Johnson Outdoors Inc. (JOUT) Q3 2014 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the Johnson Outdoors Third Quarter 2014 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. [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'd now like to turn the call over to Cynthia Georgeson from Johnson Outdoors. Please go ahead, Ms. Georgeson.

Thank you, operator, and good afternoon, everyone. Thanks for joining us for a discussion of Johnson Outdoors' results for the 2014 fiscal third quarter. If you need a copy of our news release issued this morning, it is available on the 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 these statements due to a number of factors, many of which are beyond Johnson Outdoors' control. These risks and uncertainties include those listed in today's press release and our filings with the Securities and Exchange Commission. If you have additional questions following the call, please contact Dave Johnson or me. I'd now like to turn the call over to Helen Johnson-Leipold.

Good afternoon. I'll start off with comments on the quarter and year-to-date results and share our outlook on the future. Dave will review key financials then we'll take your questions. The outdoor recreational industry is highly seasonal, and extreme weather can impact performance. This year's long, harsh winter delayed the warm weather season in outdoor equipment markets, resulting in a highly compressed retail season. We expected the weather to turn during the third quarter, and that demand for our new products would be high. We were right on both fronts. Third quarter sales were up 6% over the prior year record-high third quarter. Innovation was the key driver behind the increase, with new products generating 40% of total company revenue during the quarter. Our fishing, camping and paddling businesses reported growth that outpaced their respective markets, a clear indication that we are holding or growing share in these core segments. Growth in these units more than offset declines in Diving. Key dive markets across Europe continue to be impacted by weak economic conditions in the region, as well as political unrest in the Middle East, which limited access to the Red Sea, a favorite dive destination for Europeans. Operating profit compared unfavorably to the prior year due to noncash items, which Dave will explain in his remarks. Excluding unusual items, operating profit would have been $100,000 ahead of last year's record third quarter profit. The positive top line performance in the third quarter could not totally offset the weather-related declines during the first 2 quarters. Revenues are off 2% versus the same 9-month period last year, and year-to-date, operating profit and net income also compare unfavorably. Marine Electronics continues to be a steady engine of growth, and we are beginning to realize the benefit of our investments to strengthen the performance of the Watercraft unit. We are also working hard to lessen the impact of weak European economies on our Diving business. Accounting charges aside, Jetboil is a great strategic fit for our portfolio of brands, providing a unique and exciting platform for long-term growth for our Consumer Camping business. Looking ahead to the end of the year, our focus is on sustaining marketplace momentum and ensuring the success of next year's exciting new product lineup. At this time, demand is still solid, and new products are projected to deliver 1/3 or more of sales, illustrating the value and importance of our continued investment in innovation. To ensure we stay a step ahead on the innovation curve, we are constantly looking for ways to strengthen and improve our new product development processes. For us, innovation goes beyond designing and making a great quality product. At Johnson Outdoors, we're striving for innovation that enhances the entire experience for outdoor enthusiasts from shopping to purchase, to service, to the recreational activity itself. We have to be not only better, but the best because we're a company that competes on price value, not price alone. We may not be the low-cost choice, but we must always be the best choice for the price because of the added value we bring to the enthusiast. This Value Plus also is key to our being the partner of choice for our customers. The reality is that innovation is getting harder and it's important that we have the resources, capability and talent to consistently deliver new product successes year after year. Utilizing research to better target and understand our consumer is critical. Applying sophisticated data analytics is key to gaining deeper, richer insights into new and untapped opportunities. Leveraging the knowledge, know-how and technology across every business to benefit the whole portfolio of brands is critical. Where we do this, we have real success. A great example is the Old Town Predator, a fishing kayak launched last year. Fishing kayaks is one of the fastest growing paddle segments and for years, were designed for paddlers who like to fish. But we dug deeper and discovered that the real consumer for these boats was the angler, and no one knows more about anglers than the company who makes Minn Kota and Hummingbird, both iconic brands among fishermen. Anglers were involved in the design of the Predator every step along the way. The end result was a game changer in the fishing kayak segment. Last year, the Old Town Predator took Best in Show in the boat category at ICAST, the world's largest and most prestigious fishing trade show. At this years ICAST, the new Old Town Predator XL, powered by Minn Kota, was named Best in Show among boats once again and also took the top prize, Best in Show overall. In fact, at this year's ICAST, our fishing brands were all big winners. The new Humminbird ONIX SI took Best of Show, Electronics. Here, we've combined our patented side imaging sonar with faster, easier-to-use, advanced touchscreen technology and our exclusive TriFuel Cartography. And the elite Minn Kota Ulterra grabbed Best of Show, Boating Accessories, a revolutionary bow mount trolling motor with fully automated stow and deploy power, trim and iPilot or iPilot Link wireless control compatibility. Awards are great, but real success is measured by marketplace and bottom line performance. Demand for the Predator has been strong, exceeding expectations from day 1, and we anticipate that to continue with the new Minn Kota powered Predator XL. Importantly, growth in Predator sales have outpaced the fishing kayak market all year, so we're clearly gaining share in this key segment. And Predator commands strong margins, which has put us on track to improve profitability of our Watercraft business going forward. Now, we have a healthy pipeline of new product ideas, and we must be disciplined and diligent in focusing resources against those ideas with the greatest appeal and meaningful Value Plus to our enthusiast consumer targets. And we will be investing in additional resources to help us do that and more, with the ultimate goal of delivering the desired consistency in new product success across the portfolio. Fiscal 2014 is the second year of our 2015 Value Plus plan designed to deliver sustained profitable growth. Year 1 fiscal 2013 performance was outstanding, and although this year's severe weather put a damper on our financial results, we are putting all efforts against delivering a strong third and final year. We remain very excited by the future and confident in our ability to create long-term value for our markets and our stakeholders. Now, I'll turn things over to Dave.

Thank you, Helen. As Helen noted, third quarter and year-to-date operating profit and net income were impacted by noncash impairment charges for the Outdoor Gear segment. Now, let me explain. 2014 was our first full year of ownership of Jetboil, affording us a clearer view of the marketplace and the capability to align sales projections with our learnings and experience. While profitable, thus far, Jetboil sales have not met initial projections, and this prompted an interim impairment test on the intangible assets of the Outdoor Gear Consumer Camping reporting unit, consistent with FASB ASC 350 accounting standard. As a result of this analysis, we recorded noncash impairment charges on the Outdoor Gear segment totaling about $8.5 million. The negative effect of the write-down was offset in part by a cash recovery of $1.6 million from the Jetboil indemnity escrow account. The impairment charges, which were not tax-deductible, also drove a significantly higher effective tax rate in the quarter, which negatively impacted net income. For perspective, our tax rate this year has been hovering in the low- to mid-30s percent range, and now it's about 54% this quarter. Accounting charges aside, as Helen said, we're very bullish on Jetboil, which is the #1 brand in outdoor cooking systems. It's a great strategic fit for our camping portfolio and brings meaningful Value Plus to camping enthusiasts. We feel very good about our ability to drive growth and deliver value from Jetboil long term. As we head into the fourth and final quarter of the year, the balance sheet's in good condition. Despite this year's weather-driven pressure on operations, we've kept working capital in check, controlled costs and spending and maintained flexibility to adjust to the ebb and flow of demand. Importantly, our strong cash position enables us to invest in the future when the opportunity or need arises. Now, I'll turn the call back over to the operator for the Q&A session. Operator?

[Operator Instructions] Our first question comes from Brian Rafn.

Give me a sense of -- you guys have done a fabulous job relative to new product innovation as a percentage of trailing sales. I mean, it's outstanding. In a market like scuba diving that has been a little weaker obviously, with all, I mean, everybody's shooting in Iraq and sending everyone over there, so I can understand that. How important is when you have that area like scuba diving that's a little softer, how important is innovation in that specific segment?

This is Helen. Innovation, especially in diving, is critical. It is life support products and we historically have been one of the leaders in innovation. I would say that even with us, innovation hasn't been enough to counter what has been going on in Europe and the Red Sea. And it's not just the economic conditions, it's the fact that one of the best diving places and the most accessible dive place for Europeans is the Red Sea, and travel there has been greatly diminished. So very important to diving, but not enough to counteract what's going on in the market itself.

Yes. What have you guys seen from the standpoint of the North American scuba diving market?

North America is a little less volatile. It's not growing this year versus last year. The weather also does impact North America, but it's certainly not -- hasn't seen the impact of economic conditions like Europe has.

Okay. And then you guys -- you have more of a -- I don't want to use the word cheap because that is unfair, but more of a value price point with SUBGEAR or the one below SCUBAPRO. How is that a little less expensive line going and being developed?

Well, yes. We did introduce SUBGEAR into the U.S. last year, but really the full line is just coming in. It is our entry into the mid-priced point. I would say that the mid -- believe it or not, the mid-priced point is a little more reactive to economic conditions than the premium segment itself, but it's okay. It's not doing as we expected, but I would say the whole business is not -- the diving market in general is not performing as we expected either.

Okay. Now that you have, to some degree, a little bit of the -- we came out of the polar vortex here. Anybody north on the Mason-Dixon Line, it was a rough winter. What's been kind of your observation for some of your boutique retailers kind of coming out of that and then kind of switching over to that summer mode? How quickly are they taking inventory? Is it a just in time? Because you certainly had a little bit of it truncated season certainly here in the upper Midwest, we've had very seasonal temperatures, not a lot of big heat waves, no droughts. What's your sense in that kind of recovery you talked a little bit in your openings comments, Helen?

Well, when you -- if you're talking specifically about the smaller retail, I mean, in general, they don't carry a lot of inventory anyway. But I would say that everybody was hoping for the weather to turn, and the reaction has been good. The question is do you ever make up that first turn that you lose because the first quarter weather was not -- I wouldn't even say not good, it was terrible. And, to some degree, you'll lose that turn, and it's hard to make it up. So everybody reacted fairly quickly. They don't carry a lot of inventory and sales have gone really well. But again, we lost a big chunk of sales in that first quarter.

Yes. Okay. Okay. And then just -- I'll get back in line. Anything on the camping side, anything military sales? How has that -- you made some comments on Jetboil, how are -- like the Eureka! products, some of those other areas?

Yes. Military sales are doing pretty well for us. I mean, it's -- again it's not a huge number anymore, but it provided some growth for the quarter and year-to-date. I think it's up about $1 million year-to-date.

Okay. And then, Dave, any CapEx numbers? What you're going to do for the year and any potential next year?

Yes. CapEx this year will be between $13 million and $14 million, I would guess, something like that. And I don't expect us to grow. We'll grow with inflation, let's say, next year.

[Operator Instructions] We have a follow-up from Brian Rafn of Morgan Dempsey Capital Management.

Short line. Your sense -- I'm not a fishing guy, I'm a gun guy so I can't speak and I'd be looking forward to your comments. When you have a tough winter like we've had, how does that affect -- I was a skiing guy, boat racing so I understand cold water and how does it affect a fishing guy? Humminbird and Minn Kota are getting on the lakes, the ice is going down. Is there less of an impact with your angler than it might be with your water sports guy?

The true angler does plan ahead and does buy ahead of the season. But when you still got ice on the lake, that's a big deterrent. So even though they're hard-core fishermen, our key to our consumer segments, you didn't have the ice melting for a month later than normal, so it did impact the planned purchases. Hopefully, the season goes longer, but again, our feeling is, to some degree, we missed the turn upfront because of the weather.

Yes. No, it's understandable. With the standpoint you guys being known for great innovation, great product technology, you really developed -- deliver a great price quality value. That innovation, how receptive in getting shelf space at some of your category superstore, your big-box guys, your Gander Mountain and Cabela's, Bass Pro shops, how important is that to have that innovation and to allow you guys to penetrate shelf space and SKU sales?

Well, innovation to the retailer is just as important as is to us, and it drives a lot of support from them in terms of getting distribution and focused attention. So it's critical to those guys, and they like being partners with us because we tend to bring the exciting news and the new products.

Okay. And then, Dave, could you give us the tax rate jump? Is that episodic? Or it can't be a run rate.

No, it's episodic. The goodwill write-down is not deductible. So we were running around 33%, 34% excluding that.

Okay. Okay. All right. And then you guys sound pretty excited about it and obviously, with the anglers developing the Predator XL, what, for a guy that doesn't kayak, I was on the MerCruiser side or Mercury Marine side of boating, not in the paddle side, what kind of life duration -- when you come out with a really top line product, how many years of sales momentum can you get out of that? Or are they always looking for the next iteration for the kayak fishing side?

Well, I think it's, to some degree, an untapped market. I think historically, products have geared themselves towards the paddler who likes to fish, not the fisherman, and this product is definitely geared towards the angler. So in the -- you really have to fish from a boat in order to benefit from the experience. So certainly, innovation brings excitement every year, but there is a large segment of consumers that I think will continue to purchase if the product meets their needs. So especially the Minn Kota-powered Predator, which is coming out next year, is really geared towards the core angler group, and that's a large segment. So hopefully, it's got a long life.

Okay. But out of curiosity, Helen, what is the price point of something like that?

It's up -- you know what, let me check. I don't want to quote something that is off, but we'll get back to you on that.

But let me -- but for the guy going out and buying the whole rig, if you're buying an aluminum boat, I would think that, that would be a little cheaper entry point than, say, the full rig.

Yes.

Yes, it definitely is. And from a portability standpoint, it also meets a need because with a bigger boat, you need a trailer, you have to think about that aspect of it. But it's electric motor, not gas. Gas motors are very expensive, and it's a much lighter weight and portable boat. So it's not something one person can put on the roof of their car, but it certainly has benefits. But in comparison, it will be cheaper.

Yes. No, Helen, the Predator, is that something -- from an angler standpoint, is that across the United States? Or does it have more traction in the Upper Midwest or on rivers? Or is there a geographic specificity to it?

It really has national appeal and can appeal to all kinds of fishing, and there's different kinds of fishing across the country. So we feel very excited about the breadth of the appeal of the product.

[Operator Instructions] Our next question comes from Michael Schechter of Mentor.

Can you just triage the Jetboil write-down? It's sort of written off about half the purchase price. What happened over the last, was it 18 months or so, from when you purchased it to now in terms of its performance?

Yes. It's basically the revenue and cash flow projections are lower. It's not lower by a lot versus the original projections, but that triggered kind of a step one impairment, and the accounting rules then require you to go to a step 2. I'm not going to get real technical here, but when you do a step 2, you have to do a fair value of all the assets and then deduct from goodwill. So we actually have a fair value of assets that are higher than what's on our books, and so that triggered a full impairment. But basically, I mean, it is -- so it's kind of 2 different things. One is the cash flow projections and the other is the accounting rules that caused the full impairment.

Okay, but so the cash flow projections are down, what happened? Why is not performing the way we thought it would?

I guess it's fair to say that just the new product pipeline has been just a little bit slower than what we originally projected. I think there's been some -- there was some placement in some accounts that we need to get better placement in. So there's a variety of reasons, but I think one of the key messages is we're still very bullish on it and it's still a great strategic fit.

I'm not showing any further questions in the queue. I'd like to turn the call back over to Helen Johnson-Leipold for any further remarks.

Thanks for joining us. If you have any other questions, please give Dave or Cynthia a call. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day.