Johnson Outdoors Inc. (JOUT) Q3 2015 Earnings Report, Transcript and Summary

Hello, everyone. And welcome to the Johnson Outdoors Third 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 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 would like to turn the call over to Patricia Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Thank you, Operator. Good morning, everyone. And thank you for joining us for our discussion of Johnson Outdoors results for the 2015 fiscal third quarter. If you need a copy of our news release issued this morning, it's 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 they 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 additional questions following the call, please contact me. I’d now like to turn the call over to Helen Johnson-Leipold, Chairman and Chief Executive Officer.

Good morning. I'll start off with comments on the quarter and year-to-date results and share our outlook on the future. Dave will review a few key financials then will take your questions. The warm weather outdoor recreational season is in full swing during our fiscal third quarter. This is a time of year when we can gauge the all important consumer response at retail the most important measure of marketplace performance. We have a solid quarter as total company sales 3% above the prior year quarter. One time items in both current and prior year quarters were the primarily drivers behind the favorable comparisons in operating profit and net earnings. Dave will discuss the detail on this in his remarks. On a year-to-date basis the strong marketplace performance this quarter overcame lower sales in the first six months resulting in a 1% uptick in sales year-over-year. On a constant currency basis, sales are up 3%. Year-over-year operating profit and net earnings are slightly below last year, we made up a lot of ground in the third quarter and orders are still coming in, but it’s too soon to predict how the full year will look. We hope the good summer weather continues and extend the season, and we are working hard to deliver strong finish to the year. New products are fueling positive momentum as we head into the final months of the season. The revolutionary new Ulterra fishing motor and Talon 12-foot shallow water anchor are powering growth in Minn Kota, our $100 million plus flagship fishing brand. In Watercraft, the Old Town Predator series is enhancing our position in the all-important outdoor specialty channel and the new MiniMo from Jetboil, the leader in outdoor cooking solution systems has ignited growth in our consumer camping portfolio. Work is underway to strengthen new product development and competitiveness in Diving where weak economies in European markets have impacted results. This past month we unveiled new products for 2016 at the world’s largest and most prestigious outdoor rec trade expositions and garnered big wins at each. At ICAST, we took home Best in Show in electronics with the Humminbird HELIX 7 series, the first compact-format fishfinder fully customizable with a full array of solar technology option and features to fit the way an angler likes to fish. This series extends accessibility of our patented side scan sonar technology into the midprice range of fishfinders bringing a big value add to that segment. And at outdoor retailers, Jetboil grabbed the coveted Gear of the Show honors from Outside Magazine with the new Genesis, a first complete base camp cooking solution in an easy-to-carry travel bag. The system includes a 10 inch ceramic-coated fry pan, 5 liter cooking pot and a compact folding two-burner stove with a patented Flux Ring technology. The Genesis is true to its name signaling the birth of a new generation of outdoor cooking solutions to meet the changing wants and needs of foodies who like to enjoy the great outdoors and great food at the same time. Minn Kota, our largest and most profitable brand continues to be a powerful engine of growth and profitability. Minn Kota has incredibly strong brand equity which we leverage to expand into new categories and new geographies over the past decade under the guidance of Judy Douglas, who we’ve now named head of both the Minn Kota and Humminbird business. Judy has played a major role in maximizing the distribution strength in marketplace credibility of Minn Kota to launch and drive continued success of Humminbird’s pioneering patented side imaging technology and i-Pilot LINK, the world first and only fishing system. And Minn Kota is just one among our Johnson Outdoors family of iconic brands comprised of some of the best known and most respected in the outdoor industry. The challenge is to ensure each one maximizes its potential for sustained profitable growth long-term. Over the past year, we’ve been engaging in comprehensive planning process to determine the core strategy needed to significantly enhance and strengthen how we go to market in the future. We’ve mined an array of new sources of marketing consumer research and data to thoroughly assess our marketplace, potential vis-à-vis our competitive strength. This has enabled us to know even more about our consumers who fish, camp, hike, dive and recreate on water. We’ve identified distinct consumer segment within each of those broad recreational activities and dug deeper to really understand them what makes them tick, what’s important to them, why they engage in outdoors, where, when and how they shop and purchase and what they want out of the whole experience, soup to nuts, essentially, getting to know them better than they even know themselves. This kind of understanding will evolve as our consumers evolve, requiring ongoing diligence and analysis to ensure we keep our finger on the pulse of the outdoor consumer. And by doing so, we will continually be able to uncover richer aha consumer insights that will enable us to focus on innovation as the biggest and best opportunities and align go-to-market strategies and plans for consistent maximum marketplace success. Ultimately, at our core, we are a consumer products company and our ability to give an even growing number of consumers the best overall experience with the outdoors and with us is critical to sustain success and grow. Within this heightened consumer-centric context, we are looking beyond the limits of narrowly-defined product categories in markets to identify new growth platforms across each of the recreational activities we are in where our knowledge, know-how, strong brand equities can be further leveraged to provide us a clear and distinctive competitive advantage. Like, we’ve done successfully with the Minn Kota brand in moving beyond fishing motors to shallow water anchors and other adjacent categories. In doing so, we can expand the market footprint and innovation horizon of each of our businesses, creating power brands with great potential for long-term growth, able to deliver a better balance of profitability across our portfolio. In the coming years, we will continue our work to be a wholly consumer-centric enterprise fully committed to providing the best overall outdoors experience for people every step along the way. That means, we will be stepping up our game across the board in every area, importantly advancing to a higher level of marketing and digital sophistication, redesigning our innovation process to deliver bigger, better successes with even greater staying power, and building centers of excellence and expertise across our operations to be leveraged companywide to strengthen the power of Johnson Outdoors as a whole, ultimately becoming a company that does more than create great outdoor recreation equipment to one that inspires more and more people to get outside and actively engage with the great outdoors again and again. We are more excited than ever by the future we see for Johnson Outdoors. Now let me turn things over to Dave for the financial highlights. Dave?

Thank you, Helen. Sales this quarter were exceptionally strong, surpassing last year’s quarter and driving year-to-date sales slightly ahead of prior year despite the nearly $8 million negative impact from unfavorable currency translation. Diving was hardest hit by currency. On a currency neutral basis, year-to-date diving revenue is about 1% above last year. The strength of new products led the margin gains in the quarter and year-to-date period. As Helen noted, one-time items in the prior year led to a favorable comparison in the operating profit during the quarter. Last year non-cash goodwill and other intangible asset impairment charges in the Outdoor Gear segment totaled $8.5 million, dragging down operating profit and net income in fiscal 2014’s third quarter. Those charges were partially offset by a $1.6 million cash recovered from the Jetboil indemnity escrow account. Now in the current year, we recorded $1.4 million in legal costs related to patent litigation asserting infringement of our patented side scan sonar technology by Garmin. Excluding the net effect of these one-time items in both years, operating profit would have been $1.6 million ahead of prior year. On a year-to-date basis, operating profit is down versus prior year. Patent infringement litigation cost for the full nine months offset last year’s goodwill and impairment cost. For the number of other items, primarily higher warranty costs and promotional spending, resulted in the year-over-year decrease in operating profit. Now just a quick comment on the recent announcement by the International Trade Commission in the patent litigation matter. As noted in our release, an ITC judge has ruled that Garmin fishfinders infringe on our side scan patents. This is an initial ruling and if affirmed by the full ITC, Garmin will be ordered to immediately cease importing and selling infringing products. We do not know when this matter will finally be resolved. However, we are pleased of the validity of our patents, which was once again recognized by the courts. Net income benefited from a 5.2 point reduction in the effective tax rate and stands at $0.95 per diluted share for the nine months period. As we head into the fourth and final quarter of the year, the balance sheet is in solid condition. Inventory levels are higher, but cash to cash days remain favorable. Despite pressure from the negative foreign currency exchange and the slower than normal start to the season we’ve continued to improve our already healthy cash position, enabling us to invest in the future as the opportunity or need arises. Right now our focus is on delivering a strong end to the season and move forward aggressively against our new strategic plan priorities. Now I’ll turn the call back over to the Operator for the Q&A session. Operator?

Thank you. [Operator Instructions] Our first question comes from line of Kristine Koerber from Barrington Research.

Good morning. Couple of questions, first, with regard to the diving business, can you talk about some of the initiatives you have in place to improve the business and how long before we actually, I know the business, we've seen an upturn ex-currency, but when will we see more meaningful improvement in the diving business from some of your initiatives?

Well, just to back up a little bit, the diving business we have identified as a significant long-term opportunity for this company. And so, we are very focused on digging into the business and turning it around getting it on the right track. Certainly, the currency issue is one that we have to deal with. We’re working on pricing changes and also how we’re sourcing our raw material, which should - that’s the longer term effort but that’s underway. We are diving into all the different aspects of diving to identify potential growth platforms. We do have some great new products in the pipeline and the innovation is really what drives our business. We have some operational efficiency initiatives that we will be implementing. But again, we are very, very bullish on this business. And we have -- we’re going at it by -- in many different directions. We’re hoping that you'll see some positive momentum going into as soon as next year but certainly, for the long term, we are very positive about the business.

Okay. That’s helpful. And then as we look at the outdoor equipment business, I guess it was a weaker primarily due to the commercial and military business. I would've thought that business hit a bottom. I guess if we exclude military and commercial, how would the business -- how would that trended X the commercial and military? And why would commercial military -- why did that weight on outdoor equipment during the quarter?

Yeah. The military business was definitely a big factor and it just really timing. We expect military to kind of end up comparable last year. So if you take out the effect of the big tent business, the commercial military business, the consumer piece of it year to date was up high single digit in the quarter and was up double digit. So it’s just unfortunate that’s kind of in there. I think we’ll make that up in the fourth quarter for military business.

Okay. Dave, thanks for your clarification. And then as far as -- can you just talk about customer demand throughout the quarter. And were reorders -- did reorders come in as expected and how should we think about the September quarter?

Well, we did see a lot of momentum in this quarter a lot of energy at point-of-sale with our consumers. And I -- we are hoping that this momentum continues so far so good.

Your customers’ inventories, what kind of shape are they in? Are they in a position where they need to reorder?

These days, the customers have done a very good job of maintaining a fairly efficient level of inventory. So I would say that they are at good levels. And there's nothing that's bogging down the channel and reorders should come through.

Okay. That’s helpful. And then just one add-on to that, how is the promotional environment to this time versus last year -- the same time last year? Thank you.

Well, I think price discounts in general have become more popular with our competition. It's always something we have to deal with. But there isn’t an unusual level of discounts to move product out. It’s pretty much standard I think, so nothing unusual.

Great. Thank you.

[Operator Instruction] Our next question comes from the line of James Fronda from Sidoti and Company.

Hi, guys. How are you?

Hi, James.

Just on the, I guess, legal costs, would you say that’s for the most part behind you guys, or is that running at all into the September quarter as well?

We’ll have legal expenses kind of running until we get the final ruling, but it will be less.

Okay.

Good quarter.

Okay. And I guess just for the third quarter, how much of an impact do you think lower gasoline prices had for you guys? I guess, do you think results could have been a little worse if gas wasn’t so low?

Yes. I mean, I think it helped our cost structure certainly and then kind of indirectly the consumer spend is benefiting from that. So it’s hard to say exactly how much, but certainly on the cost of goods sold, we benefited slightly from that.

Okay. All right. Thank you, guys.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back cover to Johnson Outdoors management for any closing comments.

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