Johnson Outdoors Inc. (JOUT) Q2 2015 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the Johnson Outdoors Second 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 listen-only mode. After the prepared remarks, the question-and-answer session will begin. [Operator Instructions] This call is being recorded. Your participation implies consent to our recoding of this call. If you do not agree to these terms simply drop-off the line. I will now like to turn the call over to Alisa Swire from Johnson Outdoors. Please go ahead, Ms. Swire.

Thank you, Operator. Good morning, everyone, and thank you for joining us for our discussion of Johnson Outdoors result for the 2015 fiscal second quarter. If you need a copy of our news release issued this morning, it's 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 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 Pat Penman. It is now my pleasure to turn the call over to Helen Johnson-Leipold.

Good morning and thank you for joining us. I'll start off with comments. Dave will review financials then will take your questions. During the first six months of the year, we ramp up and start the initial selling period in advance of the primary retail season for our warm weather outdoor recreational product. Year-to-date top line results have clearly benefited from the diversity of our portfolio. Customer orders and shipments in Marine Electronics, Watercraft and Outdoor Gear picked up steam in the second quarter and brought sales for the first six months back in line with the same year-to-date period last year. Gains in these three businesses more than offset declines in diving where market dynamics in the stronger U.S. dollar present challenges. We are working to address these issues with improved performance expected over time. Obviously, bottom line results are disappointing, expenses are up for a variety of reasons with the most significant impact resulting from litigation costs related to patent protection. However, on an apples-to-apples basis, I would say our core business is solid and well-positioned for growth through the season. Dave will cover the details in a few minutes. Heading into the consumer retail season, innovation is giving us a competitive edge. It's what our markets expect and our consumers demand. And this year new products are delivering against these expectations. Let me give you a few examples. First, the new Altera, the first trolling motor with remote control automatic deploy installed is powering sales in Minn Kota, our largest and most profitable brand. Initial response to Altera is exceeding expectations and demand is strong and growing. Check out the Minn Kota Web site to see the Altera ad. We've also strengthened our position in the shallow water anchor segment with the first 12-foot anchor, a unique adjustable Minn Kota talon with push button deployment that enables fishing at various depths up to 12 feet and prevents drifting even in the roughest of currents. It is also important to note that Minn Kota's revolutionary i-Pilot Link has continued its positive growth trajectory since its introduction three years ago. Only Johnson Outdoors could conceive and deliver this remarkable smart fishing system the marriage of Minn Kota's propulsion in auto steering and Spot-Lock invasions with Hummingbird's patented sonar and proprietary mapping technologies. And Hummingbird a leader in pioneering sonar technology for fishing has strengthened its position in the mid-price point fish finder segment delivering sight-imaging and other key features with the HELIX 5. In watercraft our growth in our Old Town Predator Angler series is outpacing the market in competition and fishing kayaks. This year's New Predator XL powered by Minn Kota was designed for anglers, bi-anglers every step along the way. It's not surprising that this unique fishing craft took over the best in show honors at this year's ICAST, the world's premiere fishing show. There's a lot of excitement in the marketplace for this boat and demand is very high. The Old Town Next is an entirely new breed of boats for water recreation that's making big waves in the marketplace. The Next marries the stow capacity of a canoe with the paddling ease and fun of a kayak. It's aptly named due to its strong appeal to a younger paddler, the next generation paddler that's still important to the future of this market. In camping the big news is the Jewel, which is fueling double-digit growth in the JetBoil brand. JetBoil has been a great addition to our camping portfolio. Obvious synergies and complimentary distribution strengths with Eureka have strengthened competitiveness for both brands and JetBoil's proprietary technology and expertise further expands our innovation horizon. Innovation is the lifeblood of our brands, the critical driver of long-term success. It is more important than ever and is getting harder, if we want to continue to be the market winners, we need to step up our game. We need to take innovation to the next level, innovation that goes beyond offering great products to innovation that inspires people to get out there and experience the great outdoors again and again, innovation with staying power. That kind of innovation demands an intimate understanding of our target consumers, who they are, where they are, what makes them tick, and what they care about. Importantly, what can make their entire outdoor experience the best it can be from the moment they decide to go fishing, camping, diving or recreating on the water. That's why we have invested this year in a comprehensive multifaceted research effort to gain these deeper, richer insights into our consumers in every market. We believe there's no more important thing we can do to ensure the continued growth and success of our brands than to know our consumers almost or as well as they know themselves, maybe even better. The findings of our research are helping to shape our new long-term strategic plan which we look forward to sharing with you on our next call. The comprehensive consumer research and market analysis behind our strategic plan will enhance all of our businesses, in particular diving, where our efforts are focused on reinvigorating core life support. Innovation in the scuba program and improving operational flexibility in the future. Our top priority for the remainder of the year is to maintain positive marketplace momentum throughout the season and maximize the product success. Our 2016 new product lineup is on track to be unveiled at this summer's industry show. We have built a strong stable financial foundation for Johnson Outdoors. I remain very excited by the future and the outlook for long-term growth and success. Now I'll turn things over to Dave.

Thank you, Helen. Let me start with a few comments on the quarter. As Helen mentioned sales really took off during the second quarter, advancing 7% ahead of the prior year fiscal quarter on the strength of new products. Marketplace performance has been helped by improvement in outdoor rec markets fueled by a rising level of consumer confidence. At this time demand remains strong and if this pace continues sales are likely to be on par with last year was an opportunity for some upsite. While Minn Kota remains the primary profit engine our successful turnaround of Watercraft and JetBoil's growth in consumer camping also had a positive impact on the quarter's bottom line. As Helen said the strength of the U.S. dollar has taken a toll on diving, hurting both reported sales and our gross margins. On a constant currency basis, however, diving sales would actually have been slightly above prior year-to-date. The largest impact on profits for the quarter was the 19% increase in operating expenses. The biggest driver of that increase was legal expenses, which have risen considerably during the first half of the year. These costs are primarily related to the litigation to protect our sight imaging sonar technology patents. For the second quarter, legal expenses increased $2.6 million and $5.2 million for the year-to-date period. Next quarter we expect legal expenses to be significantly lower. By the end of the calendar year, we hope to have a better outlook on a resolution of this matter. Another factor significantly impacting the quarter's expenses was higher promotion expense related to the increased trade in consumer promotional activities primarily in Marine Electronics. Higher warranty expense and higher R&D cost for the current year quarter as well as bonus compensation accrual reversals in the prior year's second quarter also contributed to the year-over-year unfavorable comparison. Our balance sheet is in solid shape. Working capital is under control and we continue to pay down debt. The tax rate for the quarter was 45% which is on the high side. It was a function of the market's geographies where we have income. We expect the tax rate to normalize at year-end to be in the mid to up upper 30s. Looking ahead we're moving forward aggressively to deliver improved performance in the second half of the year and we will remain firmly committed to creating long-term value and delivering consistent dividends for shareholders. Now I'll turn things back over to the operator for the Q&A session. Operator?

[Operator Instructions] Our first question comes from James Fronda with Sidoti & Company.

Hi

Hey, James.

Hello.

Hey, how are you?

Good. How are you?

Good, thanks. I guess just on the legal costs, I mean, can you discuss, legally – the legal costs in terms of your history has it happened before? And is there any fear of this slipping into any of your other product lines?

We have had litigation protecting patents in the past. This is unusually significant; this patent is our sight imaging, which is incredibly important to the company. This I don't think is anything that is going have impact on our other businesses. I think we have a unique competitor and a unique patent that we're protecting, and innovation is our lifeblood. This happens to be a very expensive, but very important patent. So I would say in essence it's an isolated incident.

Right, right. Okay. I get it. Like I said just on the promotional spending in Marine Electronics going forward would that be a similar run rate?

I expect it to normalize a little bit.

Okay.

I think it's been unusually high for the first six months.

Okay.

However, I do think the success in the volume in Marine Electronics will carry with us in promotional spending.

Right. Okay. All right. Thanks, guys.

Thank you.

Our next question comes from Kristine Koerber with Barrington Research.

Good morning.

Good morning.

Few questions. First just to follow up on the Marine Electronics, so the operating margin looks like it was down about 430 basis points. So is that mostly due to the promotional activity?

Well, the legal expenses in Marine Electronics.

Okay.

So that's – go ahead.

The legal, is that -- how much – is that about $0.13 to $0.14 per share?

I didn't calculate the per share basis, but for the quarter we're up $2.6 million and then it's about $5 million year-to-date. And that's all in Marine Electronics.

Okay. And then conversely, outdoor equipment operating margin was up 360 basis points. What was the driver behind that?

It's really JetBoil. We had a -- JetBoil is having a good year, and it has shown a lot of growth and that's a high gross margin business for us in the mix. So it's a mix because of JetBoil.

Okay. And then as far as the diving business, I mean if we look at diving ex-currency, are you targeting diving to – should we see an improvement later in the year? I mean, I know you're working on initiatives to really turn that around. I mean, where do you stand with the diving business at this point?

Well, if you take out the currency, it's slightly up from a year ago, but in our minds that's not acceptable. We really want some significant growth out of diving. And we are working to really make up a gap that's happening in Europe, the economy has continued to be down in Europe. That's been a huge historic market for us, but we've got other options to make that up while Europe turns around and comes back. So those initiatives take time. It's a combination of focus and key innovation in key segments. But, we're very bullish on the diving business. It is critical to our long-term plan and we are working very intensely on the business. We hope it keeps some momentum going through this year, but I think you'll see more of the improvements going forward.

Okay. And then lastly, as far as demand, it sounds like momentum has continued into Q3, which is good news. Are you able to keep up with demand on the manufacturing front?

Well, it depends on what product you're talking about. I mean, I think we are seeing significant demand in our Marine Electronics – actually across the board is looking pretty good, and we've been pretty good about keeping up. I think it just depends on how much the demand keeps growing. The third quarter is a big, big part of our annual growth. So we're hoping.

Okay. Great. Thank you.

[Operator Instructions] I'm not showing any further questions at this time. I'd like to turn the conference back over to our host.

Great. Well, thank you all for joining us. If you have further questions you can give Dave a call. Thank you so much.