Johnson Outdoors Inc. (JOUT) Q4 2015 Earnings Report, Transcript and Summary

Hello, everyone. And welcome to the Johnson Outdoors Fourth 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 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 Pat Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Thank you, operator. Good afternoon, everyone -- good morning, everyone. Excuse me. And thank you for joining us for a discussion of Johnson Outdoors’ results for the 2015 fiscal fourth quarter and full year. 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 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 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’ll start off with comments on the quarter and full year results along with highlights from each of our businesses and then review strategic priorities for the future, and Dave will discuss the financials and then we’ll take your questions. Historically Johnson Outdoors’ fourth quarter sales and earnings are the lowest of the year, reflecting industry-wide slowdown, post warm weather outdoor rec season. In the fourth quarter, total sales increased about 1%, profits rose significantly, and earnings of $0.12 per share compared favorably to last year’s fourth quarter loss of $0.08 a share. Strong market momentum for new products, particularly in our fishing and camping and hiking brands grew throughout the season and carried over into the fourth quarter. Profits benefited from higher volume and our success in stabilizing and strengthening operations. Year-to-date performance continues along the same positive trajectory, demonstrating continued progress in our efforts to deliver sustained long-term profitable growth. Total sales for the year were up 1% to $430.5 million and operating profit rose 7% to $18 million overcoming the effects of foreign currency which weighted down sales and reduced operating profit by over $2 million. For the year, net earnings grew 16% to $10.6 million or $1.06 per share. Innovation is our lifeblood and new products like the Minn Kota Ulterra, Humminbird Helix, Old Town Predator Minn Kota and the expanded line of Jetboil personal cooking systems generated strong consumer demand, resulting in share growth as well as improved margin. Marine Electronics had another terrific year. Minn Kota posted record results driven by new Minn Kota Ulterra fishing motor and Talon 12-foot shallow water anchor. Ulterra’s many advancements appeal to broader consumer base than ever; its automatic stow and deploy feature was particularly welcomed by aging anglers with higher discretionary spending capacity. The innovative Talon series of anchors have doubled in sales in just two years and invigorated growth in the category overall. Humminbird took the market by storm this year with the award winning Helix series of fish finders, bringing our patented side scan sonar technology to small screen for the first time and expanding our consumer base. Side scan sonar is the gold standard in fish finders, a kind of innovation that enables us to strengthen and grow brand equity and importantly, compete and win on price value. The patented FluxRing technology from Jetboil is another winner. We saw great potential for growth with this technology when we acquired Jetboil, three years ago. Since then, we’ve used it to expand Jetboil’s offering to appeal to a larger outdoor consumer base. Before Jetboil was used primarily to boil water. Today campers and hikers are also using it to cook an entire meal. Jetboil’s signature compact lightweight push button ignition and heat capture design provide a welcome alternative for a foodie in the great outdoors. We are very excited about the demand for the innovative award winning Jetboil Joule and MiniMo and especially the new line of Genesis stove. We believe Jetboil is well-positioned for further expansion and growth. We feel the same way about our Watercraft brands, particularly Old Town where innovation has reignited growth in the brand, notably the Old Town Predator series which well positions us to grow share and sales in the fast growing fishing kayak segment. Our latest model, the Predator XL powered by Minn Kota, leverages our unmatched knowledge, expertise and legacy in fishing and the world’s number one electric trolling motor brand to deliver against unmet consumer needs. Designed by anglers, for anglers, the Old Town Minn Kota Predator took Best in Show honors when it was first unveiled at the 2014 ICAST show, the world’s largest fishing show, and shipment started in June and response has been very favorable. Also new to the market this year was the Old Town NEXT, which supports an innovated crossover design that combines a stability and storage capacity of a canoe with the easy paddling stylish low profile of a kayak. The NEXT is another great addition to the Old Town portfolio. It was specifically created to bring innovation to our base paddling business and to appeal to young consumers, a critical consumer segment for the future. Diving had a very challenging year, largely due to external conditions, most recently heightened geopolitical tensions which have restricted travel to the Red Sea one of the most popular dive destinations for Northern and Central European divers. No one knows how long this will last. What we do know is that dive enthusiasts in these countries will find alternative dive destinations. We believe SCUBAPRO with its rich technical heritage is positioned well to grow to share gain in core life-support product categories. At the same time, we’re working to invigorate innovation in underwater electronics and computer, a key segment for this business. In October, we acquired SEABEAR Dive Technology, specialist in development of underwater instrumentation through the unique application of new and emerging technologies. SEABEAR ‘s technical expertise together with our deep knowledge of dive consumers and iconic SCUBAPRO brand is a great combination. We’re counting on steady progress over time. Diving has proven to be a resilient market for three key reasons. First, divers are avid about the sport; once in, they’re hooked. Second, they have higher incomes and greater spending power. And third, divers look for and are early adopters of the latest and greatest equipment of gear. SCUBAPRO is world’s number one dive equipment brand, and enhancing innovation will drive future growth. Overall, we feel good about how each of our businesses are positioned for the future. And we’re looking at the future in a whole new way, specifically through the eyes of our consumers, what they want; what they need and what they expect in order to have the best experience in the great outdoors. This requires a comprehensive consumer research effort to bring a deeper, richer understanding of our consumers which is already underway, utilizing array of sources and sophisticated techniques. Consumers evolve and so must our understanding, demanding ongoing diligence and analysis to ensure we keep our on the pulse of the outdoor consumer. By doing so, we will continually be able to uncover the ah ha consumer insights that will enable us to focus innovation at the biggest and best opportunities and align go-to market strategy, plans and more for consistent long-term marketplace success. Looking at our brands with a consumer perspective also significantly changes our marketplace potential. Consumers view our brands through the lens of the outdoor recreational activities in which our products are used. They see us as the experts that we are in fishing, camping, hiking, diving, and water recreation. So, within our newly heightened consumer context, we see potential beyond the limits of narrowly defined product categories and markets. As a result, we are identifying additional growth platforms across these significant recreational activities where our strong brand equities can be further leveraged to provide us a clear and distinct competitive advantage, like we’ve done successfully with the Minn Kota brand in moving beyond fishing motors into shallow water anchors and adjacent fishing categories. This will expand the market footprint and innovation horizon in each of our businesses, creating power brands with greater potential for the long-term growth, able to deliver a better balance and profitability across our portfolio. We’re also revamping our innovation process and setting the bar higher, working towards even bigger, more successful new products with even greater staying power, based on the deeper, richer understanding of our consumers. We started filling the innovation funnel in every business with ideas targeting high growth potential consumer segments and based on insights we’ve uncovered. This begins an ongoing iterative feedback loop with consumers from concept to commercialization and beyond to make sure our consumer insights are spot on and that we’re on track moving forward against the right ideas with the best potential to deliver long-term marketplace success. Enhanced consumer intimacy is also behind a new more sophisticated approach to our digital presence to ensure our online look, feel, content and utilization is in line with consumers’ use, needs and expectation. We’re working with experts now to finalize these strategies and plans, involving everything from our company and our brand website to social media platform and interactive marketing applications and more. This is a major undertaking that will take time and require resources. Importantly, we’re minimizing upfront costs by developing a companywide plan, a phased in rollout will spread further spending out over time. Our strategic plan lays the foundation for consistent and accelerated sustainable growth and profitability in building capability and capacity to drive progress against our three strategic priorities: Enhance consumer intimacy; greater innovation success; and digital sophistication. Investments in these strategic areas will translate into even stronger brand equities and help ensure better future for Johnson Outdoors. In the end, Johnson Outdoors will be a wholly consumer centric enterprise, fully committed to providing the best overall outdoor experience for people every step along the way from planning their outdoor adventure to shopping and buying equipment to just having fun fishing, camping, diving and recreating on the water. We hope to share our excitement for the future. Now, I will turn the call over to Dave.

Good morning everyone. As Helen mentioned earlier, sales and profits were affected by foreign currency movements. The strength of the U.S. dollar particularly affected Diving, our most global business. On a constant currency basis, Diving sales this year would have been flat year-over-year and total company sales would have been up 3%. We think that the dollar will continue to be strong, at least for the next year, given the current global economic environment. To help mitigate the impact, we’ve revised pricing in key international markets to adjust to the stronger dollar. Performance in our other businesses more than offset the currency impact on total company sales and profits. Higher volume and improved margins in each unit demonstrate the value innovative new products are bringing to our consumers and customers. Marine Electronics ended the year with new product demand strong and growing, resulting in higher inventory levels at year-end. The good news is that this positive momentum is continuing and we are gearing up earlier to meet the high demand. We’re also pleased with the continued progress in Watercraft, which remains on a profitable growth trajectory. We’ve done the heavy lifting to begin to turn this business around and we’re definitely moving in the right direction. And we are not satisfied with where we are yet and we plan to keep up our efforts to get there. Just a couple of comments regarding legal costs this fiscal which added $7.3 million to operating expenses. These costs were related to litigation alleging infringement of our side scan sonar patents by Garmin International. Last month we received a favorable final determination by the International Trade Commission on this matter, which affirmed the initial finding that certain Garmin’s products did infringe at Johnson Outdoors patent. The ITC issued orders barring the import, sale and distribution of the infringing products in the U.S. to take effect after a 60-day review. At this time for fiscal 2016, we’re expecting legal cost to decline. And finally net income, which improved 16%, benefitting from a significantly lower year-over-year effective tax rate of 32%. This year’s rate was due to the reversal of valuation allowances on deferred tax assets in certain foreign jurisdictions. In closing, the balance sheet is in great shape. Our healthy cash position enables us to invest in growing our business and our brands, while continuing to pay a dividend to our shareholders. Looking ahead, we expect to see steady incremental sales and profit growth over the next three years, reflecting investments needed to implement strategic priorities for our new plan. I’ll turn the call back over to the operator for the Q&A session. Operator?

Thank you. [Operator Instructions]. And our first question comes from the line of Brian Rafn with Morgan. Your line is open.

Helen, you talked a little bit about kind of the consumer centric, consumer not being limited by narrow product lines kind of identifying growth platforms. Is this something that you are pursuing with penetrating new organic markets that you don’t compete in now; is it line extensions like Talon that extends an area like fishing you are already in or is this looking for attractive tuck-in M&A?

We’re losing you a little bit but I think I got most of the question. It’s a combination, I mean we are always looking for M&A acquisition opportunities. And specifically the growth that we’re uncovering is new consumer segments; it’s adjacent electronic categories but all within the current recreational activities in which we participate. So, if -- as we uncover these new opportunities, we certainly are open to strategic acquisitions, if they fit, but we’re not banking on that. Our assumption is that we are moving forward with organic growth but always looking for acquisition opportunities.

Yes. Helen, you talked a little bit about kind of new product development innovation. It’s really the lifeblood of Johnson Outdoors. Are you rolling that across all of the other areas? I mean you certainly have had in Marine Electronics …

We are losing you a little bit; could you repeat the question? I’m sorry.

Can you hear me now?

Yes, okay.

Yes, I’m just asking relative to your product innovation. Is that a something that you are rolling -- is that new across the entire company or is it something that you’ve done in Marine Electronics and now you are doing in other areas? How do you kind of define it, because you’re always been very good at that?

Well, I think we’re kind of raising the bar on innovation and it’s getting more and more competitive out there. This is a process that we have rolled out across all of our businesses. And it certainly doesn’t say that we were not good at it before, but I feel very excited about the fact, I think it will deliver even better results going forward. It takes a while to kick in because your pipeline doesn’t develop overnight but it’s an exciting process that has got -- it’s a repeatable process; it’s systematized but yet is really meant to maximize the potential to identify innovative new products. So, it’s a very exciting process.

Okay. Dave, you talked about higher inventory, Marine Electronics. With this El Niño, this warmer weather, does that at all extends fishing? I saw people were jet skiing on a number of lakes. It certainly impairs ice fishing. How does this warm weather impact your product line?

Yes, it’s a good question Brian. I mean, I think there is definitely a season and to the extent that we have a longer tail, it helps. We’ll have to look to see how the first quarter shakes out and look back to see how our POS data looks. But it’s certainly not hurting at all.

Yes, when to look at some of your boutique retailers, is there an offset, where they may carry kayaks in the summer but do a lot snowboarding or alpine skiing where they get just hammered and then there are inventory problems and discounting affect the next season which is your season on the waterside in summer.

We have a diverse distribution network and we do have some of the smaller ones that kind of shift season-to-season and have to deal with inventory. But some of the bigger customers, they may get stuck with winter inventory but there is still room for fishing and they won’t miss a beat on that. But -- so in fishing, the smaller kind of dealers is a smaller piece of the puzzle for fishing.

Okay. And I’ll just ask one more and get back in line. Helen, you talked a little bit about scuba diving in the Red Sea in the international Mediterranean, certainly everybody knows about that. How are some of the other areas like North America with SCUBAPRO? Are there any other markets that can kind of counterbalance that?

Well, we do have growth in our Asia Pacific region. We also have some growth in North America. We are looking, as I said, as we use this new consumer segmentation process to look at new growth opportunities, we feel that we can gain share and grow the market, even if it’s a struggle, and it will be a struggle in Europe but our goal is to identify growth despite what’s going on with the Red Sea.

Okay, thank you.

Thank you. [Operator Instructions]. And I believe we have a follow-up from the line of Brian Rafn. Your line is open.

Yes, short line. Okay, let me ask. Dave, any comments on cost of goods sold, feedstocks, raw materials? I would think it would be pretty benign but I’d ask it anyways.

Yes, it’s benign, I mean the biggest impact for us has been the strong dollar. So particularly in Diving business, we saw cost of goods sold impacted by the strong dollar because it’s such an international business. And everything else is in pretty good shape.

Okay, alright, fair enough. When you guys have such a strong culture of innovation and new products, I didn’t hear a number. Do you guys have a number of what new products were say trailing 12 months for the year as a percentage of total revenue?

Yes, it was over a third of our sales, came from new products and…

Okay.

Yes.

Yes. Dave, one of the issues, certainly that would survive that is the innovation, the electricity, the wild factor that you talk about. How does that cannibalize the current products when you develop something new, how much fall off is there or are there different price points?

Well, it depends -- it really depends on which category and what product you’re talking about. Certainly in fishing where there is a significant amount of cannibalization but that’s taken into account in the budgeting process and you assume that, but coming out the other end you get the incremental growth on top of it. I would say what we’re -- again, our process, our growth efforts are to look at new consumer segments and new adjacent product categories, which in that case, it will be all incremental and minimal cannibalization. But, as you’re in electronic business, I mean there’s like a fast turn of new products and you assume you’re going to significantly cannibalize what your previous products did but the goal is to get the incremental sales on that. But it’s different by business.

Right, right. Helen, you talked a little bit about scuba diving, your acquisition on -- and maybe I heard it wrong on underwater instruments, what specifically kind of product does that add?

Well that acquisition was specifically to enhance our ability to manufacture innovative dive computers. And the dive computer segment of the Diving business is significant and very important. And if you recall, in past calls we’ve talked about having challenges in that area. So this is a perfect acquisition to help us grow in a very important segment. It’s not going to kick in right away. We have -- it’s life support that we put. The development process takes a little more time. It has to go through a lot of testing and qualification but we hope to see some energy in our dive computer segment going forward.

Okay. And where is that manufacturing Helen; is that domestic or is that a foreign?

Well, it was -- we purchased technology and capability. And so, it will be manufactured in our current plants where we do currently make our computers which is in Batam, Indonesia, and that’s our owned plant that we currently produce in.

Okay. Thanks, everybody, appreciate it.

Thank you. And I’m showing no further questions at this time. I would now like to turn the call back over to Ms. Johnson-Leipold for any further remarks.

Thanks everyone for joining us. If you have any questions, you can give Dave or Pat a call. And I hope everyone has a happy holiday. Thank you.