Johnson Outdoors Inc. (JOUT) Q1 2015 Earnings Report, Transcript and Summary

Hello, everyone. And welcome to the Johnson Outdoors First Quarter 2015 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 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, Eric. Hello, everyone. And thank you for joining us for our discussion of Johnson Outdoors' results for the 2015 fiscal first 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 any additional questions following the call, please contact either Dave Johnson or me. It is now my pleasure to turn the call over to Helen Johnson-Leipold.

Good morning. Thank you for joining us. I am in transit right now. So let me jump right in with my comments on the quarter and discuss early reaction to this year’s new products. Dave will review key financials and then we will be able to take your questions. During our fiscal first quarter, the warm weather outdoor recreational industry is in the ramp-up mode, getting ready for the primary selling season during the second and third quarters. Sales are usually the lowest of the year and we historically post an operating loss. This quarter the industry was also affected by the slowdown in consumer spending during December. In addition, order positions in Marine Electronics, Watercraft and Outdoor Gear indicate there has been a shift in orders from the first into the second and third quarters. While performance this quarter is disappointing, first results are generally not indicative of full year performance and often do not reflect important positive pre-season momentum. For example, in Marine Electronics, first quarter results masked continued growth in Minn Kota, our largest and most profitable brand. Our analysis of year-to-date point-of-purchase data, which is a key indicator of consumer demand anticipate solid year-over-year revenue gains in Minn Kota across the retail chain. Earlier innovations like i-Pilot and i-Pilot LINK continued to boost the topline growth and excitement is building for new products such as the award winning Ulterra fishing motor and the 12-foot Talon shallow water anchor. Humminbird is also getting good response to new products like the HELIX family of fish finders. Humminbird the innovation and market leader among high-end fish finders has packed the most advanced technology features in HELIX 5 and 7 compact format fish finders to create a compelling value per anglers at the entry level and mid-range price points. Right now, the challenge is keeping pace with demand. Turning to Watercraft, we are very pleased with the trends we are seeing. Over the past two years we’ve worked hard to right size the business and put a great team in place to strengthen competitiveness and drive sustained meaningful innovation. We turned a big corner in 2014, returning this business to profitability a year ahead of schedule. And we are off to a great start this year with double-digit sales growth in the U.S. that almost completely offset the expected decline in revenue from planned international operations closures last year. Importantly, Old Town Predator fishing kayaks are driving growth for the brand in the market. Predator is the first and only fishing kayak designed by anglers, for anglers. Our newest model, the Predator XL powered by Minn Kota took overall Best in Show honors at ICAST this year, the world’s largest and most prestigious fishing show. This new Predator highlights Johnson Outdoors’ ability to create a competitive advantage by leveraging one of our greatest assets, the diversity and breadth of outdoor recreational knowledge and expertise across our portfolio. There is a lot of buzz in the marketplace around this boat and shipments are slated to begin later this spring. Moving onto outdoor gear, where changes in sales, calendars and pacing of orders, this year resulted in what was essentially an apples-to-oranges comparison for the quarters. Specifically, we moved Eureka’s sales programs to January, June versus fiscal year calendar. International orders for Jetboil have shifted into the second and third fiscal quarters. While it’s too soon to project out into the season, we are getting favorable response to new products, particularly the Jetboil fuel, which was honored by Outside Magazine in the 2015 Gear of the Year Winner. So, we feel good about our ability to maintain share in our core camping categories. And lastly, diving, our most global business. Europe's economic woes continue to take a toll on topline and bottom-line results. In diving, we’ve done a lot to reduce complexity and costs in this business and to reinvigorate innovation in core life-support segments. We are not where we want to be yet. So, our work and investment in diving will continue. We are taking a hard look at every aspect of the business inside and out to ensure we take the right steps to deliver sustained, profitable growth in diving long-term. SCUBAPRO is the number one dive brand in the world, the aspirational brand engaged divers want to own and the brand that commands strong, healthy margins. Protecting and expanding SCUBAPRO’s leadership position going forward is one of our top priorities. To summarize, first quarter results are not necessarily indicative of full year performance and is far too early to predict how the season will shake out. As always, the battle for consumer discretionary dollars is fierce and challenging. Demand for new products is growing and we are focused on sustaining this positive marketplace momentum into the season. Importantly, our balance sheet is strong and we have the capacity to continue to make strategic investments to strengthen and grow our business. And we remain optimistic in our ability to achieve our 2015 financial goal. Now, I will turn things over to Dave.

Thank you, Helen. Good morning, everyone. Clearly, there are number of moving parts that factored into earnings this quarter. Two items drove the higher operating loss for the quarter. First, lower volume which contributed about $2.5 million through the quarter’s operating loss. Second, higher operating expenses of $1.8 million in the current quarter versus last year. The year-over-year increase in expenses was driven by higher legal costs of $2.5 million related to litigation, asserting infringement of Humminbird side scan sonar technology patents by a competitor. A similar amount of legal expenses are expected in the March end quarter. Now, as a matter of fact, as we don’t comment on pending litigation and we’re not going to break convention today. What I will say is that these patents are valuable asset for our marine electronics business and our invention has been recognized by the U.S. patent office, the marketplace and by our competitors. Side imaging technology is the cornerstone platform for sustained profitable growth and continued marketplace success for marine electronics. The full extent of our disclosure on this matter can be found on our filings with the SEC. On the positive side, decreased cost and targeted cost savings efforts led to an improved gross margin of 38.6%, which helped offset the quarter’s operating loss. The effective tax rate for the first quarter was 39.4% compared to 24.9% in last year’s first quarter. The rate is a function of where we making money and where we lose money and whether there is a tax benefit in those countries where losses occur. We expect the rate will go down to mid 30s over the course of the year as we drag more profits during the season. And we are constantly looking at and implementing strategies to help reduce the company’s tax burden long term. For example, the change in terms to international distributor’s agreement with institute will allow us to take advantage of foreign tax credits in the future. Our continued focus on diligence on keeping working capital in check has brought down working capital as a percentage of sales to the lowest level in a decade. As Helen said the balance sheet is in excellent shape and we have the capacity to invest in opportunities to strengthen and grow our businesses as well as pay dividend to shareholders. Now, I’ll turn things back over to the operator for the Q&A session. Operator?

[Operator Instructions] And our first question comes from Brian Rafn, Morgan-Dempsey. Please go ahead.

Yeah. Good morning everybody.

Good morning Brian.

Can you guys hear us okay? We got a new telephone conference system. We were breaking up on another call. Are we coming over clear?

Loud and clear.

Okay. Sounds good. Dave, question for you, anything on raw materials feedstocks as we go into 2015, plastics, resins, aluminum, anything that's a benefit to maybe margins going forward?

The biggest one is fuel. We’ve seen a little bit of benefit in the first quarter from that and so keep an eye on that. Resins started off high and it’s kind of flattened out. So I think, right now we’re looking at probably even but we’ll keep an eye on that. So I don’t expect big movement either way on other feedstocks.

Okay. Sounds good. Talk a little -- we've had, obviously, these winter blizzards in the upper Atlantic seaboard. Last year it was the polar vortex. Are you seeing any changes in -- obviously not maybe weather-related, but with the early season, as you guys call it ramp up in order patterns either with boutique retailers or with some of the category superstars? Are they ordering less, keeping less inventory? Are they turning it faster? Is it more just-in-time inventorying or are their patterns about the same as they have been over the last four or five years? I'm just trying to see if there's any discerning pattern changes.

We have seen that our orders in the second quarter are up over a year ago. So I think we’re seeing some shift from first quarter to second quarter. And I think as much as the retailers can get better at inventorying and quick turnaround of product that they will continually try to reduce inventory and get to a just-in-time mode. And I think that’s just the evolution of as they get more sophisticated and have more technology to do that. So I think that we will see, but I don’t think we haven’t seen a jump from one year to the next. It seems to be kind of a slow evolution, but always moving towards less inventory and just in time.

Yeah. Okay. In the quarter, Helen, did you mention sales derived from products, new products? And I don’t know what you guys used, whether it’s 2 or 3 years, what components of current sales in the first quarter were from new products launches?

Dave, do you want to take that?

Yeah, I will jump in on that. It’s the first quarter, but we continue to see over a third of our sales come from new products and we do use a -- it’s a 24 months period that we use.

Right, 24, two years. Let me ask you -- again seasonally, it is your business and there aren’t necessarily great expectations in a lot of different seasonal businesses. Are there things that you can do strategically over the next 5 to 10 years? Businesses talk about taking cyclicality out. Are there things that you can do product-wise that can seasonally change that or because of the sporting goods, outdoor type things that really are short of getting in snowmobiles or something related to that that you really can’t, that first quarter is always going to be kind of soft?

I think just like historically, I think as long as we stay in the warm water and warm weather outdoor recreation activities, we feel that first quarter is going to be the kind of the down cycle of the year.

Okay. That’s fair. You mentioned that again European weakness relative to the diving side. Does your -- I think you call it SUBGEAR -- has that had any more traction being a little more of the value category from the standpoint versus SCUBAPRO?

The issues in Europe are actually more related to the unrest there and the fact that divers are not traveling to the red sea to die because of the -- what’s going on over there. So it’s a kind of a different element, that is impacting not just us but everybody. So it’s more of a -- the red sea to Europe is like the Caribbean to the U.S. So until they get used to traveling to other places, I think it’s going to be a challenge for everyone. But we are still bullish on the category and we do think innovation drive sales and can grow the category. And we just have to put a harder push on that end of the business.

Okay. Actually geopolitics Helen, if you just look maybe at the diving category, forget about Europe and look at North America and what has -- how has the rollout of SUBGEAR in something that’s not related to the geopolitics, how has that been as far as building the brand name?

Well, I would say the SUBGEAR did not have the performance, we had hoped, but there is certainly a segment that is -- it’s a very expensive sport to participate in. We are very bullish on the SCUBAPRO brand and continue to put the innovation behind this SCUBAPRO business. There is a role for SUBGEAR but it’s not as significant I think as we originally projected.

Let me ask you, as we talk about Eureka and camping for all the Army or the Marines or the National Guard, is there any scuba demand for your high-end SCUBAPRO from, say, Marine Force Recon or Navy SEALs or military side because you guys obviously are premier manufacturer of very high-end stuff. Do you do anything for the military on the diving side?

Well, the military very much likes the SCUBAPRO brand. We have not developed a specific customized product but they buy our product especially, the life support pieces that we produce for the technical diver. So we do get military business from that. Going forward, we have thought about making a concerted effort against that group. And I think we are very good brand for that target audience. So I think your point is well taken and we do have business there right now.

Okay. And I'll just ask one follow-on, anything on the camping site for the military, the government side?

Dave, I let you do that one.

Yeah. I mean, right now it’s -- there is not much happening in terms of sale. So our expectation is to be kind of plateaued where we ended up last year. It's funny with the business though. I mean there’s anything can pop so -- but right now that we expect kind of a flat business.

Okay. Is that somewhat episodic, short cycle, where a PO can show up just out of the blue without any warning or any bids, quotes or anything or is that something that you do get some radar on that?

Yeah. We get some radar on some stuff, yeah. But there is nothing right now that we can say that that’s going to happen.

Okay. All right. Thanks, guys.

Thank you.

[Operator Instructions] And our next question comes from James Fronda of Sidoti & Company.

Hi, guys. How a re you?

Hi, James.

Just on I guess the outdoor equipment segment, it was kind of a significant decline. Do you think that's weather-related and do you see that flattening out or picking up towards the back half of the year?

Yeah. I think it’s -- we’ve definitely seen a shift in orders.

Okay. Because you had some ramp up last half, I guess the ‘14 some?

Yeah. And it’s hard to know how the seasons going to play out but we’ve definitely seen the orders pickup here recently.

Okay.

So it’s definitely being the shift. Some of it was our own doing. We did change our sales program in Eureka….

Okay.

… to be more of an incentive for January to June type of order pattern.

Right.

And in Jetboil, the international distributors did delay orders that we’ve seen come in.

Okay. All right. That’s all I had. Thanks, guys.

And there are no further questions at this time. I'd like to turn it back to Helen Johnson-Leipold for closing remarks.

Okay. Well, I just appreciate everyone joining us. And again, if you have any questions, you can give Pat Penman or Dave Johnson the call. Thank you very much.