Vista Outdoor (VSTO) Q2 2020 Earnings Call Transcript

Vista Outdoor (VSTO -1.15%)
Q2 2020 Earnings Call
Nov 07, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Vista Outdoor second-quarter fiscal-year 2020 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Kelly Reisdorf.

Please go ahead, ma'am.

Kelly Reisdorf -- Vice President of Investor Relations

Good morning, everyone, and thank you for joining us for our second-quarter fiscal-year 2020 earnings call. With me this morning are Chris Metz, Vista Outdoor chief executive officer; and Mick Lopez, 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 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 vistaoutdoor.com, which supplement our comments this morning and include a reconciliation of non-GAAP financial measures.

With that said, I'll turn the call over to you, Chris.

Chris Metz -- Chief Executive Officer

Thanks, Kelly, and good morning, everyone. I'd like to begin by welcoming new participants to our call today. We had great interest in our story since we presented our accelerated transformation plan at our recent Investor Day in New York City. Our objectives and long-term plans have been well-received, and I'm excited about the increased interest in our company.

While much has changed during my time at Vista, our core mission has not. Our management team, employees and core consumer have a shared mission of bringing the world outside. We achieve this mission through a portfolio of well-recognized brands that provide consumers with a wide range of performance-driven, high-quality and innovative products for individual outdoor recreational pursuits. While today's call will be focused on our financial performance and operational goals, it's important that we stay grounded and not forget our mission and overall impact to society.

At Vista Outdoor, we care deeply about the outdoors and promoting, expanding and delivering outdoor lifestyles and experiences that are good for individuals, families and the communities in which we live. I'd like to begin the call with a top-line view of our financial performance. You will hear more from our CFO, Mick Lopez, on specifics, but I'd like to share the big picture in some context. In the second quarter, we continued to deliver the goals we set for ourselves, namely around reducing debt, improving profitability, renewing the focus on higher-quality sales and implementing disciplined cost management.

We made significant payments toward our high-interest junior term loan during the quarter and later paid it off in October. We continued to drive profitability improvements in our brands, made significant cuts to corporate overhead, which have resulted in better-than-expected adjusted earnings per share. You will also notice the gross profit expansion in outdoor products this quarter, which is a direct result of the strategy we have put into motion. For those that attended our Investor Day conference, you understand that our fiscal-year 2020 plan recognizes a strong second half based on seasonality trends and the timing of various internal initiatives.

And while we remain optimistic about the full year and believe our solid second quarter gives us a boost, we still face a number of uncertainties this fiscal year from tariffs to retail disruptions such as Walmart's decision to exit certain ammunition categories. For the first half of the year in the books, we have more work to do. However, transformation efforts are bearing fruit, and I'm excited about the direction we are heading. My vision for Vista Outdoor's future is one in which our family of consumer brands are the premier providers of products in each of their outdoor recreation categories and, ultimately, the overall industry.

Leading brands, combined with shared expertise, resources, and engagement of our corporate centers of excellence, put the entire Vista Outdoor enterprise on a path to success and an exciting future. We have the right structure, people and products, but we must continue to become leaner, smarter and even more focused on outdoor enthusiasts, wherever they choose to recreate and wherever they choose to buy their gear. The road map to this future is our accelerated transformation plan. This five-point plan was presented during our investor conference, and now I'll provide an update on each element.

The first pillar of our accelerated transformation plan is optimizing our organizational structure. We must have the right talent in place and organize our business unit to promote authenticity and the foundry's mentality while driving accountability and efficiency. I'm pleased to report that we have made continued progress toward this goal. As we've discussed on prior calls, we have reorganized our business to be more nimble and focused on organic growth.

Our structure drives accountability and reduces complexity for our brands, particularly in sales, marketing and other customer-facing activities that are crucial to creating authentic and lasting connections. We continue to cultivate and elevate our best people, who are the heart and soul of our turnaround. However, sometimes, we must go outside to recruit leaders to accelerate our transformation plan. I am pleased to announce the newest member of our team, Chris Sword, the new leader of Bell + Giro business unit.

Chris hit the ground running and has been in this position since October 30. Chris is a proven leader with a strong performance track record in diverse businesses, the outdoor industry and building brands. Chris most recently led Pearl Izumi, which is a wholly owned subsidiary of Shimano American Corporation. Pearl Izumi is an apparel and accessories brand that serves enthusiasts in cycling, cross-country skiing, triathlon, running and other outdoor sports.

Chris is the right leader at the right time for Bell + Giro, and I look forward to what he brings to the team. We also understand that optimizing organizational structure sometimes means making difficult choices about where to invest our limited resources. This is why we made significant reductions in our corporate overhead in the second quarter that further rightsized our organization, bringing up resources that can be reinvested back into our brands. As we've discussed at our investor conference, the second pillar of our accelerated transformation plan is to create leading centers of excellence, each with deep knowledge and expertise that can be leveraged to accelerate success at all of our brands.

When I joined the company two years ago, the areas that were most in need of improvements were digital marketing, e-commerce, and operational excellence. Since then, we have set up and integrated corporate centers focused on these strategic areas. And I'm pleased to report that in the second quarter, they're beginning to see those investments bearing fruit. I'll begin by sharing some specifics on digital marketing and e-commerce.

Improving our digital ecosystem and e-commerce capabilities are central to meeting our top-line and margin goals. We believe these investments will increase profitability, brand awareness and create new growth opportunities through sophisticated consumer insights, data analytics, and cross-brand marketing. Operationally, we have brought online 16 new websites so far this fiscal year. Needless to say, our team has been busy, and we haven't simply focused on our biggest brands.

Unclemikes.com and rcbs.com deserve a special mention. These sites, like all of our sites are enabled for business-to-business and direct-to-consumer sales. Loyal consumers can now find their favorite hard-to-find or always out-of-stock products directly from us. For Uncle Mike's and RCBS being part of the Vista Outdoor digital ecosystem speaks to the power of our better together strategy and how our systems and strategies can apply to smaller niche brands but also scale to the larger brands, such as Camelbak or Federal.

As we look to the future, this is a big part of our strategy. We continue the process of evolving our digital ecosystem by migrating our business units to the best-in-class Salesforce commerce and marketing cloud platforms. We are in the early stages of this program, which is already fueling dramatic D2C growth year over year. A good example of this is with our Federal Premium ammunition brand.

This is a very broad product line, where our dealers and distributors simply cannot carry all of Federal's products. Federal's D2C platform has sold over 300 different SKUs in the last 90 days alone. With a significant percentage of sales representing products our retail partners do not carry. This validates our goal of becoming the first major ammunition manufacturer to sell direct and creating more channels for our consumers to get our products and especially those products that are hard to get.

Also within ammunition, we recently launched our Custom Shop. This is an online direct-to-consumer store, where a hunter or shooter can get custom, hand-loaded ammunition that Federal does not currently offer. Through the Custom Shop web page, consumers can build ammunition specific to their unique needs. And Federal will hand load the ammunition to the customers' exact specifications, no matter the manufacturer of the bullet or other components.

This is a groundbreaking initiative in the ammunition industry, and we are proud to once again be setting the standard. The Custom Shop has already received accolades in the media and with our end consumers. Within CamelBak, we continue to see significant year-over-year growth in the digital and e-commerce space, driven by successful promotional activities with e-tailers like Amazon, as well as improved traffic and sales conversion on camelbak.com. We recently launched new B2B functionality on our custom design portal at camelbak.com.

This functionality enables our distribution partners to order customized models for their retail locations in a completely automated fashion. This is one of the many ways in which we are striving to deliver frictionless customer and end consumer digital experiences. Lastly, within our hunt and shoot business unit, our brand and digital e-commerce teams have stood up seven new direct-to-consumer websites, including Bushnell, Bushnell Golf, Blackhawk, Eagle, Uncle Mike's, Primos and RCBS. These websites provide a glimpse into our financial ROI of our digital efforts, but also a sneak peek into our future.

While sales in total for this business unit were down 7% in the second quarter, they were able to deliver a gross profit rate expansion of over 500 basis points. This is largely the result of digital and e-commerce improvements and we're pleased to see continued growth and profitability improvements from this business unit. So these are just a few examples of how we're advancing our digital and e-commerce program. What brings us all together and makes us an even more compelling opportunity for Vista are the consumer insights we gain along the way.

These help us to deliver even better brand-building experiences, expanded partnership opportunities with customers and to make smarter long-term product line decisions. Our Operations Center of Excellence is also driving change on multiple levels. The team has brought significant SG&A cost reductions and supply chain savings. This capability has improved profitability through margin protection or expansion in difficult market environments.

The Operations Center of Excellence has also provided a competitive advantage in the face of unprecedented external developments. The ongoing trade dispute between the United States and China has created countless challenges for our entire organization. In some product categories, more than 90% of global production capacity is in China. Simply relocating these operations to meet the political challenges of today is not feasible or even a realistic business strategy in the short term.

Despite these challenges, our Operations Center of Excellence has guided Vista through the trade war and minimized the impacts. The team has laid out three focus areas that guide our actions. First, vendor cost reductions and/or value engineering. The team has secured any cost reductions or efficiencies from suppliers, lessening the impact to our bottom line.

Second, working with vendors to find non-Chinese alternatives where it makes sense. Despite the monumental task of relocating production on short notice, we have begun to diversify our supply chain away from China. And lastly, where possible and with support from our retail partners, we have implemented price increases. This has been a delicate step as we typically drive pricing based on market demands, but tariffs have forced our hands in some instances.

For example, tariff-induced price increases at Camp Chef have negatively impacted the results, leading to reduced sales, profitability and American jobs. As the trade war continues, we will continue to fine-tune our pricing strategies to minimize the impact. For the fiscal year, we anticipate, as communicated at our investor conference, a full-year impact in the range of $15 million to $20 million, of which roughly two-thirds we have mitigated. On the Ammunition side, the operations team is driving efficiencies.

In the second quarter, we've made significant strides toward consolidating rimfire operations, rationalizing SKUs, refocusing the team on higher-margin products and improving operational efficiency for seasonal builds. The third pillar of our accelerated transformation plan is reducing our debt and ultimately delevering. Here, we've made substantial progress. We made a significant payment toward the junior term loan in the second quarter and have since paid off the remaining balance in the month of October.

The fourth pillar of our accelerated transformation plan is a return to organic growth. We acknowledge that we still have work to do, particularly in light of the continued softness in the market for our products, and unexpected challenges like Walmart's decision to exit certain ammunition categories. As we look at the ammunition industry-leading indicators, we continue to see signs of stabilization outside of the categories in flux as a result of Walmart's announcement. At our Investor Day, we signaled the full-year risk of up to $40 million and still believe this to be the case.

In the second quarter, we also saw one of our competitors win a contract to operate the Lake City Army Ammunition Plant. This will limit our access to the commercial supply of the ammunition produced at Lake City, including .223 and 5.56 and presents a top-line impact in our fiscal-year 2022. We always plan for multiple outcomes with Lake City and a no-win outcome has been part of our contingency planning. As the Lake City contract unwinds over the next 12 months, replacing the sales volume will be more challenging than replacing the profits.

As the market stands today, this is simply not a profitable category, and the net effect of Lake City will be a reduction in sales, but not EBIT. We anticipate being able to maintain our EBIT through a combination of mix, internal efficiencies, and growing existing and new contract opportunities. Should the market recover, we have multiple avenues by which we can pursue profitable growth to respond to demand. The ammunition market has historically shown to be prone to sharp and/or short spikes in particular categories.

And as the world's leading ammunition manufacturer, our focus hasn't changed. We continue to strive to make our business more nimble and better able to respond to demand wherever it may show up. Switching gears to new product innovation, which is critical to our organic growth. In the last year alone, in ammunition, we've introduced more new products than in the company's history.

Several of our most exciting breakthrough examples are: one, Hammer Down, a partnership with leading rifle brand Henry firearms that offers the industry's best-performing ammunition for lever-action guns. This firearm platform is still one of the most popular for hunting small and big games, and our co-promotion with Henry will reach a large dedicated audience. We're also proud to announce an exclusive agreement with the hottest new media company and outdoor lifestyle brand, MeatEater and its founder, Steven Rinella, are reaching a new audience with a focus on sustainable hunting, conservation and the celebration of wild foods. Federal's MeatEater line of ammunition will feature Rinella's likeness and a recipe on each box.

Federal Premium Black Cloud TSS for waterfowl hunters is a state-of-the-art ammunition, featuring a combination of patented flight stopper steel with ultra-high-density TSS. This tungsten-based product is now the preferred ammunition of internationally acclaimed Ducks Unlimited and will be featured at top Ducks Unlimited banquets across the country. And lastly, one of the most exciting new products revolutionizes ammunition for the modern muzzleloader. Firestick is being launched with industry leaders, Traditions and Hodgdon Powder to offer hunters a safer, more efficient product that charges from the breach.

Our top capital allocation priority continues to be reducing debt, but we do factor M&A into our long-term plans. While M&A is not part of our immediate operation's time horizon, I wanted to briefly comment on our philosophical approach. We will take a disciplined approach in identifying categories, costs and businesses, including their size, operation model and other integration factors. We'll be focused on businesses that bolster our current portfolio and fit into a better together model to increase the chances of long-term success.

Our team understands this approach, and we'll be ready to execute when the time is right. Much of my comments have focused on the financial performance, the accelerated transformation plan and sharing our vision of what success looks like over the long term. These are important topics, and I believe we're on the path toward meeting our short, medium, and long-term goals. In summary, I will share personal observation about the big picture.

In my career, I've had the good fortune of working with some great companies. And I worked alongside some of the best and brightest business minds. In light of these experiences, my belief and passion for Vista Outdoor is as strong as ever. Working alongside the leadership team and employees of Vista Outdoor inspires me.

Our team is singularly focused on serving the end consumer, meeting our financial goals and shaping the future of outdoor recreation for this generation and beyond. I am proud to lead this organization and proud to be associated with the company, whose core mission is making a positive difference in people's lives. I'll now turn it over to Mick to share more detail on our financial performance and outlook.

Mick Lopez -- Senior Vice President and Chief Financial Officer

Thank you, Chris, and good morning, everyone. We would like to start this morning with a brief update on our capital structure and debt pay down progress, which, as you know, remains our first and foremost primary financial goal. At the end of our second quarter, we had around $562 million in net debt. This includes a $20 million reduction in our higher-cost junior term loan of $40 million.

We are pleased to report that we also paid off the remaining balance of $20 million in full during the month of October. While our intent was to pay off the higher cost junior term loan by December 31, we had sufficient free cash flow to accelerate the payment in the first few weeks of October. The full payment of the term loan provides a 50-basis-point improvement to our interest expense on our asset-backed loan credit facility. As of now, our fixed charge coverage ratio requirement is lowered to 1 times from 1.15 times previously.

As you can see on Slide 5, our leverage ratio after the second quarter was approximately 5.7 times, adjusted for the sale of firearms. Our fixed charge coverage ratio, which is the only major asset-backed loan covenant, was 2.03 times at the end of the second quarter, which is substantially above the new 1.0 times requirement. Our finance team priorities are to strengthen our overall cash performance through improvements to inventory and reduce capital expenditures, as well as improve profitability through cost management and pricing optimization. So now let's review our second-quarter consolidated results.

We have provided you today with both as reported and adjusted results on an organic basis in our press release. My comments today are going to focus on our adjusted organic results. Turning to Slide 6. The company reported second-quarter sales of $445 million, down 19% from the prior-year quarter or down only 7% on an organic basis.

The year-over-year decrease primarily reflects continued softness in outdoor products due to tariff impacts and continued challenges in ammunition's rimfire market. There were notable revenue increases in tactical and a strong start to the snow season for Giro. On a GAAP basis, gross margin was $90 million for the quarter, down from $109 million in the prior-year quarter. On an adjusted organic basis, gross profit was $91 million, down $3 million from the prior-year quarter.

However, the overall gross profit rate increased positively by 38 basis points compared to the prior-year quarter, and up approximately 77 basis points on an adjusted organic basis. On a GAAP basis, operating expenses were $89 million, down 31% over the prior-year quarter. Adjusted operating expenses for the second quarter were $81 million, down 14% from the prior-year quarter, and after adjusting for the sale of eyewear and firearms, operating expenses decreased by about 1%. The primary driver in the decline of operating expenses is the result of cost reduction actions taken within our business segments that mitigate salary increases and inflation.

In the back half of the year, we expect to see additional reductions in operating expenses from actions that have been taken already. Interest expense for the current quarter was $9 million, compared with $14 million in the prior-year quarter. The average borrowing rate in our second quarter is 5.5%, compared with 5.8% in the prior-year quarter. The net debt balance at the end of our second quarter was $562 million.

On a GAAP basis, our tax expense was about $1 million or a tax rate of minus 8%. Our adjusted tax rate for the quarter was 107%. The adjusted tax rate was primarily affected by continued unfavorable discrete items, such as interest expense on uncertain tax positions and nondeductible expenses. GAAP net income for the quarter was negative $11.9 million, resulting in a GAAP EPS of negative $0.21, compared with a negative $0.57 in the prior-year quarter.

Our adjusted net income was close to zero, resulting in adjusted earnings per share of $0.00, compared with $0.05 in the prior-year quarter. Our adjusted earnings per share for the quarter was better than we expected as a result of a focus on higher-quality sales, greater-than-anticipated savings from the result of operational excellence projects and an unplanned insurance settlement. Sequentially, from the first to second quarter, the change in free cash flow was a positive $21 million as a result of accounts receivable collections and controlled inventory actions. Year-to-date, free cash flow is negative $23 million.

We anticipate the usual seasonal cash inflows that come in the back half of our fiscal year to assist in achieving our full-year guidance. Before we get into our operating segment performance, I wanted to briefly give color on the nature of the year-to-date non-GAAP expenses, which can be found in the appendix of the presentation. Roughly half of the expenses incurred are noncash charges, including a write-off of debt acquisition costs of just over $3 million and asset impairment charges of approximately $3 million. Remaining expenses are approximately $1 million related to the final earnout from the Camp Chef acquisition, and approximately $4 million, which is related to our most recent restructuring activity, which also includes sales.

In our adjusted results, we have changed our deferred tax assets by approximately $2.6 million to more accurately reflect our ongoing tax liability. As we look to the back half of the fiscal year, we anticipate only minor restructuring and asset impairment charges related to the payoff of the junior term loan and the completion of the distribution consolidation project. Turning to Slide 7. We will now review operating segment results.

Shooting sports recorded second-quarter organic sales of $210 million, down 23% from $274 million in the prior-year quarter. On an organic basis, revenue decreased 6% compared to the prior year as a result of continued softness in the rimfire market, partially offset by increased demand for pistol ammunition. Second-quarter adjusted organic gross profit in shooting sports was $29 million, down 22% from $37 million in the prior-year quarter. The gross profit rate this quarter was 14%, which is a decrease over prior-year quarter gross profit of 17%.

Sequentially, this quarter's gross profit rate is 182 basis points lower than that of the first quarter. The year over year and sequential compare was challenging due to Black Friday deals shipping in the second quarter of this year as opposed to the third quarter of the prior year. Adding to this challenge compare the result of Lake City ammunition consumer rebate we ran in the second quarter of this fiscal year as opposed to the fourth quarter of our fiscal-year '19. Beyond timing, the decrease was also driven by lower sales volume, partially offset by favorable overall commodity pricing.

Turning to Slide 8. Second-quarter sales in outdoor products were $234 million, down 14% when compared to the prior-year quarter. On an organic basis, adjusting for the sale of eyewear, sales were down 7% on a year-over-year basis. Organic adjusted gross profit was $62 million, which is a 9% increase from $57 million in the prior-year quarter.

Increases to gross profit are the result of focusing on higher-quality sales and more importantly, the benefits of onetime restructuring investments that we made last fiscal year. This gross profit increase in the second quarter was partially offset by lower demand for hunting and shooting Accessories and tariff impacts on our outdoor cooking products. Despite the sales declines, outdoor products was able to increase the gross profit rate from 23% to 26% on an adjusted organic basis for an overall increase of just under 400 basis points. This is the result of disciplined focus on higher-quality sales, as well as benefits due to continued simplification of the business model.

Turning to Slide 9. As we closed a solid second quarter and turn our focus to the back half, I would like to take a minute and let you know that our profitability improvement plan is on track across all of our seven initiatives. And I'd like to add some color on three elements at this time. Specifically, we have executed a large corporate SG&A cost reduction that shows approximately $4 million in restructuring expenses in the second quarter but will yield a payback in less than two quarters.

On improved product mix and outdoor products, we saw already in the second quarter, a drastic improvement in profitability that was earlier than we anticipated. On reduced interest expense, we executed also earlier than anticipated, the payoff of the junior term loan in mid-October, and we'll realize those savings sooner than planned. However, looking to the back half of our fiscal-year 2020, we expect a couple of uncertainties and challenges. We may experience competitive pricing activity in Ammunition until the market settles from Walmart's announcement to exit a number of categories.

While we are executing on the tariff mitigation strategy Chris described earlier, we view as a continued risk, the impact these tariffs have on end consumer spending. From a cash flow standpoint, we delivered improved cash flow performance over our first quarter and continue to expect positive strong cash flows delivered in the back half of the year as fall hunting and holiday season sales are collected. Turning to Slide 10. At Investor Day, we announced a $40 million change to our revenue guidance down to a range of $1.75 billion to $1.85 billion, and this simply reflects the near-term risk as a result of Walmart's announcements to swiftly exit key ammunition categories.

Also reflected in this risk is some anticipated loss of foot traffic in the retail stores, thus presenting a headwind for our accessories in outdoor products. Also, as previously stated at Investor Day, we lowered our total annual interest expense guidance from $40 million down to $37 million. This is the result of paying the remaining balance on the junior term loan. We are pleased to have paid this off two months earlier than anticipated, and we will likely update guidance in the next quarter.

We affirm our current full-year adjusted earnings per share guidance in the range of $0.10 to $0.25. Given the better-than-expected adjusted earnings per share in the second quarter, we evaluated increasing annual EPS guidance. However, in light of market channel and tariff uncertainties, we are maintaining our guidance at this time. As the tariff impact on our business becomes more clear and the market for handgun and .223 5.56 ammunition normalizes post-Walmart announcement, we will be in a better position to revisit this guidance next quarter.

As Chris indicated earlier this morning, we are proactively engaged on all fronts with regard to our company's tariff mitigation strategy. We are holding the approximately $0.05 EPS tariff risk to reflect this uncertainty. We will update you in the next quarter as the trade situation continues to develop. Lastly, we're working diligently to get product available in the channel and the hands of our consumers for those Ammunition categories Walmart is exiting.

The loss of a Lake City contract for .223 5.56 ammunition does not present any risk to the current fiscal-year 2020, as that contract runs through the end of our second quarter fiscal-year 2021. As Chris indicated earlier, the full impact we are facing as a result of Lake City will be in our fiscal-year 2022. Current fiscal-year 2020 revenues annualized for the .223 5.56 product manufacturer in Lake City are roughly expected to be in the range of $185 million to $195 million. And at a much lower contribution margin than other centerfire ammunition.

Approximately 20% of this total volume from Lake City are what we consider to be lumpy international orders with the remainder of the commercial volumes annually contributing a total of $7 million to $8 million in EBIT under the current contract terms. Given how competitive the recompete of this business was, we anticipate the full-year '22 full -- EBIT exposure to be less than the current commercial contribution. As a part of the recompete process, we developed plans for the manufacturing and/or procurement of this product to mitigate the risk to the second half fiscal-year 2021 and the full fiscal-year of 2022. Our fiscal-year 2020 guidance is as follows.

We expect sales in the range of $1.75 billion to $1.85 billion. Interest expense of approximately $37 million. Adjusted earnings per share in the range of $0.10 to $0.25. Capital expenditures of approximately $40 million.

Free cash flow in the range of $30 million to $40 million. We anticipate R&D spending to be approximately $30 million. We expect full-year EBITDA margins of approximately 6%. To provide additional transparency, as requested by many of you, this quarter, we have included in the appendix an additional slide on our adjusted EBITDA for the last 12 months.

We also expect shooting sports gross margins for the full year in the mid-teens. Outdoor products gross margins for the full year in the mid-20s. For the third quarter, in particular, we expect shooting sports gross margins to be in the mid to high teens and outdoor products gross margins in the mid-20s. Previously, we have provided you with tax rate guidance on a percentage basis.

However, due to the fact that our earnings before tax are close to breakeven, we feel it will be more meaningful for your models to provide guidance in absolute tax dollars. On a reported basis, we will have a tax benefit of approximately $6 million. On an adjusted basis, we will have a tax benefit of approximately $2 million. Lastly, on a cash basis, the tax cash impact is immaterial as it will be close to zero this year.

While we have made much progress, there's still much more to do. We will remain diligent in controlling our costs, continue focusing on improving profitability, generating positive free cash flow and reducing our leverage. External headwinds and market softness remain, but we will continue to be intensely focused on delivering sustained returns for our shareholders. Thank you, everyone.

Now we will please open the line and take your questions.

Questions & Answers:

Operator

[Operator Instructions] We will take our first question from Dave King with ROTH Capital Partners.

Dave King -- ROTH Capital Partners -- Analyst

Thanks. Good morning, everyone. I guess, first on the guidance, Chris, you talked a little bit about for the second half, some seasonality and internal initiative benefits that are sort of embedded in getting to the 1% organic growth versus, I think, the down 7% you had the first half. Can you speak to some of those things and what's driving that improved outlook?

Chris Metz -- Chief Executive Officer

Sure, Dave. So as we communicated at our investor conference, we -- and really, at the beginning of the year when we gave full-year guidance. We fully expect our outdoor products business, backed by a robust new product pipeline to start to return to growth. So we're going to see some contributions there.

And it really is largely due to the new products pipeline that we've been working on. Secondly, we've got an Ammunition business that has got some timing issues where we had some contract sales that fell into our first half, predominantly the second quarter last year that are going to fall into our back half this year. So there's some seasonality in that business, and there's just more goodness, frankly, coming from the outdoor products business. We've also got our e-commerce and D2C initiatives that we've got ramping up.

We mentioned we've got 16 websites we brought online this year, year to date. So we're seeing smaller but increasingly more contributions from that investment.

Dave King -- ROTH Capital Partners -- Analyst

OK. Great. That's really good to hear. In terms of -- switching gears, in terms of the Walmart exit that you talked about at your Analyst Day, the reduced orders there, are they reflected in the Q2 run rate at all? Have you seen any to date in Q3, if not in Q2? And then what have they shared around plans around liquidations and reduced pricing? Are they picking up additional other calibers to make up for it? Just what are the current things you're seeing with that relationship?

Chris Metz -- Chief Executive Officer

Sure. So Walmart is in a state of transition right now, and they publicly stated that they want to be out of the Ammunition category of handgun and in the .223 5.56 calibers by the end of this calendar year. So certainly, we're anything but normal in that point-of-sale movement. So what we've seen is, frankly, as well as our competitors, more shipments toward the end of the second quarter, and we'll see a bit more here in the third quarter as we wind that down.

And we've seen a pickup in POS, so the product is selling through. So certainly not normal. Now as we go forward here, we still got a remaining healthy business with Walmart that we're going to continue to drive with that big partner. But I think what's probably more important is, as we look forward, where does that volume go? So we've had our ammunition team that has been working just since the announcement from our customer, working with every retail partner that covers every 3,500 stores, where the product is sold.

We've got it all mapped out. We've got it, frankly, blanketed and capturing as much of that share as we can. As you can imagine, our other retail partners are really, really excited to try to capture that volume. So I couldn't be more proud of what the ammunition team has done to try to counteract that and try to figure out where that product, and that demand is going to go.

So we feel like as we go forward, we're doing everything we can to capture the loss of a big customer.

Dave King -- ROTH Capital Partners -- Analyst

OK. Fantastic. Thanks for taking my questions and good luck for the rest of the year.

Chris Metz -- Chief Executive Officer

Thanks, Dave.

Mick Lopez -- Senior Vice President and Chief Financial Officer

Thanks, Dave.

Operator

Take your next question from Scott Stember with CL King.

Scott Stember -- C.L. King and Associates -- Analyst

Good morning. And thanks for taking my questions.

Chris Metz -- Chief Executive Officer

Good morning, Scott.

Scott Stember -- C.L. King and Associates -- Analyst

Chris, on your Investor Day, I guess it was really early on in the process, but it was right after Walmart had announced that they were going to discontinue selling certain parts of your ammunition. But you intimated that it sounds at least like business at Walmart had really, really picked up, I guess, in reaction to that. Can you maybe talk about how that played out within the quarter? Was that just a one or two-week thing? And also, you had talked about the impact on pricing in the industry in the back half of the year. How are you seeing -- is there any impact from Walmart on the rest of the industry from a pricing perspective?

Chris Metz -- Chief Executive Officer

Yes. So Scott, what I will say is that I don't want to comment too much on our customers' point-of-sale movement. But since the announcement, we saw, as well as our competitors, a continued interest in the product, and a lot of fanfare around that announcement. So POS was not just a one or two-week spike.

I mean, POS has been pretty steady. It jumped up initially and then it tapered off, and it's been pretty steady as we've moved through the last 30 days or so. In terms of pricing, we remain optimistic in terms of the pricing environment. And we're seeing that with, frankly, less discounts.

Now I say that in light of the fact that we brought forward more discounts in our Ammunition business in the second quarter versus last year, where we accrued a number of our Black Friday discounts in the second quarter, brought the margins down. We won't see that here in the third quarter. But setting that aside, we see a better discount environment, and we are optimistic that the pricing has stabilized, and pricing will see more rationality as we go forward. That's the landscape that we see.

Scott Stember -- C.L. King and Associates -- Analyst

OK. And I know you guys have done a great job of bringing your debt levels down, but you've also talked about the need to potentially monetize another piece of your business to pay down more debt. I mean, Bell + Giro looks like you brought some new management in. Maybe just talk about particular areas where we could see that? Or is that still narrative? Is that still there that you realized that you need to monetize something to pay down more debt?

Chris Metz -- Chief Executive Officer

Scott, it's a good question. It's something that we think about all the time because we've committed to reducing our leverage ratio. It's extremely important. It's on every leader's mind within Vista Outdoor.

But as you and others can imagine, this is a bit of a tricky slope because we're trying to be great stewards of capital, and we're trying to drive earnings at the same time. So since I walked in the door, we've sold two assets. We've taken out a ton of cost. And we've invested a lot in processes that we feel like -- in the supply chain area, these processes we've invested in, we feel like we're in a position where we can now drive some inventory reductions without sacrificing service levels.

So more than ever, we feel like we're in a position to control our destiny a bit more than we were just a little a while ago. So that being said, our overall goal is to reduce debt and get down to the leverage ratios as we've communicated to you. We feel like there's a number of avenues to get there, and we will get there. So if it's a combination of working capital improvements, earnings improvement, a large asset sale or maybe a couple of smaller asset sales, we're going to get there.

And we just know that we've got a little bit more optionality in terms of how we get there.

Scott Stember -- C.L. King and Associates -- Analyst

That's great. And last question on tariffs. There was some positive developments this morning. I know it's only a couple of hours old, but just thinking out loud from a high level, if tariffs are rolled back and eventually go away with it, I don't know, whatever the phase-out period is, do you expect with the maneuvers that you've put in place to first attack this -- the mitigation factors, do you expect to be in a better net situation on the bottom line even when tariffs eventually if and when they do go away?

Chris Metz -- Chief Executive Officer

Yes, Scott. It's -- hey, it's a very, very good question, and it's a very, very deep answer that's required because there's so many mutations of the tariff increases. We've seen multiple tariff increases. We've seen the same headlines that you're reading would suggest that there may be some rollback.

There may be some rescinding. We just don't know where this is going to end up. Clearly, with our mitigation efforts, we feel like there's the potential for some upside. But our vendor partners have absorbed a lot.

Our retail partners have absorbed a lot, we've absorbed a lot. So there will be some goodness to be had. But we've still been left with a bit of a hole here. And we put that into our forecast, and we've communicated that very clearly where we sit.

But I would largely look at that as kind of a next fiscal year type of thing because, like a lot of companies, we bring in inventory. And we've got a lot of inventory that reflects that higher tariff amount. So it may not be a short term gain, meaning the next quarter or two. But certainly, as we look forward, any tariff relief would be a win for us in a big way.

Scott Stember -- C.L. King and Associates -- Analyst

Got it. That's all I have. Thanks, again.

Chris Metz -- Chief Executive Officer

Yep. Thanks.

Operator

And we'll take our next question from William Reuter with Bank of America.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Good morning. I'm following up on the question around tariffs. And I'm just going to ask you the question a slightly different way, but have you commented on what the dollar value of products that you currently purchase from China is?

Chris Metz -- Chief Executive Officer

Yes. So we -- what we've done is we've sized up what we think the challenge is. And so our tariff product across all of the increases is $15 million to $20 million. That's the amount that we're absorbing this year.

And we stated that we can mitigate, and have mitigated about two-thirds of it. There's about a third of it that's a risk, and we've called that out in our full-year guidance. And so Mick, you want to add or comment on it?

Mick Lopez -- Senior Vice President and Chief Financial Officer

Yes. I just wanted Bill to understand that we look at this across all our products and our value chain. And it's special noteworthy to understand that our Ammunition category is entirely sourced in the U.S. There's no tariffs in it.

Outdoor products, we do manufacture some here, but most is in-sourced from China and other countries. And as Chris stated, we're having multiple litigation strategies. But every single dollar is being seen. But rest assured, our ammo is not under any tariff impact at all.

William Reuter -- Bank of America Merrill Lynch -- Analyst

OK. And the $15 million to $20 million number, was that related to this fiscal year? Or is that calendar-year '19? What does that relate to? Or is that an annualized type of a run rate?

Chris Metz -- Chief Executive Officer

Yes. No. That relates to this fiscal year.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Fiscal-year '20. So I guess, all right. And then, I guess, that would really only have one quarter or so of the list four tariffs that were implemented either in September or December. When you guys think about a full kind of run rate number of a full year of those tariffs.

Do you know what that number is?

Mick Lopez -- Senior Vice President and Chief Financial Officer

No. Look, there's -- yes, we know what the number is. We're not at this point sharing that because there's so much uncertainty. Just this morning, we had a very positive news in so far as the tariff.

A lot of it also depends on the latest positions of our government and our president, so we do have that. We also have mitigation strategies. They're going to be into effect next year. So what has applied this year will not be necessarily what will apply next year.

But I would say it is not a run rate number by any stretch.

Chris Metz -- Chief Executive Officer

No. And I'll add to what Mick's comments are, as much as we know what the number is point in time, we look at this every week and every month, and that number changes. And it changes based upon the actions the team has put in place, based upon the schedule of the mitigation efforts beyond just cost reductions. And of course, the tariff changes here.

So it's a big moving target. We know what the outside parameters are, and we're managing it as hard as we can.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Yes. No. I know it's tough for everyone to kind of get their head around. I guess, just my last question.

Previously, you've been awarded a couple high-profile contracts with the L.A. Police Department, the New York Police Department, U.S. Army, etc. I guess, in terms of additional contracts that you potentially could get awarded over the next, I don't know, six months or a year, I guess, what's the outlook there? Has there been a lot of business that you've been responding to RFPs for, just looking for an opportunity there?

Chris Metz -- Chief Executive Officer

Yes. So listen, let me give a little shout out to the ammo team here because I've never in my career seen a business unit absorb as many punches as our ammunition team has, and I couldn't be more proud of the resilience and the fight that we've seen from this team. I mean, many teams would have folded their tents and woe is me. This team has reacted in unbelievable fashion.

And they've done it from a number of aspects. They've taken a lot of cost down, which is really, really hard. They rightsized operations. They've rationalized production, but they continue to invest in new products.

And we mentioned that we've got one of the most robust product pipelines that we've ever had, introducing more new product than in the company's history. The other thing they've done is they've really, really gone after contract business. So right now, we're sitting on probably the most robust contract pipeline, both in law enforcement and military than we've had in the company's history. So we're very optimistic and confident about some of the contracts that we're going to win.

Now in fairness, we're going to need those, right, with the Lake City loss that we're facing in our fiscal 2022, although that's a couple of horizons out, we're managing really hard against that and these contracts will help us. So feel good about the contract side of the business.

William Reuter -- Bank of America Merrill Lynch -- Analyst

Great. I'll pass to others. Thank you.

Operator

Our next call comes from Gautam Khanna with Cowen and Company.

Dan Flick -- Cowen and Company -- Analyst

Hey, good morning. This is Dan Flick on for Gautam. So circling back to Walmart, just the lost sales there. What is the -- could you remind me what the timing is on that? Is it mostly in the second half? And then do you know how much yet could be offset by alternative customers? And do you have any of that offset included in guidance already?

Chris Metz -- Chief Executive Officer

So Dan, everything we know to date is included in our guidance. And the -- listen, the offset, we're going to see as we go forward here. We -- it's fair to say we probably didn't see much of it at all in the second quarter. We're going to see more in the back half here.

We're going to see more as we go forward into the next fiscal. And we know what we've gotten committed to offset that. We're working really hard. We've got a punch list over a page deep of customers and programs.

And kind of end cap sidekicks to get product in, promotions to support it. So we feel really good about what we're doing to combat that loss of a major customer, but it's a -- listen, it's a hole for all of us. And we know there's going to be a hole there at the end until it finds its natural demand.

Mick Lopez -- Senior Vice President and Chief Financial Officer

And as we stated on Investor Day just a couple of months ago, we decreased our revenue guidance by $40 million to reflect this revenue this year. And we know, as Walmart has stated, that they are selling well. They will continue to sell through the holiday season up to the year end. So that sell-through is going through this year and will, therefore, be a more of an impact in the third and the fourth quarters.

Looking to the future, we foresee some decline and some attrition because Walmart will not be stocking some of these popular ammunition categories. But it would be remiss to believe that this is just going to vanish. And we think we are more nimble than many of our competitors on distribution and in our marketing skills. So we are actively pursuing with some of our retail channel partners a real substitute channels for our customers to get their product elsewhere.

So where we think this is a -- some time of one-time hit here. It's a transitional. There will be some attrition in the total amount of ammunition being sold. But all in all, we know that our customers are avid fans of their sport, and will continue to buy that ammunition elsewhere.

And we plan to be there.

Dan Flick -- Cowen and Company -- Analyst

Thank you.

Operator

We'll take our next question from Mark Smith with Lake Street Capital Markets.

Mark Smith -- Lake Street Capital Markets -- Analyst

First off, can you give us a little more insight into your SG&A, kind of the steps that you took in cutting some of the corporate G&A? And then your guidance seems to imply lower SG&A here in the second half compared to kind of the run rate in the first half, can you just walk us through some of those numbers and initiatives a bit?

Mick Lopez -- Senior Vice President and Chief Financial Officer

Yes. Certainly, Mark. And the one thing that we have been doing and really focused on over the past year as we have divested significant amounts of revenue, in Eyewear, in our Savage, and we have been successful in keeping our SG&A percentage at around the same level. So a lot of stranded costs, and it takes a lot of work, and there has been a lot of sacrifices by our employees.

And unfortunately, we had to rightsize much of our business, as a consequence. The recent restructuring that we alluded was about a $4 million expense that we're taking through our restructuring line, and that has a payback of, as we stated, a couple of quarters. So you can deduce what the ongoing savings are going to be on an annual basis from that. And again, this is a daily effort on the part of everyone here.

And as you may recall, again, on Investor Day, we do have a key center of excellence, which is operational excellence doing benchmarkings, comparisons, external validations of our processes and expense to revenue ratios that have highlighted areas, whether it's in the business units or in our corporate that require this. And I'll give you one example. We had two warehouses, one of them was much higher cost than the other, and they were running at almost less than half capacity, both of them. So we consolidated that, and that is going on extremely well.

We already shipped our first CamelBak from the rental facility. And we will continue to look at different types of SG&A and certainly, operational expenses going forward.

Mark Smith -- Lake Street Capital Markets -- Analyst

OK. And then second, can you quantify at all the impact of pulling some of these Black Friday promotions into Q2 rather than Q3?

Chris Metz -- Chief Executive Officer

Well, what we stated is in the seven-point profit improvement plan that we expected $2 million from the first half to the second half of improvement as a consequence of that. So that was something we shared with you just a couple of months ago, and that is still a valid number as far as we're concerned.

Mark Smith -- Lake Street Capital Markets -- Analyst

OK. And then last one from me, excluding Walmart, excluding Ellett Brothers, can you give us any insight into what you're seeing from customers today in the ammunition market? Are you seeing any uptick that's maybe following some of the potential increased demand for firearms? Do you still think that we're a ways out from that? Just give us kind of your thoughts into where your customers' at and their kind of thought process right now?

Chris Metz -- Chief Executive Officer

Yes. So Mark, I don't know if this is a leading indicator or not. But our customers are pretty optimistic. Now we want to be realistic about their optimism because they're optimistic because they've seen some of the attrition in the distribution basin in the retail base, and so they're excited about that.

Because they're going to capture some of that volume, but they're also very excited about the fact that the NICS data is up pretty dramatically. And it's been up month-over-month over month-over-month. So that is not a direct correlation for Ammunition sales, but it certainly is exciting to see. And then secondly, when you all look at the excise data taxes, and this doesn't necessarily relate to the industry, but it relates to our products, we continue to grow in our share of the commercial market.

So we're excited about that. And the retail customers who we're working with are seeing that in our innovation and our creativity with marketing programs. So they're pretty excited about it.

Mick Lopez -- Senior Vice President and Chief Financial Officer

Yes, I'd just like to add, we look at NICS too, and we have seen for the past three months that NICS is -- background checks are up double digits. And in the previous quarter, they were up single digits. So that's six -- almost six -- sorry, months in the previous three months. So for the past six months, NICS background checks are up.

And we think that will bode well for the ammunition market if, historically, the correlation continues where first gun sales are up and then the Ammunition sales follow.

Thanks Mark.

Mark Smith -- Lake Street Capital Markets -- Analyst

Thank you.

Operator

We will take our last question from Brian DiRubbio with Baird.

Brian DiRubbio -- Robert W. Baird and Co. -- Analyst

Good morning. On your Investor Day, you've mentioned that you had an excess and absolute -- obsolete issue with your inventory. Can you just give us a status update of how much of that you've been able to clear over the last quarter?

Mick Lopez -- Senior Vice President and Chief Financial Officer

Certainly. I'll tell you, we now have monthly reviews for only inventory, and those are led by myself and by the general managers of each business unit. So we have a glide path of reducing inventory from here to year-end. That is significant.

Most of that is actually on efficiency-based, the driving less surplus, less waste, and focusing on less SKUs and whatnot. But the significant component is excess and obsolete. We did have some numbers in our Bushnell category that have been moving well. And our -- and I would say that so far, we're very much pleased with our performance in eliminating the excess.

Chris Metz -- Chief Executive Officer

Yes. So Brian, as much as we don't quantify the stratification of our inventory, what I can tell you is our excess and obsolete total is coming down as a percentage of our total inventory. And what's happened in the past is when we introduce products that don't resonate in the marketplace, we get stuck with excess and obsolete. The product pipeline we're introducing now is very, very much in user research.

We're optimistic. And so we're going to continue to drive down our excess and obsolete as a percentage of the total to give us room for these great new products. And we're highly confident that we won't be driving excess and obsolete as we go forward.

Brian DiRubbio -- Robert W. Baird and Co. -- Analyst

Perfect. And can you give us any indication of what your spend has been on the digital marketing and e-commerce efforts? And is that -- what is the spend we should think about?

Chris Metz -- Chief Executive Officer

Yes. So what's happening here is, as you all know, one of the advantages of Vista Outdoor, this is the better together, is we take the dozens and dozens of brands that we own that would not be able to afford this digital spend on their own, and we leverage the might and muscle of Vista Outdoor. And we're doing that. I mean, I don't know that any of these 16 brands could have brought up the websites, and spent the money that we've been able to spend if they were on their own.

But together with Vista, we're able to do that. And so we've been able to fund that with the reductions in corporate SG&A, we're putting it right back into growth initiatives like D2C. So hey, we're excited about the investment we've made in there, the margin is super high. And we're going to continue to measure the ROI on it to ensure that we're getting great payback on the investments.

Brian DiRubbio -- Robert W. Baird and Co. -- Analyst

Great. And just last question for Mick. As I look at the balance sheet, we probably get the Q tonight, but pro forma for the paydown of the junior-term loan? Are we looking at maybe $210 million outstanding on the revolver at this point?

Mick Lopez -- Senior Vice President and Chief Financial Officer

I would say yes. Obviously, if our net debt is approximately $562 million, and we have 350 on our notes payable, there was some cash in there. So you can do the math off of it. All right.

It's time. Listen, we appreciate it --

Operator

And that concludes today's question --

Chris Metz -- Chief Executive Officer

Yes. Go ahead, operator.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Kelly Reisdorf -- Vice President of Investor Relations

Chris Metz -- Chief Executive Officer

Mick Lopez -- Senior Vice President and Chief Financial Officer

Dave King -- ROTH Capital Partners -- Analyst

Scott Stember -- C.L. King and Associates -- Analyst

William Reuter -- Bank of America Merrill Lynch -- Analyst

Dan Flick -- Cowen and Company -- Analyst

Mark Smith -- Lake Street Capital Markets -- Analyst

Brian DiRubbio -- Robert W. Baird and Co. -- Analyst

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