Johnson Outdoors Inc. (JOUT) Q4 2014 Earnings Report, Transcript and Summary

Hello everyone and welcome to the Johnson Outdoors Fourth 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. Prior to the question-and-answer session, all participants will be placed in a listen-only mode. After their prepared remarks, the question-and-answer session will begin. [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 Patricia Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Thank you, Nicole. Good morning everyone and thank you for joining us for our discussion of Johnson Outdoors' results for the 2014 fiscal fourth quarter. If you need a copy of our news release issued this morning, it is available on the Johnson Outdoors web site 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 today's press release and our filings with the Securities and Exchange Commission. If you have any 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 morning everyone, thank you for joining us. I will start off with comments on the quarter and full year results, Dave will review key financials, then we will take your questions. The outdoor recreational industry is highly seasonal and extreme weather can be impactful on performance. This year's harsh weather across North America and Europe put a freeze on consumer spending and customer orders during the first half of the year. During the first six months, sales were off about 7% from the year before. We expected the weather to turn in the second half, and that demand for our products would be high, that's exactly what happened. Strong market momentum in the second half of the year almost overcame the sales decline in the first six months. Fourth quarter sales were over 10% year-over-year, bringing full year revenue to $425.4 million, just shy of last year. Despite the second half comeback, operating profit of $16.7 million fell short of last year's record high, due largely to non-cash impairment charges taken in the third quarter. Dave will provide more on this in his remarks. Excluding impairment charges, operating profit would have been $23.6 million, the effective tax rate more than doubled year-over-year and brought earnings to $0.90 per diluted share, which Dave will also cover. Despite a challenging start to the year, we once again benefited from the power of our market leading brands and dedication to delivering innovation to our outdoor recreation enthusiasts, and we saw continued share gains from many of our flagship brands, including Minn Kota, Eureka!, Jetboil and Old Town. A key focus of our plan is to ensure a better balance of profitability across our businesses in the future. This year's bottom line results mask the progress we have made to that end, notably in our camping and Watercraft recreation units. For one, we have successfully integrated Jetboil into our camping portfolio, which is a significant achievement. Jetboil brings a completely new proprietary technology and is a great complement to our Eureka! brand. It's also a profitable addition to our portfolio that provides an exciting platform for growth in the years ahead. For example, the new Jetboil Dual to accommodate Gear of the Year honors at this year's outdoor retailer show. The Dual has all the benefits of the original patented Jetboil personal cooking system, lightweight, designed with fully integrated cooking vessel and combustion elements, quick start push button ignition, and fast -- even heating, with the new added benefit of being large enough to cook for a whole group of campers. The pipeline is filed with even more exciting new product ideas that will bring great cooking to the great outdoors in the years ahead. Over the past two years, we have worked hard to create a business model for our Watercraft business that will ensure consistent performance against the ebb and flow of market consumption. We recognize in consolidated global operations into Old Town, Maine, exited on profitable markets in Europe and moved to a local distributor model in Australia and New Zealand, by moving R&D, marketing and production under one roof, we aim for greater focus and alignment to help increase the velocity of innovation and speed to market, and rather than try and be all things to all consumers, we took a highly targeted approach, directing our efforts towards the most profitable channels and fastest growing segments, such as fishing kayaks. We told you, it would take time for our strategy to take traction, and it has. The highly successful introduction of the Old Town Predator fishing kayak last year, and this year's new Predator XL powered by Minn Kota demonstrate, it was well worth the wait. The Predator was the big driver in the year-over-year double digit increase in sales for the Old Town brand and we are very pleased to report that Watercraft turned profitable in 2014, a full year ahead of schedule. The plan now is to build on the positive momentum that has been created and continue to steadily improve the profitability profile of this business. We are very pleased by the performance of our Marine Electronics unit this year, our largest most profitable and fastest growing business. Minn Kota has shown again, that it is a powerful growth engine for Johnson Outdoors, posting record sales and generating profits almost equal to last year's record high. New products drove sales growth for the unit, this included the introduction of Humminbird's much awaited new Onix operating platform. Onix makes using of Fish Finder simple and easy, along with the cross-touch control, Onix units come with patented side imaging and down imaging SONAR technologies and they are fully compatible with our revolutionary patented 360 SONAR. Even more important, Onix unlocked the future potential to bring a host of new innovative features and upgrades to anglers faster, simpler and easier. Onix was introduced in higher end models this year, and will roll out to mid-priced units next year. Onix development was an important investment to remain competitive in an increasingly tough Fish Finder segment. Diving, our most global business, faced challenges across many fronts this year, the weather, weak European economies, the political unrest, all of which took a toll on sales and profits. New product delays also played a role in the results. Clearly, we have more work to do, to strengthen operations and build consistent momentum in diving. We started the heavy lifting on this, taking a hard in depth look at all aspects of the business, internal and external, to ensure efforts and resources are focused on all the critical drivers of operational excellence and marketplace success. SCUBAPRO was the number one dive equipment brand in the world, and we plan to do whatever necessary to protect and grow that leadership position. So in summary, 2014 was a challenging year, yet one where progress was made in key areas. 2015 will mark the final year of the current three year strategic plan, and work is already underway on our next long range plan. We look to build on our strengths and market opportunities with an across the board focus on continuous improvement in everything we do. We have been dissecting our markets, our brands, our businesses and our organization. We have looked at where we are and where we need to be and identity three initial key priority areas. We believe that by enhancing our capabilities in these, we will be better positioned to take our game to the next level and bringing the more value to our markets and create greater value to stakeholders, well into the future. First, consumer insights; we have to know our consumers almost better than they know themselves. Who they really are, what makes them tick and what will make their entire fishing, diving, camping and watercraft recreation experience the best it can be, everything from shopping to the actual activity. More sophisticated market research capabilities will enable us to both connect with consumers in new, more meaningful ways, and identify those richer, deeper insights, and enable us to consistently deliver the best all-round outdoor recreational experience. Second, innovation process, there is no doubt that we have a great track record of innovation, and as I have said before, innovation is getting harder all the time. That's why it's so important that we have a full pipeline of new product ideas coupled with a concept to commercialization process that ensures we are working on the right ideas with the greatest chance of success. Third, digital arena; web and digital technologies have become our most important marketing tools. Each of our businesses is working to keep pace with what consumers and customers expect when they connect with us in the digital realm; and, we are exploring opportunities to maximize our overall investments through best practice strategies that will strengthen our individual and collective brands, share voice in this key marketing arena. Over the next year, we will be finalizing the new plan and laying the groundwork required for successful execution. Looking forward, our commitment to long term value creation and sustained consumer loyalty demands added focus and investments, further expanding to grow our brand equities and market positions and consistently strive for improved operational performance. In doing so, we will continue to be an even smarter, stronger and better company overall. We hope you share our excitement for the future of Johnson Outdoors. Now, I will turn the call over to Dave.

Thank you, Helen. There are lots of moving parts that had an effect on financial results this year. Helen already talked about the weather, which shifted the pacing of orders, driving the bulk of sales into the third and fourth fiscal quarters. We are in a highly seasonal industry and a shift of this magnitude posed a significant challenge. The good news is, that we benefited from the efforts over the past five years to strengthen operations in every business, through disciplined working capital management and ongoing costs and spending controls. These enhanced operational flexibility and help protect profitability against the ebb and flow of market demand. Inventory and working capital are in great shape, and were key factors beyond our ability to drive over $33 million in cash from operations this year, which is about $3 million above last year. The outdoor recreational equipment industry overall was affected by this year's harsh winter weather conditions. As a result, we have reset 2015 financial targets at 2% to 3%, compound annual growth and sales and a 5% to 6% operating profit margin to reflect this year's impact on our markets. Despite a very strong fourth quarter performance, full year operating profit and net income were negatively affected by $8.5 million in non-cash impairment charges recorded by the outdoor gear unit during the third quarter. The majority of these impairment charges were not tax deductible, contributing to a significantly higher effective tax rate for the year. The tax rate this year was 46% compared to 22% last year. Full perspective of a normal tax rate for us is in the mid to upper 30% range. Heading into next year, the balance sheet is in excellent shape and our strong cash position enables us to invest in the future, when the opportunity or need arises. And as the weather patterns follow a more normal path this year, we have got a solid lineup of new products, to sustain positive market momentum for our brands. Now I will turn the call back over the operator for the Q&A session. Operator?

Thank you. [Operator Instructions]. Our first question comes from the line of James Fronda of Sidoti and Company. Your line is now open.

Hey guys, how are you?

Hey James.

Hi.

I guess just on the OpEx line, I mean it was a little marginally higher than last year. Is that related to the shift in terms of the traction that you got towards the end of the year?

Are you including the impairment charges in there, because that's a big driver for that?

No I mean -- yeah, the $35.3 million compared to $32 million last year, I mean it’s a little bit marginally higher. I was expecting it to be a little flatter. So was there anything into that, that I might be missing?

You're talking about for the quarter there, right?

Right.

Okay, sorry. Yeah, its sales related, so there is volume related expenses in there. We did have a little bit more in terms of outside costs for professional services and legal expense.

Okay. And I guess you said that the operating margin for fiscal 2015 would be down to the 5% to 6% range. Is that related just because you had a strong fourth quarter of this year, is that what you are saying?

Well, we are about there for 2014. So I think it will enhance the margin a bit, but we are not [indiscernible] to increase significantly.

All right. Okay. All right. That's all I had. Thank you guys.

Thank you.

Thank you. Our next question comes from the line of Brian Rafn of Morgan Dempsey Capital Management. Your line is now open.

Good morning everybody.

Good morning.

Good morning Brian.

Yeah. Give me a sense, with the slow pace on -- with the weather in the first, kind of the polar vortex we had, January, February, March and that; what was your sense across your distribution channels, relative to the kind of the inventory build, replenishment. You think that there was any -- just business that was lost, whether that be a category superstar like Bass Pro Shops or Cabela's or maybe a Boutique? I am just getting a sense of how you -- or do you think you've probably recovered as much in the back half as you lost in the first?

I think it was so significant an impact in the first half. I think we feel we almost lost turn, that we couldn't make up. I think it had that kind of impact.

Okay. Looking on the outdoor gear side, were there any significant, or maybe a delta change in any military purchases in the camping side depends on that?

No, there hasn't been much of a change really in the military business. We were up for the quarter in military slightly and up for the year slightly, but it's not significant.

Okay. And I don't know if you guys comment; when you look at -- maybe a question on for a guy who doesn't fish, on the Minn Kota and the Humminbird side, for the fish SONAR; do you guys have any idea or will you talk about kind of what your market shares are in those two brands? And then what -- that whole fishing kind of SONAR, Fish Finder, how big is that market, or what's the compound annual growth in sales, for you guys? How fast does that market grow?

Well, we don't get real good information on shares, so that -- we kind to have kind of take a guesstimate on that. But I think, we got one major competitor at this point, which is Lowrance and we are -- I would say, its close that we both have close to 50% of the market. There are some other smaller players. But we are pretty head-to-head on that. The market growth, it's interesting, it does; it has growth because innovation drives the cost per unit up, and so innovation is the key creator of the market growth itself. I don't know if you want to take a guess at the size of the market?

Yeah, it's tough to call the size of the market. But, we have talked before too, Minn Kota is a huge player in the Trolling Motor side of things, so we feel like we got a fairly large share there. And we are seeing a lot of growth, as Helen said, through the innovation and the fact that fishermen are just -- they are willing to pay whatever it takes to find fish and have a good experience.

And we do know that the fishing licenses every year have remained pretty constant. So we know that the new fishermen coming in are pretty much the same rate every year. There is also, an outside the U.S. business for Humminbird that is not included in this. We do a decent amount of business in Europe, so the numbers don't exactly work out. But fishing seems to be one of those activities, where there are some -- certainly, a group of passionate people, and it is an activity that is continuing.

Okay. Over the years Helen, how much seasonality -- or maybe better, how much cyclicality is to the fishing business? Is that currently bulletproof relative to economic recession? How secular is that business from a cyclical standpoint?

Well, we can't say that its bulletproof, and we have seen that it has gotten hit, when its -- usually when the boat market gets hit, a big purchase is when people buy new boat and they put motors and they buy Fish Finders. But to that point though, when the market is tough, they consider -- they may not buy a new boat, but they might buy a new accessory and our Minn Kota motors and the Fish Finder considered accessory. So we are not as cyclical as the boat market itself, and there is a pretty passionate group of fishermen, that sometimes you go fishing more if it’s a tough year, but it is cyclical, but not as bad as the marine business.

I think that's fair enough. What does the Marine Electronics, that you guys have done a fabulous job in that. What type of capacity utilization do you have there? How many ships are you guys running between Humminbird and Minn Kota? Just give me a sense of the manufacturer side?

Yeah we are not 24/7, so we have capacity in both operations. Having said that, we do tend to be constrained a little bit in our supply chain, especially in electronic side of things. So I don't want to give the impression that we could just double our business right away, because we rely on our suppliers for components.

Okay. Would you be running two ships a day for a shift and a half or a shift --

Well NCs [ph], but it tends to be more of a shift and a half to two shifts, but off season it's just a shift.

Okay, okay. All right. A question for you Dave, where is the cash equivalence domicile, where do you have that invested in?

Right now its just short term stuff. So we haven't done anything that's aggressive at all. So it's readily available.

All right. on the debt leverage, which is negligible or miniscule, are you just waiting [ph] that run-off on maturation or are you going to prepay that off, or what's --

You know, we keep talking about what we want to do with that. I mean, its nice long term debt, but of course it is floating rate. So we have got some plans in place to keep our eye on that.

Okay. I didn't hear from Helen, did you guys break out -- because you guys have always done a fabulous job in new products as a percentage of trailing -- the composition of trailing 12 month sales. Can you talk what new products, over the last one, it was two-three years whatever bogey you guys used, was as a percentage of sales?

Yeah, it's about a third of our sales volume.

Okay. All right. When you guys look at, you guys are always kind of fine tuning, across your four different businesses, scuba diving, outdoor gear, Watercraft and Marine Electronics, are there any changes that you guys are looking at, maybe even in your next strategic three year plan, relative to distribution channel, logistics, supply chain, are there any -- or are you pretty satisfied with the distribution on those four channels, on those four product lines?

You know, we are looking certainly at all aspects of the business on this round of the strategic plan. And distribution, one of those areas, that has gone through significant evolution. So we are certainly diving into that aspect of things and it’s a very different situation by business, so each one, we are looking into -- for ways to improve our distribution.

Okay. Dave, anything on cost inflation pressures on raw material feedstocks?

You know, the resin market is kind of tight. So for our Watercraft business, that's a little bit of a -- deeper on [ph] that. But obviously on the flipside, the cost of oil is going down, and we are looking forward to fuel costs being down because of that.

Okay. And what is -- styrene, polyethylene, what's the plastic there?

Polyethylene.

Polyethylene, okay. Let's see. Helen, you talked a little bit about, and you guys have again done a good job, relative to innovation. What -- from a standpoint, we hear when a lot of companies have spent time with that, that there is shortages of design engineers, and it is always -- they always seem to be racing to build up design teams, whether its firearms or name your product. How are you guys, when you look at innovation, you look at technology formation and the conceptualization of that, how important is the labor component of design engineers, or is that not an issue for you guys?

Well in certain businesses, that's a key discipline for us, and we are always looking for new talent there. But I think in general, this is more the emphasis on really understanding the consumer and how they have evolved and what their needs are in developing and designing the products for them. So it's getting that innovative idea that we are really putting the focus on, because we haven't found that it’s the lack of design to pull it together. Its really -- we have to come up with the concepts that are meaningful and valuable to the consumer.

Okay. And when you look at, and you talk about trying to understand the -- whether it'd be a demographic or psychographic or geographic and you're trying to understand the customer like you said before, they understand what they're looking for. Is that different, when you look at maybe a big box category superstore customer or -- versus a boutique or do you have to craft your intel by channel, how do you kind of run the science of that?

Well it isn't really by where they shop, as much as their psychographic and how they interact with the product and what is important to them. You tend to end up with some kind of correlation between whether they shop, but the real driver is the different segments of consumers and what is meaningful to those segments, and then understanding where they shop, so you can be at the right place with the right place with the right product at the right price. You know this is all about data that doesn't necessarily have to be quantitative and qualitative in its new research techniques. I mean, we totally realize that consumers can't tell us what they need, sometimes they don't even know what they need, but its about doing the research in the right way, and being out there, and with them in person and understanding and observing how they use the product, how they interact with it, and that to me is a very-very exciting part of what we are focusing on today, and it really drives those -- like very special insights that are in the foundation to new product development.

Okay. You're also talking, again with some of the global chaos that has affected the scuba diving market. You guys had kind of initiative to bring up SUBGEAR as kind of that middle market. How has that process or that program been at all impaired by the weakness in the global diving markets?

You know, we are really looking closely at that, I think with the market being as challenging as it is, we are just making sure to put the most focus and the most resources against our key brand, which is SCUBAPRO and that is protecting, building, enhancing our core franchise is the number one priority that we have right now.

Okay. One more question; Dave, CapEx for 2015?

Yeah I don't expect big change versus what we were going to report in 2014. Around the $13 million mark.

Okay, sounds good. Have a good holiday everybody. Thanks.

Thanks Brian.

Thank you.

Thank you. [Operator Instructions]. And I am showing no further questions at this time. I'd like to hand the call back over to Ms. Johnson-Leipold. You may begin. End of Q&A

Just want to thank everybody for joining us. Again, if you have any questions, please give Dave or Pat a call. Goodbye and I hope everybody has happy holidays.