Hello, everyone, and welcome to the Q3 FY '23 Vista Outdoor Earnings Conference Call. My name is Nadia, and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Tyler Lindwall, Vice President, Corporate Development and Treasury and Interim Vice President, Investor Relations to begin. Tyler, please go ahead.

Thank you, operator, and good morning to everyone joining us for our third quarter fiscal year 2023 earnings call. With me this morning is Gary McArthur, Interim Chief Executive Officer; Jason Vanderbrink, President, Sporting Products; and Andy Keegan, Vice President and Interim 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 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. Gary, I'll turn it over to you.

Thank you, Tyler. We appreciate all of you joining us this morning. Before we discuss our third quarter results, I would like to take a moment to address the CEO of transition that we announced today. Chris Metz has agreed to resign as CEO and as a Director at the request of the Board, and I have been appointed to serve as interim CEO effective immediately. Chris' resignation was based on the Board's loss of confidence in his leadership for reasons not involving financial reporting or internal controls. On behalf of the entire Board, I appreciate Chris's many contributions to Vista Outdoor and wish him well in his next endeavor. We've entered into an agreement with Chris to ensure access to his institutional knowledge, and I look forward to working with them to ensure a seamless transition. By the way of a brief introduction, I have served as a member of Vista Outdoor's Board of Directors since 2015. Previously, I served as CFO of CH2M Hill from 2014 to 2017, and before that, spent more than 15 years at Harris Corporation, including serving as its CFO for 8 years. Together with my fellow directors, I have been deeply involved in the oversight and execution of Vista Outdoor strategy, including the planned separation of our Outdoor and Sporting Products segments. I will forward to serving as interim CEO at this pivotal time in Vista Outdoor's history. We have a clear strategic path and remain on track to complete the separation in calendar year 2023, which I'll cover in more detail later in my remarks. I am confident that we will continue to capitalize on our strong momentum with Vista Outdoor's unmatched portfolio of iconic brands, resilient operating model and strong balance sheet. We are very well positioned to create compelling value…

Thank you, Gary, and good morning, everyone. Sporting Products is stronger today in terms of brands, operations and share of wallet than we've ever been. There are 6 key themes that demonstrate this strength. Number one, the industry is very healthy. During 2022, the NICS background check system processed more than 1 million checks every single month for a total yearly increase of 24% over 2019; number two, our operational footprint across 4 factories is driving cost downward while enabling a culture of ingenuity, collaboration and self-determination. We are doing this while also improving our mix to help offset higher input costs; number three, our dynamic and balanced portfolio. The acquisition of Remington in 2020 brought 2 of the largest American ammunition brands under the same company, which has improved the market stability even during times of intense competition from imports; number four, our new product pipeline is robust with collaboration across brands that provides high-quality performance ammunition to our dedicated consumers, law enforcement and the military; number five, our customers are rationalizing vendors and selecting us to fulfill their needs, which provides us with more share of the shelf; number six, while the market continues to normalize in a few categories, we are delivering at near-record profit levels. Moving to the quarter, we have not been immune from the macro pressures Gary outlined. For the quarter, sales for the segment were down 13%, driven by market normalization and 9-millimeter and our planned exit from the Lake City Army ammunition contract. In addition, rising costs, higher interest rates and declining macro consumer confidence have affected history sales. We also know the ammunition market is cyclical and that the elevated patterns seen during the pandemic would not last ever. Even with these pressures, we have demonstrated that our strategy, multi-brand offerings…

Thank you, Jason, and hello, everyone. My comments today will focus on adjusted results compared to the prior year period, unless otherwise noted. Both as reported and adjusted results are included in our earnings release and website and can be found on our website. Turning to Slide 15. We posted another solid quarter of sales, including record Outdoor Product sales and Sporting Product sales that were consistent with our guidance of approximately $400 million per quarter. Q3 margins were impacted by lower volumes in the organic business, increased promotional activity, unfavorable mix and higher input costs, including freight and commodities. Overall, as Gary said, we are operating from a position of strength. We are holding our share of wallet and seeing strong industry participation trends. Our balance sheet is healthy and our quarterly results are in line with what we expected. For the third quarter, total sales were $755 million, down 5%, driven by a double-digit decline in organic sales across several categories, partially offset by our Golf business and recent acquisition. Compared with Q3 FY '20, total sales are up 78%. Recall that our FY '20 represents the most recent pre-pandemic year at our fiscal year-end in March. Throughout the quarter, we've been methodical with our approach to promotional activity, having walked away from opportunities to sell discounted products to retailers. Some sales may have been left on the table, but the decision otherwise kept a healthier margin profile and protected our brand images without [ exasperating ] the higher retail inventory levels. Gross profit decreased 14%, $244 million and gross margin contracted 327 basis points to 32.3%, primarily due to increased promotional activity, mix shifts and higher input costs, including freight and commodities. EBITDA decreased 26% to approximately $137 million. EBITDA margin decreased 522 basis points to 18.1%,…

[Operator Instructions] And our first question today go to Eric Wold of B. Riley Securities.

Two questions, 1 for each of the 2 segments. I guess, first off, you mentioned that you did increase prices on some of the ammo categories in response to some inflationary pressures. I guess, in general, can you talk about the current ammo pricing environment at retail and how sustainable you think those higher prices are kind of heading through '23 and '24, kind of what are the long-term gross margin expectations for the segment given those pricing expectations?

Eric, this is Jason. What we're seeing on retail pricing is we are -- it depends on the category. We mentioned 9-millimeter small rifle. You're obviously seeing the retail prices come down in the market. We took pricing action on some categories where we thought we could offset some margin pressures due to the commodities. Those pricing actions have stuck, and we expect those to stick all year long. As far as the overall pricing category at retail, we're pretty confident with what we see as input costs continue to go up. I think what we see at the shelf today is going to hold for '23 given anything that we see right now tells us that we certainly don't expect it to go down any.

And the gross margin expectations kind of longer term?

As we laid out at our Investor Day, we're still bullish on mid-20 EBITDA margins. We think that's going to be the normalization of -- the market normalizing, it's still going to be in the mid-20 EBITDA for Sporting Products.

Got it. And then just a quick question on the Outdoor Product side. Can you talk about kind of what you're seeing with the point of sale -- the POS patterns at retail and then maybe within your own e-commerce platform that gives you some indication of kind of the health and consumer where the consumer is. Just trying to get a sense of if you are started -- as you do start shipping more product into retailers kind of towards a more normalized restocking? Just trying to get a sense of how do you think that inventory would sell through in this environment?

Yes. I appreciate that, Eric. This is Andy. So what we're seeing in this is that the POS is down year-over-year at retailers right now. But the sell-in is down further than the POS. And we feel the demand is strong in our Outdoor Products. As we mentioned, our actual -- our site are actually up over that time period. And so we're -- we do see that demand is there. We're seeing stock out on shelves in our Outdoor Products. So as retailers do start to normalize their purchasing, which we expect over the coming quarters that they are going to do that, that we'll see that POS start to increase as we are missing some of the stock-outs in our sell-in will certainly go up as well. So we're bullish on the -- what will happen once retailers are starting to repurchase.

And the next question goes to Mark Smith of Lake Street.

First off, I just wanted to ask a question on the ammo side of the business. I don't know if you guys can quantify or talk about maybe the impact in the quarter from back and away from some of the Lake City Ammo.

Mark, this is Jason. We don't quantify Lake City. I think we've released publicly previous fiscal years, sales peaked at around $180 million a year, when we had that contract years ago. So as far as we're going to quantify Lake City.

Okay. And then looking at the other side of the business, I'm just curious, any other insights you can give us on Action Sports business, and in particular, the Fox business, is that hitting internal expectations, some of the slowdown that we've seen in Action Sports, is that impacting Fox as well any additional insights there would be great.

Yes, Mark, it's a great question. So we -- in the quarter, sales for Fox were $67 million. They are experiencing some of the pressures that the Action Sports business is. They do have a fairly large international presence, which is being affected as well from the U.S. currency adjustments that we're seeing. But that being said, I'd say we have optimism with the synergies that we're already experiencing between Fox and Bell, they're meeting our EBITDA expectations, and we see actually additional opportunities in those arenas that we've identified. So we are very pleased with the current results, given some of the macroeconomic pressures. The sales are little bit lower along with the similar Action Sports, but not to the same extent as their demographic and who they sell to is not that opening price point. So they're not nearly at the reduction that you're seeing given our mass business that we have in the Bell area.

Perfect. And just confirming that was $67 million, Andy?

Yes, $67 million.

And the next question goes to Anna Glaessgen of Jefferies.

On the Outdoor Products business, thanks for quantifying the Fox Racing, but could you quantify overall the impact from acquisitions on sales and EBITDA?

I can't give you the exact amount. What I can say is that the -- the organic decline was in line with what we expected from last quarter, which was in that 20-ish percent range. So it was in line with what we had expected it to come in at overall.

Got it. And then I appreciate the need for some promotions as the channel is cleared, particularly in the Outdoor Products business. I guess when are you expecting to get to more of a normalized promotional environment in those end markets?

Anna, this is Gary. Let me speak to that. I mean, I think as most of the world, we're expecting a tougher first half of the year and with expectations that we'll see a better environment that retailers looking into the second half. Maybe Andy could add a little more to that.

I think you're exactly right that we -- certainly, as we go through Q4, we do expect that the promotional environment is going to continue and you'll start to see it ease but still be elevated and start clearing into the Q1, and then we'll start to clear up. It aligns with that kind of clearing the retailer inventories through those at the same period. As we said in the coming quarters, we expect that to ease and that will help us facilitate less promotional activity.

Got it. And then one more. Any thoughts to when the Form 10 would be publicly available?

What I can say on that is that we are working with the SEC to clear our -- any questions and concerns that they have. At the end of the quarter, we will be providing the SEC 9-month performance that couldn't be provided until the quarter ended. We would then be working with them on any questions or comments related to that. But I just assure you we're working through this as quickly as we can. I can't give you a definite time, but it is top of mind for sure, and we're working through it.

And the next question go to Matt Koranda of ROTH MKM.

Just on the Sporting Products segment, any way to quantify or think about the volume price split and the 13% decline within the quarter? I would assume on a blended pricing basis, you were up. So does that imply volume down more than the 13%, then how does that feed into sort of the full year outlook that you provided, it looks like maybe a little bit more deterioration in top line in the fourth quarter, but how should we think about volume versus price there?

Well, let me have Jason start, and then maybe Andy will add a little bit to that.

Matt. As far as the question directly, it was mostly volume driven, due to what we had talked about in the opening remarks. And then as far as the guidance that we had given you last quarter, $400 million for the third quarter, $400 million for the fourth quarter, we're pretty comfortable with that guidance range.

Andy, anything you want to add?

Well, I think net-net price was actually up for the -- there are certain categories that -- as we talked about, that pricing has been under pressure. But versus last year, net-net price was actually up. So the decline was volume offset by price going up. Now there's mix in there that drive some price some pressure on that. But overall, I would say price is up.

Okay. Great. And then on the Outdoor Product side, can you just highlight more specifically where you've seen strength in the DTC performance? You guys have mentioned that a couple of times, both in the prepared remarks and the Q&A. And to clarify also, if you've seen some positive pockets as well, if you could call out any of those on a year-over-year basis.

Yes. I can touch on it, obviously, we've seen a lot of good DTC experience at Simms. We've had pockets of great performance in snow as well. Maybe, Andy, you can add some more details...

Yes. In general, I would say, across the board, the majority of the sites did experience better results. There were ones that are under pressure, but they align somewhat with what we're seeing in the POS that you're talking to, the hunt/shoot category, which is down the most overall. That one did experience continued pressures. But what I think is a highlight is it's less than what we're seeing in our wholesale in the retail channels themselves. So though it is down, it's down less, which for us gives us indications, as I said earlier, that the demand is there and that we'll see it come back as we continue to move through some of the pressures we're seeing in our wholesale channels.

And our final question today goes you to Ryan Sundby of William Blair.

Gary, Andy, I think you both mentioned retailer inventories, it's high in total, but then you've had some other categories that are showing stock-outs. Could you give us a rough breakdown of what percentage of the portfolio is over inventory versus correct versus under at retail? And then I think you mentioned resellers taking in the next couple of quarters to normalize their ordering patterns. Is that across the board? Or is that really just for a couple of specific categories?

Let me have Andy speak to that.

Yes, Ryan. It's a great question. I'm glad we can help clarify here. So first thing I would say is, in general, we actually feel our inventories are actually in fairly good shape. There is pockets that are a little bit over inventory, but not on the whole, it's actually fairly good shape. When we say retailer inventory, we're talking about their total inventory, not just our products, but all inventory they're carrying. And what we see is, and it might be by category that if they're heavy in all in the category of a total, they may not be purchasing anything in that category. And so we're seeing that happening right now. And so we're trying to work through that with them. Just as we said, we had stock out in certain areas, and they're just saying, well, others aren't stocked out. So until we can clear through that, that is causing some pressure on us. So our inventories -- where we are heavy is some of the areas that we've talked about. We look at outdoor cooking has a little bit heavier inventory right now. But on the total, it's actually in fairly good shape, and we just think that the retailers are going to move through these inventories and as they get through their fiscal year-end, we'll start seeing those -- them be able to move and reorder at a more consistent basis.

Got it. That's really helpful. And then just on the like we are seeking out either more discounts or promotions, can you talk a little more about how widespread you're seeing that? Again, is that across the portfolio? Is it in specific categories? And maybe how does that look for your premium items versus your opening price points?

That -- so on the premium, I think it is split fairly well is that our premium items aren't seeing the same level discount. We talked about Snow Glacier not having through the holiday season. They didn't -- they weren't seeing any discounts. So some of our top end products aren't seeing the same levels of discounting. The heavy -- what we were talking about is during the holiday season, what we did note, and we noted this on our sites and in the channels is -- the -- without a discount on kind of the mid- to low-price point items, you weren't seeing the activity. The buyers would look, but they wouldn't purchase. They -- as we go forward, that is something that we're monitoring. We do think that promotions will be necessary, especially in the retail channels to move through the inventories maybe less so on our DTC sites to try to move through that. But it is going to continue. We are -- but it is more so on the lower end price points versus the upper.

We have no further questions. I'll hand back to Gary for any closing remarks.

Okay. Let me make a few comments. As you're aware, this is a great company, and we're going to be laser focused on making it even better. We have great employees who work really hard. I am very fortunate to be surrounded by a deep talented and experienced management team, several of which will be included in the search for the Vista Outdoor CEO position. We have 41 iconic brands that we are going to work hard to even better leverage. We had a solid quarter, but we're aware there's work to be done. We are 100% committed to completing the spin in this calendar year, and we'll be working hard towards that. And I just want to leave with you that we are very optimistic about the future. It's bright. We're ensuring you that we'll be shareholder rewarding and look forward to talking to you further. Thanks for your time today on the call.

Thank you. This now concludes today's call. Thank you so much for joining. You may now disconnect your lines.