Johnson Outdoors Inc. (JOUT) Q2 2017 Earnings Report, Transcript and Summary

Hello everyone, and welcome to the Johnson Outdoors' Second Quarter 2017 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 this call, if you do not agree to these terms, simply drop-off the line. I would like to turn the call over to Mr. Khalaf Khalaf from Johnson Outdoors. Please go ahead, Mr. Khalaf.

Thank you, Amanda. Good morning everyone, and thank you for joining us for our discussion of Johnson Outdoors' results for the 2017 fiscal second quarter. If you need a copy of today's news release it is available on our Web site at johnsonoutdoors.com under Investor Relations. I also need to remind you that this conference call may contain forward-looking statements. These statements are made on the basis of our current views and assumptions, and are not guarantees of future performance. Actual events may differ materially from those statements due to a number of factors, many beyond Johnson Outdoors' control. These risks and uncertainties include those listed in our press release and filings with the Securities and Exchange Commission. If you have additional questions following the call, please contact David Johnson. It is now my pleasure to turn the call over to Helen Johnson-Leipold.

Thanks, Khalaf. Good morning everyone. I'll begin with an overview on the quarter and year-to-date results then provide our perspective on the performance and outlook in each of our businesses. During the first six months of the year we are in the preseason ramp up and selling period for the primary retail selling season for our warm weather outdoor rec products. We had a great first quarter, with sales up 10% versus the prior year, and continued that positive momentum throughout the second quarter, with net sales ending about 12% ahead of last year's quarter. On a year-to-date basis, net sales grew 11% year-over-year to $243.5 million, so top line performance is quite good. Our main goal is to grow profits faster than sales, and we're going that. Operating profit for the quarter grew 35%, to $20.5 million. On a year-to-date basis operating profit increased 47%. Net earnings during the quarter increased 50% to $14 million or $1.39 per diluted share, and more than doubled for the year-to-date period ending at $18 million or $1.80 per diluted share. Innovation is our lifeblood, and what Johnson Outdoors have delivered consistently for nearly 50 years. It is the driving force behind our legacy of continuous growth and success. And excitement in the market for our innovative new product lineup is giving us such a great start for the year. Fishing remains the primary engine of growth for us, with sales 15% above last year's quarter and first six months. New product innovation is driving revenue and share gains from Minn Kota and the Hummingbird brands. Importantly, we are leveraging the pioneering technologies of both brand and our ability to uncover unique fishing consumer insights to maximize the growth potential in this business. A great example of this is Minn Kota's revolutionary i-Pilot LINK, which has continued on the strong, steady positive growth trajectory since its initial introduction five years ago. Only Johnson Outdoors could conceive and deliver this remarkable smart fishing system, the marriage of Minn Kota's propulsion and auto-steering and Spot-Lock innovations with Hummingbird's patented sonar and proprietary mapping technologies. We are the only company that has navigated this technological hurdle to provide anglers a significantly better fishing experience. This year's new Minn Kota Ultrex brings this technology to a whole new fishing audience, bass anglers [ph], who prefer foot-pedal motor control to keep their hands free for fishing. This is a large fishing consumer audience who've been eager to have the edge over the fish that wireless connectivity gives them out on the water. Now, for the first time, they can have that edge. The patent-pending Ultrex is the first electric cable steer [ph] motor, and the most technologically advanced one, providing our breakthrough steering and navigation features at the tap of a foot. At this time orders remain very strong and picking, and we feel good about the plans and programs we're executing to drive consumer sell-through. Right now, it's all hands on deck to ensure we can keep up with the marketplace demand. Moving on to Watercraft Recreation, where sales are outpacing the competition to maintain the positive profitable growth trajectory of this business, the Old Town Predator series of fishing boats have propelled the turnaround in this business. And the latest in the series, our new patent-pending Predator PDL pedal craft, which was last year's [indiscernible] vote of the year, is the hottest selling pedal kayak on the market so far this year. The Predator series was created for anglers by anglers every step along the way, from concept to commercialization. Their insights and feedback gave us the guidepost we needed to bring forward meaningful and relevant innovation new products that are priced to the true value they deliver. This has helped improve margins and strengthen the profitability profile of Watercraft Recreation. We're not where we want to be yet, but very pleased by the progress we're making. We feel the same way about our diving business. The last couple of years have been very tough for the diving industry. Global turmoil took a big toll, further dragging down a market that had not yet fully rebounded to pre-recession levels. At this time, we're seeing initial signs of market stabilization, the first step forward to market recovery. In diving, the goal is to strengthen performance, and plans are focused on reinvigorating, innovation, and growing shore in core life support categories. We're starting to benefit from these efforts with great new products, like the HYDROS PRO buoyancy compensator, and the 620 TI ultra easy breathing regulator, which are on track with expectations, so good progress is happening, but more work lies ahead; continued efforts, our design to accelerate the pace of the innovation and speed-to-market for every new dive product whose concentrated focus and resource alignment against best-in-product opportunities with the greatest potential for success. SCUBAPRO is the most trusted brand in the diving marketplace, with a reputation for unsurpassed quality and innovation. And we are committed to growing and sustaining our leadership position. In Camping, performance is being affected by very challenging market conditions. Retail restructuring in the marketplace made it difficult to bring down higher-than-normal preseason customer inventory levels before this year's sell-in. [Indiscernible] anticipating camping sales to be flat or slightly lower versus last year. We have great innovation potential around Jetboil's proprietary FluxRing technology, and are confident in our ability to maintain Jetboil's position as the world's number one personal cooking system brand. Eureka has a proud history of technology, first from four-seasons, to wind-resistant, to all-weather, Eureka made it happen. However, the current challenging market conditions underscore the importance of our strategy to reposition Eureka against the new emerging camp consumer. Work is already underway to tailor innovations in the consumers' target-specific wants and needs, and to align go-to-market strategies consistent with our expectations. We are moving forward aggressively, and it will take time before we begin to see results. As we head into the season, the number one priority is flawless execution behind our plans to finish the year strong. Performance through the first six months has positioned our fishing, diving, and watercraft rec brands for continued growth. We believe consumer demand is the truest measure of new product success, and we'll see that in the next quarter. At Johnson Outdoors we take the long view, looking to a growth horizon extending well beyond the next quarter or the next year, to be a thriving enterprise that's built to last, and deliver long-term value creation. Our strategic plan reflects how critically important sustained innovation leadership is to achieving that. And the plan's key priorities focus on ensuring a continual pipeline of meaningful new product innovation, with even bigger, better marketplace success. Those priorities are won keeping our finger on the pulse of consumers to gain ever deeper, richer consumer understanding. Consumer insights are innovation guideposts helping us identify the best new product ideas, as well as shaping marketing and selling programs that are wholly in sync and in touch with our consumers. Nothing is more important to winning in our highly competitive marketplace. Number two, revamping our new product development process so we are consistently translating our unique consumer insights into marketplace winners, for a more disciplined, more fact-based in our decision-making, and involve consumers every step along the way, from concept to commercialization, and beyond. Number three, building stronger, better relationships with consumers through enhanced digital sophistication. For most consumers, the purchase journey begins online, and we need to be more connected and better connected with them along that journey. Across the board, we're transforming our consumers' experience with our brand and our company. We are moving forward aggressively against all three priorities. Ongoing focus and investment in these areas are essential to ensure continued progress toward our goal of delivering accelerated, sustained, profitable growth long-term. We remain very excited about the future for Johnson Outdoors. And now, I'll turn the call over to Dave for his comments. Dave?

Thank you, Helen, good morning everyone. I just want to highlight a few items during the quarter. As Helen noted, new products are doing very well this year, and pricing to the true value of these innovations is giving margins a good lift. Total company gross margin grew 2.3 points in the second quarter. Every business is posting higher gross margins, driven largely by new products, as well as improved operating efficiencies, and a favorable mix of products. Operating expense increased $4.6 million in the quarter, with higher volume-related cost accounting for about half of that increase. Consistent with our focus on innovation, R&D investment was up about $700,000 in the March quarter. A couple of other items contributed to the increase in operating expense. First, $700,000 in deferred compensation, which was offset in the other expense line; and second, bad debt expense, which was up about $400,000 versus the prior year. Working capital is up about 4% versus last year's second quarter. This was driven entirely by an increase in accounts receivable, which are up about 19% due to higher sales during the period. On the flipside, inventory is down about 17% from last year, indicating strong preseason selling this year. Net income in the first six months benefited from a 17.3% effective tax rate, which reflected approximately $4.2 million of foreign tax credits generated by the repatriation of about $22 million in cash from overseas in the first quarter. The decision to bring cash back when we did was due to favorable foreign exchange, combined with our ability to utilize these tax credits. As we noted last quarter, we anticipate a mid-20s effective tax rate for the full year as a result of the repatriation. We expect to use the cash to curtail debt, and invest in targeted growth strategies and opportunities. So, in summary, the balance sheet is strong, and our cash position is growing, enabling us to continue to invest in strategic priorities and in opportunities to expand our business and growth potential. We remain confident in our abilities and plans to create long-term value, and consistently pay dividend to our shareholders. Now I will turn things back over to the operator for the Q&A session. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of George Kelly with Imperial Capital. Your line is open.

Hi guys, congratulations on a nice quarter.

Thanks George.

A couple of questions to start on the fishing business, I'm wondering if you could give any more clarification around retail inventory levels and sell through and just how that has trended now that the fishing season is kind of just getting started?

Well this is now we do get point of purchase data from some of the accounts and we are seeing the sell through starting to gain momentum. So we feel good that what we have sold in is starting to move up.

Okay, so it seems like the inventory levels at retail are you still having to catch up or do you feel comfortable with that retail currently?

I think we feel good at this point but we are definitely putting everything on a fast pace, so that we don't run into how does that [indiscernible] this is a pretty exciting sell-in so far, so we'll have to see how things move.

Okay, okay. So, you still continue to have to really push your production volume to keep up with what you're seeing so far?

Yes.

Okay, great. And then another question on fishing; pricing keeps moving higher on your newest products, have you seen any kind of evidence that it doesn't sound like it from this call that are you seeing any evidence that it's getting hard to grow that pre-unit pricing from previous years?

With the innovation that we have that the price value is we make sure that that it matches up with the price point from what we've seen is we deliver what they're looking for that there is the core fishing route that will pay whatever be [indiscernible] to reflect the value I think you know one of the strategies is we offer full line of products and so we do accommodate those that are not willing or can't go up that type. So we do cover a range of price points, so we do have comfort for everything.

Okay, okay. Last question on fishing, is the margin, operating margin was up nicely year-over-year, is that just incremental margin or is there any sub-segment whether it's member or tenant or anything that has improved more than normal year-over-year?

Yes, I mean the margins doesn't really reflects new products gross margin [indiscernible] so nothing unusual there.

Okay, okay. And then your balance sheet, a nice problem to have lots of cash. You feel like you're getting closer on whether it's an acquisition or for returning cash to shareholders, should we expect some coming in the next couple of quarters on that front?

We're always looking, so it looks continue our strategy, so I can't tell more than that relates.

Okay. Could you prioritize I guess?

No I can't really prioritize because as this is part of our strategy, so this kind of depends on the market.

Okay, that is it for me. Thank you.

Thank you.

Thank you. And our next question comes from the line of Brian Rafn of Morgan Capital Management. Your line is open.

Good morning everybody.

Good morning, Brian.

Give me a sense you guys talked about, certainly talked about -- Helen talked about innovation that if you were to go back the last five, seven, eight, 10 years and you look at the cycle time between engineering concept, design, rapid prototyping, inventory build to getting new products out into the market, if you go across your four business lines I'm sure they're going to be different by fishing from camping to scuba diving how much cycle time compression or games that you've got north about the same?

Well I would say that we are planning ahead better, so we've got, we plan out years as to having significant launches and I would say that if that is with this new process that we're putting in place, I think we're putting ourselves through some more hurdles but we have got an efficient process in place that will make it happen fast, I think it was a different competitive environment, I think innovation is getting harder and harder but you know with the process in place, we are still being able to identify those consumer gaps. So I would say if we were good back then I would say that now it's much more systematized and it's planned and it's paced but we get more done in a shorter period of time but we still are very careful about what we launched and make sure that it's quality and it's delivering against the consumer needs. So it's I think we will be more consistently in the market with successful new products.

Okay. Can you describe just in quantitative I've been an analyst, would you see the product development cycle between concepts and having inventory selling would that be a period of years or months or it certainly isn't weeks, I mean how long is that to get, you know is it a three year type thing with your specific end markets or is it 18 to 20 months, give me a sense if you could kind of and even by business if you had a better sense?

It is truly breaks from technology, I mean that doesn't happen overnight and you spend a lot of time you have to plan way ahead to that, I think if there's a line extension or an added benefit we can do that on you know potentially in annual basis if we're planning ahead but the one thing we don't want to do is the market can only handle a certain amount of new products, for season we can - so we want to pace it and each business is different in terms of the capacity of the market to handle. So I would say we try to come out with new products every year but it's more than you don't start on the concept 12 months before that, you need more lead time on that.

Yes so it would be years basically is what you're saying, couple of years maybe and then if it's an iteration or the line extension then you might be able to do that within a year? Right, okay, that makes sense. You mentioned any was the inventory surplus just on the camping side in that channel wasn't in scuba or something else?

Yes we saw mostly camping out.

Okay, okay. What when you look at your production across the four businesses, what might you be running capacity utilization or maybe you could frame it by shifts, would you be doing three shifts plus 10% overtime on fishing but maybe once you have done Scuba give me a sense across your businesses kind of where you're at either capacity utilization or maybe by labor shifts?

Yes, it's hard for me to answer that because a lot of the pinch point in fishing is really the long lead time for raw materials. So that's really kind of what we're working with right now is to make sure we've got the raw material in place in turn, so that we're working pretty much fully out with in fishing but we're limited by the raw materials we have right now.

So with pull up in three shifts, two shifts, one I mean I just try and understand what is normal for you?

Yes, it's really a shift and then maybe like a shift that happens over time involved there.

Okay, okay and then scuba private is also probably kind of normal kind of one shift?

Yes that is fair, one shift.

Yes, and then kind of on a cost of goods sold, Dave, from an inflation standpoint, are you seeing aluminium, resins is there anything that you're seeing as giving any percolation relative to inflation or demand, you certainly spoke on fishing with the ability to source or get the timing on there but anything on the cost side?

Nothing significant Brian, resin has been percolating up here lately but it's nothing huge.

Okay, okay. When you look to just the season and again obviously the country is different, we've had a lot of rain in the west, here in the Great Lakes you expand kind of a milder season less maybe ice switching early melt, has that had all gotten fisherman out earlier on the Lakes you know from a Great Lakes perspective for you and if you see any more pull through demand from a weather standpoint, I guess this would be the question?

I don't think we've seen any different or people turning out there earlier than normal. You know the kind of sell through right now that we're getting is fairly standard but the –you know they buy in anticipation of the fishing season but we see it not the other way around which is the lakes are not frozen.

Yes right, I was just looking to see if there is anytime you equate the weather sometimes as an issue that nobody looked at, your what would you kind of if you look at you guys are very [indiscernible] certainly with the demographics and geographic and cytographics and all the insights you talked about pause and the pause of the consumer, what is kind of your you know because fishing and electronics has done so well. What is your demographic pull from your U.S. fishing fisherman or fishing lady?

Well, you know, we try to stay away from that through demographics and we get more excited graphics and motivation for purchase but we truly are targeting the fisherman that is values that fishing experience and values the equipment that that helps him catch more fish and so there is a core passionate group of fisherman and you know there is scattered regionally and, there are different north to south but and the type of fish they catch. But it's really more of in attitude and motivation and they just really value product that delivers a benefit that helps them have a better experience so that's it to me that is, they put a high priority on fishing and are always looking for the latest and greatest.

Yes, no, I come from the boating side early days you didn't need a 300 horsepower mark to get to efficient spot now you do, so I do understand that psychographics side would that, would that core passionate fishing guys now on be with that number or that market be millions of fisherman or tens of millions.

Well, we know the participation rate I mean we've got, the numbers vary between 13% to 15% of the population fish and then you know we sell to those who own both so, you get it down to that level but I would say, its there's a large fraction of nautical fisherman out there. And there's a little variation year-to-year but demographically they are getting a little older but they seem to be bringing, the family on board which is key for the future.

Yes, so you're seeing that, that between generational ship you're not guess you kind of answering the question, you're not seeing an aging or his is a dying group you're actually seeing the participation to the next generation so that I would see that's certainly good.

Well, I think if you really look at they get the trend in fishing licenses I think it's gone down very slightly so it's either flat, it's flat or down, but there's obviously a lot of dynamics going on. And you've got new boats coming in, new fishermen coming into the market every year, obviously because we see that in our purchases. And then you've got some on the other end are moving out of the market. But for now, I think it's a pretty strong dynamic market.

Okay. From the standpoint, Dave, anything on military on the camping side?

No, not really. Military is not a significant mix of the business.

Okay. And then on -- I just caught the tail end of your scuba diving side. How has the new product introductions been on the diving side?

We actually have had some great response. And it's quite an important year for us because we feel it's important for us to lead in the life support categories. And we introduced a new innovative buoyancy compensator, which there hasn't been a lot of innovation in that segment of the market for many, many years. And the response has been outstanding on that. And we also introduced a new high-end regulator that has better performance, is lighter weight, is more comfortable, and that, the response is doing really well. I think this does prove that the innovation does drive market excitement, and our target diver is the same kind of thing as fishing. They are a core group of passionate divers that, especially in life support you want the best and the latest and greatest, and innovation drives those sales.

Okay. And then I'll just ask one more, what has been the -- and correct me if I'm wrong, is there was some disruptive relative to diving patterns in the Mediterranean area with what's been going on in the Middle East. Is 2017 better or worse, or is that still an issue?

Well, I think we feel it's stabilized. It's not declining. It doesn't mean that it's going to start growing. I think the Red Sea is still an issue. It was a big dive destination. I think the -- we are putting plans together to address growth opportunity in that challenging market. But I would say that because our consumer is the higher price point buyer that they will also be the ones that are going to [indiscernible] "You know, the Red Sea is not working real well, I'm going to travel, and I'm going to go to a different location." So I think as being one of the leads in the premium segment of that market, we are, I would say -- and we can only guess on that because we don't get the data. But we would most likely be less impacted by the Red Sea because of the type of diver that we attract.

Okay, all right. All right, thanks guys. Appreciate it.

Thank you. [Operator Instructions] And you have a follow-up from Brian Rafn of Morgan Capital Management.

A short line; Dave, you talked a little bit or somebody commented on bad debt accounts receivable. Are you seeing that? It's been kind of a trepid economy. Do you see that across any of your channels?

The retailer environment is challenging. We had a bankruptcy of a customer -- actually a couple of customers. So that's reflected in that number. And we continue to keep an eye on it. I think where we're positioned right now, the season is fine. But in the future we'll have to make sure we understand what's happening out there.

Yes. And Dave, when you look at that kind of boutique we've got in a lot of the sporting goods business, whether gun stores, or whether they're watercraft or rock climbing, there's these kind of nichey mom and pops as well as big-box. What is the encroachment in your product lines with an Amazon, with the cyber in that, or does your customer really need that physically, tactical interaction with the product?

I believe you can pipe into, but it depends on the category, but certainly it varies, but there is -- we are high ticket items and people would like to touch it and feel it, and I think they used the Internet for research and information, [indiscernible] you know exactly what they're looking for, then they will look for best price they can get, but I do think more activity and more -- our goal in our digital websites is really to give the consumers accept to the information and exposure to the product line that we offer and if we can help them make some decisions and then they go into the store and buy that's great. But I do think because of that some of the complexity of our business is that, it's a little more I want a touch it and feel it and -- but I think that the Amazons of the world are touching every industry and category, and if you're confident, you know what you want, I think it serves the purpose, and it's easy.

Yes. I admit that make some sense. Is there a challenge in other, Helen or David, is there a challenge in four closures of retail chains, or one off, or is it may be shipped if you see a big box, you see a certainly on downsizing consolidation with big box you know, [indiscernible] Pro or Cabella's. Do you pick up one Mom and Pop, single private shops, or I'm just wondering from the standpoint of if we see closures indoor, fronts and stores and smaller little one offs, where does that -- where does your market go, and obviously in fishing both of yours are some of the big box, how do you kind of see that navigate, what's the assault that's on retail?

We do have specialty dealers in dining. We have a lot of specialty dealers in our watercraft business. And they can -- they do play a role, you have to get certified through the dealers in diving and in panel, you want to see the boat and get in it. In fishing, I think they are obviously with between [indiscernible] Cabella's -- we have other channels that they go to. So I'd say camping probably is a little more of a struggle because it's -- many of the closures have hit that industry and there's a lot of online options. So I think it's a little more challenging in camping, but I think the other businesses there is -- they will find a way to get the product. So I don't think it will be lost sales, but I think that again camping is stronger, but Dave you can…

No, I mean I think the key is that the consumer can find our products, and as Helen alluded to, sometimes that could be difficult in some businesses, but as long as they can find our product more use our product innovation to drive that sale.

Yes, okay. Okay, all right. Anything, as you guys [indiscernible] have you kept headcounts about the same or you're adding people or engineers anywhere in the business?

Yes. We are adding functionality here and there, but overall headcount is pretty stable.

Okay. What -- I don't have a [indiscernible] what's the headcount about, Dave?

That's about 1,200.

About 1,200, okay. Okay. Any expansions, probably planned equipment, Dave, your budgets, any expansions in any of your manufacturing facilities or store consolidations or anything with the physical footprint?

Nothing significant, no.

Okay. Okay. All right guys, thanks much, appreciate it.

Thank you.

Thank you.

Thank you. And at this time, there are no further questions. I'd like to turn the call back over to Helen Johnson-Leipold for closing remarks.

Thank you all for joining and I hope you all have a great weekend.