much better perspective to allow us to thoughtfully make the deep cuts that we have made and add much of the -- and add some of the much-needed talent we now have, knowing that we'll be much stronger as a result.

To put a finer point on the areas we have cut is in the senior leadership team. The prior leadership team in this company had 8 Senior Vice Presidents at corporate, and today, I have 2. And now the leaders of each of our major business units directly -- report directly to me. We are a leaner and more-focused executive team, and we continue to push more accountability to our brands, driving faster and better decision-making.

In total, we have consistently improved our operating expenses over the past 4 quarters. We have reduced our SG&A each quarter since the fourth quarter of FY '18, with a total reduction of nearly 28% on an organic basis and nearly 35% on an adjusted basis. Our cost structure will now enable us to grow our profits considerably as market conditions improve and our top line begins to grow.

However, I want to be clear, this is not just about cutting cost, this is about top-grading. At the same time we've been reducing unnecessary spend, we've been adding talent in critical areas where we previously had none. And importantly, we have not reduced our R&D spending, and we continue to invest in new products for future growth. All of this is reflected in our current spend rate.

In addition to SG&A cuts, our operations and supply chain efficiency work continues to find significant savings in our business to help improve our gross profits, and we're just tapping the surface. We've worked to optimize our sourcing practices and we just recently completed an initiative to consolidate packaging across many brands to realize additional cost savings.

To put a finer point on the impact of our initiatives to improve our gross profits, our organic Q3 gross profit rate is flat to Q3 last year. Now again, on the surface, this might not sound as much until you consider that our organic sales are down 13% year-over-year. We are facing considerable year-over-year commodity headwinds, and the competitive pricing environment is worse year-over-year. Despite all of this, our year-over-year organic gross profit rate has remained flat. I'm proud of the efforts of our team and confident that this will result in increased gross profit rates as we move forward.

We've also instilled a new discipline within our business units that we want profitable growth and not just growth. As part of this due discipline, any change in price must be preapproved by the general manager of the business unit, and our salespeople are now incentivized on sales and profits, not just sales. In past years, we focused on top line growth, which translated into sales at any cost. We have moved away from that mentality, instead are now committed to what I'll call good sales, which means increased profitability.

I should note that while we have walked away from sales opportunities that had no corresponding profits, we have continued to hold share in the majority of our categories. This is because many of these opportunities were simply quarter-end deals that resulted in revenue-timing shifts. We remain leaders in many categories across the industry and especially in our core businesses, knowing that maintaining our market share is a vital part of setting ourselves up for the successes -- for success as the market recovers.

While we still have more to accomplish, I can assure you that these profitability improvement actions I've just discussed are essential to positioning our company for success. These are the areas we can control today, and we are taking advantage of them now. Moreover, I'm very proud of the lean and focused team I've put on the field to go deliver these results.

The second element of focus we have delivered on again this quarter is cleaning up and strengthening our balance sheet. We're doing that in several ways, one of which is deleverage -- is our deleveraging initiative that you're all familiar with. I'm proud of the progress we've made on that front. As you know, in the second quarter, we completed our Eyewear sale and used the proceeds of that sale to pay down debt. And then, at the beginning of the third quarter, we refinanced our outstanding credit facilities. This resulted in all of our debt extending to a 5-year, 2023 maturity date and better terms and more flexibility to continue with our turnaround plan and pursue growth opportunities in our core categories. Both of these actions have created a stronger and more flexible balance sheet for us.

And now as we come toward the end of the fiscal year, we have the divestiture of Savage within our sights. We had a deep and competitive field of bidders, and we'll have more to announce by the end of March. We are confident that once we sell Savage and use the proceeds to further pay down debt, we will be in a much better situation, and that will provide us with some additional options moving forward.

Finally, as you've seen in our release, a mix of both internal and external factors has resulted in our having to announce an intangible asset impairment charge. While Mick will talk more about this in a few minutes, I would like to provide a little bit of context on this challenge.

Our impairment valuation assessment was significantly impacted by the trading price of our common stock, higher prevailing interest rates and lower market multiples. Mick will discuss this in more detail. The impairment mostly affects our Outdoor products portfolio. Continued market pressures in these units following a slower-than-expected holiday shopping season, combined with continuing retail bankruptcies and uncertainty around the impact of tariffs, have resulted in a downward revision to sales projections for these units.

This impairment is obviously a disappointment, but I'm confident that the goodwill accounting hangover from just these past acquisitions is now over. We're absolutely on the right path with these businesses now, we brought in strong leaders who have built impressive teams and developed solid business plans. While we are belatedly paying the price for those earlier decisions, we move forward with the knowledge that better days are ahead.

As I said at the top of the call, we recognize the challenges in our industry that continue to impact our company and our brands. So let me take a minute to address the current industry and the external climate.

The first and biggest obstacle that the entire sports and recreation industry continues to face is the market itself. I don't think this is a surprise for those of you who have been paying attention over the last several quarters. There are a number of factors contributing to the market challenges. First, we've been facing continued softness in consumer demand for the past 2 years, particularly for hunting and shooting-related products. This period of soft demand has persisted longer than any previous market cycle in recent history.

As we've seen numerous times, most typical correction cycles have lasted between 12 and 18 months, we are currently at 24 months. There's simply no precedent for this trend. We, like a lot of other folks in the industry, look at a whole series of data points, NICS checks, federal excise tax, point-of-sale data, consumer surveys to get a read on the market. And whatever metric you choose, we see a continued challenge. Now I realize the just-released January NICS data shows a positive month, which we are thrilled to see, but we also know 1 month does not make a trend.

In our ammunition business, POS data for ammo continues to be soft. By many accounts, the commercial market for ammunition has declined by as much as 20% to 30% over the past 24 months. However, our sales have declined less than this, and we believe we have held, and in some areas increased, our share within the commercial market.

More specifically in the commercial market, while we did see pockets of good news coming from our pistol business, our new waterfowl loads and our centerfire rifle and hunting ammunition, we continue to see decreased demand for our large volume .223/5.56 and rimfire ammunition products as shooters continue to work through the stockpiles they have amassed over the past several years.

Now many of you have asked about our business beyond our commercial business in ammunition, which is military and law enforcement businesses where we are also market share leaders. These markets are longer-term contract markets and we compete for these contracts all over the world. As you have seen from many of our public announcements, we continue to gain share in this market to strengthen our leadership position. In fact, we just won the Royal Canadian Mounted Police contract.

The only pressure we see from this business segment is frankly the .223/5.56 product supplied by Lake City. Unfortunately, Lake City is taking -- has taken a significant price increase, forcing us to either make significantly lower margins or walk away from certain business opportunities. We have chosen to walk away from business where we cannot make a decent profit, but should Lake City change their cost position, we see continued opportunities to grow in the segment.

The second market challenge we're seeing is that as our markets have declined, certain competitors have chosen to reduce pricing to unhealthy levels. These pricing decisions have resulted in some competitors either closing their doors or needing to reorganize themselves under the protection of bankruptcy. And some of these pricing decisions have also resulted in lower retail pricing and less margin dollars for both our retailers and our wholesalers. While we don't know with certainty, we do believe that a more disciplined approach to pricing will prevail as we go forward.

The third challenge we're seeing is the impact of lower demand and profits on our retail and wholesale partners, creating even more uncertainty in the market. This has manifested in multiple consolidations and bankruptcies for key customers and distributors. We have also seen more cautious buying habits of our retail customers, resulting in lower inventory-carrying levels and in some cases, stock-outs on shelf.

We have also seen some retailers hold off on buying products due to the uncertainty surrounding tariffs on goods coming from China. While the tariffs themselves are, on the whole, not a material impact to Vista, this uncertainty for retailers is impacting many of our brands. All of these issues are at play and affecting the environment in which we compete.

Now despite all of the industry and external challenges we face, our brands put a lot of points on the board this quarter, and I believe are a harbinger for sales to come.

First, in our ammo business. Our Federal brand recently updated its packaging to better designate its premium category, and this change was very well received by media and customers at the SHOT Show in Las Vegas earlier this month. In addition, several new ammo products were introduced to the SHOT Show, including the new blended HEAVYWEIGHT TSS, new options for Syntech and Valkyrie ammunition, and our expansion into Barnes and Berger game ammunition. Additionally, Federal's Hydra-Shok Deep won the 2019 ammunition of the year award from Shooting Illustrated.

In addition to these exciting new products, we have also introduced new campaign we called BYOB, Bring Your Own Buckets and Bullets (sic) [Bottles]. The buckets come in 825 or 1,375 rounds, and bottles come in 250- or 450-round bottles, which are convenient because they fit in the cup holder of your vehicle. We've created these for the pistol and rimfire categories in both Federal and CCI brands as another way to drive higher consumption with our consumers.

At CamelBak, December was the brand's largest e-commerce month in history. The brand also surpassed its highest January e-commerce numbers while they were still halfway through the month. Further, we see solid upside at CamelBak's newly launched custom bottles as they start to gain traction.

This quarter we saw Primos awarded the Golden Bullseye Award for our SurroundView Blind from American Hunter for Gear of the Year. The award will be officially presented in April, but we were notified at the end of December.

In our Action Sports Bell and Giro business unit, we have officially taken over the #2 market position in the United States for our Giro snow goggle business. Our Giro Aether MIPS, which is the brand's new high-end road helmet, has outpaced year-to-date sales budget expectations by 2:1 since launching in August. Aether has received stellar reviews and won numerous Gear of the Year awards. Perhaps most impressive, Aether was the lead product in Bicycle (sic) [Bicycling] magazine's Gear of the Year feature, and that publication is the largest cycling magazine in the world.

Bushnell introduced a brand-new Golf laser Rangefinder, the Pro XE. This new rangefinder is the first in the industry to take into account such elements as elevation and barometric pressure. It was all the buzz at the recent PGA Show in Orlando, winning Best in Show from the Golf Channel and Golf Digest. Also Forbes named it their best -- their 10 best finds at the PGA Show.

Finally, Camp Chef continues to be a great example for all our brands on the importance of influencers in this ever-expanding digital world. Camp Chef has been featured recently on the Food Network and is getting great reviews and endorsements from celebrity chefs. They have some exciting new products and technology advancements at Camp Chef that are soon to be announced, and we believe we will continue to lead the outdoor cooking industry.

In total, I'm extremely proud of these great brands and their leadership teams who continue to make progress in a challenging environment.

Now when we announced our transformation plan, we said we were going to focus on improving our profitability, reducing our cost and paying down our debt, all of which would position us for success. We have made incredible progress on that plan in a short period of time while continuing to invest as much as ever in leadership new products.

As we look to the final quarter of our fiscal year, you can count on us to continue to build on these portfolio-shaping initiatives. And I want to make clear that the future for us is not something we are waiting to plan. We are confident that the remaining steps in our portfolio reshaping will be successful, and we have already started planning for the future.

During the third quarter of our fiscal year, I assembled my new leadership team for the sole purpose of starting to plan our growth strategy, including discussing options for future acquisitions in our core categories, creating a disciplined process for examining and defining natural adjacencies to our core and prioritizing the corporate initiatives that we believe will have the largest impact on our portfolio and how we will tackle them.

We know that our future involves expanding our market leadership in our core categories, both through acquisition and organic growth, in building further brand loyalty and capturing more market share through innovative new products. We also know that building a robust e-commerce platform for all of our brands will be transformative to the entire business.

We continue to make progress step by step and quarter-by-quarter. While we know there still is a long ways to go and many external forces to contend with, we believe we have turned the corner and now have the tools to better control our own destiny and begin to grow our bottom line. I believed walking into Vista that there was tremendous potential, and I remain confident that we are on the right path.

Thank you for being on today's earnings call and sticking with us as we continue to reshape our company. With that, I'll turn the remainder of the time over to Mick to discuss the financials.

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Miguel A. Lopez, Vista Outdoor Inc. - Senior VP, CAO & CFO [4]

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Thank you, Chris, and good morning, everyone. As Chris mentioned, we continue to make progress toward the completion of our strategic transformation plan. While many external factors in this challenging environment have changed and shifted, we remain committed to strengthening our brands for our customers and improving profitability for our shareholders. Our financial results reflect the expected progress we have made in delivering on our commitments in this transformational year.

First, let's move on to the financial presentation on the website, onto Page 3, where we'll start with the balance sheet. Here, we can see clearly the major changes. In regards to our success in portfolio rebalancing, we closed the sale of our Eyewear business in the second quarter and took the net proceeds of over $143 million to pay down our debt. Now in anticipation of the sale of our Savage firearms business, given that we have entered into a definitive negotiations, we have classified it as held-for-sale. These are the first steps in our strategy to focus on our core product categories and pay down debt.

The balance sheet also highlights a major improvement to our capital structure with our new loans we effected in November. The asset-backed loan structure for $450 million provides us reduced interest expense levels, flexibility to expand with growth, 5-year maturity and minimal restrictive covenants. We complemented this with a $109 million term loan and a $40 million junior term loan. Also, these term loans are intended to be repaid upon sale of our firearms business.

From the time we began our transformation and restructuring journey, we have reduced the total net debt on our balance sheet by 28%. As of the third quarter, we have approximately $721 million in net debt on our balance sheet, which is a $284 million improvement from the time we began this journey in the second quarter of our fiscal year 2018. The substantial progress made is the result of not only asset sales, but the product of disciplined working capital management and our ability to quickly respond to changing market conditions. Upon completion of the Savage firearms sale, our total debt reduction will be over $430 million or 42%. Our expected leverage ratio will be below 5x leverage, which is in line with our credit ratings.

Finally, the balance sheet shows this quarter a major reduction of $546 million in asset values from goodwill, intangible assets, expected loss in held-for-sale firearms business and deferred tax assets. Breaking it down, this consisted of a $328 million impairment to goodwill, $102 million in indefinite-lived trade names, $29 million impairment to deferred tax assets and $3 million in amortizable intangibles. These are related to our Hunting and Shooting Accessories, outdoor recreation and Action Sports units.

Additionally, we took an $84 million impairment related to an expected loss in accordance with the accounting rules for held-for-sale assets for Savage firearms. After tax, the total impairment charge was $504 million. This impairment was triggered by the significant decline in market cap during the third quarter as per the GAAP accounting guidelines. As you know, we typically test goodwill once per year during our fourth quarter, unless a triggering event occurs requiring us to test goodwill earlier.

Given a weaker-than-expected holiday shopping season, we then reduced our sales projections in our long-range financial plan. As you're aware, these impairments are noncash in nature and now align our equity value more closely to current market capitalization. We certainly do not expect any other major asset reductions, unless there is a material deterioration of our markets. We provide much more detail on the impairment in our 10-Q, which we're filing today.

Let's move to the comprehensive income loss statements, the next pages. As you can see, our GAAP financial results of negative $8.94 earnings per share were affected mostly by $8.76 per share from the asset impairments we took. On a non-GAAP adjusted EPS basis, we see our third sequential quarter-on-quarter improvement in profitability as a result of productivity and restructuring efforts. We're also pleased to have delivered on our commitment with demonstrated 3 consecutive quarters of improvement to adjusted operating expenses.

Amidst an environment that has been managing through challenging input costs as well as pricing pressures, a 22% year-over-year reduction to our adjusted operating expenses, 12% on an organic basis reflect a consistent, committed and disciplined level of execution within our company to winning in today's market, starting with our corporate organizational structure in real estate, all the way to business unit expenditures in noncustomer-facing units, we are continuing to drive out waste.

Our cost-saving initiative underway is not only beginning to show its benefits in our financials, but is beginning to transform the organizational culture of our company. We feel that the key to delivering a sustainable and successful cost management philosophy is by embedding in it in our company's culture.

Let's move to the details on our financial results. As usual, we have disclosed both as reported and adjusted results in our press release to assist you in your understanding the underlying numbers, and to assist in comparison the prior year periods. You will find a more detailed financial presentation of our third quarter fiscal '19 in our website. Our comments will focus on our adjusted results, excluding the impairment expenses just mentioned. I will discuss our results for the quarter for Vista Outdoor overall, then I'll provide more color on the drivers within each of our segments.

Turning to Slide 4. The company reported third quarter sales of $468 million, down 19.5% from the prior year quarter or down 13.1% on an organic basis. The year-over-year decrease reflects overall softening of demand in both our Shooting Sports and Outdoor Products segments. As mentioned by Chris, we're not only in a challenged market environment, but further are focused on making good sales that deliver profitable revenue.

On a GAAP basis, gross margin was $94 million for the quarter, down from $126 million the prior year quarter. Third quarter adjusted gross profit was $97 million, reflecting about $3 million in inventory adjustments for exited businesses. While the gross margin percentage was down approximately 97 basis points year-over-year, the gross margin percentage was maintained quarter-on-quarter with a slight 2-basis-point improvement.

On a GAAP basis, operating expenses, excluding the impairment, were $93 million, down 13.2% from the prior year quarter. Our adjusted operating expenses for the third quarter was $80 million, down 22% the prior year quarter, which is 12% down organically without Eyewear sale. Excluding the impairment expenses previously discussed, the decline in operating expenses is a result of cost-reduction actions taken both within our business segments and at the corporate level.

Interest expense for the current quarter was $16 million compared with $12.5 million in the prior year quarter. The increase was due to write-off of costs associated with the refinancing as well as a higher borrowing rate in the current period, partially offset by a lower average debt balance. The average borrowing rate in our third quarter was 5.9% compared with 4.5% in the prior year quarter. The average debt balance during the third quarter decreased to $765 million compared with $1.05 billion in the prior year quarter.

On a GAAP basis, our tax rate for the quarter was 3.4%. Our adjusted tax rate for the quarter was a negative 52%. The tax rate was primarily affected by the release of tax reserve as well as a true-up of prior year taxes.

For the third quarter, GAAP net income for the quarter was negative $514.6 million, resulting in a GAAP EPS of negative $8.94 compared with $0.94 in the prior year quarter. We recorded adjusted net income of $5.4 million, down from $7.7 million in the prior year quarter, resulting in adjusted earnings per share of $0.09 compared with $0.13 in the prior year quarter. This is a $0.04 increase from the $0.05 adjusted EPS that we had in the second quarter.

Year-to-date free cash flow generation was $51 million compared with $208 million in the prior year period. As you may recall, last year, we had a major improvement in free cash flow by significant reductions in our inventory.

Now I'll turn to the performance of our business segments where we report sales and gross profit, turning to the next slides. Third quarter sales in Outdoor Products quarter were $226 million, down 23.2% (sic) [23.4%] compared to the prior year quarter. On an organic basis, without the effects of Eyewear sale, sales were down 9.6% year-over-year. The organic decrease was caused by lower sales across most reporting units due to lower-than-expected sales in hunt and holiday season.

On a GAAP basis, most profit -- gross profit was $54 million, which is a 27% decrease from $74 million in the prior year quarter. Adjusted gross profit was $56 million, a decrease from $74 million in the prior quarter, down 4.4% on an organic basis. The decline was primarily due to lower volume but includes the impact of increased promotional activities across the sector. Additionally, we were able to deliver a sequential improvement in our gross profit rate from 23.6% to 24.9% or 130 basis points.

Turning to the next slide. Shooting Sports recorded third quarter sales of $241 million, down 15.7% from $286 million in the prior year quarter. Ammunition revenue decreased 17.3% versus prior year as a result of continued softness in both rimfire and .223/5.56 markets. Firearms revenue decreased 7.8% due to softer-than-anticipated holiday shopping season. Sequentially from the second quarter, both ammunition and firearms reporting units experienced a 12% decrease.

Third quarter gross profit in Shooting Sports was $40 million, down from $52 million in the prior year quarter. The year-over-year decrease was a result of lower sales volumes, increased promotional and rebate activity and unfavorable commodity costs. Sequentially, this is a 17% decrease from the second quarter.

Turning to our guidance on Slide 7. We delivered another quarter of solid operating performance, reflecting good progress in the number of areas as we execute our strategic transformation plan in a very competitive market environment. Our focus on indirect and direct sourcing initiatives and our productivity improvement plans are well underway and on track.

The investments we made among numerous supply chain and manufacturing efficiency initiatives throughout the fiscal year are expected to drive margin expansion through the remainder of the year and beyond. In addition, we're beginning to see the positive impact on our profitability as a result of our restructuring activities. We are confident that this trend will continue.

Based upon an overall softening of demand in the third quarter, we have lowered our full year fiscal 2019 revenue guidance from $2.1 billion to $2.16 billion to a range of $2.0 billion to $2.05 billion. In addition, we have lowered interest expense guidance from $55 million to $52 million, the adjusted tax rate from 30% to approximately 20%, and our capital expenditures from $60 million to approximately $45 million.

Considering all of these factors, I would like to summarize our fiscal year '19 guidance as follows. We now expect sales in the range of $2.0 billion to $2.05 billion, interest expense at approximately $52 million, an adjusted tax rate of approximately 20%, adjusted earnings per share in a range of $0.20 to $0.35, capital expenditures of approximately $45 million, free cash flow in a range of $70 million to $100 million and R&D generally in line with our prior expectations at approximately $30 million.

We expect EBITDA margins of approximately 7% to 7.5%, Shooting Sports gross margins of approximately 18% to 20%, and gross margins in Outdoor Products in the low to mid-20s.

So in summary, with 3 quarters behind us, we are encouraged about our prospects for the balance of our fiscal year 2019 and beyond. As Chris as outlined, our priorities are both tangible and clear. The scalability, vision and relevance of our brands, as well as our focus on delivering consistent and disciplined execution, are leading us to be a more responsive and effective company than ever before. Despite top line challenges, our passion for our brands, our businesses and our employees remains unchanged. We are confident that the changes we are making now will translate into increased stability and growth in the future.

I'd like to thank all of our employees for their continued hard work, dedication and efforts during this challenging period. And lastly, to our shareholders, thank you for your support during this transformation. We look forward to keeping you updated as we progress into the future.

And now, we'd like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brett Andress of KeyBanc Capital Markets.

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Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - Associate VP [2]

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Chris, I know the last time we talked on this call, you had one competitor participating in some pretty irrational pricing practices, selling below cost. I guess, where are we at with that situation? And how much, if any, does that factor into your fourth quarter expectations for Shooting Sports?

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Christopher T. Metz, Vista Outdoor Inc. - CEO & Director [3]

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Well, Brett, we feel like we've anniversaried it. I mean, they put out a -- the particular competitor that, I believe, that is in question, put out some ridiculously low pricing, we felt, at the end of this past calendar year in kind of that November-December time frame, and we feel like that's behind us. We feel like we're in a more rational price environment right now. We know that, as I've stated previously, we're going to continue as leaders to take a leadership stance on this and price accordingly in the marketplace to make sure that we're delivering shareholder returns and making sure our customers can continue to make more money. So we feel like that particular action is largely behind us right now. And I think it's just a combination of everything we mentioned in my scripted remarks that creates a more challenging macro environment that has guided our rest-of-year and full year guidance.

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Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - Associate VP [4]

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Understood. And maybe more of a clarification on the Lake City cost increase you mentioned. I know that was a dynamic we dealt with about a year ago after that contract lapsed. But the increase you mentioned in your prepared remarks, is this a new cost increase? If you could just shed a little bit of light on what you mentioned earlier.

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Christopher T. Metz, Vista Outdoor Inc. - CEO & Director [5]

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It is, Brett. So obviously, we don't control that facility. We are the majority customer of and supplier to the commercial market or the aftermarket. And they've elected to put a pretty significant price increase in place recently. And unfortunately, that coincided with a softness in the marketplace. So we found ourselves not only having to absorb a higher price, but frankly, having to be promotional on the marketplace with those 5.56 and .223 rounds. So we just elected to not be as aggressive anymore because of that. So that's a dynamic situation, that can change. And we're hoping that we'll get more rational pricing as we go forward, but our guidance certainly does not reflect that.

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Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - Associate VP [6]

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Got it. Okay and then maybe the last one here. I guess, I'm having a hard time conceptually getting to your 18% to 20% segment gross margin guidance in Shooting Sports for what implies for the fourth quarter, a very steep ramp in the margin improvement. I mean, I guess I get that the cost pressures abate a little bit, but how much of a contributor to the fourth quarter performance is this international shipment that you guys have talked about in the past? I'm trying to square that with the fact that it doesn't really sound like the industry is getting any better at the moment, but also how much are you guys -- some of the internal things you're doing on the cost front, how much does that help? I'm just trying to pull apart some of the moving pieces for what's implied for the fourth quarter there.

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Miguel A. Lopez, Vista Outdoor Inc. - Senior VP, CAO & CFO [7]

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Yes, Brett. And what we see again is an improvement from a couple of segments. One is we continue to have some commodity tailwinds, which will help us in the fourth quarter. We also have this large international shipment we have referred to before, which is significant and does make a difference. And lastly, our continued improvement in productivity due to the changes we're doing on the manufacturing floor. So there will be, in our expectations, an improvement in our gross margins for Shooting Sports, and we will maintain our efficiencies in Outdoor Products.

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Operator [8]

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Our next question comes from Dave King of Roth Capital Partners.

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

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Maybe following up on that last point a bit real quick in terms of the continued improvement in productivity. The free cash flow guidance, it assumes, I think, a fair amount of improvement in Q4 versus the last couple of quarters. Can you talk about what might be driving that? Is that on the inventory side? And then what does that mean in terms of the slowing down production, if at all?

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Christopher T. Metz, Vista Outdoor Inc. - CEO & Director [10]

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Yes. So Dave, I'll answer that and I'll -- then Mick can add on to it. First of all, to continue on Brett's question on the improved margins. I mean, this is the first quarter that we're going to see commodities become a bit of a tailwind, not a lot but a bit of a tailwind, so that certainly is helping us. Secondly, as we've slowed down -- as the market has slowed down and our production has slowed down in our facility as you'd expect, we've taken out a lot of cost, both indirect and direct costs, commensurate with the sales drop. So our ammunition team has done a really, really nice job of rightsizing that facility, including some early retirement programs and some other stuff, to make sure that, again, our costs are in line. They've also taken the opportunity to lean out the facility. So we've had a concerted effort with some outside help to work on relaying out our floors and making sure that our equipment is laid out in the most efficient way possible. So really just an opportunity to take advantage of a bit of the downturn -- or downtime, if you will. Now as it relates to the free cash flow, you see a significant contribution from the inventory. So we've prebuilt a bit of inventory, you see our inventory is up quite a bit year-to-date. And frankly, some that is just timing. I mean, we've built some products here towards the end of the third quarter to support our sales, one of that being the international sale that we had talked about before. So some of that is timing and most of the free cash flow change you see in the fourth quarter is us bringing the inventory levels down. Mick, you want to add anything to that?

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Miguel A. Lopez, Vista Outdoor Inc. - Senior VP, CAO & CFO [11]

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Yes, certainly. I think that our free cash flow right now stands at, year-to-date, $51 million. As you may recall, we had a very, very positive first quarter at a positive $70 million. And then second quarter was down about $16 million. This quarter's basically flat, just down about $3 million. So in order for us to make our guidance of $70 million, that would entail that we would be in the range of $19 million to $50 million, which is certainly something we have done easily in the past. You will notice that we have been very good at collecting our AR, but we've actually increased our inventory of $30 million quarter-on-quarter from the beginning of the year, significantly more than that. The reason we have done that is we are building ahead to meet Q4, we also have enhanced commitments on on-time and full delivery for our customers, and we also have some e-commerce buildup of inventory. But this inventory will be reduced this quarter and we will continue to -- with our expectations of making our cash flow guidance in the $70 million to $100 million range.

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David Michael King, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [12]

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Okay. That's really good color, guys. And then maybe switching gears on the asset sales side. So for the $200 million in net assets, call it, held-for-sale, how much EBITDA do you think might go with that? I think, Mick, you said that you plan to get under 5x leverage. So it sounds like that's $35 million to $40 million of EBITDA. Is that the right way to think about it? And then maybe on the BellGiro side, what are your updated thoughts there, Chris? Are you still planning to sell it or might look to turn it around some more first?

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Miguel A. Lopez, Vista Outdoor Inc. - Senior VP, CAO & CFO [13]

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Yes, we have not really given out any numbers for Savage. So I don't think this is the right forum for that. As you know, the EBITDA on an adjusted basis will depend, and we're in negotiations for that. Obviously, that information is being shared with the parties involved. I don't want to make too much speculation on that at this point in time.

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Christopher T. Metz, Vista Outdoor Inc. - CEO & Director [14]

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And Dave, on the BellGiro side. So we've said all along that we're going to sequence our divestitures. But the way we're looking at it now is we're, as we said before, optimistic and pretty confident that we're going to announce something here fairly soon in our fourth quarter on Savage. And then we're going to hit the pause button. We feel like we're going to be in a position from a debt standpoint, where we're in a position that we like for the moment. And we see, frankly, more upside in the BellGiro business given some of the initiatives we've got in place with that team. Great brands. Great team. And we feel like we can drive more value in that business for shareholders by holding on to it versus selling it. So we don't want to do something rash, where we would sell a business that's got more upside and more value to us. So we're going to continue to run that business and we're excited about it.

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Operator [15]

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Our next question comes from Rommel Dionisio of Aegis.

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Rommel Tolentino Dionisio, Aegis Capital Corporation, Research Division - MD of Equity Research [16]

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Just a question on the ammunition segment. I guess you guys cited some statistics, Chris, on how the sell-through hasn't been -- has lagged that of firearms. Do you get a sense that participation is actually dropped off? Or is their inventories coming down at the retail level or at the consumer level? I realize that will be difficult to measure. But I mean, the inventory is got to be coming down somewhere. Could you maybe give us some color on that?

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Christopher T. Metz, Vista Outdoor Inc. - CEO & Director [17]

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Yes. So Rob (sic) [Rommel], this is the million-dollar question that everybody's been wrestling with over the past 2 years. And so what we do know with surety is inventory levels have been coming down across the board. And that goes from retailer -- wholesalers and distributors and retailers and even the consumer. And so we know for certainty that all of that is the case. What we didn't know and what we still don't fully know is how much inventory consumers are sitting on. Everybody we talk to in all of our surveys, whether it be with ranges, where you've got a lot of shooting; whether it be people that are hunting or what have you; or just frankly, our own surveys, so we talk to thousands of our customers, and we don't see any sense that shooting has diminished at all. In fact if anything, we think the underlying trends of shooting are very, very healthy. I think what we have discovered in our surveys is people just carry more inventory. And so I think we all underestimated that in the years of the buildup, people bought thousands and thousands of rounds. And when you sit down and you think physically how much room a few thousand rounds takes up in your safe or your closet, it's not that much room. And so people are just been sitting on a lot of inventory and they're shooting through it. And so we think they've gone from multiple years of inventory to something certainly less than that. So we like the underlying trends and health of shooting today. And we know at some point in time here soon, people are going to be back at the registers purchasing to replenish their stock, we just can't say with certainty exactly when that's going to happen.

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Operator [18]

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(Operator Instructions) Our next question comes from Scott Stember of CL King.

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Scott Lewis Stember, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [19]

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You guys talked about some, I guess, early successes on the e-commerce front now that you have some new people in place. Maybe just talk about from a broader perspective, I know that you've talked about being able to dropship, you need to be able to, I guess, standardize some of your shipping practices and things like that. But can you just maybe talk about from a broader perspective, where we are with that and maybe just give us an idea on how things are going there.

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Christopher T. Metz, Vista Outdoor Inc. - CEO & Director [20]

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Yes. So Scott, e-commerce, and frankly, digital marketing, is one of the biggest focuses we have across all of our brands and our business units at Vista. It is no surprise to anybody that e-commerce and sales online have continued to grow and have become, in many respects, the preferred purchasing route for all sorts of consumers. So as a result of that, we know that -- and we've known this for a while, that we had to increase our capability to meet this demand. Secondly, it's unfortunate, but we've had a number of customers that have gone out of business or have decided to diminish some of the categories that we participate in. As a result of that, the only way we can increasingly control our own destiny is to make sure that we are promoting our brands larger online. So we're continuing to build out our capability. Now all that being said, we have some fantastic retail partners that do just a wonderful job, and we want to continue to be the best partner we possibly can be. So that would include dropship where dropship is desired, that would include continuing to drive content so that they can pull that content and we can use that content to build our brands online, be it social sites, be it through videos, be it through bloggers or what have you. But increasingly what you're going to see from Vista, and you have my commitment on this, is we're going to continue to bring in more thought leadership. We're going to continue to put in what I call the plumbing in each of our brands, that is enabling the best systems and architecture to be able to drive the experience that is necessary. And we're going to make sure we can control our own destiny in this ever-changing e-commerce world.

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Scott Lewis Stember, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [21]

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Got it. And just last question, Mick, on the balance sheet, where was leverage at, at the end of the third quarter?

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Miguel A. Lopez, Vista Outdoor Inc. - Senior VP, CAO & CFO [22]

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Yes. At the end of the third quarter, our leverage ratio was about 7.3. And that will improve as you're -- looking back, our last 12 months, we had a Q4 of last year EBITDA that was very low, it was about $10 million or so. And as we move more towards EBITDA in the 30s, mid-30s, that will improve our ratio also.

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Operator [23]

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Our next question comes from Brett Andress of KeyBanc Capital Markets.

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Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - Associate VP [24]

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I just had a quick question on the EPS guide. I guess, why are you keeping the range so wide with less than 2 months left in the quarter? I guess more specifically, what are the puts and takes you're looking at that could take you to either the high end or the low end of that EPS range?

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Miguel A. Lopez, Vista Outdoor Inc. - Senior VP, CAO & CFO [25]

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Yes. Thank you for that, Brett. And look, our expected range for earnings per share is actually tied to some of the revenues. And it's a range of $50 million in revenue for the following quarter. And there are many variables that affect this: there's obviously some of these major shipments, the retail environment, pricing and other factors. So the EPS guidance is reflective of the revenue range more than anything.

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Christopher T. Metz, Vista Outdoor Inc. - CEO & Director [26]

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And Brett, I'll just add to that. I mean, frankly, at the level of EPS we're at right now, you can have small movements in sales, shipments here, shipments there that could have an outsized effect on our earnings per share. And so that's why you see a little bit more of a wider range even with the sort of period of time we have to go.

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Operator [27]

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At this time, we have no further questions in queue.

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Christopher T. Metz, Vista Outdoor Inc. - CEO & Director [28]

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Okay. Thank you for your time today, everyone, and appreciate the questions. We look forward to the follow-up calls after this.

And we're 14 months into our journey to transform Vista Outdoor, and the progress we've made would clearly not be possible without the talent and commitment of all of our people. I want to thank all of our employees for what they're doing every day to make this happen, for their passion in serving -- servicing our outdoor enthusiasts, our customers and the lifestyle that they live.

I also want to thank all of our investors who have been patient with us through this period of time. And we look forward to talking to you in May when we report our full year results and discuss the fiscal year 2020 guidance.

Thank you very much.

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Operator [29]

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Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.