Good morning, and welcome to today's First Quarter Fiscal Year 2023 Vista Earnings Conference Call. My name is Candice, and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Shelly Hubbard, to begin.

Thank you, operator, and good morning to everyone joining us for our first 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 the information known to us today. These forward-looking statements are subject to the risks and uncertainties that face Vista Outdoor 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 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. Today, I will cover 5 key topics which address why we are confident about our future despite current macroeconomic headwinds. These include our strong quarter 1 earnings performance, our planned acquisitions of Fox Racing and Simms Fishing; trends we are seeing across the marketplace in our businesses; strong growth from product innovations; and lastly, an update on our planned separation. Let's start with our first quarter performance. Fiscal 2023 is off to a great start with a strong Q1. We outexecuted our plan and long-term targets and invested free cash flow in future returns while maintaining a strong balance sheet with ample liquidity, and doing so in a challenging macroeconomic environment. We believe Vista Outdoor is well positioned to deliver continued growth in fiscal 2023 despite the economic headwinds. Our strategy and execution have positioned us to capture the lifestyle shifts we are seeing in outdoor recreation. Although sales are not as elevated as during the COVID bump, we are highly encouraged by the continued participation in outdoor activity in the post-pandemic environment. I've always led with the mantra that we control our own destiny. As you can see on Slide 4, we've created a company with 39 coveted brands and soon to be 41 as we continue to expand our addressable market through strategic acquisitions such as the most recent planned acquisitions of Fox Racing and Simms Fishing. As a result, we will have amassed 12 power brands generating more than $100 million in annual revenue. We're also maintaining our leading #1, #2 category positions across multiple brands, as you can see on Slide 5. Moving to Slide 6. Both Fox Racing and Simms Fishing, our iconic brands with cult-like following in their categories. Fox Racing, a global brand in Performance…

Thank you, Chris. Good morning, everyone. As Chris mentioned, Sporting Products set a record in the fiscal first quarter, delivering $511 million in revenue, which is a 40% increase from the prior year. Our sales growth this quarter was driven by continued demand for our coveted brands. It has also reflected higher volumes due to the timing of shipments to fill large commercial orders along with improved pricing. Note that the higher-than-expected volume of shipment resulted in low finished goods inventory for the upcoming quarters. Labor shortages and higher turnover rates are also impacting the amount we are able to ship over the next few quarters. That said, we continue to see low channel inventory in the categories that we are the clear market leader in, and we still have a multibillion dollar backlog. . We've long been low-cost manufacturing leaders, and we've invested to improve the operations and drive efficiencies as well as implement cost savings projects across the business. These improvements translated to strong performance on the bottom line this quarter. We delivered EBITDA of $182 million, up 39% year-over-year, driven primarily by higher gross profit. EBITDA margin was 35.7% compared to 36% in the prior year. In improving our operations, we've also aligned and optimized our production for changes in consumer demand. As a result, I feel confident that we have built a strong foundation for years to come. Although we don't anticipate the high levels of demand that we experienced over the last couple of years to persist, we have seen structural changes in the market that suggest the new post peak demand levels will be higher than in prior cycles. We are better positioned today than we ever have been, both internally and externally. From our low point in fiscal year 2020, we have transformed…

Thank you, Jason, and good morning, everyone. 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 18. We posted our second best record quarter for sales, EBITDA and EPS effort. Overall, we delivered more than 20% in sales and profit growth in the quarter and generated strong cash flow. For the quarter, sales increased 21% to $803 million, the second quarter ever to exceed $800 million. Gross profit increased 21% to $293 million and gross margin expanded 9 basis points to 36.6%. Operating expense as a percentage of sales was 13.7%, down approximately 80 basis points due to prudent cost management. EBITDA increased more than 25% to $203 million driven by higher gross profit and operating leverage. Total company EBITDA margin increased 83 basis points to 25.2%. Q1 EPS increased 33% to $2.31, driven by strong sales growth, profitability expansion, a slightly lower tax rate and roughly 2.5% decline in outstanding shares which was minimally offset by higher interest expense. Turning to Slide 19. Our balance sheet is strong. Net debt increased year-over-year to $553 million, driven primarily by executions. Our immediate liquidity increased to $336 million as of quarter end. Our net debt leverage ratio declined to 0.7x below our target ratio. With the recently announced planned acquisitions of Fox Racing and Simms Fishing, post-closing, we expect a leverage ratio of roughly 1.6x, which is within our target ratio of 1 to 2x. Slide 20 highlights our capital allocation strategy. Over the past 4 quarters, a strong free cash flow generation has enabled us to meet our capital allocation priorities. We are continually to invest organically.…

[Operator Instructions] So our first question comes from Eric Wold of B. Riley.

I guess, Sudhanshu, just a couple of quick questions to follow up on your latest comments. Appreciating the contributions from the 2 acquisitions and the guidance, you made the comment that they're more Q1 seasonal. So my assumption there is obviously, there's less contribution in the back half of the year that someone just took a straight average of their sales. Is there any way you can give us a sense of some level of kind of pro forma sales change between fiscal '22 and fiscal '23 kind of assuming Foresight, Fox and kind of roll in both periods? Just trying to get a sense of kind of the baseline business delta between the 2.

Eric, this is a great question, and it has a lot of moving pieces. As you know, we haven't closed Fox and Simms. We expect to close some time by end of Q2. So we will have second half benefit for Fox and Simms in our number, and that's where we're seeing Outdoor Product will be higher in dollar term in Q3 and Q4. Foresight, we closed last year. And last year, it did -- it was roughly $100 million business. We're growing. We're growing a lot in Q1, helping us offset the decline you're seeing in outdoor accessories business. You saw the only decline 2%. So it helped -- it was helped by Foresight. But it's hard to do the pro forma math till we close the Fox and Simms for this year.

Got it. Understood. And then I'm not sure a question for you or for Jason. But on the ammo side, is the there's a thought that sales will drop from the $500 million range to, I guess if I do the math, something around kind of the $400 million range for the remaining 3 quarters. Is that more your ability to supply demand? You talked about labor shortage and whatnot into the market. Or you see something on the demand side and POS sell-through that would give you some pause in terms of where consumption is landing?

This is Jason. Great question. When we delivered $510 million, as we had pointed to in the script, our finished goods inventory is very low right now. So when we look at the rest of the year, I think we should look at what we did on an average for fiscal year '22 kind of being the run rate going forward due to labor shortages. And frankly, just our finished goods inventory being relatively low right now from where we'd want Simms.

And Eric, this is Chris. I would add to Jason's comment too. We had a healthy inventory position. So we were able to feel a bit more of the backlog, if you will, in Q1, and that's why you saw elevated numbers for the Sporting Products business.

And also to add on to that, Eric, as far as what we're seeing, not like -- unlike what we've seen for the last 2 quarters, really, the 556 small rifle market is full and that's why we're much, much less reliant on that category. So the growth going forward is the growth in where we are the clear #1 leader going forward in the categories where the most demand remains.

Just to confirm, is it demand driven in any way or really just supply driven to your part in terms of where the sales will shake out?

In our category, we're the clear #1 leader is certainly supply.

Our next question comes from the line of Scott Stember of MKM Partners.

First question, Jason, just talking about ammo. Obviously, things are normalizing, things can't keep going through the roof forever, but it sounds like we're on a much higher plane. Could you talk about how you expect the pricing environment to be over the course of the next year, even if you take out the midterm elections?

Scott, as far as the pricing, we're seeing some pressures on the 556, the small rifle arena, but we're a relatively small player in that market. Again, on the categories, where we are seeing the most demand with our biggest market share advantages, we haven't seen any price degradation in the market.

Okay. Got it. And then the comments of some of the bigger mass merchandisers that have cut their overall order intake because of some of our ordering. Could you talk about if that's leveling out? Obviously, the hit this quarter and they're probably going to hit the second quarter. But could you talk about the time line of when you would expect that process to run its course?

Yes, Scott, as we alluded to -- Chris. We alluded in the prepared remarks that it's a bit a tale of 2 cities, right? So you've got the lower price point SKUs that are selling through the mass merchants that, that consumer demographic is more affected by inflation. And so that affects our helmets in our Action Sports business. It affected our outdoor accessories to a great deal, and it affects our load mid-price point grilling platform in Camp Chef. But on the flip side, we've got the higher-end demographic where we sell a lot of our products and, frankly, where all of our acquisitions that much more inflation and recession resistant, given the inflation hasn't affected the consumer demographic as much. But in terms of the timing of the math, so -- to your point, some of our customers have just stopped ordering overall. So you saw Walmart report down earnings and more promotionally rid of a heavy inventory position. So they pretty much up across the board in a lot of categories that affect us even though our demand was still pretty solid. We've seen this before, and it typically takes a couple of quarters to work its way out. So the way we've guided for the rest of the year is you should expect Q2 to look pretty similar to Q1 and then we start to pick back up in the second half in some of these categories where we've been suffering.

All right. And the last question, just on the guidance. I appreciate the last 2 deals have not closed yet. But could you just give us a little bit of a framework of how much that's contributing to your updated guidance, so we could just better measure the pre-acquisition of core businesses?

Yes. So this is Sudhanshu. If you assume that it closes by end of Q2, it will be roughly in $200 million-plus range depending on when we close. So that's the math we should do for our Outdoor Products business. We guided $1.475 billion to $1.550 billion. If we take roughly $200 million out from these M&As, you will see our base business is growing slightly or flat. And that reflects all the macro challenges we're seeing, that reflects what we're seeing in Q1 and Q2. But all of these is much -- when you compare us from fiscal '20 and 2021.

Our next question comes from the line of Matt Koranda of ROTH Capital.

Just curious if you could maybe do the same thing with the EBITDA outlook as well as Sudhanshu, it would be helpful, just to kind of reconcile the $693 million at the midpoint versus your prior EBITDA guide. And what Fox and Simms are expected to contribute?

So it's a similar math as you see our base business, you will see some traction in gross margin from Q1 onwards, mainly in ammunition business efficiency, higher labor costs and then Outdoor Products business, the continued higher supply chain cost, product cost and also reduce operating leverage because the sales is not growing as much as [indiscernible]. Fox and Simms EBITDA, we haven't guided. You can do the math because it is -- it's not that meaningful for first 6 months -- for last 6 months of our year and plus 6 months on their watch. It's there, but it's not that meaningful, but you can do the math from Fox and Simms depending on when we close.

Okay. Got it. And then on the Sporting Products segment, wondering, maybe, Jason, if you could put a finer point on -- it sounds like maybe not -- maybe there's some supply constraints, and you guys did allude to maybe some inefficiencies at Remington. But how much of the constraints on your supply side is Remington versus the core brands within Vista like Federal?

Matt, we're not going to break it out by factory, but it's safe to say in the categories where the most demand is none of our factories [indiscernible] that demand. So it's not so much on the efficiency side. It's just on a throughput side on the categories where we are #1 clear leader.

Got it. And then maybe last one for Chris. You mentioned sort of potential for pickup in demand, especially load-in within the Outdoor Products segment in the back half of the fiscal year. Just curious what visibility you have there in terms of open-to-buy indications from some of your retail customers. What gives you the confidence to sort of say that we see a pickup in the back half of the fiscal year?

Yes. Matt, there's a number of factors. So first is quarter 1, quarter 2 are really difficult comps for our Outdoor Products business, particularly in outdoor accessories, where we loaded in a bit more than, I think, our customers and us thought last year in quarter 1 and quarter 2. So that's going to -- it's already working its way through the system. Secondly, early indications on some of the fall activity, particularly in hunting is highly encouraging. And then three, you just got general seasonality as we move into some of our seasonal periods. And then lastly, you've got the contribution of some of the new products coming in, particularly in golf and snow.

Our next question comes from the line of Ryan Sundby of William Blair.

Chris, I was wondering if you could maybe compare and contrast some of the growth opportunities and maybe risks for an acquisition like Fox that seemingly close fit with some of your other brands and bikes and accessories versus something like Simms, that's more of a first entry in a new category here [ and efficient ]. Just any color there on how you think about the approach to [indiscernible] be great.

Sure. So Ryan, both of them are -- have a lot of similarities and to your point, had some differences as well. So let me first talk about the similarities. When we look at acquisitions, and there's a consistent theme across the other acquisitions we've made to date, they're all #1 brands in their space. They're iconic and have cult-like followings. They participate in large TAMs and then increasingly faster growing markets, if you will. They've all bring a world-class management team and the great cultural fits, right? So they're complementary and they're synergistic and allow us to leverage the centers of excellence that we've developed. Now the differences between a Fox and Simms is, Fox is highly synergistic. It's probably the most synergistic acquisition we've made since Remington. So when you think about the opportunities with actions, we really can't control our own destiny there. It's a business that we believe will continue to grow. The trends are great. Our pre-order book looking into fall is terrific. So there's no reason to believe that we shouldn't continue to grow this business, but we're able to control our destiny on the logistic cost side as well. So we'll be exploring that. That's not a quick one, but we'll be integrating it carefully as we look forward over the next couple of years. Simms, we couldn't be more excited about the opportunity for Simms. With KC Walsh has his team as he's built a terrific team, and it is easily the most iconic brand in the fishing space. And so we've been as I've commented previously on prepared remarks and in opening comments, we've really been targeting the fishing space over the last couple of years. Studying it, understanding it better. Really, really digging into it. But we wanted to get into it with more of a platform play if we could. And so Simms just provided that perfect opportunity. And they love us as a landing spot for them because they know that we'll continue to grow them and use our strengths to leverage them in places where they just couldn't leverage as much as they hope they couldn't. So both of them are just terrific acquisitions that we think will add a lot of value to just Outdoor.

Great color. And then just I guess quickly on Outdoor Products, it sounded like part of the decline there was due to the stimulus checks from a year -- two year ago. Is that isolated just to this quarter? And is there a way to help maybe quantify how they can impact that had versus maybe some of the broader softening demand for certain products and price points you talked about earlier?

Yes. So Ryan, I would view the stimulus checks is affecting that more price-sensitive category of consumers. And what's really interesting, and I think this kind of back pulls a lot of people in our country is -- unemployment is very low. So people have jobs, they're earning good wages. But at the lower demographic end of the market, inflation has affected them more so. And so without stimulus checks or what have you, we see it affecting us and affecting some of those categories, as I mentioned before, that are more price sensitive.

Our next question comes from the line of Mark Smith from Lake Street Capital Markets.

First, I just wanted to dig in on the ammo business just a little bit. Jason, it sounds like you've kind of confirmed backlog still at multibillions. Just trying to kind of reconcile with that strong of a backlog, why we would look at volume production down, if pricing will be flat, why production would be down maybe so much over the next 3 quarters versus Q1 level?

Yes. Mark, as we have mentioned, our finished goods inventory is much lower than we had expected. So our efficiencies at factory and output that we had expected didn't quite get where we want to get. So a throughput versus finished goods inventory equation, nothing on the demand side where we see healthy demand, as you have mentioned.

Mark, this is Chris. So let me add a bit to it. As you guys start to dig into some more of the detail, you're going to see the inventory position in our Sporting Products business is relatively healthy. But if you really dig into finished goods versus raw materials and WIP and what have you, as Jason said, we've kind of draining the pond a little bit in Q1 just because we have the ability and the routes open up to be able to do that. And so Jason's mantra has been, hey, listen, if we're able to ship a backlog, we're going to do that. So we did that well in the first quarter. Now what Jason is talking about with inefficiencies is really a tight, tight labor market, right? So when you got a tight labor market, particularly in some of these geographies where we're manufacturing, you're bringing in new labor. You got some labor that's turned it over. And so they're not as efficient as they will at a couple of quarters. So we plan Remington in particular, to be higher output. They're doing a great, great job versus our original expectations, but it's going to take them a little bit longer to get to the efficiency that we see in our other 2 plants. And that's simply the reason for the lower quarters, if you will, is rebuilding some of that finished goods inventory to supply the demand.

Okay. And as we look at demand trends, but also look at kind of retail shelves and retail inventory that's out there, are there some inefficiencies that come in changeover perhaps from 9 millimeter to more centerfire rifle or shotgun? Are there any inefficiencies that come with kind of changeover in the plant?

Yes, Mark, there's certainly some. During the last 5 years, we have worked to minimize what changeovers are, whether it be SKU rationalization, what products we make on what lines. So on a go-forward basis, we're much, much better off than we were 5 years ago. Just on changeovers getting OEE up, getting through out and getting efficiencies up. So we have certainly kept a steady eye on that during these past 2.5 years.

Okay. And then kind of big picture as you think about consumer trends, you guys have talked about kind of the entry price points being weaker than the higher end price points, it would Bell versus Giro be perhaps an example of that within? And if so, can you talk about trends that you saw on demand for Bell during the quarter maybe versus Giro?

Yes. So Mark, what's interesting about the Bell brand is the Bell brand, a lot of us think of it as selling mass helmets through mass channels of distribution, which is a big part of their business. So one of the leaders in the motocross and mountain biking category, which are a higher demographic. So Bell in itself really needs to be taking down another level or 2. So we've got pockets of Bell that are really, really growing nicely. And then, of course, we've got our mass channel, that's a bit upside down right now [indiscernible] stuff is built into our guidance. Now Giro, Giro sells predominantly to a higher socio demographic. So that has fared well. So the one thing I do want to say, though, because you're talking about consumer trends is we talked a lot about the slowing in the opening price points, but the participation rates are still very high, and we're highly encouraged by people that we see that are continuing to grill in the backyard or back country. And that's why we said our stores were up 30% for Camp Chef. We continue to see people visiting parks and camping, participating with road biking. So we don't think that this is going to be a long-term issue with the opening price point categories continuing to be soft. Some of it is as our retailers start to replenish in some of those key categories will fix it. But we think it will start to level as we go forward.

Perfect. And the last one for me, just can you guys talk about direct-to-consumer or e-com trends during the quarter?

Yes. So direct-to-consumer business continues to be strong in total. Obviously, some of the categories that are affected in brick-and-mortar also get affected the same way in direct-to-consumer. So our [indiscernible] business where we've sold a lot of opening and mid-price point drilling platforms in the past is a little bit slower, but made up by some of the other categories that continue to grow in strength in D2C.

Our final question comes from the line of Jim Chartier of Monness, Crespi and Hardt.

I was wondering if you could talk a little bit more about the Foresight partnership with Topgolf. What does that mean for the business? What does that do in terms of getting you towards, I think, the $500 million goal for the platform over time?

Yes. So Jim, this is Chris. Good question. We don't typically size up partnerships like that. But the way we characterize is, it's not as much of a big dollar increase. It will be nice, right? So we'll get our platform in the top costs. We'll get it into some of the other locations. We'll get it into their fitting locations. But what's really exciting is the halo effect this gives the Foresight brand. When you get a top brand like Callaway that says, okay, you guys have the best technology. And it wasn't just Callaway, right? We've been working with Taylor Made for a long time now. We've been increasingly working with the Acushnet Titleist that group as well. So Callaway is the third big one to come on board to say, guys, credit to you. You've got terrific technology. We want to use the best and so we're going to bring you guys on. And that's why the partnership announcement was really exciting. And so we're going to continue to build a relationship with them and support them in every way we can.

Great. And then on Simms, I think you said the deal won't be accretive until FY '24 and you're forecasting a mid-teens EBITDA margin post integration. So I guess what do you need to do to bring those margins up to the mid-teens? And then you mentioned kind of building a fishing platform. What's the plan kind of acquisitions versus organic to that?

So this is Sudhanshu. So there are 2 things, as you know, with the center of excellence we have with e-commerce and supply chain, and that's where we will add a lot more value, a lot more synergy to Simms. It's a new platform. So they will get most benefit because center of excellence. Plus our relationship with retailers, being part of a bigger $3 billion plus companies so those, those are the things that help us get to that mid EBITDA margin. And they made large investments for last couple of years to get to this level. So we will see more leverage in the business as we continue to grow at this level.

And Jim, just to add on to Sudhanshu's comments. You had a question too about the fishing platform. So that's really nod to the future that it opens up a very large total addressable market for us because we have stated our capital allocation strategy at this point is to pay down debt even though we've got a low leverage. We'd like to continue to take that leverage down in a prudent manner. And then secondly, look at share repurchases where we think we can opportunistically go in and purchase. So not that we're ignoring M&A activities, but we don't have anything in our funnel right now that's imminent, and we're just going to continue down the path of building that Simms business out and looking to the future.

Ladies and gentlemen as there are no additional questions at this time. I'd like to thank you for joining us on today's Vista Outdoor conference call. Have a great day ahead. You may now disconnect your lines.