Vista Outdoor Inc.

consumer demand to be slower for the rest of the calendar year 2023, resulting in channel partners remaining cautious and not increasing their purchasing behavior until calendar year 2024. This dynamic is causing slower than expected inventory sell-in, which, coupled with promotional pressures as we work to sell through our high-priced inventory positions during the holiday season, is driving down profitability in Q3. We expect sales to decline in the high single-digit range in Q3 versus the prior year period, returning to low single-digit growth in Q4 versus the prior year period. The year-over-year growth in Q4 will be driven by exciting new product introductions in our golf business, as well as more favorable purchasing patterns in our action sports businesses versus the prior year. Due to the increased promotional environment of the holiday season and moving through the higher price inventory in Q3, we expect segment adjusted EBITDA margins to be in mid single digits, returning to high single digits in the fourth quarter as we reduce promotions and start to see the impact of our Gear Up program read through. With the expected improvement in outdoor products to end fiscal year 2024, which includes returning to organic growth and generating segment adjusted EBITDA margins in the high single digits in Q4, Combined with our gear-up profitability improvement program, we see Revolus adjusted EBITDA dollars on a standalone basis to double in fiscal year 2025. We are also still gaining market shares in key categories, which positions us well for a strong start to fiscal year 2025, as we expect demand to return and channel partners to begin purchasing at normal rates again. Thank you, everyone. Operator, please open up the line for questions.

Thank you. If you would like to ask a question, please press star then one on your telephone keypad. If you change your mind at any time, please press star then two. We now have Matt Caranda of Roth MKM. Your line is open.

Hey guys, good morning. Thanks for taking the questions. Just first on the higher level sale dynamics involved with the MO business. Any potential for another buyer to emerge now that that transaction is public? And then just could you maybe help us understand the next steps of CFIUS approval as it pertains to the transaction?

Sure. Matt, this is Gary. As to speculating whether another buyer will come forward, that would be, you know, just speculation. It's always possible. We as a board and a company are not allowed to go solicit buyers. But, you know, if a qualified bid comes forward, we do have the ability to evaluate such. With regards to CFIUS and other regulatory approvals, we expect to have all of those filed in the coming weeks. And from there, obviously, it will just proceed as they typically do through that process. We do have a shareholder vote that is required that we will, you know, anticipate in that March-April timeframe, and that's kind of the process for the next steps.

Okay. I appreciate that, Gary. Thank you. And then maybe just for Jason, can you talk about the dynamic that's happening in the retail and distribution channels as it pertains to 223 and 556? I guess we've been seeing some of that inventory clearing in recent weeks. What are you seeing in terms of inventory and pricing? And how does that feed into the commentary that you guys provided in terms of the more favorable performance for the next couple of quarters?

Yeah, good question, Matt. So on the 223556 specifically, you know, we don't do a whole lot of that commercially anymore. Most of ours is tied to law enforcement government contracts. What we've seen recently, and we'll say in the last four weeks, we've certainly seen POS upticks significantly across broader categories. And we watch that daily, literally daily with our customers and then our wholesale partners, we watch their inventory daily. But we certainly have seen an uptick in the last four weeks across pretty much all categories.

Got it. And then as it pertains to the near-term sort of guidance commentary they provided, the more favorable performance, I guess, just help us unpack what that means. It sounds like higher revenue, and then you alluded to sort of mid-20% EBITDA margin in that segment. I guess that might be a little lower than where you were in the second quarter. So just help us kind of square those.

Yeah, I think on the EBITDA front, We like what we see on the EBITDA front. We've always guided towards mid-20s in the back half of the year. There could be some favorability to that in the third and fourth quarter if we see what market trends are and if we can control mix a little bit and get more profitable items out there than we had assumed. I think on the revenue side, we don't guide quarterly. I think it's going to look very similar to the first half. The second half will look very similar and there is a chance that we don't see the degradation of the profitability that we had predicted in the first part of the year.

Okay, got it. That's clear. And then on Revelist, for Eric maybe, just curious, are we committing to mid-teens standalone EBITDA margins for Revelist still? And then is the GEERA program enough to get you there? I guess I'm curious how much of the the $100 million of incremental cost savings in that program are related to sort of segment cost improvements versus corporate costs. If you could maybe just help us understand and unpack that program in a bit more detail and how it pertains to the long-term targets, that'd be great.

Sure. Hey, Matt, it's Eric. I'll provide some color, and then I'll turn it over to Andy to give a little bit of additional detail. But, you know, first and foremost, to your first question, you asked about, you know, our long-term guidance. And we do feel like the mid-teens long-term guidance is something that we are still committing to. And, you know, we'll continue to provide more detail on that over the coming months. With regards to the Gear Up program, it's obviously something that we're very excited and committed to doing. You know, it's a program that drives profitability improvements along with organic growth for Revolus. And, you know, everything does ladder back to that $100 million in new cost savings and $25 million in cost savings from the March 2023 initiative. So we just want to make sure it's clear that that's how we get to the $125 million in cost savings by fiscal year 27. We're on that with a great team and a world-class consulting organization. And just to give you some color before I pass it over to Andy, you know, there's a lot of significant detail there that I think will build confidence for all of our stakeholders. You know, when we look at Simplifying the business model, we do feel really good about the three platforms that we announced this morning and we've been working on now for the past several weeks. You know, really going to that precision sports technology platform, which will be driven by Foresight and Bushnell Golf. The adventure sport platform, which will be driven by Fox, Bell, Giro, Quiet Cat, and Camelback. And our outdoor performance group. which will be driven by Sims and Camp Chef, Bushnell, Blackhawk, Primos, and more. And there's a lot of excitement about being able to really focus on those brands to grow. And then secondly, we feel really good about delivering increased efficiency and profitability. There's some color to that initiative called Gear Up, which is really that entirety of the transformation. With supply chain today, we have nine DCs in domestic warehouses. and we see significant consolidation opportunity in the future. Today we have eight USA manufacturing sites, and we see opportunity for consolidation in the future, which will lead to cost savings there. On the real estate front, we have over 21 domestic locations today, and we expect some significant real estate consolidation. So that's just a little bit of color for how we're gonna get there, but yes, we do feel good that those programs will lead to those You know improvement improved margins over time and you want to add any more to that?

Yeah, I mean Matt I think your point was a great one is that we want to be clear the 100 million dollar gear up program is going to be fully related to Revlus so there isn't going to be Only a part of that that actually goes Revlus unlike the previous program which was split between the two This is going to be completely related to Revlus. So that will get us a fairly significant way towards that mid-teens once fully implemented. There will be a little bit more we need to do, and I think some of that is going to be a lot of what Eric talked about, is the growth in some of these very high-profit areas of golf and other areas with new products that are going to generate additional revenue will help close that gap as well. But this is going to be a significant component of us getting, which is why we're confident in the mid-teens in the long run.

Got it. I'll leave it there, guys. Appreciate it.

Thank you. We now have Mark Smith of Lake Street Capital Markets. Please go ahead when you're ready.

Hey, guys. Alex Stern is on the line for Mark Smith this morning.

Want to ask?

Hey, Alex. For my first question, for the Revelous business, you know, you guys mentioned simplifying the business model, reinvesting in high potential brands. Is there any consideration or discussion about the possibility of divesting certain brands within that Revelous portfolio?

Hey, Alex, it's Eric, and thanks for the question. The answer is yes. You know, as we think about focus, you know, we're going to continue to give more information about how we're looking at our brands over the months ahead. But at a high level, we look at our power brands being things like Foresight and Bushnell Golf, Fox, Bell, Giro, Sims, and Bushnell. And we're going to really focus a lot of our efforts on those things. And as we focus intensely on our power brands, that will also mean that we're taking a look at all of the brands in our portfolio. And I would say that we're evaluating all of our assets and we're open to licensing or divesting from non-core assets and brands in the future. And as we make more progress on that, we'll certainly be updating all stakeholders in our community.

That's great. And then for my second question here, Could you give your thoughts around the promotional environment as we enter this holiday season? Are you guys being a little more promotional than traditional levels? And then are you guys seeing retail partners getting overly promotional? Yeah. So as we mentioned, the promotional level is going to be, I would say, more than historical as we are moving through inventories and our retailers are moving through inventories in this time period. So the high-priced inventories, that we have on our balance sheet. We have made progress. Our outdoor products business was down about $20 million, a little bit over that in inventory here in the quarter, but we need to move through more of that. So you're going to see promotional environment more than typical in the third quarter, which is why we are expecting EBITDA margins to be a little bit lower in Q3 for the REVLIS and then that'll return because those promotions will not continue past the holiday season. So it'll come back in Q4, which is a little bit of a dip and bring it up, but it will move through the inventories and the retailers will have moved through it because we're partnering with them as well. And that will not continue into next year is the expectation. It'll return more to historic normal level. Well, that's great. Hey, thanks for taking my question today.

You bet. Thanks, Alex.

Thank you. We now have Jim Chartier of Monash CrepsiHUD.

Good morning. Thanks for taking my question. Can you just tell us, you know, kind of what your expectation for standalone EBITDA for Rebelist is this year?

Yeah, standalone EBITDA, it's So based on a 8% kind of midpoint for what we're guiding for the segment with just over 50 million of expected standalone cost, it's going to be in that four and a half ish percent range is what we, what you would expect for FY 24.

Okay. And then you mentioned a press release, you know, thought to maybe double that next year, you know, what's kind of the confidence in your ability to do that. And then, you know, in addition to the cost saving plan outlined, what would be the drivers behind that significant growth?

Yeah, so there's a few things. I think we are, I mean, we said it, so we're certainly confident that we can accomplish this goal. I think you're right, the 25 to 30 is a big component of that for what we're doing with the project savings. Promotions that we just talked about as well, not having those repeated because we do expect promotions, but they're going to be at more historical normal levels and with inventory that is at the lower price that we expected. So those items between the promotions coming down to more normal and the supply that we already expected with freight reductions and those high-priced inventory items that we have moved through, Will get us the remaining amount of that difference from the 25 to 30 to the doubling that we're talking about.

Okay, so you don't need any meaningful revenue growth next year to achieve that.

Revenue growth would not be the necessary. This is going to be more on the cost to get to that level. We will evaluate the revenue and where we expect to grow, but given the new innovations and whatnot that we're working through and the fact that Q4 is going to start the organic growth, that'll be assistance on the top, basically, of that.

Okay. And then any plans to reinvest any of the gear-up savings into parts of the business?

The $100 million is the net that we would expect EBITDA to move by. We are fully expecting that we are going to be reinvesting, so there will be portions of the savings that will be going into reinvestment, but that is the net number that we would expect our EBITDA, which is going to get us to that mid-teens long-term. But the reinvestment is a very important aspect for our business between marketing and the innovation of R&D to really grow these businesses and see that organic growth that we're fully expecting. That is going to be a key component of it, but we just wanted, we're communicating the net to make it as easy as possible.

Okay, great. Thank you.

Thank you. As a reminder, if you'd like to ask any further questions, please press star then one on your telephone keypad now. We now have William Rutter of Bank of America. Your line's open.

Hi, I just have two. The first is, now that you've had a little more time since the announcement of the divestiture, has there been any change in the plans with regard to repaying the bonds? Do you still plan to repay them before closing, and do you know if this is planned to be a call or a defeasance, if you'd give that any more thought?

Thanks, Bill. We have had a little time, as we said, the, the vote would be in the March, kind of end of March, April time period. So it likely will be a redemption of the bonds, not a call on the May call premium. So that, that is still the expectation until then. We haven't had any other discussions on anything earlier than that being done at this point.

Great. And then in terms of the commentary about what's going on with Revolis and inventory levels in your different channels, is it just elevated inventory and destocking that's going on with regard to the kind of soft environment, or how is sell-through of those products?

So, no. POS is down as well. So it isn't just that inventory. POS is down. it's uh but the what we're seeing is beyond the pos being down the sell in isn't even keeping up with the pos so there is still a gap between those those items that pos is is down but it's slowing on how compared year over year that isn't as down as it previously was but that's more that it started last year at this point in time so we're just seeing that it's kind of stabilized at some level so i am so it is continuing to be down on POS, which is why part of what promotional is going to be for Q3 to push through the inventory. We need to increase some of that POS, which is why the promotions are a little bit higher than they would be normally to drive that here in the holiday season.

I guess one follow-up on that, the POS being down, how much of that do you think is being driven just by constrained consumer budgets versus changes in behavior that may be causing people to participate less in some of these activities post-COVID?

I think it's a mix on, it certainly is a mix that there are constrained budgets, but the in these discretionary type of activities is a little bit lighter, but I think they're making some decisions to do other items. The participation in general in the outdoors is still high. We're still seeing solid participation in elevated levels above the pandemic time or pre-pandemic period. So long-term, we're still confident that this is going to return to growth from where they have been here over the last few months or even year. But it is right now constrained on that, and it's a mix. It's hard for us to point exactly what's driving what, but there certainly is a mix of that.

Yeah, understood. Okay, cool. That's all from me. Thank you.

Thank you. If you would like to ask any further questions, please press star and 1 on your telephone keypads now. I can confirm we have had no further questions so I would like to conclude the call here. Please have a lovely rest of your day and you may now disconnect your line. So I would like to conclude the call here. Please have a lovely rest of your day and you may now disconnect your line.