Vista Outdoor Inc.

Hello everyone and welcome to the Q3 FY23 Vista Outdoor Earnings Conference call. My name is Nadia and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star followed by one on your telephone keypad. 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 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. 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 transition that we announced today. Chris Metz has agreed to resign as CEO and as the director at the request of the board, and I have been appointed to serve as interim CEO effective immediately. Chris's 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 Outdoors. 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 him to ensure a seamless transition. By the way of a brief introduction, I have served as a member of VISTA Outdoors Board of Directors since 2015. Previously, I served as CFO of C.H. Twem Hill from 2014 to 2017, And before that, spent more than 15 years at Harris Corporation, including serving as its CFO for eight years. Together with my fellow directors, I have been deeply involved in the oversight and execution of VISTA Outdoors' strategy, including the planned separation of our outdoor and sporting product segments. I look forward to serving as interim CEO at this pivotal time in VISTA Outdoors' 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 this outdoors unmatched portfolio of iconic brands, resilient operating model, and strong balance sheet. We are very well positioned to create compelling value for our shareholders. With that, I will now turn to discussing our third quarter results. First and foremost, I would like to thank all VISTA Outdoor employees for their hard work during this quarter. The period included two major holidays, Thanksgiving and Christmas, meaning that many of our employees spent time away from families to help support our teams and our customers. The entire leadership team can't thank you enough for all you did to help VISTA Outdoor achieved solid results again this quarter. I'd like for you to walk away from our call today with four key takeaways. We are operating from a position of strength. Our separation is on track, and we are reaffirming expectations for the spin to be completed in calendar year 2023. Our long-term outlook is encouraging, and we're growing our share of the wallet via operating discipline and brand strength. We maintain a strong and healthy balance sheet because of our robust free cash flow generation, prudent use of cash, and disciplined inventory management practices. Moving to the quarter, we again delivered solid results in a challenging environment. Total sales were $755 million, down $40 million from the prior year period, and up 78% over the same period in fiscal year 2020, which was pre-pandemic. Our outdoor product segment posted record sales of $353 million, up 5% over the prior year period, and up 59% over the same period in fiscal year 2020. 40 product sales were $402 million, down 13% over the prior year period, and consistent with previous guidance. The quarter's performance was up 98% over the same period in fiscal year 2020. Our adjusted EBITDA margins were 18.1%, which is approximately 1,000 basis points higher than the same period in fiscal year 2020, and roughly 300 basis points above our long-term target of 15%. We generated $109 million in free cash flow for the quarter, bringing our year-to-date total to a record $304 million, up 44% over the prior year period and 556% higher than the same period in fiscal year 2015. share was $1.30, which is approximately 520% higher than the same period in fiscal year 2020. These results continue to prove that we are operating from a position of strength. Through our transformation and execution of our long-term strategy, we have built a diversified portfolio of 41 iconic brands, allowing achieve levels of excellence in financial performance that would be out of reach for any one brand on its own. Leading brands are not created overnight. We now have a stable of 12 power brands that generate more than $100 million in annual revenue that we have grown either organically or purchased through acquisition. To that end, I want to provide a brief update on the integration of Fox Racing and our Action Sports business unit. We have captured a number of quick synergies and have also identified additional synergies above our initial business case. We're also doing more to leverage the strength of our multi-brand cycling, snow, and power sports positions. I am pleased to announce current Fox Racing president, Jeff McWane, will become the new president of the combined platform and guide the seven brands to new heights. Jeff's role as president will be focused on building a shared, scalable platform for operational strength, synergies, and margin expansion, while enabling each brand to prioritize individuality, creativity, and ingenuity. Congratulations to Jeff on this exciting accomplishment. I would also like to thank Rick Kern, the former president of Bell Gerald. Rick led an incredible recovery over the last few years and leaves the business significantly stronger than when he took the reins. We have instilled a founder's mentality across our corporate and brand cultures, expanded profitability initiatives, and created shared resources to bolster supply chain distribution and digital commerce capabilities. We have closed and successfully integrated eight acquisitions of leading brands that have increased our total addressable market, broadened and deepened our categories, and further diversified our portfolio to serve outdoor consumers across a variety of activities. Taken together, we've added some of the most revered and well-known brands in the outdoor space, while also improving our growth and margin profile, a win-win against our strategy. This execution is the result of a dedicated and resilient team and demonstrates that we are well positioned for the road ahead. Our strong positioning in the industry lays the foundation for our plan separation and is our second key takeaway. We are reaffirming the expectation for our separation to be complete in calendar year 2023. The separation announced last May will create two independent publicly traded and soon to be named companies of nearly equal size by revenue. Following the separation, our outdoor product segment will be an industry leading portfolio of outdoor brands Bushnell Golf, Camelback, Camp Chef, Foresight Sports, Fox Racing, Giro, Quiet Cat, Sims Fishing, and Stone Glacier. Sporting products will continue to focus on ammunition categories through its renowned brands including CTI, Federal, Heavy Shot, Remington, and Spear. products will have enhanced strategic focus with supporting resources, tailored capital allocation priorities, a strengthened ability to attract and retain top talent, compelling value for shareholders, and expanded strategic opportunities. As we stated last quarter, we filed the confidential form 10 with the SEC and have been diligently working with them to address any questions they may have. We are confident in our ability to complete the SPIN in calendar year 2023. We also plan to share details about management teams, members of the board, and names for each company in the coming months, so stay tuned. Our third key takeaway to leave you with is that we believe our long-term outlook is encouraging. and our brands are resilient and well-positioned to drive shareholder returns. Taking a step back to look at the broader market, we continue to see macroeconomic pressures impacting consumer purchasing behavior in response to high inflation and higher interest rates. We still see consumer purchasing patterns tightening in some categories, and many are seeking to buy discounted or promotional items. overall retailer inventory levels remain high. We are seeing positive signs emerging, and we expect retailers to return to more normalized purchasing in the coming quarters compared to the continuous restocking that we saw in the prior year period. In addition, some of our categories are empty on retailer shelves, and retailers have been cautious to reorder and add additional inventory. We are continuing to monitor the situation in China related to COVID-19 case counts and the changing guidance related to lockdown. We have a large team in China that has allowed us to react quickly to issues and adjust as necessary. Even with these headwinds, we are still seeing positive industry data and demand for our brand. Our outdoor products BTC sales are up, which is typically a good leading indicator that consumers are still demanding our products and are continuing to recreate in the outdoors. We believe that the pull-through of demand will start appearing as retailers work through their excessive inventory and resume their normalized purchasing patterns in the coming quarter. millimeter, for example, we believe demand is normalizing at a higher level than pre-pandemic. According to the latest government data, the outdoor recreation economy generates $862 billion in economic output, 1.9% of national GDP, and 4.5 million jobs. In addition to these promising figures, we continue to see strong participation numbers across the outdoor industry, and more specifically, in many of the categories that our brands serve. In the broader outdoor recreation industry, more than 20 million net new participants have entered over the past five years. once someone begins to participate in our outdoor activities. To demonstrate the resiliency of this industry, I wanted to share a few market highlights in certain categories that we compete, including golf, snow, and e-bikes. Now, National Golf Foundation research found that the combination of on and off course golfers topped 40 million Americans in 2022. Based on this data, it comes as no surprise that our golf business posted record year-to-date sales, with much of the success attributed to the launch of new products combined with strong holiday performance as Bushnell Golf's assortment of laser, range finders, GPS trackers, and speakers makes for excellent gifts during the season. In the snow category, a recent report estimated visits for the 2021-2022 season were the highest reported in history at roughly 61 million. These trends are continuing this year. We have seen a direct benefit from this strong snow season, coupled with the launch of the new Tor and Tenaya helmets. Gero snow cells are up more than 30% year to date versus the comparable prior year period. According to the latest research from People for Bikes, e-bike sales were up 15% year to date through November. This growth is powered by stronger consumer adoption and also government and corporate incentives that are becoming more popular. For example, in Denver, an e-bike rebate program was so popular the city plans to expand it And Quiet Cat just secured a major agreement with a Fortune 100 company to provide Quiet Cat e-bikes as part of an employee engagement program. In our sporting products business, we continue to see a growing diversity in hunting and shooting sports, with females representing 27% of participants in the industry, up from 16% only a decade ago. Additionally, Nick's checks, an indicator of health of the shooting sports industry, remained strong in 2022, growing 24% from pre-pandemic lows. Jason will elaborate further on the sporting products business in a few moments. Although not exhaustive, these data points provide a snapshot into how our business is continuing to expand outreach, and capture new participants while still serving the strong existing base of consumers who are recreating in record numbers. Even in our more challenged categories, our brands still continue to deliver strong results through brand strength, new products, and more. Cab Chef is a great example. The outdoor cooking market has been pressured by excess channel inventory Pro shows that demand exists for compelling products. The same is true for our channel partners, and we are excited to share that Camp Chef is earning entry into Lowe's on the strength of innovation and its brand. Stone Glacier also had an excellent third quarter. Revenue was up over the same period last year, with December accounting for triple-digit year-over-year growth. One unique attribute to Stone Glacier is the strength of the brand. Their third quarter performance and specifically Black Friday and Cyber Monday happened with zero discounting or promotions even while competitors were discounting aggressively. Additionally, since fishing, our most recent acquisition delivered over 25% growth during the quarter compared to the prior year, driven by excellent DTC sales, which were up 65% in the quarter, and exhibits the power of VISTA's investments in premium brands with strong digital customer acquisition capabilities. Our last theme is the health of our balance sheet. Our balance sheet is a pillar of strength and continues to be a competitive advantage and provides us to invest in long-term growth, even in challenging times. Our free cash flow continues to remain robust. And in the first nine months of our fiscal year 2023, we have generated a record $304 million, up 44% year over year. This is a testament to our inventory management practices, prudent use of cash, and rigorous monitoring of our customer and vendor terms. These actions have allowed us to continue debt pay down, maintain our net debt to EBITDA leverage ratio of 1.7 times within our targeted range of one to two times and significantly below the fiscal year 2020 year end value of 4.3 times. This stability supported investment in new product research and development, which is the lifeblood of our company. This is seen by our year-to-day R&D spending increasing by 59% year-over-year. During the quarter, we also paid down approximately $90 million in debt, and we will continue to focus on debt paydown ahead of our plan on separation of our outdoor products and sporting products. Before I hand it over to Jason, I want to reiterate that I am proud of this company. We are operating from a position of strength. The outdoor industry is robust. We're navigating challenging economic conditions and maintaining our share of loss. And our resilient operating model focused on strong brands and a clean balance sheet positioned this company favorably to thrive in all phases of the economic