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Vista Outdoor (NYSE:VSTO)
Q2 2019 Earnings Conference Call
Nov. 1, 2018 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Vista Outdoor quarter 2 FY 2019 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kelly Reisdorf. Please go ahead.

Kelly Reisdorf -- Vice President, Investor Relations

Thank you, Cassidy. Good morning and thank you for joining us for our second-quarter fiscal-year 2019 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

Thank you, Kelly, and good morning, everyone. Two quarters ago, we announced a new strategic plan to put Vista Outdoor back on the path to success. In a very short time since then, we've made much progress on that plan. Here are some of the highlights since announcing our new strategy.

We have now delivered two solid back-to-back quarters. We've taken significant steps to optimize our portfolio, including closing our first divestiture, our Eyewear business. We've begun to -- the divestiture process on our Savage brands and we are seeing encouraging initial interest. We've hired strong leaders for our Bushnell, CamelBak, and BLACKHAWK! businesses.

I've completely restructured my corporate leadership team, taking layers out and consolidating positions to reduce overhead. We've also reduced our physical footprint in corporate by consolidating facilities. We have placed an even greater emphasis on e-commerce and digital marketing across all of our brands by adding a higher-level e-commerce executive to the leadership team. We've driven multiple other cost savings and efficiency initiatives across the enterprise from procurement to supply chain, to sourcing, to manufacturing efficiency, to payroll consolidations, and more.

And importantly, we've introduced the winning culture to our entire organization. I will discuss these initiatives in the quarter in much more detail, but I believe the executive summary is that the transformation is taking shape, we are seeing results and are more confident than ever that we now have the tools and plan in place to complete this turnaround to get this company back to profitable growth and to see more successful Vista Outdoor for the future. So today, I'd like to talk about what we've accomplished this quarter, review the market challenges that we continue to face, and our plan to mitigate those challenges while continually delivering results. Let me start with some more details on the quarter.

We delivered a solid Q2. We exceeded our internal plan on both revenue and earnings per share. Sales for Vista were $547 million and adjusted EPS was $0.05. At the segment level, Shooting Sports sales and adjusted gross profit both increased sequentially from quarter 1 to quarter 2.

Within Outdoor Products, adjusted for the Eyewear business, sales were relatively flat year over year. Sequentially, organic sales were up 6%. And it is important to note that we delivered another solid quarter, while we're also completing our sale of the Bolle, Cebe, and Serengeti eyewear brands. I think this demonstrates that the existing key team can deliver results both operationally and strategically at the same time.

As we said when we announced the sale, we plan to use the proceeds to pay down debt, and I'm pleased to say that in quarter 2, we paid down $143 million in debt. Year to date, we've paid down $176 million in debt. And since October of last year, we've paid down a total of $307 million of debt. We've also made progress on our previously discussed refinancing actions.

As you know, earlier this year, we entered into an amendment to our existing credit facility to give us covenant relief through the end of our fiscal year. We did this to allow us adequate time to put in place a more flexible, asset-based loan structure that will facilitate the completion of our strategic transformation plan and support our pursuit of future growth in our core categories. I'm pleased to say that we have completed our restructuring discussions with our lenders and received commitments from them for a new facility that is tailored to our strategic path forward. Mick will provide more details on that in a moment.

So as you can see, we've made incredible progress in a relatively short period of time. We are demonstrating that we can execute our transformation plan and still deliver against the bottom line. So, now let's talk a little bit more about the progress on the transformation plan. As you know, we've made the decision to rightsize our portfolio of brands and focus on four core categories: ammunition, hunting and shooting accessories, hydration bottles and packs, and outdoor cooking products. We also decided to explore strategic options for brands that we didn't deem as core to our business going forward.

As I said earlier, we just completed the sale of the Eyewear business in early September. That sale was an important first step in transforming our business and we are eager to build on that momentum. Our team is now laser focused on the divestiture process for Savage Arms. We've chosen the financial advisor for the transaction and are beginning to engage with potential buyers for the Savage brand.

Initial interest leads us to expect that we will have a strong auction process with bids from both strategic and financial buyers. I'm pleased with the interest level we've had and believe we will have more news to share before the end of the fiscal year. Concurrently, we're also working on a number of other initiatives to focus our brand portfolio and make sure we are the most competitively can be in our core product categories. We took several steps during the quarter to free up resources that we can better deploy in these categories.

First, we sold certain assets associated with our small hunting decoys brand, Final Approach, to one of our retail partners. Secondly, we have begun the process of pursuing strategic options for the Jimmy Styks stand-up paddleboard brand. So as you can see, we are making progress on our turnaround. And while we are absolutely approaching this strategy with a sense of urgency, we are also acting in a deliberate, processed manner following a disciplined plan to ensure smart, strategic, and financial decisions are made each step of the way.

In addition to these portfolio actions, we've also taken steps to strengthen our brands and improve their ability to continue to compete and win in our core categories. We have restructured our business units and moved responsibility for sales, marketing, and other core customer-facing functions to our brands to drive accountability and results at that level. And we know we can't achieve winning results without the right talent and culture. I'm pleased that our transformation plan is resonating with some seasoned and successful brand leaders who want to be a part of this turnaround.

We have attracted new talent to invigorate our brands and lead them into the future. Vishak Sankaran is now the president of Bushnell. Vishak is a seasoned executive with a long history of success at other consumer products companies. And Vishak is no stranger to turnarounds and is already well on his way to a more engaged and successful Bushnell. We also recently welcomed Greg Williamson as the new president of CamelBak.

We already -- we are already seeing Greg's impact and focus on getting CamelBak back into fighting shape and take back market share in a category that we created. And at BLACKHAWK!, we brought in Josh Waldron. Josh is a successful entrepreneur and the founder of brands like SilencerCo. And nobody embodies our new focus on founders' mentality like Josh.

I'm excited about the potential these great leaders bring to these iconic brands. I mentioned culture and want to elaborate on this for just a moment. With any great organization I have been a part of in the past, a key ingredient for success was the underlying culture. To me, culture is behavioral tendencies. We all wake up each day and tend to behave in a certain way.

And all great organizations tend to exhibit behaviors that are consistent with long-term success. At Vista, we have identified and defined these behaviors and have begun to roll them out to our entire employee base. Our people are excited about it. And I can tell you from personal experience, this will become the secret sauce of our organization's success going forward.

So while portfolio optimization is one of the keys to a successful transformation, it's not the only focus area. We've also focused on improved profitability across the business. To expand gross margins, we have focused on reducing costs through both improved sourcing and production efficiency initiatives at our owned manufacturing plants. We've made great progress on these initiatives and expect the investments we've made in the first half of the fiscal year to drive margin expansion in the second half of the fiscal year and beyond.

We have also undertaken several initiatives that have reduced corporate staff and consolidated corporate functions under fewer senior leaders. This allows us to go forward with a leaner corporate team and place more emphasis in investment at the brand level. In addition, we made the decision to reduce our corporate footprint and are in the process of finalizing a sublease for our Farmington, Utah facility. The Farmington office space is much larger than we need, is our most expensive piece of corporate real estate and is an unnecessary cost to incur during our turnaround.

We determined that we can use our other two corporate facilities in Anoka, Minnesota and Arlington, Virginia to house our corporate and shared services teams. We believe these are important steps to take as we continue our transformation. While I'm optimistic about the future of Vista and confident in our ability to succeed, we are still facing a number of external challenges that will have an impact on our business. The first challenge is the market itself.

Like the rest of the industry, we do not see a return to growth for the ammunition market in the near term. We had been expecting to see some improvements over the prior year in the back half of this year, but those expectations have not come to fruition quite yet. Rimfire where we are the clear market leader continues to be down year over year, and the 223 556 tactical shooting market remains soft. Our ammunition distribution channels, our back-to-normal inventory levels, and shooting trends are still strong, but we have yet to see evidence of a sustainable recovery in consumer demand.

POS and sell-through data have yet to demonstrate any sustainable, positive trends. Additionally, the pricing environment in certain ammunition categories remains very challenging. We face competitive pressures from a certain other ammunition producer, who has reduced pricing to levels that we do not believe to be sustainable. Though we do not intend to chase any of our competitors to the bottom and expect pricing to stabilize in due course, we will take action to defend our leading market share position in the short term.Despite these challenges, there is reason for optimism with regard to our ammunition business.

We continue to be the world's leading ammunition producer and are holding share across each of the categories we compete in. And despite the challenging market conditions, we expect to see sequential growth quarter over quarter for our ammunition brands in the remainder of this year. This is due largely to the innovative new products we continue to introduce and the strength of our long and deep relationships with our channel partners. We are also seeing strong sales in the traditional hunting market categories over prior years such as big-game centerfire rifle, waterfowl loads and heavy-field loads, which are some of our highest-margin ammunition products.

I am confident we can leverage our leadership position in ammunition to continue to capture market share and weather this market downturn. In our Outdoor Products segment, the market picture is mixed. The market for our golf and outdoor cooking products continues to grow, and Camp Chef and Bushnell have strong market positions within their respective product lanes. The market for hunting and shooting-related accessories remains largely flat. In hydration, we have seen some growth in packs, but the market for bottles remains largely flat and competition is fierce.

Beyond market challenges, we also faced increased commodity cost in our ammunition business in Q2. Though we expect commodity pressures to be reduced in the second half, price levels still remain elevated over the second half of our fiscal year 2018. The final challenge I want to discuss is the recently announced tariff increases on certain goods imported from China. Some of our brands will be impacted by these tariffs, while others will be largely unaffected.

Vista Outdoor was an active participant in the regulatory process and worked to gain exemption from the tariff list for several of our product categories. We were successful on multiple fronts, getting exemptions on helmets and sporting optics, which significantly reduced the impact of the tariffs on our overall business. However, several brands on our portfolio are still affected. And due to the specialized nature of the manufacturing, these are not products we can simply make elsewhere in the short term.

We expect that affected brands will absorb the impact through a combination of price increase and reduced margins, but the final results will differ for each brand. On a positive note, we do not currently expect a cumulative financial impact on Vista to be material and have factored in the net effect of tariffs into our full-year guidance. Before I finish today, I'd like to spend just a few minutes talking about some of our brand wins in the second quarter. While the biggest takeaway from Q2 was our ability to make progress on our strategic transformation while simultaneously improving the underlying profitability of our business, I don't want any of you thinking there aren't exciting things happening within our brands. As we've said before, delivering innovative new products will be critical to our future success in all market conditions, and our brands continue to deliver on this front.

I'll just mention a few that will provide some color to what our brands are focusing on and where we're winning. First, we won a significant ammunition contract with the Department of Homeland Security. This is the largest law enforcement contract of its kind in our federal ammunition team's history. So, as you can imagine, we're very excited by this news.

It's a five-year IDIQ for up to $75 million in Federal Premiums new 223 duty rifle ammunition. This win is a testament to the federal team for producing such a trusted product that will be relied upon by our men and women in uniform. Our new 224 Valkyrie ammunition just received Ammo Innovation of the Year at the 2018 National Association of Sporting Goods Wholesalers. As you'll recall, we introduced the 224 Valkyrie early on in the year, and it has become the industry's hottest new load.

We're excited by how it has been received, thus, far and the potential going forward. We also introduced the Tungsten Super Shot load to both waterfowl and turkey hunters. This new TSS tungsten alloy gives us the hardest hitting payload at extreme ranges while also giving hunters the highest pellet count available. These new loads have the season's hunters hitting limit faster than ever.

And we announced two new lines of Federal Premium centerfire big game loads and started a new bulk ammo campaign this fall for pistol and rimfire called BYOB, bring your own bullets. There's a lot of excitement in the retail channel over these product lines and we anticipate delivery in the fourth quarter. Lastly, in our ammunition business, we recently announced our partnership with General Dynamics to capture next year's Lake City contract. The partnership with Federal and General Dynamics brings together the industry's biggest and best brands, giving us the strongest opportunity possible to capture this contract.

Savage's model 110 Refresh featuring the innovative AccuFit stock system has been a huge success with our consumers. Following discounting and rebate actions that Savage took last year to clear older inventory from retail channels, we are seeing excellent sell-in and sell-through with the refreshed model 110. Bushnell's new optics lineup has started to appear on store shelves, and the initial response has been strong. The new lineup raises the bar in technical solutions for low-light conditions.

Customer and media reviews have been very strong, and this new suite of products begins to put our Bushnell team in the best position to win in years. Meanwhile, Bushnell's Golf, Phantom, the top-selling GPS product on the market, has helped the brand achieve an all-time high in tournament gift sales. And finally, to build brand connections with the end consumer and grow our high-margin direct-to-consumer business, several of our brands have added customization offerings to their product lines. For example, Giro's flagship Aether cycling helmet is being offered in custom design and color configurations exclusively through the Giro website.

Similarly, CamelBak is offering its customers the ability to purchase customized water bottles. I would encourage each of you to visit Giro and CamelBak's websites to create your own unique custom helmet and water bottle. The strength of our brands and our industry-leading share positions are what first attracted me to Vista Outdoor. In downturns like the one we are currently facing, it is typically the industry's leaders with strong brands and management teams that end up on top.

I'm confident with the strength of our brands and the leaders we are attracting, we will emerge as winners. So once again, I want to thank you for being on today's earnings call. I hope you've gained a little more insight into our strategic plan and can see that we are moving forward and making good on our commitments. As I like to tell our team, we need to continue doing what we say we are going to do one quarter at a time.

As with any journey, however, we're taking, we won't get to the destination immediately. We have to continue to make progress and build upon our momentum. I continue to believe there's tremendous potential in Vista Outdoor and that with a renewed focus on profitability and discipline growth in our core categories, the future is bright for us. With that, I'll turn the remainder of the time over to Mick to discuss the financials. Mick?

Mick Lopez -- Executive Vice President, Chief Financial Officer

Thank you, Chris. Good morning, everyone. We have disclosed both as-reported and adjusted results in our press release to assist you with -- in your understanding of the underlying numbers and how they compare to prior periods. You will find a more detailed financial presentation of our second-quarter fiscal-year 2019 performance on our website.

As Chris mentioned, we are implementing our strategic transformation plan and our second-quarter results reflect continued progress. Closing the sale of our Eyewear business is the first step toward our strategy to focus on our core product categories and concurrently, our continued commitment to reduce our debt and improve our financial flexibility. The divestiture of Bolle, Cebe, and Serengeti brands was completed on August 31, 2018. Selling price was $158 million, subject to the customary purchase price adjustments.

We used $143 million of the proceeds to pay down long-term debt. Due to the final allocation of goodwill and fixed assets required by GAAP, during the second quarter, we recorded a pre-tax loss of $5 million related to the sale of Eyewear. We have taken steps toward our strategic intent to deleverage by paying down debt. We have reduced our term loan balance year to date by a total of $176 million.

We finished the second quarter with a total leverage ratio of 6.77, which remains below our credit agreement covenant of 8.25. As previously discussed, we have been working to replace our current credit facility with a more flexible asset-based loan structure that will facilitate the completion of our strategic transformation plan and allow us to pursue growth in our core categories going forward. We are pleased to announce that we have received commitments from Wells Fargo and other joint leader rangers for our new $450 million, five-year, asset-based revolver and $109 million, five-year, asset-based term loan. In order to align our debt structure with our liquidity needs in the short term, we have also obtained a commitment for a $40 million second-lien term loan.

We believe we have obtained better terms and structure as a result of being able to share our positive second-quarter results. We anticipate closing on the refinancing in November. We believe this debt structure is well suited to our strategic path and will provide us with significantly improved financial flexibility while simultaneously lowering our ongoing interest rate expense. Within our stand-up paddleboard business, we experienced the loss of a key customer in the second quarter.

Accounting guidelines require us to reevaluate our customer relationship intangibles when there is a triggering event such as this one. The analysis shows that the future cash flows cannot support the valuation. And as a consequence, we took a noncash impairment of $23 million to the customer relationship intangible associated with the Jimmy Styks acquisition. I will now discuss our adjusted results for the quarter, first, for Vista Outdoor overall, and then I'll provide more color on the drivers for each of the segments.

Now on to our adjusted financial results, turning to Slide 3. The company reported second-quarter sales of $547 million, down 6.9% from the prior-year quarter or down 3.8% on an organic basis adjusting for the Eyewear sale. The year-over-year decrease was caused by lower sales in ammunition. On an organic basis, the Outdoor Products segment remains flat.

Second-quarter gross profit was $113 million or 20.7%, down from $139 million or 23.7% from the prior-year quarter. Gross margin percentage was down approximately 300 basis points year over year. Sequentially, from our first quarter, gross margin decreased approximately 170 basis points. Our operating expenses for the second quarter were $94 million, down 10.2% from the prior-year quarter.

Cost-reduction actions taken in both business segment and at the corporate level drove this decline. Interest expense for the current quarter was $14 million, compared to $13 million in the prior-year quarter. The slight increase resulted from a higher borrowing rate in the current period, partially offset by a lower average debt balance. The borrowing rate in our second quarter was an average 5.8% compared to an average of 4.3% from the prior-year quarter.

The average debt balance during the second quarter was $850 million, compared to $1.1 billion in the prior-year quarter. Our tax rate for the quarter was 49.7%. The tax rate is affected by international tax and nondeductible tax expenses recorded in the quarter. For the second quarter, we recorded net income of $2.6 million, down from $19.5 million of net income in the prior-year quarter, resulting in an earnings per share of $0.05, compared to $0.34 in the prior-year quarter.

Year-to-date free cash flow generation was $55 million, compared to free cash flow generation of $80 million in the prior-year period. The decrease in free cash flow was driven by investments in working capital primarily tied to increased inventory balances, partially offset by lower capital expenditures. Now I'll turn to the performance of our business segments, where we report sales and gross profit, turning to Slide 4. Second-quarter sales in Outdoor Products were $272 million, down 6.6% compared to the prior-year quarter.

On an organic basis, sales were flat, compared to the prior-year quarter. The reduced sales volume is primarily due to the sale of the Eyewear brands, which had sales of $19 million in fiscal year '19 versus $39 million in fiscal year '18. Hydration solutions business had lower sales as a result of lower demand, offset by higher sales in our outdoor cooking business as a result of continued growth. Gross profit in the second quarter for Outdoor Products was $64 million, a decrease of 14.8% from $76 million in the prior-year quarter, down 6.9% on an organic basis.

The decrease was primarily caused by the sale of the Eyewear brands. Turning to Slide 5. Shooting Sports recorded second-quarter sales of $274 million, down 7.3% from $296 million in the prio- year quarter. Ammunition revenue decreased 11.5% versus prior year as a result of the timing of some international contracts for centerfire ammunition and continued softness in both rimfire and 223 556 markets.

Firearm sales increased 18.7% due to new Savage Arm product launches. Sequentially, from the first quarter, firearms increased by 21.3%, ammunition increased by 3.4%, with a total segment increase of 6.2% in a challenging market. The second-quarter gross profit in Shooting Sports was $49 million, down 23% from $63 million in the prior-year quarter. The year-over-year decrease was a result of unfavorable commodity cost, lower pricing, and lower sales volumes as described.

Sequentially, this is a 9.5% increase from the first quarter. Turning to Slide 6. We delivered second-quarter results that exceeded our expectations while facing continuing market challenges. Our focus on indirect and direct sourcing initiatives and our productivity improvement plans are well under way and on track.

The investments we are making among numerous supply chain and manufacturing efficiency initiatives throughout the first half of the fiscal year are expected to drive margin expansion in the second half of the fiscal year and beyond. Based on a very strong second quarter, we have raised the low end of our full-year adjusted earnings per share range from $0.15 to $0.35 to now $0.20 to $0.35. The modified earnings per share guidance reflects an increase in our core business performance. Considering all of these factors, we would like to summarize our fiscal year '19 guidance as follows: we expect sales in the range of $2.1 billion to $2.16 billion; interest expense at approximately $55 million; and adjusted tax rate of approximately 30%; adjusted earnings per share in the range of $0.20 to $0.35; capital expenditures of approximately $60 million; free cash flow in the range of $70 million to $100 million; and research and development also generally in line with our prior expectations at approximately $30 million.

We expect EBITDA margins of approximately 7.5%; Shooting Sports gross margins, approximately 20%; and gross margins in Outdoor Products in the mid-20s. For the first half of the year, we had tough comparisons to the prior year, mainly in Shooting Sports, as the rimfire market was slower to tail off last year. We expect to see profit recovery in the second half across the company as the Shooting Sports market continues to normalize, commodity costs remain lower, cost initiatives are realized and new product launches begin to hit the market. Because of the divestiture of Eyewear, we thought it would be prudent to give you a bit more color on the second half of the fiscal year.

We expect third-quarter sales to be approximately 8% to 10% less than second-quarter sales as a result of the Eyewear divestiture and the movement of a significant international order to the fourth quarter. We also expect third-quarter gross profit to be relatively flat to the second quarter as cost improvements compensate for the loss of Eyewear revenues. We then expect fourth-quarter sales to be up about 5% to 6% versus the third quarter. With continued favorable impact of commodity pricing and the timing of our cost initiatives, our fourth-quarter profit should have substantial increase over quarter 3.

At the midpoint of the fiscal year, we are on track with our financial plans and initiatives to optimize our portfolio, lower our debt, refinance with a flexible low-cost alternative and continue to drive cost improvements. With that, we will open the call for your questions. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Jim Chartier of Monness, Crespi and Hardt.

Jim Chartier -- Monness, Crespi, Hardt & Co. -- Analyst

Hi. Good morning. Thanks for taking my questions. Just want to talk on the sales outlook.

It sounds like your expectation for ammunition for the year is maybe a little bit lower than it was three months ago. So, you're reiterating your sales guidance, but are you trending more toward the low end or how should we think about that?

Chris Metz -- Chief Executive Officer

Well, the guidance that we've given, Jim, is the most accurate reflection of where we expect the business to be. So, as I alluded to in my opening comments, it's a tough market out there. There's no question about it. But we feel good about what we've got in place, both from a promotional cadence as well as a new product cadence that we see coming on market -- in the market.

So that's why when we look at the improvements we're seeing sequentially, particularly as we move into the fourth quarter, we feel good about where we're at from an ammunition standpoint.

Jim Chartier -- Monness, Crespi, Hardt & Co. -- Analyst

OK. And then on the firearms side of the business, you had really strong growth this quarter. Was there any timing that maybe resulted in outsized growth this quarter? Or is that the kind of growth we should expect for firearms for the entire year?

Chris Metz -- Chief Executive Officer

So, Jim, good question. I mean, what we certainly capitalized on was the onetime refresh. So the growth we saw -- I mean, I wouldn't expect the firearms business to be growing at mid- to high teens as it has in the first half. I think a lot of that is the success of the 110 and the initial reaction to that.

But we certainly do continue to expect the firearms business to be healthy and to continue to capitalize on the innovation they brought to the market.

Jim Chartier -- Monness, Crespi, Hardt & Co. -- Analyst

Great. And then on the tariffs, you mentioned that you have a relatively immaterial impact for the full business. What percentage of your sales were impacted by tariffs?

Chris Metz -- Chief Executive Officer

Fortunately, a small percent. I mean, it's less than 4%. And really, kudos goes out to our team. We've got a group of folks that -- including the business leaders as well as a couple of folks that focus on the relationships on the hill every day, and they did a phenomenal job in the testimonies and really pushing our case.

So as a result of that, we had a number of critical categories for us that were taken out of the tariffs. So, the resulting impact was not by accident but was through the hard work of our team, and I'm proud of what they've done. So as we've said, the impact should be immaterial.

Jim Chartier -- Monness, Crespi, Hardt & Co. -- Analyst

Great. Thanks. Best of luck.

Chris Metz -- Chief Executive Officer

Thank you, Jim.

Mick Lopez -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

Our next question comes from Scott Stember of CL King.

Scott Stember -- CL King & Associates

Good morning. And thanks for taking my questions.

Chris Metz -- Chief Executive Officer

Good morning.

Mick Lopez -- Executive Vice President, Chief Financial Officer

Good morning, Scott.

Scott Stember -- CL King & Associates

Chris, can you maybe talk about online capabilities? I know that that's been an issue in the past, whether it'd be drop shipping for big online channels or individual online capabilities at the individual divisions. Can you maybe just talk about how that process is going and where we are with that? Thanks.

Chris Metz -- Chief Executive Officer

Yes. So, Scott, it's a big focus area of ours. I mean, to the point where we've made some very good progress in some key areas and, frankly, haven't made as much progress in other areas. And it's a primary reason why we brought in a new leader of e-commerce and digital marketing.

Bob Steelhammer, who we brought in, I've worked with him in the past. He is just a great talent. And as you recall, a couple of quarters ago, I mentioned the first order of business was really building the content and building the story. So, we've got tons of products, and we didn't have the content being pictures and editorials and all that kind of stuff that when people go online that can really discover our products.

We've done a huge amount of work to overhaul that. Secondly, we want to make sure the experiences on our websites are crisp and are really up to date. And so you've seen a lot of refreshes in our brands from our website development. And we moved into some customization in this past quarter, as I mentioned, with BellGiro and with CamelBak.

So now for the first time, you can go on and order a customized helmet that is the highest-priced helmet in the marketplace because it's the best. And bottles, for the first time, you can download your -- and share with our team a PDF file of family pictures and great experiences and have that printed on the bottle or whatever you want. So we're making a lot of progress as it relates to our efforts to be a much more digital-friendly and e-commerce company, but a lot more to come.

Scott Stember -- CL King & Associates

Got it. And talking about the -- that new Homeland Security ammo, one that you talked about, $75 million. Maybe just talk about the timing of that and how we should look at that from a margin perspective compared to core ammunition business.

Chris Metz -- Chief Executive Officer

Scott, we don't give a lot of color on individual contracts other than what we've won. So typically, these are multiyear contracts and it takes some time to start to realize the sales. So, everything that we expect from that and from our other contracts has built -- been built into our guidance. But we're excited about it.

In fact, I just heard last night we also won the Boston Police Department business, so another great win. I had mentioned last call, we had NYPD. And so, you look across the -- and that was on top of the LAPD, and so you look across all of the police forces and men and women in uniform, and we are winning not only our fair share but the majority of that. So we expect, whatever I've mentioned so far, including the Homeland Security, to start shipping this fiscal year, built into our guidance but it will be a multiyear contract.

Scott Stember -- CL King & Associates

All right. And last question just on ammo pricing. Obviously, you have to deal with the competitor that you spoke of that has been very, very aggressive. But what are you baking into your guidance? What level? Anything worse than we've seen right now? Or is it pretty much static with what we've seen in the last couple of quarters for the rest of the year? And that's all I have.

Thank you.

Chris Metz -- Chief Executive Officer

Sure. So Scott, to the pricing that we've seen is -- it baffles us because we know what the input costs are, and we know where pricing should be to be able to make a reasonable profit. And so with some of the pricing we've seen in our discussions with our key retail partners, they're not real happy either because it -- they may sell a bit more, but the margin dollars they're going to make are less. And so, it doesn't result in a sustainable situation for us or our retail partners.

So we don't expect the impact of pricing to be at the levels that we're seeing now. And remember, this is only in a couple of calibers that we're seeing it, so it's not across-the-board type of price decrease but we're watching it carefully. We've reacted to the extent that we need to so far, and we'll continue to watch it. And as you'd expect, being the industry leaders, we're not going to lose share, and we're going to do what we have to.

And we've built into our guidance what we think is a prudent amount of moneys and efforts to be able to do what we need to do.

Scott Stember -- CL King & Associates

Got it. That's all I have. Thank you.

Chris Metz -- Chief Executive Officer

Thanks, Scott.

Operator

Our next question comes from Brett Andress of KeyBanc Capital Markets.

Brett Andress -- KeyBanc Capital Markets -- Analyst

Hey, good morning.

Chris Metz -- Chief Executive Officer

Good morning, Brett.

Mick Lopez -- Executive Vice President, Chief Financial Officer

Good morning, Brett.

Brett Andress -- KeyBanc Capital Markets -- Analyst

Good morning. If I could actually dig into your answer to that question a little bit more, it does seem like that pricing pressure is a little bit worse than it has been in the past. But is that occurring in any particular category, centerfire, rimfire? Is that across the board? And is there any way you can maybe help us frame up a little bit more the magnitude of that pricing pressure that you're seeing?

Chris Metz -- Chief Executive Officer

Yes. So, Brett, we're predominantly seeing it in 9mm as well as some of the 223 556. But it's predominantly nine millimeter. And so nine millimeter is a popular caliber.

It's used in handguns. And so I don't want to talk too much about what other folks are doing. All I know is that it's a recent decrease in pricing that we think is unsustainable. But we've reacted to it in the short term, and our retail partners have been happy with our reaction so far.

Brett Andress -- KeyBanc Capital Markets -- Analyst

OK. And then if I could circle back on tariffs within Outdoor Products. Can you tell us how much of your supply chain and cost of goods in that segment is sourced through China, I guess, either directly and indirectly?

Chris Metz -- Chief Executive Officer

Yes. So, we don't share that level of detail for a number of reasons, not the least of which is competitive reasons. But, Brett, there's a lot of product that comes from China. And so some of the categories, frankly, China is the only source for some of the product categories.

There's not a lot of movement from us or the industry to be able to change that in the short term. And in other categories, you've got optionality both with your current suppliers that happen to have manufacturing locations in other parts of the world that we're talking to them about should we keep it or should we move it or what have you. So, we're evaluating all alternatives, working with current suppliers, looking at potentially new suppliers, everything you can imagine from that standpoint. And lastly, where we have to, we will adjust price to compensate, but that's not the first or the second choice, for certain.

Brett Andress -- KeyBanc Capital Markets -- Analyst

Got it. And, Mick, I don't know if I missed this, but it doesn't look like you gave us the amount of the inventory writedown. I think, you called out, and I think it was tactical gear. Can you give us that amount?

Mick Lopez -- Executive Vice President, Chief Financial Officer

Yes. The amount for our BLACKHAWK! inventory reduction was $2.7 million.

Brett Andress -- KeyBanc Capital Markets -- Analyst

Got it. And that wasn't adjusted out, right?

Mick Lopez -- Executive Vice President, Chief Financial Officer

No.

Brett Andress -- KeyBanc Capital Markets -- Analyst

OK. That's all I had. Thank you.

Mick Lopez -- Executive Vice President, Chief Financial Officer

Welcome.

Operator

Our next question comes from Dave King of Roth Capital Partners.

Dave King -- ROTH Capital Partners -- Analyst

Thanks. Good morning, everyone. First, on the firearms growth of 19%, do you have what the growth rate was at POS for firearms? And then on the Outdoor side, other than CamelBak, which was down, and Camp Chef being up again, what were the trends from the other Outdoor brands between Bushnell and BellGiro, etc.?

Chris Metz -- Chief Executive Officer

Yes. So, Dave, we don't give out POS information because it's spotty. It -- we get good POS data from some customers, no data from other customers. And so in total, what we try to do is extrapolate out our sell-in versus our will sell-through to make sure that our inventory levels are at appropriate levels.

All I can tell you is that the 110 model refresh that has driven a lot of the success at Savage is selling through. It's getting in consumers' hands and we're seeing quite a bit of rewards. The good thing about Savage, too, we haven't talked a lot about this, but they make a lot of their product almost made-to-order. So, almost half of their business that comes in in a given 30-day period of time, these orders that were written that month.

So, there wasn't a heavy load on products. So, what's selling in has been selling through. As it relates to the second part of your question, again, we don't give detailed commentary on brands or what have you. But suffice it to say that our outdoor recreation business in total, our Action Sports business, were relatively flat from a sales standpoint, again, with outdoor cooking up a little bit and hydration being down a little bit.

Our hunt-shoot accessories were down low single digits, we think, in line with the rest of the category. It's been soft from what we're hearing from retailers, Hunting and Shooting Accessories, in general. It typically follows ammunition. So, it's not surprising to us, and we're hopeful that, as we go forward, we'll see an improvement there as well.

Dave King -- ROTH Capital Partners -- Analyst

OK. That's really good color. So, thanks for answering those. And then on the new debt facility, Mick, did you say what sort of rate we should be assuming on that versus what I think was, I think, like a 5.81 did in the current quarter?

Mick Lopez -- Executive Vice President, Chief Financial Officer

We did not say the specific rate but as we've stated, this is an asset-based loan. We're getting much favorable rates that comes in our first tranche, which will be an ABL revolver. And the debt will probably be at LIBOR plus 200 range. And as you know, these change.

Our second tranche will probably be at LIBOR plus 375. That is certainly much better than our current term loan, which is, depending on our leverage ratio, between L plus 400 to 500, where we are right now. So year on year, we do expect an improvement of anywhere from 70 to 100 basis points, again, depending on levels of leverage. And we can certainly be able to give you guidance next year that will show a significant improvement in our interest expense.

Dave King -- ROTH Capital Partners -- Analyst

OK. That's great color as well. And then lastly for me on the asset sales, is the plan there still to sell Savage Stevens and then move on to BellGiro? And if so, why are you approaching it that way versus running both processes simultaneously? And then, what's sort of the current expectation on what you could do to that facility -- or take that and deal with that, take down debt post these sales?

Chris Metz -- Chief Executive Officer

Yes. So, Dave, we've discussed previously that we have the bandwidth internally to only be able to handle so much. And so I outlined in my beginning remarks that we've got a number of things going on, on a number of different fronts. And some of those same resources are helping us in other areas.

We took on the Eyewear divestiture, and that was a complicated divestiture. It was a very global business. It had a footprint in multiple countries. There was a well-negotiated Transition Service Agreement, and we're really happy with the outcome.

What we got what we thought was above-market price, I think it was 12 times EBITDA, it was a good sale for us. Then we felt as though the timing was right for Savage, and so we moved into that process. That will take us a bit of time. We're happy with what we're seeing so far.

So, we're going down that path of what we stated previously, and we're going to stick the course there. We're going to go sequentially through these. In terms of how we're going to use the proceeds of the -- from the sales is, as we've communicated previously, our number one priority is to continue to pay down debt. We're hopeful that we'll be in the near future in a position where we're at appropriate leverage ratios where we can start to look at different ways to deploy our cash and our availability.

And so that will include what you'd expect, which is potentially looking at smaller tuck-in acquisitions for some of our core brands as well as looking at potentially stock repurchases, depending upon what the price of the stock is. So, we haven't changed in terms of our thoughts on capital allocation, and that's where we're at right now.

Operator

Our next question comes from Rommel Dionisio of Aegis.

Rommel Dionisio -- Aegis Capital Corp -- Analyst

Thanks very much. Chris, could I just follow up on Scott's earlier question on the law enforcement, potentially in the military channel -- congratulations, by the way, on the DHS contract win. What's sort of enabling you to win some of these police and federal law enforcement contracts as of late? Is it pricing, product efficacy or anything else? And also, I'm also intrigued by this partnership with General Dynamics. I don't know if you could just expand on that a little more. I know -- does that help position you with the military now? For example, the military is looking at a potential revision to the 223 because apparently, it can't shoot through this new Russian type of body armor.

So, are you positioning for a potential contract win there as well?

Chris Metz -- Chief Executive Officer

Sure. And good questions. I'll really try to take them one at a time. So, why we're winning? What we think is our fair share of these contracts and these tenders, it's, frankly, because of the great products and great relationships we have.

And there's a lot that goes into both of those points. So from a product-innovation standpoint, I think we have got the best R&D team in the industry. And you look at what we've done on the commercial side with this tungsten alloy, waterfowl, and upland bird load, it's wonderful. It's a terrific product.

It sets a whole new way of expectations in terms of shooting, what have you. We've done the 224, which is a brand-new caliber. And so we want to continue to drive that innovation. And a lot of the innovation working on internally starts with the military and the government because their requirements are very stringent, very tough.

And so, they've reached out on -- to us on a number of different future projects that we're working with that, we think, in its own way, shape and form could work its way down into the commercial market. But the team that leads that, we have a terrific team that has developed these relationships over years and years and years, and we've become a trusted source for confidential future projects as well as current tenders. The partnership with General Dynamics is very exciting. This is a big opportunity for them and a big opportunity for us.

We've got lots and lots of people that are working on this RFQ that is -- has just been issued. And so we're -- it's a long ways off, right? So, they won't make a decision on this for another year, and then there's another year on top of that transition. But we're in good stead there to do well on that. So -- and your comment on 223, there's some confidential stuff that, as I mentioned, as a trusted partner with the military, we're looking at all sorts of different stuff as we go forward with them.

And as you can appreciate, I really can't comment too much on that.

Rommel Dionisio -- Aegis Capital Corp -- Analyst

OK. Fair enough. Thanks very much, Chris. Congrats on the quarter.

Chris Metz -- Chief Executive Officer

OK. Great. Thank you.

Operator

Our next question comes from Khanna Gautam of Cowen and Company.

Unidentified speaker

Hi. Yes. Good morning, guys. Chris and Miguel, this is Jeff on for Gautam.

Chris Metz -- Chief Executive Officer

Hi, Jeff. How are you?

Unidentified speaker

Good. Thank you. Thanks for taking my question. I had a question on the ammo market, again, circling back to that.

I think last quarter or the quarter before, you were saying you're picking up share this year in the first half or last year, rather. In Q3, did you -- did that continue? Were you able to pick up any market share? And if so, what categories were you getting it?

Chris Metz -- Chief Executive Officer

Yes. So it's a little early to tell as we look back on it. But we know in some of the -- I mentioned some of the centerfire product were coming out with in the hunting markets, we feel like we are positioned to take share there. I also mentioned the TSS turkey, waterfowl and upland bird load.

We feel like we're in a position to take share there on high-end shot shells. And we've got innovation across other key categories where we feel like we're taking share as well. Some of the other categories like rimfire where we're the clear market leader, it's hard to tell there, given the downswing we've seen in demand and as consumers work through their stockpiles. But in total, we see the ammunition market.

We've got pretty [Inaudible] on FET, excise taxes, and what have you. And in total, we continue to grow our share position.

Unidentified speaker

OK. Thank you. And on the inventory levels, you said the channel inventory is improving. It looks pretty good.

Is there -- I know it's difficult to gauge, but what would you -- do you have any color or thoughts on like personal consumer inventory levels and stockpiling? I know it's hard to kind of get a feel for that, but any color would be helpful.

Chris Metz -- Chief Executive Officer

Yes, Jeff, I wish we had more detail to share with you there. We stop short of walking into people's homes and again, looking in their safes and their basements. So, we just don't know. But what we do know, and I've mentioned this previously, is we've gone out and interviewed thousands and thousands of users to get a feel for shooting trends.

And that's why we're confident when we say we think shooting trends are healthy is because we've gotten direct feedback from people talking about their own consumption month over month, year over year, what they've shot, what they expect to shoot. And we've been able to extrapolate out from that where we think the overall shooting market is healthy. Now how quickly did they work down their inventory? I think we are all hopeful that they would have worked it down quicker, but we don't know. We don't have a firm answer on that.

Unidentified speaker

OK. Thank you. That's helpful.

Operator

Our next question comes from William Reuter of Bank of America.

William Reuter -- Bank of America -- Analyst

Good morning.

Chris Metz -- Chief Executive Officer

Hi, William.

Mick Lopez -- Executive Vice President, Chief Financial Officer

It sounds like you're committed to continuing to use asset sale proceeds to reduce debt. Can you talk to us about where you expect leverage to be when you complete those asset sales? And then, I think, in the past, you've said your target leverage is two to three times. I was wondering if you still are kind of sticking by those numbers.

Mick Lopez -- Executive Vice President, Chief Financial Officer

Yes. We are committed to reducing our leverage ratios. As you can see that we have taken our total debt outstanding from $1.1 billion to $750 million. That is quite an achievement with only one asset sale.

A lot of it has been cash generation, taking down inventory levels, improving our working capital. And we will continue to apply proceeds from debt against that, but we are aiming for long term between two to three times leverage is what we said. I think, in the short term, we also have to improve our EBITDA ratio. And by improving our EBITDA ratio, we should be able to be very comfortable in that range in a year or two.

William Reuter -- Bank of America -- Analyst

OK. And then, I guess, the only other question for me, your CAPEX. You're guiding to $60 million for this year. I'm not sure how that might break out between your different brands. If you were to complete all of the asset sales, do you have a sense for what your CAPEX would have been this year?

Mick Lopez -- Executive Vice President, Chief Financial Officer

We still guide to the same number. I think it's fair to say that we had a very economic approach in the first half where our CAPEX is around $20 million. We are making significant improvements in our manufacturing capabilities, which are on the ammunition side. That drives greater efficiencies and cost reductions, as a result.

We do not break it up by brand, of course, and no intention.

William Reuter -- Bank of America -- Analyst

OK. All right. Thank you very much.

Mick Lopez -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

We have a follow-up question from Brett Andress of KeyBanc Capital Markets.

Brett Andress -- KeyBanc Capital Markets -- Analyst

Thanks for squeezing me in. I just had a quick follow-up on the paddleboard business. I guess, what exactly happened with that customer? And how much customer concentration risk is there in that business? And does that really change the range of strategic options that you have available for other business?

Chris Metz -- Chief Executive Officer

Yes. So, Brett, when you -- you go back to when we originally purchased the business, so a bit of the investment thesis back then was we felt like we could take a growing category. And through expanding their very concentrated customer base at the time as well as new product innovation, we felt like we could grow that category and that brand. So, what's happened since then is we've introduced some pretty neat innovation but so has our competition.

And so, we didn't introduce anything that was substantially different from what I've seen, and our customer concentration did not improve. And so with the loss of one of our key customers, it puts us in a spot where we are best to look at strategic alternatives, and I'll just leave it at that.

Brett Andress -- KeyBanc Capital Markets -- Analyst

OK. That's helpful. Thank you.

Chris Metz -- Chief Executive Officer

OK. Thank you, Brett.

Operator

At this time, we have no further questions in queue. And I would like to turn the conference back over to Chris Metz.

Chris Metz -- Chief Executive Officer

Thank you, operator. And Thank you, everyone, for joining us today. Just to restate the big takeaways from this quarter. We are pleased our results exceeded our internal plan, and we have made substantial progress on our transformation plan.

We've closed the divestiture of the Eyewear business and have made progress on the Savage process. And we've taken steps at both corporate and the brands to reduce costs and improve profitability. I'm confident we're on track to turn around this company, deliver profitable growth, and see a more successful Vista Outdoor. We appreciate your time today, and look forward to speaking with you -- with everyone again on the next earnings call.

Thank you.

Operator

[Operator signoff]

Duration: 61 minutes

Call Participants:

Kelly Reisdorf -- Vice President, Investor Relations

Chris Metz -- Chief Executive Officer

Mick Lopez -- Executive Vice President, Chief Financial Officer

Jim Chartier -- Monness, Crespi, Hardt & Co. -- Analyst

Scott Stember -- CL King & Associates -- Analyst

Brett Andress -- KeyBanc Capital Markets -- Analyst

Dave King -- ROTH Capital Partners -- Analyst

Rommel Dionisio -- Aegis Capital Corp -- Analyst

William Reuter -- Bank of America -- Analyst

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