Vista Outdoor Inc.

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. If you would like to register a question during the presentation, you may do so by pressing star followed by one on your telephone keypad. I would now like to hand over to our host, Shelley 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 Outdoors 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 two sales increased to 782 million, with direct-to-consumer sales up approximately 65%. Adjusted EBITDA margins of 21% remain 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 two quarters of FY23, 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 FY24. That said, we continue to execute our long-term strategy of investing for future growth and expanding profitability. We have now successfully closed eight acquisitions with leading brands that have increased our TAM, broadened and deepened our platforms, and further diversified our leading brand portfolio 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 two and a half years, Sudhanshu was instrumental in refinancing debt with better terms and rates, as well as debt rating upgrades and completing our newest debt issuance. Thank you, Sudhanshu. I'm also excited for Andy Keegan, who will be our interim CFO and is joining us on our call today. Andy has extensive finance, accounting, and leadership experience from his time at Vista Outdoor, its predecessor, and at Deloitte. This is a great opportunity for Andy, and I'm confident that he will do well in this interim role. Sudhanshi and Andy have worked very closely together over the last two-plus years, and Andy has been a part of most of our investor meetings, conferences, and earnings preparations. I know many of you have met him, and we look forward to your continued leadership, Andy. Now, let's turn to our key themes today. Following the call, I want you to walk away with three key themes that illustrate how Vista Outdoors' business is healthier and more profitable than ever, and why we believe that our performance is more sustainable than in pre-pandemic years. Those key themes are, one, the strong underlying fundamentals of our two segments, outdoor products and sporting products. Two, our solid balance sheet and robust free cash flow. And three, the actions we are taking to mitigate risks. in this dynamic global macroeconomic and geopolitical environment. We have the right team to win and believe these actions will position us to thrive in the future. First, let's discuss the strong underlying fundamentals, starting with sporting products. We acquired Remington in Q3 FY20, the third largest U.S. ammunition manufacturer, driving sales from 15 million at its inception during the first quarter of ownership, as we restarted the factory to approximately 350 million in annual sales today. We also acquired the leading non-lead shot shell manufacturer, Heavyshot, in Q4 FY20. In FY21 and FY22, we leveraged these acquisitions to refocus our product mix on less volatile and more profitable products, such as hunting loads and shot shells. Prior to these strategic acquisitions, Our ammunition product mix was heavily weighted towards 5.56, 2.23 small rifle calibers that are primarily manufactured at the Lake City Army Ammunition Plant. Our previous supply agreements with Lake City required minimum unit orders regardless of market conditions, which often resulted in us being forced to sell that product at a loss. This supply agreement ended on October 1st. Today, whereas 5.56-223 calibers are now experiencing slowing demand and accumulating channel inventory, we continue to see high demand and low channel inventory in hunting, shot shell, and other categories where our ammunition business is now by far the leading player in the market. With our sporting product business now focused on categories that are less politically driven and where demand is driven primarily by usage rather than stockpiling, we expect that our business will be able to produce steadier, more profitable results in coming years than were possible before we made the strategic decisions to refocus our product mix. Moreover, the Remington and HeavyShot acquisitions have given us two additional factories, allowing us to capture synergies through low-cost routing. We also expect to see meaningful profitability gains in the future as we bring the Remington facility up to the efficiency standards of our legacy facilities in Minnesota and Idaho. I'll let Jason dive deeper into this in a moment. Turning to our strong underlying fundamentals in outdoor products. In FY23, we expect our annual revenues to grow over 50% as compared to FY20 or pre-pandemic, driven by the expansion of our brand portfolio and by organic growth from new product innovation, market share gains, and implementing D2C capabilities. In addition to organic growth, we also invested in six acquisitions in the last two years that we expect will drive strong returns long term. Importantly, each of these acquisitions expands our TAM and contributes higher than average margins. For comparison, our FY20 outdoor product sales were approximately $880 million across 27 brands. In FY23, we expect outdoor product sales to be approximately $1.35 billion across 34 brands. Note that we have included the outdoor accessories business in our FY20 results for a direct comparison over these periods. Our family of leading outdoor products brands now contains 10 power brands, each contributing more than $100 million in annual sales. This gives us the strongest and most stable family of brands enabling us to better manage economic downturns. Adjusted EBITDA margins have also improved nearly 400 basis points year-to-date FY23 as compared to the same period in FY20, despite the significant cost headwinds over the last year. B2C sales have increased over 400% in Q2 FY23 as compared to Q2 FY20. Despite this growth, we continue to be under-indexed and have significant room to grow as we further improve our capabilities. Recall that when I came to VISTA five years ago, we didn't have enterprise-wide D2C capabilities at that time. Our supply chain center of excellence has also been a significant benefit to both our sporting products and outdoor product segments by using our experienced team to leverage our scale to improve pricing and service levels. This was clearly demonstrated in our ability to have minimal disruptions to supply over the last two years. For example, we were able to ramp up brass and other commodity inputs with rising demand by securing multiple supplier options. We have built a strong sourcing capability in Asia with a team of over 75 people. This was critical to our success during COVID by having local resources to manage new product introductions and quality, ensuring we could secure product and deliver it to our customers. Additionally, our sourcing team is making good progress in our efforts to diversify our supply chain away from China for key Camelback, Bushnell, Bushnell Golf, and Bell and Giro products. We've also improved our U.S. distribution capabilities through a variety of actions, including consolidating distribution space across multiple brands, which will drive improved efficiency, productivity, and fixed cost leverage. And we have improved our D2C footprint through this consolidation, which will further reduce costs in the future as we move closer to our consumers. In September, Vist Outdoor was named one of the world's top 50 procurement organizations and awarded the best-in-class gold medallion in leisure products by Vero, a global SaaS-based procurement intelligence and analytics provider. Needless to say, we have implemented several strategic actions to not only grow, but to generate growth with improving profitability long-term. Our second key theme is our solid balance sheet and robust free cash flow. First, we have improved our financing through lower rates and better terms over the last three years. We have also received three debt rating upgrades over the past 18 months, with two from S&P and one from Moody's. Second, we have improved our net debt to EBITDA leverage ratio from 4.3 times at year-end fiscal 2020 to 1.7 times at the end of our Q2 FY23. And lastly, in Q2 this fiscal year, our debt to equity ratio improved to 1.5 times from over two times at our fiscal 2020 year-end. Regarding free cash flow, in the first six months of FY23, we have generated $195 million up 84% year over year. Our third key theme is actions we are taking to mitigate risks in the current environment, which will position us better in the future. As I noted last quarter, we are focused on controlling what we can by managing inventory, controlling and reducing costs, and improving the productivity of our product mix through SKU reductions. With regards to managing inventory, we've been slowing our buy orders for a couple of quarters to better align with current demand and outdoor products while continuing to monitor weeks of supply, POS activity, and D to C trends. For example, our in transit inventory at the end of Q2 declined 35 million as compared to a year ago. It has also declined over 11 million sequentially from Q1. Additionally, our Q2 total inventory increased 15% excluding acquisitions. Rising inflation has also increased the cost of our inventory As we look at the retail channel, we are seeing pockets of higher inventory due to slowing demand for products at opening price points, which have now expanded into mid-tier price points, particularly in the mass channel for bikes and in our outdoor accessory business. However, we are leveraging promotions strategically and participating at the right level across all our channels, including D2C and in ways that retain competitiveness and protects our brands and share long term. Another element that we can control and are focused on is controlling and reducing costs. For example, we have and continue to evaluate all investments in sales and marketing to better align with current demand trends while looking for opportunities to reallocate investments towards those that will drive a higher return. This includes sales and marketing spend across a variety of consumer touchpoints. Lastly, our brands continue to evaluate product offerings with new product innovation to drive improved productivity across our SKUs. One example is outdoor accessories, in which we have reduced the SKU count by nearly 50% over the last four years, driving higher productivity. Our other brands have also focused on SKU productivity over the last four years and continue to prioritize today. Before I hand it over to Jason for additional commentary on our sporting product segment performance, I wanted to provide a brief update on our upcoming spin. As previously mentioned, we believe this is an opportunity to further unlock shareholder value. The spin-off of our outdoor product segment will create two publicly traded companies of near equal size in revenue and two of the largest public outdoor companies, each with their own set of competitive advantages. This creates an opportunity to enhance the strategic focus of each company and allocate resources to support their specific operational needs and growth drivers. Additional benefits include tailored capital allocation priorities, a strengthened ability to attract and retain top talent, and expand strategic growth opportunities. As we mentioned last quarter, we were expecting to file the Form 10 with the SEC, confidentially this fall, and we did. This first milestone is complete. and we anticipate sharing the Form 10 publicly once we obtain the SEC's approval and remain committed to the value creation opportunity presented by the separation. We're on track to complete it in calendar year 2023. With that, I'll hand it over to Jason. Jason?