Johnson Outdoors Inc. (JOUT) Q4 2013 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the Johnson Outdoors' Fourth Quarter 2013 Earnings Conference Call. Today's call will be led by Helen Johnson-Leipold, Johnson Outdoors' Chairman and Chief Executive Officer; also on the call is David Johnson, Vice President and Chief Financial Officer. Prior to the question-and-answer session [Operator Instructions] This call is being recorded. Your participation implies consent to our recording of this call. If you do not agree to these terms, simply drop off the line. I would now like to turn the call over to Cynthia Georgeson from Johnson Outdoors. Please go ahead, Ms. Georgeson.

Thank you, operator, and good morning, everyone. And thanks for joining us for our discussion of Johnson Outdoors' results for the 2013 fiscal fourth quarter and full year. If you need a copy of our news release issued this morning, it is available on Johnson Outdoors website at www.johnsonoutdoors.com, under Investor Relations. Before I turn the call over to Helen, I need to remind you that this conference call may contain forward-looking statements. These statements are made on the basis of our views and assumptions at this time and are not guarantees of future performance. Actual events may differ materially from those statements due to a number of factors, many of which are beyond Johnson Outdoors' control. These risks and uncertainties include those listed in our media release from today and our filings with the Securities and Exchange Commission. If you have additional questions following the call, please contact Dave Johnson or me. It's now my pleasure to turn the call over to Helen Johnson-Leipold.

Good morning. I hope you've had an opportunity to review our earnings announcement. I'll start off with comments on the year and discuss priorities for each of our businesses going forward. Dave will cover the fourth quarter results and key financials, then we'll take your questions. Fiscal 2013 was the first year of our new 3-year strategic plan designed to deliver sustained profitable growth and enhance shareholder value. Our plan targets 3% to 5% compound annual growth in revenue and a 6% to 7% operating margin by the end of fiscal 2015. While bad weather delayed the season this year and impacted every business, we succeeded in meeting financial targets for our fiscal 2013. Total company revenue increased 3.4% due to the acquisition of Jetboil and outstanding innovation. For the ninth consecutive year, new products generated a 1/3 or more of total company revenue. Operating margin grew 6% with operating profit of $25.6 million, a 20% increase year-over-year. Operating profit last year benefited from a onetime favorable legal settlement of $3.5 million, and excluding that, our operating profit would have increased 43% year-over-year. Net income of $19.3 million resulted in earnings per diluted share of $1.95, a 90% improvement versus last year. Dave will discuss more about this positive comparison in his remarks. Marine Electronics continues to be our primary growth engine, posting record results of 7.1% increase in revenue and a 28% jump in operating profit compared with last year. For the third consecutive year, our flagship Minn Kota and Humminbird brands each surpassed $100 million in sales with new products generating 40% of the units revenue. Sustaining leadership in fishing electronics is a key priority going forward. And that will require investment in new technology and new features to enhance the experience for fishing enthusiasts. What sets us apart from others in this space is unparalleled knowledge of markets, unique insights into fishing enthusiasts and the technical know-how to turn those insights into winning products. Importantly, we do more than create individual fishing electronics. We are the pioneer of fishing systems, which leverage technology to enhance the fishing experience. We have an exciting line up of new products for 2014. For example, in Minn Kota, we've introduced the most powerful, most quiet and energy-efficient trolling motor technology into our most popular freshwater and saltwater fishing models. And Humminbird has just unveiled its new ION series of fish-finders, which raise the bar on ease-of-use with our new touchscreen technology. A big question is, can Marine Electronics continue to grow at this pace? While the race for technology in this market has really heated up, and competition is fierce. While we feel good about our plans, sustained leadership in fishing electronics, our plan focuses on achieving a better balance of profitability across our portfolio as a whole. Diving is our most global business. This year's decline in sales reflected weak economic conditions in Europe, one of the largest dive regions in the world. Over the past 3 years, we've worked hard to drive complexity and costs out of the business, while maintaining marketplace momentum and strong margins. As a result, we were able to limit the bottom line impact of volume decline this year. SCUBAPRO is the #1 dive equipment brand in the world and a recent independent study among dive dealers showed that SCUBAPRO ranks first in quality, performance and reliability, even among dealers who don't currently carry the brand. We believe there are clear opportunity for us to further leverage our strong brand equity to grow share in highly profitable dive computer segment. In October, we unveiled 2 new dive computers at DEMA, the world's largest dive equipment trade show. First, it's SCUBAPRO Chromis a full-featured easy to use, easier to read, risk dive computer with a larger screen and higher clarity display. The Chromis also functions as a watch out of the water. A fashionable and functionable must-have for the diving enthusiasts. Our second new SCUBAPRO computer, the Aladin 2, targets the recreational diver in the high mid-price range. It's appeal is in its simplicity. It has the essential features the rec diver needs with an extra-large square screen and extra-large character display for easy reading underwater. Initial response from dealers on both computers has been very good and we're optimistic about our ability to grow share in the computer segment. Our Camping business has also been built on tremendous brand equity. Eureka! ranks among the Top 10 best known outdoor brands among consumers. Early this year, we added Jetboil to our Outdoor Gear family of brands. Integration has done -- has gone smoothly and we put a new organizational structure in place to better leverage the complementary distribution strength of both brands and to further maximize synergies going forward. This year's growth in consumer camping, due to the addition of Jetboil, was offset in part by the continued decline in military orders. New products for our Outdoor Gear business in 2014, target camping and hiking enthusiasts who prefer to shop in outdoor specialty stores. We are expanding our Eureka! base camp tent series, which exceeded expectations this year along with the new Jetboil Joule, which won gear of the year honors from the Gear Institute at this summer's Outdoor Retailer show. Lastly, Watercraft. Results this year reflect the impact of global restructuring and our strategic emphasis on regaining a leadership position in the Paddle Specialty channel and strengthening innovation. All our key to putting Watercraft path -- on the path to sustained profitability. This year, we put together a new team of paddle sport industry veterans with a solid track record of success. Their first boat out of the gate, the Old Town Predator fishing kayak, is winning awards and rave reviews and orders are strong heading into the new year. Innovation has been key to our success and growth to date and it will be even more so in the years ahead. Meaningful innovation requires, what I call the "ahas!" -- these are the unique insights that come from deeper, richer understanding of our consumers and customers needs and expectations. Going forward, we plan to invest in market research tools and techniques as well as enhance data analytics to help identify the "ahas!" insights that better ensure new product success and valuable perspective for our acquisition radar screen. To summarize: good progress this year toward our long-term goal of sustained profitable growth, but more lies ahead to achieve a better balance of profitability across our portfolio. To do so, our priorities are to sustain leadership and fishing electronics, gain share in core dive equipment segments and improve performance in key paddling and camping specialty channels. Importantly, we end this year having grown profits faster than sales with a strong healthy balance sheet. We are pleased to have achieved the cash position that now enables us to both invest in the future growth and pay a quarterly dividend to shareholders for the foreseeable future. Now I'll turn the call over to Dave for his remarks.

Thank you, Helen. I'll start with quick overview of the fourth quarter. Results this quarter are consistent with the seasonality of warm weather outdoor recreation markets. While sales were up 3.4%, operating loss has increased to $4.7 million in the quarter. Lower gross margins in certain end-of-life product lines in Marine Electronics increased SG&A costs due to the discretionary bonus accruals during the quarter contributed to the unfavorable comparisons and losses. As well as a $0.5 million insurance covering the fourth quarter last year. Despite the higher operating loss in the fourth quarter, as Helen mentioned, fiscal 2013 operating profit was up 20% year-over-year and highest in more than 20 years. The higher operating profit and lower interest expense were key contributors to improved net income for fiscal 2013. In addition, the tax strategies employed this year contributed to the favorable comparison. For example, we're able to recognize foreign tax credits in the U.S. and we booked R&D tax credits when Congress retroactively enacted the credit in January of this year. We told you last year's effective tax rate was unusually high, and this year's tax rate of 21.6% should not be viewed as the norm. Historically, in most years, our effective tax rate has been in the mid-to-upper 30s. In September, we announced completion of a new cash flow base loan agreement with more favorable covenants. Year-over-year, interest expense declined by $1 million in fiscal 2013 and this agreement is anticipated to further reduce borrowing costs. Operating expense year-over-year was down 0.6% as a percent of sales even with the addition of Jetboil. And you'll recall last year's operating expense benefited from a $3.5 million favorable legal settlement. We ended the year with that $8.3 million, the lowest debt level in the company's history, and with a strong cash position of $55.7 million. The balance sheet is in really good shape. As Helen mentioned, we've achieved the Year 1 financial targets of our 2015 3-year plan. The challenge is to strive for consistency and total company performance going forward. It's important to note that the outdoor recreation markets have yet to return to prerecession levels and growth in dollars does not match by the growth in unit sales in any of the markets in which we compete. At this time, with market still in an unpredictable postrecession recovery scenario, we continue to believe our 2015 financial targets are stretched goals. We do feel good about where we are and we maintain a clearer disciplined focus on growing profits faster than sales. And we'll turn it over to the questions.

Okay, operator.

[Operator Instructions] Our first question comes from Brian Rafn of Morgan Dempsey Capital Management.

Give me a sense, you guys talked your new product development as a percentage of trailing sales is phenomenal being certainly a 1/3 across most of your businesses. If you look at the board groups Diving, Marine Electronics, Camping and Watercraft, is there any one area that you see more product development more technology innovation, obviously, Marine Electronics and Diving have that sophistication, but or you look at more balanced part of development across the different businesses?

Well, and this is Helen, we try to emphasize new product development in all our businesses. Certainly, the technology is skewed more towards Marine Electronics and Diving, but innovation doesn't necessarily have to be technology. It's about developing product that better meets the needs of the consumer and it can be modifications and to the design or the experience -- enhancing the experience for the consumer. So certainly, from a technology standpoint, that is skewed, but the emphasis on understanding the needs of our consumers and what we can do to enhance their experience is equally important across the board.

When you look at a lot of companies that, that spend and have as robust a new product development as you guys have, I'm curious, have you seen say in the last 10, 15 years, a compression or a cycle time between a product design specifications, engineering drawings, doing actual working prototype or actual products. Is that important in your area or is the time cycle of new product development less applicable to your business?

No, the time is very critical and speed to market is then shortened. It continues to be shortened especially in the area of electronics. And you not only have to develop speed in the development process and certainly identifying the need, but it's also the ability to manage your product that's on the shelf because you now have to also make sure that you don't overload with SKUs and you take as many SKUs out as you do put in. So the whole process is -- has been sped up.

Let me ask you, Helen, in the Diving, in the Marine Electronics, where you have more technology-based product development, how much patent protection do you guys have in that area, relative to maintaining market share?

We do -- it's very important for us to protect innovation, if possible. And it's certainly a key strategy for us given how quickly competitors are following and able to copy what we do. So we are -- we spent a lot of time on that. We spend money on that and we do have some key patents that are protecting things in those 2 businesses. But again, we don't -- you can't go after protecting everything because it's an expensive and it's a resource draining process. So we are very selective in what we go after.

Okay, yes, question maybe for, Dave, what you guys formulate your CapEx budgets for next year?

Yes, I think it will be similar to what we ended fiscal '13. And it's a pretty good increase in '13 versus '12 and that's really reflective of the investments we're making in some of these technology areas.

Okay. How do you look at across the businesses, where you guys are relative to payroll, headcount, a number of manufacturing businesses are pressed for engineering CAD/CAM design people, you have some of that I would imagine in your electronics and scuba area. Just how do you see kind of headcounts going forward?

Well, we would love to be able to spend resources on R&D area. That's obviously, very important to us. But we have tried to maintain that and keep that at a level that is consistent and manageable, but if we would consider investing in R&D that is something, that if we need to do, we will do it.

Okay. And then, I will just ask one more and get back in line. Dave, the $55 million in cash, where is that invested in this low interest rate environment?

Yes, it's basically, invested in low interest rate vehicles. So and that's -- that's a year end number so, of course, we're going to use some of that cash to fund working capital, that's the plan, at least, going into the season this year. But yes, unfortunately its -- to keep it liquid and that's what we want to do. We're keeping in low interest-rate vehicles.

Yes, so is that treasury or bank deposits, FDIC or...?

Bank deposits, yes.

Our next question comes from Michael Schechter of Mentor Partners.

I guess, in light of the 3-year plan and where year end and what's occurred with the Jetboil acquisition et cetera, I look at the company and you've got, and it's really to me, I look at it in 2 pieces: you've got Marine and Diving, which Helen you said are really the technology and marine is growing stupendously -- it has been. It's had tremendous success with multiple acquisitions, rarely missteps, and Marine and Diving provide the bulk and it's got to be 90% plus of the EBITDA and cash flow of the company. And then, Outdoor in particularly and then the Boat business, which we've been -- this is -- we're on our fourth attempt to try to right size this thing system and I just wonder whether that capital allocation to Outdoor Equipment and the Watercraft business is the best use here, especially when one would consider the multiple for Diving and Marine Electronics would be substantially higher than where the company trades in a public market vehicle. If you were just Diving and Marine -- I think we are masked by the issues we've had in Watercraft for 10, 15 years?

Well, all I can say, Michael, is that for the Watercraft business, we are on plan. And, we put a very disciplined plan in place together for our 3-year plan and we feel good about where we are. So we're not disappointed at all, where we are with Watercraft. We know there's more to do. We've done a lot of work on it. And I think, we feel good about where we are with them.

Michael, our business model is having multiple platforms is a key benefit in this industry. The cyclicality, the seasonality, the different impact of the economy on the different businesses is significant. So the diversity is important to us. There -- it's a very fragmented industry in general, Watercraft is one of the largest single product areas that is out there that was within our space. So there are characteristics of that business that are very good. We know how to do it. I would say that, that recently we have spent a lot of time doing consumer research, understanding the markets and in -- our latest launch has reflected our understanding of the market and it's doing well. So right now, we have dollars to do acquisitions. We're not not doing acquisitions because we have Watercraft. I would say that if -- our goal is to build it and it is not an anchor around our neck, it is, at this point we feel moving forward. So I know, we've had it for a while but I do think that we have the opportunity to get it right and we are approaching this in a different fashion.

Okay. And then, I can appreciate the issue of seasonality and cyclicality and having a diverse portfolio, but you've got Marine Electronics, which is just a crown jewel business that runs 15% plus EBITDA margins, has tremendous growth, and as far as I can tell, it's almost never stumbled. It's just a consistent wonderful business. Diving has some economic cyclicality to it but it's just prime brand. It's got technological innovation. It's got barriers to entry based on patents and the issue of safety. Where is Watercraft, it maybe some counter to cyclicality, but it's only count works worthwhile if it's profitable and if I go back over to 15 years and look at this company, it's operating margins and EBITDA margins have never ever approached double-digit. They've always been below 5%. And to have $50 million of revenue, $40 million of assets deployed and when we talk about capital allocation, it's not just dollars and cents, it's management time. They're only 24 hours in a day and to have you spend the fourth iteration of trying to repair that business as opposed to growing the next piece of Marine Electronics or spending more time with Diving or even looking at something else, I don't understand how it has any benefit for the company.

You've got a perspective on this, which I appreciate. I would just say that if you do go back -- you know Watercraft saved the Motors business and if we didn't have Watercraft in the mix, we would not have the Marine Electronics business. So we not suggests...

When was that? Because I'm looking back to '02 and I...

It was like 12 years ago. So I mean, not that, that's the reason. I'm just saying that this is strategically, we feel this is a business we should be in and we should be winning it. I am not making excuses for performance, but I would say that our understanding of the consumer and the needs, it's clearer than it's been ever and the whole launch of our new boat has shown success. So with that, I think, we agree to disagree on this, but your point of view is definitely appreciated.

How do we take -- the Marine business and the Diving business as a separate business would be a 10x EBITDA, a 11x EBITDA, big multiples of earnings, yet I think it gets dragged down by the Watercraft and Outdoor Equipment business. How do we -- assuming we're going to hold on to Outdoor and Watercraft, how do we get the world to recognize that the 90% plus of our business is this high-end, defensible, growing, technologically IP positive business that should trade 4, 5 turns of EBITDA greater than where we have historically and are currently trading?

It's one comment and then I think, we'll go on, but you make it sound like there's no competition in those businesses. It is highly competitive and we work very hard every year to get where we're going. So nothing in this world is for sure and we need to develop some other foundations. But Dave, I don't know if you have any...?

No, I mean, I think it's fair perspective. I think, what we believe is the portfolio we have. We believe in and the fact that we report these segments separately to investors and tell our story the right way, hopefully, everyone recognizes what we have here. So I think it's fair to question it and -- but I think, we feel good like I said. We feel good about where we are right now, we feel good about where we're going with all 4 businesses and we'll continue to have this conversation.

[Operator Instructions] Our next question comes from Brian Rafn of Morgan Dempsey Capital Management.

Let me -- let me ask the question in a little different way. Having grown up in Wisconsin, my idea of water is powerboats with Mercury and Marine and chasing fishermen around. That being said, I don't know much about canoes and kayaks. How big is that market and what's kind of your organic growth of that, say, non-motor boat business?

Well, the canoe and kayak business has kind of a steady penetration and participation rate. The growth recently has come from fishing. And so the boats -- the new boat that we have introduced is the Predator and it is specifically targeted at the fishing consumer. So there is growth from new activities beside the just traditional canoeing and kayaking. So people love to recreate in the water and the evolution has been in the sit-on-top kayaks and the fishing and recreational aspect of it.

Okay. But again, how large in dollar terms might that whole business be in? And maybe out of ignorance, are you really looking at that Paddle business in a global basis or is this more of a North American market?

Well, we have actually just gone through some of the expense that has hit us in the Watercraft businesses, that we have restructured our European business to go to distributors only. We do feel that, either there is hard shipping boat and we have a distributor that does it better than we can do it in Europe, but we did move that way. So our focus is in the U.S. and there in the specialty channel. And with different consumer segments than just the traditional canoer and kayaker. So right now, it's the focus is in the U.S.

Okay. So with the growth forward then, Helen, for Johnson Outdoor being matching the growth in the overall paddle Watercraft business, or are you able to think capture market share with innovative products like the Predator?

We are absolutely adding incremental consumers for incremental activities. And I think, what we're seeing is that, the fishing consumer is highly passionate and it's a large segment out there and not everybody has a big fishing boat to go fishing. So it is about adding new consumers in new activities.

Okay. Is that Predator just specifically for fishing or can that be for hunting or just standard water enjoyment towards; is it designed with the fishing pole holders? I have never seen the product so...

Actually, that -- we are being very targeted and that -- the Predator, specifically, the one that we launched was specifically for fishing, but we do feel that other activity done the water such as hunting is opportunity and our ability to produce kayaks and canoes gives us a great foundation for which we can address these segments of the market, and that I think, really is what has come out a lot of our consumer research.

Okay and from a cost of goods, a COGS basis, what relative presence and kind of the commodity side of the Watercraft, how has that played out of the last few years and kind of where are you on commodity spot prices for some of the plastics and things I would imagine go into this?

Yes, I think, we haven't seen a lot of pressure in that market -- in the resin market and the plastics market recently, but these things change quickly. So, but our plans right now aren't necessarily to have a ton of inflation there.

Okay. And then, on the military side, Helen, you mentioned -- you guys have any visibility either from the Army or Marines relative to kind of returning from in-country, any replenishments, National Guard, anything on the camping site, for the military?

No. I would say that it is first of all, visibility is very difficult in general with them. And we are predicting that it is not going to grow or have increased -- they're not going to have the increased dollars allocated to this. So that is a very challenging area.

And at this time, I'm not showing any further questions. I'd like to turn the call back to Mr. Helen Johnson-Leipold for any further remarks.

Well thank you, everyone, for joining us and best wishes to all of you for a great holiday season. Thank you so much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.