Hello, and welcome to today's Second Quarter Fiscal Year 2023 Vista Outdoor Earnings Conference Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I would now like to hand over to our host, Shelly Hubbard, Vice President of Investor Relations. The floor is yours. Please go ahead.

Thank you, operator, and good morning to everyone joining us for our second quarter fiscal year 2023 earnings call. With me this morning is Chris Metz, Vista Outdoor Chief Executive Officer; Jason Vanderbrink, President, Sporting Products; and Sudhanshu Priyadarshi, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements and we make these statements under the safe harbor 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 investors.vistaoutdoor.com, which supplement our comments this morning and include a reconciliation of non-GAAP financial measures. Chris, I'll turn it over to you.

Thank you, Shelly. Good morning, everyone, and welcome. We posted another solid quarter despite the external challenges we've been navigating over the last year. Quarter 2 sales increased to $782 million, with direct-to-consumer sales up approximately 65%. Adjusted EBITDA margins of 21% remains strong as we absorb higher input costs, including freight and labor from rising inflation. Lastly, we recorded $1.71 in EPS, which was down 29%, driven by higher operating costs, largely due to inflation as well as higher interest expense. For additional context, our prior year period was a record second quarter in sales, EBITDA and EPS. We estimate that we have absorbed $90 million in higher supply chain, freight, tariff and other input costs in the first 2 quarters of FY '23 as compared to the same period last year. However, we are not anticipating any benefits from lower supply chain costs this fiscal year. It will likely be a benefit next year in FY '24. That said, we continue to execute our long-term strategy of investing for future growth and expanding profitability. We have now successfully closed 8 acquisitions with leading brands that have increased our TAM, broadened and deepened our platforms and further diversified our leading brand portfolio to serve -- to best serve outdoor consumers across a variety of activities. This strong execution is a result of a dedicated and resilient team with the expertise to navigate a challenging macroeconomic environment and the nimbleness to adjust quickly. Before we move on, I want to take a moment to thank Sudhanshu, and wish him the best of luck in his next role. He has been a valuable part of our team. And during his tenure, we have significantly improved our financial foundation. In the last 2.5 years, Sudhanshu is instrumental in refinancing debt with better…

Thank you, Chris, and good morning, everyone. I'd like to echo Chris' sentiment that we are bullish on the outdoor industry despite near-term macroeconomic conditions that have eroded consumer confidence and pressured performance across the economy. We always understood that the elevated purchase patterns of the last 2.5 years would normalize. I'm pleased to report we have seen a more gradual return to normalization and a sustained larger base of new and core users. Through our multi-brand strategy, more profitable product mix and disciplined approach, we are well positioned to drive sustainable earnings throughout all phases of the ammo cycle. For the quarter, sales for the Sporting Products segment were down 4% due to shipment timing that we mentioned in quarter 1, which resulted in low finished goods inventory heading into quarter 2. Our profitability was pressured by increases in freight and other commodity costs with some of those challenges offset by strong demand and pricing. However, we continue to perform at substantially higher sales and profitability than we did in the year prior to the pandemic. I'd like to highlight 4 areas that showcase our ability to drive sustainable earnings through a normalized ammo cycle and how we are positioned to thrive now and into the future. Number one, M&A. Our M&A strategy has positioned us for long-term success. Our acquisitions of Remington and Hevi-Shot have allowed us to replace over $185 million of ammo sales from the Lake City Army Ammunition Plant that we had to sell at or below cost. Remington and Hevi-Shot now give us close to $350 million in revenue that is both higher margin and in more stable categories. These 2 brands are leaders in rifle and shock an shell hunting loads, which have proven to be much less price sensitive overall. And in…

Thank you, Jason, and hello, everyone. Before I begin, I want to take a moment to say thank you to Chris and the team. My time here has been a great experience. I am proud of what we have accomplished with a strong leadership team and I look forward to seeing what you will do next. There is no doubt that Vista Outdoor is set up for long-term success. Now let's move on to our results. My comments today will focus on adjusted results compared to the prior year period, unless noted otherwise. Both as reported and adjusted results are included in our earnings release and web slides and can be found on our website. Turning to Slide 14. We posted another strong quarter of sales while margins were impacted by higher input costs as well as higher freight and labor costs. For the quarter, sales were $782 million, up 0.4%, driven by acquisitions, which more than offset a low double-digit organic sales decline. As compared to Q2 fiscal year '20 sales increased 76%. Recall that our fiscal year '20 represents the most recent pre-pandemic year as our fiscal year ends in March. Gross profit decreased 11% to $266 million, and gross margin contracted 438 basis points to 34% and driven by higher commodity freight and other input costs, which were partially offset by price increases. EBITDA decreased 22% to approximately $164 million. EBITDA margin decreased 611 basis points to 21%, which remains very strong. Also recall that in Q2 fiscal year '22, we reported record EBITDA margin, driven in part by favorable hedges, lowered input and freight costs and higher sell-in due to low channel inventory. As compared to quarter 2 fiscal year '20, our EBITDA margin of 21% last quarter or Q2 reflects margin expansion of approximately 1,500…

Thank you, Sudhanshu. Before we open it up to questions, I wanted to reiterate our key themes that you've heard from myself, Jason and Sudhanshu today. Through our strategic transformation over the last 5 years, we have built a resilient company that can thrive in all economic cycles. We have strong underlying fundamentals, a solid balance sheet and robust free cash flow and we are taking appropriate actions to mitigate risks in this challenging environment. To do so, we are managing inventory controlling and reducing costs and reallocating resources for future growth as well as optimizing our product offerings to drive higher productivity. We are building a company and innovating new products for the next generation to enable them to continue to enjoy the mental and physical and health and wellness that the outdoors provides. Thank you, operator. Let's now open it up for questions.

[Operator Instructions] Our first question comes from Scott Stember from MKM Partners.

Can we maybe flesh out the Outdoor Products side. It sounds like, Chris, you mentioned that some of the mid-tier pricing items are starting to show some weakness. Can you maybe just give a little bit more detail and maybe by subsegment?

Sure. And so Scott, maybe it's best to frame it up is kind of what's the same versus what has changed when we talked last 90 days ago. So what's the same as outdoor accessories continues to be challenged. And we talked about particularly the Bushnell brand of family of products being challenged with the lower price point categories because of the inflationary effects. Same with outdoor opening price point mass elements, particularly Bell Helmets at mass retail. Outdoor cooking, as you've seen from some of the competitors like Traeger and Weber, our Camp Chef business continues to be challenged with a glut of inventory in the marketplace. And overall, there just continues to be an overhang of inventory that our retailers are working through. So that is largely the same as the last quarter and hasn't changed much. What has changed though is international has softened a bit, right? So with the U.S. dollar strengthening, we've seen it tougher on the international front. With the Russian-Ukraine war still raging, Europe is virtually at its knees, and it's a tougher environment. And we expected a little bit more sell-through and vibrancy with the fall and early holiday promotions, and that hasn't come through quite as we expected.

Got it. And then maybe talk about the $90 million of headwinds that you talked about for the first half of the year. How much was it in this quarter? And maybe talk about your ability to put through price to mitigate that or cut cost to mitigate that?

Yes. So Scott, what we said was the $90 million is a year-to-date number, and we expect that to continue in the back half. So you're looking at about $180 million of headwind. Much of that is freight increases and much of that is just inflationary input material costs that have had a rise. Now what we have seen to mitigate this is freight rates are coming down. And we're negotiating vigorously with our suppliers and have gotten price reductions. and some allowances, if you will. But all of these benefits roll through our balance sheet. So we won't see this until our next fiscal year. So it should provide a bit of a tailwind for us next year. We continue to take price where we're able to, particularly in some of our higher price point products. We just announced this week another price increase in our sporting products business.

Got it. And just last question on long-term debt or just debt in general. Obviously, you have a lot more exposure to variable rates now. Can you talk about your thoughts about your debt structure closing out the year? And it sounds like debt repayment is a priority right now.

Yes. Sudhanshu, do you want to take that?

Yes, Scott. So our debt is roughly $1.25 billion by end of this quarter and it's 1.7x levered. We're generating a lot of cash. We generated more than close to $200 million cash in the first half. And based on our guidance, we will generate a lot more cash in second half too. Because of the spin, we said we don't want to do more M&A and just pay down debt. So by year-end, we should be roughly $1.1 billion in debt, if you just look at our EBITDA and free cash flow $500 million of that is unsecured notes. And rest is variable. You're seeing that impact on our EPS by higher interest costs in second half. So that's the plan. We have -- we will continue to generate more cash, and our goal is to pay down debt, but we are very happy with where we are in terms of leverage is 1.7x is well within our range of 1 to 2x.

We now turn to Eric Wold from B. Riley Securities.

Thank you. Jason, a couple of questions, I guess, on your side, I guess, given that with the guidance change, you guys did not reduce guidance -- revenue guidance from the Sporting Products segment. So we'll kind of hold in there a bit. You know that ammo demand is starting to normalize in some caliber. Just maybe kind of help us understand what you mean by normalized. Is that it's flattening at L&A levels, it's declining back to pre-pandemic levels or something else? Just trying to get a better sense of demand from your standpoint as inventory levels improve? And then secondly, I know it's been difficult staffing out or ramping up production and staffing at some of the facilities given maybe the undesirable kind of overnight weekend shifts the new hires we're facing. I guess if you're starting to see trends normalize. Are you still looking to ramp production ramp hiring in those facilities?

Eric. Thanks for the question. As far as guidance in the second half, we guided to about $400 million a quarter. That's due to what we continue to see as normalization in 9-millimeter. And also, as we said, we're out of the Lake City contract as well. Now our -- we are very bullish on replacing that business with Remington and Hevi-Shot. So I think where we have the longest runway is where our back orders are the longest, which is certainly shot and shell, rimfire and big game hunting rifle. So we love the backorder position with the mix that we see. And as far as the labor markets, we're pleased to announce that the labor market has eased a little bit. Our attrition is lower than it was in the first half. So that will help in the out quarters and into fiscal year '24, get the production up in the markets that not only are the healthiest, but also the better margins for us. So we like the trajectory of labor, what we see in Arkansas and Idaho.

Eric, I'd add to that, too, that when you look at our backlog, it's still really, really healthy. It's 5x more than what a historical backlog level would be. So the question about are we looking at opportunities to potentially expand capacity. We continue to do that. And what Jason and his team have done has really driven efficiencies. And although Remington has been a spectacular acquisition for us, there's still a lot of room to improve the efficiencies to the level of other facilities. That in itself will help us continue to reduce the backlog and maybe exceed sales targets.

Perfect. And then just last kind of follow-up question, not sure if you want to take it Chris or Sudhanshu. I guess on the 150 basis points at the midpoint, kind of reduction in adjusted EBITDA margins for the full year, there always kind of break down the major pieces of that fixed cost leverage, additional inflation or kind of input cost versus what you previously thought? Maybe the biggest pieces of that 150 bids.

I mean -- yes, Sudhanshu. go ahead, as you can set.

Eric, there are 2 things. We talked about that operating leverage in ammunition business, our porting product business is down. We still have a great margin there, but we were expecting lot more from Remington. So you're losing a little bit there. And outdoor product organic growth, you can see it's -- we are not growing as much. We have been declining right now based on our numbers. So we are losing some operating leverage there. And as Chris mentioned, we are seeing the benefits in freight cost and all, but we will see those benefiting us in next year, not the second half.

Yes. So I would add to that. It largely is, Eric, the $90 million that will continue into the second half. It's the input cost, and it's the freight rates, which we are working hard to offset. The -- outside of our ammunition business, much of our costs are variable other than obviously our G&A. So we don't have the same absorption issues, if you will, that we might have the ammunition business.

We now turn to Anna Glaessgen from Jefferies.

I guess, first, I'd like to unpack the implied back half guidance a little bit. What is this assuming in terms of Outdoor Products organic growth versus the contribution from M&A?

Yes. So Anna, what we are guiding to is a slightly better back half than the second quarter for Outdoor Products in total, which would imply with the contributions of Fox and Simms, our organic business is going to continue to be down kind of in that low 20s like it was in the second quarter.

Got it. And on the -- go ahead.

No, go ahead, Anna, Go ahead.

Okay. And then on the adjusted EBITDA margin change, is that mostly reflective of the top line change to Outdoor Products? Or is that assuming a change in sporting products as well?

Anna, this is Sudhanshu. It's both. As you can see, the ammo business is also slightly down, but we predicted last time for the quarter. We did better in Q2 and obviously, Outdoor Product, we're also losing operating leverage. So it's, I would say, 50-50.

Got it. And then you noted retailers are grappling with some excess inventory in certain categories. How are they adjusting to this? Are they increasing promotionality? Or is it concentrated to certain categories? And where do you see us, what inning are we in, in terms of rightsizing field inventories?

It's a really good question, Anna. It's something that we wrestle with every day. And you look at some of our bigger retailers and back in the COVID days, they are coming out with mantras of we're not going backwards, we're giving no ground. And so they overbought to make sure that they could manage the demand that they were seeing. And so we're living with that today. We see a more promotional environment. Now we do see positive POS pockets and trends with some of the retailers that are winning out there. And so it's hard to say what inning we're in. We believe that it will continue to persist, obviously, through our back half here. But we we're of the belief that it's more of an inflationary environment than it is a recessionary environment. We believe that the consumer is still relatively healthy. Obviously, with the inflation, their foregoing purchases of some of our discretionary products to withstand the increases in fuel, the increases in rent or homeownership and food and what have you. And we also see a shift to more service-based goods like travel and entertainment as COVID has opened up. So we see the POS trends likely to improve as we move forward, although we're being pretty pessimistic in our guidance for the full year, as you've seen, but we still are very optimistic about the underlying trends.

Our next question comes from Matt Koranda from ROTH Capital.

Just maybe following up on that one, whoever can take this one. But in terms of POS trends in your Outdoor Products businesses, could you just highlight for us which of our products businesses are you still seeing strength in at POS versus those where you're seeing sort of relative weakness. Obviously, we -- I guess we can surmise that the other accessories business is seeing pretty strong headwinds in terms of POS, but where are the other elements of weakness versus strength with NOP?

Yes, it's a good question, Matt. And where we're seeing strength in our higher-end brands. So if you look at 0 bike and particularly snow, where we had an absolute banner year. You think of our golf platforms, Bushnell Golf, Foresight Sports having a good year. Stone Glacier, although it's small, is on pace to continue to double its business as is our QuietKat business. You look at our sporting products brands, obviously, Federal Remington, Hevi-Shot are doing well. And then the new acquisitions that we've just closed on the last 90 days with Simms Fishing and Fox Racing both iconic brands that we expect to do well. So there are some brands in some categories that you'd expect in a diversified portfolio like ours that are doing very, very well. But as we've noted in our outdoor accessories being down 36% in the second quarter, that's tough to overcome. And the mass helmets, interestingly, we continue to take share. In fact, we just want a line review at our biggest customer in mass helmets, won't affect us this year, but we fully expect it to contribute to next year. So -- not all is doom and gloom. I mean we're excited about a lot of our categories and products as we look forward.

Okay. And then just on supporting products, Jason, with normalized demand, what is wholesale pricing like in your key calibers? If you could just kind of clarify for us how that's trending year-to-date or year-over-year, however you want to characterize it. And then you mentioned sort of you're back to kind of a better level of staffing at the production facilities. What does that mean for the cadence of revenue for the rest of this year? And then kind of maybe if you could comment into even the next several quarters, that would be very helpful for modeling.

Yes. On the wholesale pricing, it's been pretty stable for the most part. We are taking price. We are putting a price increase out to the market again in some categories today, categories where we continue to see inflationary pressures such as shotshell. So as far as wholesale pricing, it's been stable for the last several quarters. So we like what we see as far as the pricing at the wholesale level. And as far as in the out quarters, we remain really, really bullish. We know that the labor market is easing, which will allow us to get some backorders cleared in the very profitable categories such as big game rifle at Remington and Hevi-Shot our labor market has really kind of held us back to getting to that $400 million that we want at Remington. So for the next couple of quarters, our labor market is we're allowed to focus more on the categories that we've been wanting to focus on so we can get more demand in the categories to help offset maybe some normalization in 9-millimeter. If 9-millimeter normalizes in price in our back pocket as we have more profitable categories and the labor market will allow us to capture that.

We now turn to Mark Smith from Lake Street Capital Markets.

I wanted to dig in just a little bit more in the outdoor accessories space. As we think about that, is there any trends to call out maybe in hunting versus shooting in 1 category that's maybe stronger or weaker than the other?

Mark, it's unfortunately weak across the board. I mean everything from optics to laser sighting equipment to trigger sticks. I'm just thinking across trail cams, across our entire portfolio, we're coming off of just 2 incredible years where people got out to recreate. They really embraced hunting and shooting. We've entered in millions and millions of new consumers and into the hunting and shooting space, and they bought a lot. And they're still recreating. So they're changing their purchase habits to stuff that you'd expect them to change to, right, with fuel increases and food increases and just general inflation. So we see our retailers, I think, largely are dealing well with it. And so we're adjusting as well as we look at our promotional calendar as we look at our new product introductions focused on areas where we think there's going to be pockets of growth.

Okay. And then maybe for Jason, as we think about sporting products, the ammunition business, is any commodities or other pressures that we're seeing in ammo?

We still face some pressures, Mark, in a few categories. brass is came down. But I mean by no means do we think copper at $3.40 as a deal. So it's still historically high. Our biggest one that we watch very closely as we mentioned last quarter, is freight. Freight is still a significant contributor to the gross margin degradation that you saw in the quarter. So it's -- while it's leveled out, if you will, there are some variable pockets that remain historically high.

Okay. Then similarly, as we look at across retail, still seeing more empty spots within shotshell. What's kind of your outlook for that business and then your ability to kind of get the components to build out that shotgun shell business more?

Yes. The shotshell market is still extremely backordered with the labor market that we're seeing at Remington will help fill some of that void where we haven't been able to fill that void in the last 24 months. component availability, we're fine on that category. So I expect us to have a very, very long runway in shotgun shells for the next year or so. We have -- we won't be able to fill that demand.

Our next question comes from Jim Chartier from Monness, Crespi and Hardt.

You talked a little bit about POS strikes, but could you give us a sense of what the overall POS for outdoor products organically look like in second quarter and what the delta was versus the sell-in?

Jim, we don't take all the broad categories that we're in and aggregate them into a single POS number.

Okay. I guess, you'll -- what are you assuming in terms of kind of sell-in versus sellout then in the back half of the year? And when do you think inventory levels at retail will be at an appropriate level?

Well, Jim, our guidance, as I've said, is we expect our organic growth to be down low negative 20s and POS certainly isn't down that much. So we're going to be continuing to help our retailers bleed their inventory down. And we expect over the next 180 days, we're going to take a big chunk of inventory out of our retail locations.

Great. And then for Jason, you mentioned the labor market holding you back from that $400 million run rate for Remington. Can you give a sense of how far off that run rate are you today?

Jim, we don't want to break that out. It's -- when we acquired the company, the historical sales were around 400, we certainly will get to that $400 million, depends on attrition rates and market demand. But we are very, very happy with what we're seeing out of Lonoke. We just know that we can still grab pretty significant revenue and EBIT out of that facility.

Okay. And then what is the current delta between Remington and legacy ammo margins look like today? And then how long will it take you to close that gap? And what are the biggest initiatives to get there?

We certainly -- we're not going to break that out by legacy versus Remington. Just -- it's safe to say that it's a fairly good delta where Remington is at today. Once our employees get trained better, our efficiencies will come up to where we are in the legacy facilities and trust me, that's a lot of dollars that we're going to get to the bottom line when we get a slower attrition rate, better trained staff. Every day is getting better. And as we said in our opening remarks, we have a multiyear journey to get Lonoke to be efficient like our other 2 facilities, and we are putting the capital in that facility to grab cost out of that facility. So we love the trajectory of profitability at Remington. It can only go up from here.

Yes, that finishes out the Q&A. And I just wanted to make a -- yes, I just want to make a closing remark for our investors and analysts that are on the call. we remain very optimistic on the future of our business. And we certainly recognize, and it's in our guidance that we're in a challenging economy that will persist at least through the next couple of quarters. However, as I mentioned before, we view this as largely inflationary and less recessionary as our consumers are still relatively healthy and well employed. Now in our guidance, we're reflecting $180 million of inflationary cost headwind and further retail corrections. We've assumed that we're going to be down in kind of that 20% in organic outdoor products with POS at our retailers being much better than that to help reduce the inventory levels, which we think is the prudent thing to do. Now despite all this, we're guiding at the midpoint of $3.1 million in sales. You think back to 30 months ago, to put this in perspective, we closed fiscal '20 at $1.7 billion, almost double this year. That fiscal year, 30 months ago, we finished $112 million of EBITDA. We're going to finish at our midpoint, we're guiding to 6x that at $620 million of EBITDA. We were 4.5x leverage then. We're 1.5x leverage today. So we're a completely different company where we've got a big -- much bigger TAMs that we're participating in. We've got stronger brands. We've got a very experienced team, and we're a more stable company. So I know the doomers and gloomers out there may find this hard to believe, but with the addition of Fox Racing and Simms Fishing, I believe we're an even stronger company than we were 90 days ago. So a lot to look forward to, and we appreciate everybody's continued support.

Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.