Johnson Outdoors Inc. (JOUT) Q4 2017 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the Johnson Outdoors Fourth 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] Also, 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 now like to turn the call over to Patricia Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Thank you, James. Good morning, everyone, and thank you for joining us for our discussion of Johnson Outdoors results for the 2017 fiscal fourth quarter and full year. If you need a copy of today’s news release, it is available on our website at www.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 Dave Johnson or me. It is now my pleasure to turn the call over to Helen Johnson-Leipold.

Thanks, Pat. Good morning, and thanks for joining us. I’ll begin with an overview of our results, give perspective on our brands’ performance this year and outline key priorities for next year. Dave will review the financial highlights, and then we’ll take your questions. Johnson Outdoors had record results in fiscal 2017. Annual sales grew 13% to $490 million, profit surged 99% to nearly $46 million and net income expanded a 160% to $35.2 million or $3.51 per diluted share. Strong positive momentum continued into our fiscal fourth quarter, the period when the warm-weather outdoor rec industry is ramp down mode. Net sales during the quarter rose 22% above last year’s fourth quarter to almost $92 million and net income improved to $600,000 or $0.06 per diluted share. Overall, we had an exceptional year, driven by unprecedented growth across our flagship Minn Kota and Humminbird brand fishing brand on the strength of significant new product successes. For perspective, fishing new products this year accounted for about 60% of their entire product offering. Normally, the new product target level is about a third. Leading the way was the pioneering Minn Kota Ultrex fishing motor which made big waves in the marketplace this year. The award winning patented Ultrex is the most technologically advanced electric cable-steer motor, a first and only to give foot pedal control, anglers all -- our breakthrough steering and navigational features and technologies at the tap of a foot. This is a group of avid anglers who bring eager for us to achieve this technical leap in their motor of choice. Additionally, last year’s restage of our electric steer motors which upgraded wireless and GPS technology in these units, powered growth across the entire lineup. Legacy technology innovations, i-Pilot and i-Pilot Link, added to Minn Kota’s success with another year of double digit growth. Humminbird had an equally good year, driven by continued strong marketplace demand for the Helix series of fishfinders, particularly large screen models. The availability of our new-to-world MEGA Side Imaging and MEGA Down Imaging in second generation Helix model created even more excitement around this fishfinder series. MEGA launched its fishfinding sonar technology into the megahertz range for the first time ever to provide the greatest underwater clarity, detail and definition ever seen. This year, the formidable combination of Minn Kota and Humminbird delivered growth in every key fishing channel for the year, both in sales and units. And while new products have done extremely well, sales in base business segment and models for both brands are also strong. So, a fair amount of trading up without erosion of the base business. Net-net, an incredible year for our fishing brands. Going forward, we expect continued growth at a slower pace in fishing. Together, Minn Kota and Humminbird are the primary engines of profitable growth for Johnson Outdoors and we’ll continue to invest in sustaining the technology and market leadership of these brands. In 2017, we also benefited from our work to revitalize innovation in SCUBAPRO, the world’s most respected dive equipment brand. Demand for both the new Hydros buoyancy compensator and G2 dive computer exceeded expectations this year and strengthened the SCUBAPRO share in core life support categories. The success of these new products along with our work to reduce infrastructure overhead, brought diving back to profitability. We made good progress in our turnaround efforts in this business but we’re not where we want to be yet. Key global dive markets remain pressured by a number of geopolitical and economic factors and more work is needed to ensure SCUBAPRO’s sustained profitable growth trajectory against such fluid market dynamics. Lastly, very challenging market conditions can strain growth in Watercraft Recreation and Camping brand this year. Both camping and kayak markets were impacted by retailer bankruptcies and market restructurings, which led to overall softness in these markets. Continued solid growth in Jetboil is simply not enough to offset the market drag on Eureka!. Work to repositioning Eureka! for future success against new emerging camp consumer targets is underway to alter the current dynamic. More time will be required to maximize value and deliver improved results for Eureka!. The continued success of our Old Town Predator series of fishing boats particularly had a strong reception to this year’s new Predator pedal drive drove share gains in otherwise lackluster kayak market. We’re very excited about our new Ocean Kayak Malibu pedal drive craft, which sets the bar higher for fun and fitness pedaling, a growing rec kayak target segment. Returning Watercraft Recreation back to profitability ahead of schedule was an important step in our efforts to create a strong future for these brands. Our work continues to further strengthen innovation, broaden distribution and enhance marketplace competitiveness for long-term success of our Watercraft recreational brands. Looking back, outstanding product successes this year underscore the critical importance of our consumer-centric transformation to long-term growth. Everything we do, every touch point with our consumers must emanate from an intimate understanding of exactly who our consumers are, what they want, need, and expect for an overall great outdoor experience. Richer consumer insights are the catalysts behind our winning innovation and going forward will be the genesis of targeted cutting edge marketing. These insights also play a pivotal role in the transformation of our overall digital landscape, which is now underway. With more and more consumers beginning their outdoor experience online, it is imperative we make their shopping and purchasing experience the best it can be. Looking forward, ultimately, we view success as the evolution of our Company into a portfolio of thriving businesses with market winning brands, delivering consistent sustained growth and profitability. To that end, continued advances against our strategic priorities are necessary. Progress will require more work, more time and increased investment, particularly in the digital transformation and global systems infrastructure to take us to the next higher level of success. Now, I’ll turn the call over to Dave and a review of the financial highlights.

Thank you, Helen. We came into our seasonally slow fourth quarter with a strong tailwind and demand continued to be strong around new product offerings. Higher volume and pricing to value drove gross margins to 42.3%, an increase of nearly 4 points year-over-year. Operating expenses for the quarter were $5 million higher than last year’s quarter. The key drivers were higher volume related expenses, restructuring costs in diving and higher incentive compensation. Rising healthcare costs and warrantee expense also contributed to the increase. While operating expenses grew in dollars quarter-over-quarter, they compared favorably by 2.7 points on a percent of sales basis. Operating margin improved 6.5 points versus the prior year as operating loss shrunk to just $100,000 compared with a loss of nearly $5 million in last year’s same quarter. Now, looking ahead to next year, we expect the slower rate of topline growth and a slight decrease in the operating profit margin due to increased spending against digital priorities. We also expect significant growth in capital spending due to the digital investments and a global systems infrastructure upgrade. Additionally, we expect the effective tax rate to return to a more normal level. At the end of the year, cash and short-term investments grew $23.1 million from a year ago to $110.4 million. Our growing cash position enables continued investment in organic and new growth strategies for our brands. As always, targeted strategic acquisitions remain a growth strategy for Johnson Outdoors with the goal of strengthening capabilities, enhancing our connection to the outdoor rec consumers and expanding our playing field. There’s no timetable on when acquisition opportunities may emerge. That’s why we have an active ongoing and disciplined M&A radar screen process enabling us to proactively identify and evaluate technologies, brands and innovation building targets with unique application to our segments. Ultimately, we are looking for acquisitions at a reasonable valuation that deliver an appropriate return on investment to our business and our shareholders. Importantly, the balance sheet is strong and our healthy cash position enables us to continue to invest in growth opportunities while continuing to pay cash dividends to our investors. The terms of our new five-year revolving credit agreement which was recently completed with our bank group, gives us the flexibility to invest in growth while supporting the ongoing needs of our business. Now, I’ll turn the call back over to the operator for Q&A session. Operator?

[Operator Instructions] Our first question comes from Brian Rafn with Morgan Dempsey. Your line is open.

Dave, you made a comment, we had an extended summer here in the northern Great Plains, Great Lakes. What -- was this event maybe a record fourth quarter for you guys? How was this kind of tempered weather, did it allow for any inventory replenishment orders or fishermen when boats get stowed away, does that just really kind of put an end to the season?

This is Helen. I think in the end of the season, I don’t think people -- I think it does help us from an activity level, but I don’t think it necessarily pushes the purchase process because there is no prediction of how long it’s going to last. But, I think in general, we have such a great year that we did have the retailers filling up their inventory because of the purchases that happened earlier in the season. But, I would say, it’s more of the impact of the new products in general and not necessarily the weather.

Okay, all right. When you look at -- and I think you mentioned, almost 60% in the marine electronics side. What -- if you look at, you talk about sensitivity and consumer insights. From the standpoint, if you look at say marine electronics in either Minn Kota or Humminbird versus the diving SCUBAPRO, the two areas where you have a lot of high technology, what is your -- the kind of the adoption rate of your consumer? Is it faster in fishing and little slower in diving, or are they both about the same? Kind of give me a sense when you bring out new products, which markets are very electric relative to that new adoption?

Well, I think there is other factors that play a role, and I think it’s how quick the distribution channel is to take on the new products. And I think if there -- so, it’s more a function of availability and acceptability in store because both -- there is a core target in each of those businesses that innovation drives purchase. And I would say, the fishing market is much more efficient at getting the product on the shelf and available to the consumer. So, when we launch in scuba diving, the channel is very fragmented and it takes a little longer to get the new products into the market. So, I think distribution is more of the challenge in diving, fishing is very efficient. But both sets of consumers are -- innovation drives purchase.

Okay. When you look at those channels, Helen, what have -- if you look over the last 5 or 6 years, is it the same amount of wholesaler distributor shows or how you get that technology to inspire some of those retailers? Is it faster today, is the education process quicker, because obviously you need them to adopt those in store? How has that market changed?

Well, in fishing, it’s a much bigger and I think more sophisticated channel. And I think they trust us as the market leader and that we -- when we come out with innovation, they know we’ve done our homework. So, I would say, in general, we’ve done more innovating in the last five years. And so, that has I think set up their acceptance of the fact that new products drive sales. So, I think both -- because of the electronics and that all the iPhone technology, the turns have -- innovation is driving turns in general. And so that is set up. And I think in fishing, our retailers trust us. And when we come out with something new, they know it’s going to work.

Yes, okay. And what’s from a standpoint of time? Between the time you conceptualize on engineering design and then get it to market, how quickly? I mean, do you have a -- do you look at it, in fishing, on a seasonal basis, we’ve got to have these new products by November? What’s the season pattern for filling up that for the next year?

Well, we have industry shows that -- where we have to have our new products out there for our dealers, our customers and consumers to see, prior to them ordering. So, we do kind of time our launches, so that we can have a good showing at these important shows that kind of educate the channel on what to purchase. So, it is cyclical and we try to get it out there and in time where they can have pre-season orders. And that’s important. So, it is -- we time it so that they have enough lead time to get it in the store and market for us.

Okay. As you guess, I know zip about fishing. So, when are those shows? Is that a -- if you want to get -- obviously the fishermen, when the ice goes out and the early spring, when are you actually having those educational dealer shows?

It is in the early summer for fishing and it’s also -- diving is more of a fall show time. But that kind of -- it is what we back into from a new product standpoint or through the next year, if you got -- so, the summer is for the next season. So, it’s really, -- we kind of have the lead time, we also need time to build inventory. So, it’s -- there is a long lead time.

I appreciate the color on it, Helen. And then, Dave, you talked a little bit about in the text about more capital expenditures or more capital next year. Is that capacity utilization constrains? Is it factory floor space, is it machinery? What are you talking about there?

There is two large items there. One is our digital strategy where we are revamping our websites and investing in our digital marketing efforts. So, capital is going to be required -- incremental capital will be required for that in 2018 versus 2017. And we also are upgrading our ERP system in 2018. So, a technical upgrade in our system.

What CapEx 2018 versus 2017, what would the gross numbers look like?

I’m not going to give numbers, but it’s a meaningful increase. It’s not double but it will be a meaningful increase in capital spending.

Can you give me the base number? I don’t have a K in front of me for 2017.

Yes. Well, 2017 was about $12 million.

Got you, okay. All right. That gives me a sense. You talked just quickly a little bit on restructuring charges in scuba diving and there was -- Helen made a comment about Eureka!. What specifically things you have done in that area? Obviously the diving has been a little longer.

We are constantly looking at simplification of our business. And I think diving is one of those areas where I think we are going to be doing some -- a little bit of streamlining and consolidation but it’s ongoing. We also have some challenges with operating expense obviously in diving. Our sales have good momentum and we are looking at ways to be more effective and efficient.

Okay. And Helen, in the diving area, how much -- and I ask Dave all the time about Military and Eureka! Tent. How much is resorts, dive centers, police and sheriff, Navy Seals, Delta Force, all those special forces guys in the navy. How much demand is SCUBAPRO of its sales, what portion goes to those niche maybe more commercial type sales?

Well, I think we were very focused on the hardcore consumer for a while. And I think we talked about it that going after and looking at military as a target going forward is an area of growth for us. So, it’s more about the future than the current.

Okay. And then, I’ll just ask one more question. You talked a little bit about the camping side having the impacts, we’ve seen on the gun side with the Gander Mountain and some of those. What are you guys doing from the standpoint, are you introducing yourselves on the camping side for more mom and pop proprietors or are you waiting for Gander Outdoors to reopen or what’s kind of the channel going in 2018?

Well, certainly, the channel disruption has turned for camping industry upside down. But, we are really focused on repositioning the brand and to appeal to the omnichannel aspects of things. We are going online as well. But, camping in general is a category or an industry that has really grown in the ecommerce, classic trade. And so, our goal is to really -- and actually, that’s to our benefit because what we’re doing is working on very -- on targeting the right consumer with the right messaging. And the tools that digital will allow us to get to those people is perfect for us, because I think it’s hard to predict how the channel is going to -- the bricks and mortar is going to work out long-term. So, we’re excited about that aspect because we, it gives us a chance to get to the right target.

Got you. Okay. Thank you.

Thank you. Our next question comes from George Kelly with Imperial Capital. Your line is open.

Hi, guys. Couple of questions for you. So, starting with restructure. You mentioned that there were some diving restructuring costs in the quarter. Can you qualify what they were and what they were in the full year?

Yes. Do I have the quarter number here? $1 million, yes, $1 million for the quarter in diving, and I think similar number of the full year. So, most of that was in the fourth quarter.

And will that be an ongoing -- what’s your expectation for 2018?

We continue to look to simplify that business. So, I don’t expect a large hit on that line necessarily in 2018, but we continue to work on simplifying the business. So, more to come.

Okay. And then, secondly, on the fishing segment. You mentioned that you have -- you expect it to grow next year, but at a slower pace. What gives you confidence? It’s been such a big new product here. What gives you confidence you can continue growing fishing?

Well, the dynamics of that business, it really as we look at it, because it’s long purchase cycle product. So, launch is not necessarily a 12 month timeframe. So, you could actually call launch, maybe it’s a two years worth of launch. But, given many of our fishermen, they have bought a product within the last few years, they need one more year to wait until they are ready to turn it. It’s not like we have got multiple purchases; it’s same consumer every year. So, that’s one dimension. The other dimension is our new products, we are hitting a segment that is quite large, southern -- one of our big new products is the southern bass market and that’s a large group of fishermen and they are known to be pretty loyal to their product. So, you would -- as we look at it, there is a pretty large opportunity there to penetrate a significant segment of the market. And so, we feel it’s certainly got more legs in terms of gaining momentum.

And Dave, so, just to your point that it’s -- when a new product launches, it’s a several year dynamic, it’s now -- did Ulterra -- I know Ulterra has been in the market now for a few years, did that grow this year?

Yes, Ulterra did grow this year.

And again, that’s another indication of the long launch, launch frame. And we do -- we have an innovation strategy that we don’t hit the same consumer segment every year with a new product because we want -- they are not in the market every year for a new product, we try to launch and ultimate the consumers, so that they have time to even absorb the launch from the previous year.

Sure. And then, are there any major -- I believe, Talon has a new product this fall, right now it’s in the marketing. What are the major news? Are there any new brand new things to the market or product -- Minn Kota extensions or anything else that you are baking into your expectations for next year?

Yes. You hit on Talon. So, that’s a new product for us this year 15-foot shallow water anchor with Bluetooth two technology. Humminbird is going to continue with its MEGA Imaging new products. So, there is more models coming up under the MEGA. So that’s exciting as well. And then, we have got new products in Watercraft. We have got a pedal craft coming out under the Ocean brand name, which is we are very excited about. So, those are some of the highlights.

I know in past calls you’ve talked about looking into Minn Kota and where else can you take the brand, any update there?

Well, Talon is certainly one of our key current efforts to extend the brand outside of just the trolling motor. I think right now, the effort is coming up with new capabilities that connect Humminbird and Minn Kota, which is truly new functionality and provides new consumer benefits. But, we are always looking for ways to extend the strength of the brand equity and provide extra value. So, those are little longer term in development, but certainly top of mind.

Okay. And then, just a couple of modeling questions. In your press release, you’ve commented that operating margin is expected to decline. Can you quantify that at all?

Unfortunately, George, I can’t. I think, we put the word slightly declined in there. So that’s the best I can do for you. But, we’re investing in digital; that’s driving some incremental expense next year.

Okay. And then, the tax bill, is there anything that you’re seeing in this reform package that scares you or should you be pretty, if at all, clear, so you’d be pretty close to that sort of low-20 rate?

Without getting into details on that and understanding kind of where they are and not predicting where that could end up, we expect to kind of be where the corporate tax rate would be.

Okay. And then, last question for me on your cash. It’s really a big number now. So, do you feel like you’re getting any closer on acquisitions or what’s your balance sheet -- why doesn’t it make sense to a special dividend or something? Because, I’m sure that you could access -- it would be easy to fund debt if you did fund an acquisition. So, can you just talk about the strategy in your balance sheet?

Yes. I mean, the strategy continues. I mean, we’re active. We’re very focused on putting that cash to work. We’re investing internally, so that we’ll continue. We love to have a dividend that’s meaningful and growing. That’s important for us. And the acquisition work continues. So, it’s kind of -- the strategy is that three-pronged effort. And we continue to have discussions about how we can best put that to work. We’re very cognizant of the fact that we’ve got a lot of cash.

And just to add to that. We are very strategic about what we play in and where we play. And I think also of the kinds of multiples that are out there right now. And so, I actually feel we are constantly looking but we are not going to do an acquisition just to do an acquisition. And we’ve got -- we’ve evolved our strategies, and this past planning process has really helped us focus on what our long-term opportunities are. And so, we will be very-disciplined in how we evaluate and look at acquisitions. So, they aren’t always out there, but we are looking. And we need to make sure that we’ve got the cash in the balance sheet to do what we want to do when that time comes. So, again, our view is a long-term view about strong sustainable growth. So I feel good about where we are and I feel good about what we’re doing. And I really feel the discipline that we have to know what we’re good at and to know where the opportunities are is really a key aspect of the success of the business. And I know it sometimes makes people impatient but you know it’s the right thing to do right now.

[Operator Instructions] We have a follow-up from Brian Rafn. Your line is open.

Yes. Dave, can you put a little numeric color on what you are seeing in M&A? I think, Helen said multiples are little expensive. Are you seeing more financial buyers versus the strategic buyers? What’s your range or what is an acceptable multiple of EBITDA or sales and what are you seeing in the market right now?

Yes. Valuations are still high versus history. So, that’s a factor in terms of the buyers, I mean, it’s mixed. We do see stuff come across the desk and we continue to look out there. So, as Helen said, valuations are high versus history.

Let me just add. It’s not just the multiples. Certainly, it is a strategic that really drives our energy. And our goal is to make sure that what we do buy that we can generate value and that we can bring added value to that acquisition. And we can integrate it appropriately, whatever. And it’s the right plan. I think, all those things would say we are not afraid of high multiples. It’s in fact, the brand and the product and the company is the right strategic fit. So, it’s -- it’s not a formula and certainly not a financial formula that we are looking at, it’s more of what can we bring to the party that will really leverage our expertise and be able to add value to whatever the acquisition is. And if we had a formula, that really doesn’t work for how we do business. So we are looking.

Let me add. You are very good at articulating I think some of your thought process. Would it be fair to say from your standpoint that a niche technology that you could expand, you could scale up sales, you could add line extensions would for Johnson Outdoors be more attractive than buying a large sales outdoor product that’s more of a restructuring play?

We are looking at both of those, but obviously technology is critical to being able to innovate. And so, I think those are both areas of interest for us. So, you did a good job of articulating them. But I don’t think -- it just depends. We’ve got to find at the right time what’s available. And sometimes you can’t control that piece of it and most of the time you can’t. But, we’re looking at both.

And Dave, on your comment on the ramping up the digital side, the website. Are you talking computers, are you talking ecommerce, people, headcount, are you talking call centers? What specifically is that money going for?

It’s website work, infrastructure to support the digital marketing and social media, and other things. We are also ramping up capability in digital marketing, both internally and externally.

Okay. So, infrastructure; is that guys, or is that boots on the ground or is that like computers or what is that when you say infrastructure?

It would be technology. Most of it’s technology, meaning -- yes, the websites.

Okay. And then, what -- if you look at -- and I appreciate Dave sending me the square footage on the plants; that was awesome. So that’s a big, big help. If you look at your biggest plants, like I’m thinking Binghamton or Alpharetta or Mankato or Little Falls, Old Town, Batam out in Indonesia where you guys do the diving. What might you guys be running kind of capacity utilization number shifts or is that really not an issue at this point, given how well you guys have done in sales?

It’s not necessarily an issue for us. We’re not running full out kind of anywhere. We’ve got shifts that we’ve been adding. So, I think right now we’re in good shape.

Would it be one shift plus overtime, or kind of your factory’s one shift going to two shifts, where might you be in that evolution?

This kind of depends on the factory. Yes. I mean, some are running one shifts and overtime, and others are running three shifts right now.

All right, okay. Helen, you talked a little bit about consumer insights and digital connections and some of the things. If you went back three year, four, five years, what have you added today from an expertise and understanding your customers or how you look at that versus what you might have done five years ago?

Well, we have made a consistent effort to evolve our marketing capability which historically been very good at manufacturing and sales. And so, we’ve evolved our marketing piece of it, and also invested in marketing tools and marketing partners in terms of agencies. And so, we don’t expect to have all the expertise in-house. And so, developing those with partnerships externally is important as well. We’ve spent more money in the research area, so that we can get into the consumer segments, and that’s a little bit different for our company. But it is really -- it is opening our eyes to lots of exciting opportunities. So, I would say, it’s been an evolution and not all of it in-house, but it’s recognizing areas that we have to tap the expertise outside as well. So, it’s been a process.

Okay. Now, I appreciate it. You talked a little bit about -- you made a comment I think Helen, relative that your trade up fishermen guy, your early adopter, first mover initiative guy, the guy that’s really looking for that cutting edge. You have those sales but you really also didn’t impair the base. In the fishing area, be at either Minn Kota or Humminbird, what percentage or how big is that trade up guy in that fish base? Is he a third of the business, is he 10%, can you give a sense as to how big that guy is?

Well, I would say -- and we don’t have the exact numbers on that. But, our success in recent years has been the fact, our motors and our products we feel very good about the quality of our products. And in terms of how long they last, they last a long time and they continue to perform. What we have done is when we introduce a new product, we innovate, we give them enough of an added value and added features that they’re willing to turn their product between, which means, okay, my motor still works but I love those new features, I’m going to purchase a new motor, even though mine still works. So, we are getting growth in a number of ways but one of them is that we’re condensing the purchase cycle across many of the segments. And that’s what innovation does. So, whether they are in all those purchase cycles, we get the increased price points. Some of it is paying, some of it isn’t. But, there is some that will [indiscernible] that it is probably a pretty big percent of our consumers that will wait until the motor breaks. But, it’s that added passionate fishermen that will want the latest and greatest, and that’s the segment that really contributes to the majority of the high -- the trade up to the higher price point product. So, exact percentage -- we don’t have that but they obviously-- it’s not that -- it’s more likely the 80-20 world, which is the smaller segment is the one that is really contributing to the growth.

When you look at the electronics, the technology that you’ve talked about, be it either Minn Kota or Humminbird on the fishermen side, is the technology revolution such that it’s easier for you to package new technology in a completely new product, be it a sonar or a motor, or are you able to do upgrade software that you can install in the older legacy basis already out there, for the guy that may not have the dollars to go out and actually dump the old motor and get a new one? I’m just trying to understand that business.

Well, I don’t think it’s -- I would say that applies more to the Humminbird brand and we do both. But, I would say having the ability to do upgrades in software and that is something we are working into the product, which adds more value to the consumer as well. But, Minn Kota is a - now got Bluetooth, but it’s a little bit more mechanical. So, it’s a little harder to do those -- as you are going kind of upgrades.

Right. I got you. I’m just curious, is there a much trade in -- I know, the gasoline outboard racing market for motors which is the Mercury and Johnson [indiscernible] I don’t really know the fishing side. What’s kind of the overhang? And we have it, even in another field of sport is a gun side. You can have trade in guns impact new gun sales. Is there much of a trade in market on the Minn Kota side or is the guys just throw the motor in the back of the garage and go and buy new one?

I think with the advent of the online sales and the eBays of the world, there is a much bigger secondary market for our products. And again, there is a -- for those that are added [ph] and want it, buy the legacy in greatest, there is a big market of people who would never spend the money on truly a new motor, if their motor still works. So, I think that secondary market actually helps us to get the purchase cycles shorter.

And Dave, where is the cash invested, the 110 million?

A good chunk of it is here in the U.S. We repatriated about $22 million in the first quarter from Europe. So, we’ve got a good chunk of the cash back here in the U.S.

And what’s -- given what the term structure interest rate, so, what’s the denominated yield or what’s it invested in?

Yes, it’s all short-term money with the bank. So, it’s a pretty nominal yield right now.

Okay. And from the standpoint, if you look on the M&A side, is it you probing for deals, is it bankers betting [ph] you guys deal? How is you’re kind a radar for deal setup?

Yes. I mean, it’s both. We’re out there probing all the time, and of course stuff comes across our desks.

And just to add to that. We have identified via our strategic plans the areas of opportunity and growth, which help us kind of do the proactive look. Plus, we are the recipient of people wanting -- bring things to our attention when they pop up. So, it is both.

Okay. And then, just one on the camping side. Is the camping, the hiking, the rock climbing, is that all that same end guy or are those different end markets?

They are -- I would say, from an equipment standpoint, they are different. The climbing guy is a different guy. But there is certainly a lot of overlap between those segments. If you’re an outdoor camper, you probably hike, and you are more likely to be the climber versus if -- there is a lot of relationship there. So, there is -- at the core, there probably is overlap. But, it’s not just -- when you think about those, it’s a -- there is a cryptography that is very different there. So, we consider even the camper for the Eureka! brand versus the Jetboil; they are different types of campers. So, but, we remain -- there is a tendency, if you were to have a higher propensity to do multiple sports, once you’re in it. but they tend to be…

Yes. I appreciate it. Dave, on healthcare costs, anything that stands out, premiums or umbrellas or what specifically or is it just a higher incidence of having to pay for one-off surgeries or what…

Yes. Basically, our own experience has been driving it. So, it was not a year for a lot there.

Okay, all right. I appreciate the patience; fantastic year. You guys have done a marvelous job. So, you should be commended. Thank you.

Thanks, Brian.

Thank you.

Thank you. Our next question comes from Eric Brudos [ph] with Westfield Capital Management. Sir, your line is open.

Hi. Just a follow up on the questions regarding strategy. Is there an element that requires you to be in some of these businesses that are lower margin, sort of loss leader, for instance, the camping or boating, or why won’t you take advantage of a strong M&A market and shut some of those assets and focus on the higher margin businesses?

They are easier said than done. But, in our mind, these are very important strategic categories to be in. We have expertise in them. I think the market evolution has the disruption with the channels -- has I think created a little bit of a situation that we have to adjust to. But, we do have decent -- it’s not that one is low -- that these are lower. But, with innovation, we can drive decent margins. I think, our long-term goal is that they will contribute a good level of profitability. It’s just how it looks right now. But, camping is one of the biggest outdoor markets that exists right now, and we want to be a player in that. And with the new digital tools and our ability to target, we think that we can do that. But again, that takes time. We are still ramping up our whole digital capability. And I think in watercraft, we are one of the leading global manufacturers of watercraft, and the consumer is changing. We are bringing technology in. And our goal is to have it as a -- both businesses as a strong margin contributor. We didn’t have a vision that for that I think -- we would have to consider alternatives. But, we feel good about the future. It just takes time.

And as you think about the spending in digital and marketing to get those -- to drive innovation and also to get higher share and higher margins, what’s you return on investment view? And what’s your long-term view in terms of how far you think you can expand margins in those businesses?

Obviously, the digital strategy is key for us to drive margins and growth. So, we are confident that we can do that. As Helen said, it’s a big effort. So, I think the margin expansion play across the business is definitely part of our vision.

Motors is going a great job. The fishing business has been driving great margins, and I think diving has room to generate much stronger margins. So, I would say we’ve done a good job in fishing and the others, it’s an opportunity.

Sure. Yes, I understand that. But, when you put pencil to the paper and you think about spending incremental $5 million or $10 million in CapEx, you must have a view on your return on investment, what your payback is going to be on that, is it going to be a three-year, five-year kind of payback?

Yes. We definitely have a view to that. It’s just that we are not going to talk about that. So, it’s something that we are very cognizant of the investment and the payback that needs to happen.

And then, on the tax rate, when you talk about getting to a normalized tax rate, what does that mean exactly? Because, if I look at fiscal 2014, 2015, 2016 and 2017, your tax rates of 47, 32, 43 and 27, there is not a lot of normalization to that.

Yes, good point. Yes. We tend to look at the federal rate, plus a couple of points. So, federal corporate tax rate right now is at 35%.

Okay, thanks. I appreciate it. Bye, bye.

Thank you. I show no further questions in the queue. So, I’d like to turn the call back over to Ms. Johnson-Leipold for closing remarks.

Okay. Well, thanks everyone for joining us. And we hope you have great holiday. We look forward to talking to you next year. Thank you.

Thank you. Ladies and gentlemen, that does conclude today’s conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.