Johnson Outdoors Inc. (JOUT) Q1 2018 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to Johnson Outdoors First Quarter 2018 Earnings Conference Call. Helen Johnson-Leipold, Johnson Outdoors’ Chairman and Chief Executive Officer will lead today's call. 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 their 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. Good morning and welcome to our discussion of Johnson Outdoors fiscal 2018 first quarter results. 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 either Dave Johnson or me. It is now my pleasure to turn the call over to Helen Johnson-Leipold.

Good morning, I'll begin with comments on performance of the quarter and outline key priorities for the year ahead. Dave will review key financials and then we'll take your question. During our fiscal first quarter October through December, the warm weather outdoor recreational industry is in ramp-up mode, preparing for the primary selling period during the second and third quarter. Sales in this quarter reflect pre-season selling to customers. We'll begin to see initial consumer takeaway in the spring. This year first quarter sales were $117 million, down to 24% increase over last year's first quarter and operating profit improved significantly to $7 million. Tax reform legislation led to changes in accounting and taxes which lowered net income, resulting in earnings per diluted share of $0.02 in the quarter and Dave will provide more details in his remarks. Overall, it was a good start for the fiscal year. We're pleased by performance in our fishing and guiding brands. One of our key priorities and then ongoing focus is to ensure we have a robust innovation process with the ultimate goal of delivering bigger, better new product successes, bringing forward new products that provide distinct meaningful added value for our target outdoor recreational consumer. Products with value that continue building launch momentum beyond the 12-month period like last year's outstanding mew products in Minn Kota and Hummingbird brands. In this quarter, we benefited from their continued momentum with preseason orders trending up across all channels for both brands. The 2017 new product line up in Minn Kota was a mix of new motors and a major technology restage of our entire electric steer line. As a result, new products represented over 60% of the total brand offerings, which was usually higher than the norm and not repeatable every year. [Import] value plus innovation has expanded margins and given a nice lift to the entire Minn Kota brand portfolio, including i-Pilot and i-Pilot Link, our legacy remote wireless steering and navigation technology. The Minn Kota Talon Shallow Water Anchor Series is also benefitting. This year we've added a new talon, the first-ever with a 15-foot depth range and added technology capabilities, such as wireless remote deployment and retraction. Since talon came on to the market the shallow water anchor category has more than doubled in size which highlights how important innovation is to the overall growth of our markets. Hummingbird Helix of fishfinders continue to grow in popularity, offering the full range of our patented sonar technologies in medium and large screen fishfinders. The Helix series provides crystal clear screen clarity and advanced intuitive touch screen control, now coupled with our new pioneer in MEGA Side Imaging and MEGA Down Imaging technologies, Helix brings unmatched value in the market and is driving ongoing positive momentum in year two. And anglers who want everything, helix -- everything helix provides with an even bigger screen display are flocking to our new SOLIX product. Fishing is our largest and most profitable business and we are making smart strategic investments to sustain our position as a technology and market leader. And while we expect the pace of growth to slow somewhat, fishing will continue to be our primary engine of profitable growth. Moving on to diving, where our emphasis is on driving share gains in SCUBAPRO to enhanced innovation, primarily in our core life support segment. This quarter new products were a key factor in guiding strong results. The revolutionary HYDROS PRO buoyancy compensator is the most comfortable lightest weight and fastest driving BC ever and the new G2 dive computer, both started out the year with solid gains. We also began to see an uptick in key international dive markets, reflecting the steady improvement in global economy. We’re pleased by the positive momentum in diving, but there is more to do to get where we want to be to ensure sustained growth for SCUBAPRO. Market conditions in both camping and watercraft recreation continue to be very challenging. The impact of retailer bankruptcies in subsequent restructuring across the sporting goods channel, hit campaign categories early last year, driving tightened retail inventory controls that weighed down [tens] and year sales all season. In camping, Jetboil is targeting innovation that meets the growing wants and expectations of our outdoor foodies. This year the [Jewel] is the latest in our line of compact, lengthways, portable and push button start personal cooking systems. Jetboil is holding steady against the market headwinds and remains the number one personal cooking system brand in the world. And the reason, we're focused on the future for perspective, camping is one of the largest outdoor recreation markets and also an important gateway to our other outdoor recreational activities. Camp consumer demographics and dynamics are evolving and so are their expectations for overall great camping experience. We're positioning Eureka! to deliver against those future expectations. Overtime, we'll begin to realize the benefits of these efforts. Now in Watercraft Recreation tightened retail inventory controls began to affect the paddling markets late last year. Pre-season orders suggest, retailers are anticipating continued market softness this year. We got great brands, great innovation, unmatched expertise and are in a great position once the watercraft market rebounds. Right now, we're moving quickly to strengthen operational efficiency to protect margins and reduce impact on profit. Just a quick reminder that first quarter results alone are not indicative of full year performance. As the season kicks in, this year we'll start to see consumer sell through, which we believe is the truest measure of new product success. In closing, we feel good about our plans for the season and our ability to deliver against our goal of accelerated sustained profitable growth. Now I'll turn the call over to Dave for more details on the financials.

Thank you, Helen. The 24% increase in revenue was a key driver in the year-over-year dollar increase in operating expenses. Expenses are up about $5.7 million, however down 2.7 as a percent of sales. A portion of the expense increase was due to cost associated with this year's implementation of our digital transformation strategy. The impact on distribution channels from tough market conditions and watercraft recreation and camping further emphasizes the critical importance and urgency of our investment. Cost for implementation will continue over the course of the year. Capital spending was also higher this quarter. This year we’ll start rolling out a new enterprise system upgrade across operations with a target completion sometime next year. Also, we’re making some longer-term investments behind digital, both contributed equally to the increase in capital spending. Lastly net income, the U.S Tax Reform Law triggered a revaluation of tax deferred assets on the books. In addition, it calls for a one-time transition tax on previously tax deferred foreign earnings. Together these items resulted in a $6.4 million charge. which lowered net income to about $250,000. Excluding these unusual tax items, we would expect our full year tax rate to be a blended U.S. tax rate in the mid-20s, plus a few points for state and foreign taxes. In closing, while it’s too early to predict how the full year will go, we do expect a slower rate of topline growth throughout the year versus the prior year. Pre-season sales suggests customers are positive about continued consumer demand, but we believe actual consumer takeaway is the truest measure of marketplace success and we won't see that until the spring. Our balance sheet is strong, our cash position is healthy enabling us to invest strategically and growing our business while continuing to pay cash dividend to shareholders. Now I will turn things back over to operator for the Q&A session. Operator?

Thank you. [Operator Instruction] And we have our first question from the line of George Kelly from Imperial Capital. Your line is now open.

Hi, guys. Thanks for taking my questions. Congrats on a great quarter.

Hi George, thanks.

Few questions for you. So first on the fishing side of it. Wondering if the sell-in, did it surprise you how strong the sell-in was?

Dave, you can answer as well. But, I think we were a little surprised because this is the second year of launch, but I think as we look at it, the inventories were fairly low coming out of last year. Pus I think, our customers want to make sure that they have product in stock. The high demand we had last year, some of them got quite a little short. So, I think they're all just making sure they have the right amount of products to get going in the season.

Okay. And then, you sounded not cautious, but I know you said again, I think for the second quarter in a row that you expect the growth to be at a lower pace in fishing than it was last year. And just based on the sell-in and in my checks, I see continued out of stocks in some of your products and it seems like, they're still really popular in the markets doing well. I was wondering if there's anything you're seeing in purchase, the data that you get -- the tracker data that you get, is there anything you're seeing that's making you feel more cautious or does it still look like a healthy environment?

It certainly is a healthy environment at this point and it's too early to really look at the consumer takeaway data. It's really preseason, the big growth in our customers ordering and filling whatever voids they had. So, our caution is just that we had such significant growth last year and we will continue to grow. We feel good about that. It's just duplicating a year like that is a big challenge and a hurdle. If we do that, that would be great. But I think just based on past experience that was a very unusually positive year we had. And we will continue that momentum, but we're just saying, it's going to be at a slower pace than last year. But we'd love it if, it went the other way.

Yeah. Yeah. And then, on Minn Kota did you raise pricing on any of -- any of your products there, any of the major ones?

When we introduce new products, we tend to raise the prices to reflect the value that we’re providing and usually the new products also have a higher cost of sales as well. But we do that really in the launch period. So that was -- we wouldn't do it in second year of the launch.

Okay. Okay. And then last question on the fishing business, I guess two last questions. Do you feel like you have enough capacity in Minn Kota to handle, is your production up to what you expect to do this year? And then can you talk at all about Humminbird, have you seen more margin gains there or what is -- what does it look like in '18 for Humminbird?

Just on the first question George, we are constrained more with long lead time items on Minn Kota. Our capacity ourselves, we're in good shape. We're very busy, but we're in good shape. So, it's more about the supply chain and making sure we have the products coming in that we can put into our finished product. So we'll continue to be very busy making sure we meet demand. On Humminbird, things are -- things are looking good. I think the new products are resonating and I think the profitability of that brand is good. So, we feel good about where we are with Hummingbird.

Okay. Great. And then just a couple last questions for me. Last quarter, you had guided for this year's operating margin to be down slightly I believe versus 2017, is that still your expectation.

Yes, the caveat being the topline, but given where we think the topline is, I think we'll see a bit of a haircut on the operating profit margin, some of the investments in digital.

Okay. And then I guess that's my last question thereabout, so your digital strategy, can you lay out what is the incremental expense and amount of CapEx for 2018?

Yeah. We're not going to give clear numbers on that. I apologize for that. But the CapEx spending will be incremental to what we did last year. And again, on the expense line, the operating expense line, we expect spending there as well and that's what's really going to drive that haircut and operating profit margin.

Okay. And most of that is around your smaller segments, is that correct, camping and watercraft and...

No. We're spending across the board and we're enhancing all of our sites, including fishing. We've also got an investment in our JDE system as well. So, there is a couple of -- that's a new added expense we have to do an upgrade across the board in all of our global locations and that's another piece that adding to expense. But we are putting all of our product on the same platform and so it's a spend across the board.

Okay. Thank you.

Thank you. And our next question comes from the line of Anthony Lebiedzinski from Sidoti & Company. Your line is now open.

Yes, good morning. And thank you for taking the questions. So, certainly your big sales increase that runs counter to your December 08 cautious commentary about sales growth deceleration. I was wondering if you could give us maybe some more color as to looking at the quarter, how much of the sales increase was units versus pricing? If you can't share any specific numbers, that's fine, but maybe just some color that would be great?

Yeah. And the caution is this is preseason. So, we said it, but it is a sell-in into the retail channel. But it's both, its units and importantly the new products that we believe to has a higher price per unit in both the trolling motors and in the fishfinder business. So, both are contributing to that increase in revenue.

Got it. Okay. Thank you for that. And I was just wondering if considering the challenges that you've had in the watercraft recreation, would that be something -- if that business doesn't turn around as you would expect, is that a segment that you would possibly consider divesting at some point?

Well, we are always evaluating every business we have for what's the best option long term. I would say given our expertise and our strategic emphasis and plans for the future, I think at this point we feel there is opportunity for growth long term. But to your point we're not ever ignoring the evaluation of all of our businesses. But the recreation in the water is not going away. We are one of the global leaders in the space. I think what we're seeing now is there is a disruption in the marketplace, not only I think it’s soft market but you've also got the trade and the channel evolution that is impacting. And we have to let that play out and hopefully we will be in the right position when things work themselves out and with the innovation we've got planned we feel very optimistic about the business.

Okay. Got it. And do you have any updated outlook for acquisitions at this point?

We are actively looking and as we said, we’ve had a strategic planning process that really helps us hone in on the growth opportunities across our businesses. We are looking and I think one of the things that has kept us successful historically is that we are very strategic about the acquisitions and we don't do acquisitions just for growth. We do it because it is a long-term value to the company and that's something we can add value to. And so, we're looking and when something that is right for us comes along, we’re right there.

All right. Well, thank you very much.

Thank you. [Operator Instruction] And our next question comes from the line of Brian Rafn from Morgan Dempsey Capital Management. Your line is now open.

Good morning, Helen. Good morning, Dave.

Hi Brian.

Let me ask you guys relative to -- you had a great certainly sell-through stockpiling in the first quarter on the fishing, electronics with Minn Kota and Humminbird, how much in that business with your retail channels, your vendors would be at the big box category superstore sporting goods or some of your smaller boutiques selling Minn Kota or Humminbird. How much in-season replenishment orders or EDI or how much orders that really just -- is there is a big surge in the front end of the season and then you may be less weighted on replenishment. I'm just trying to see how much inventory delivery gets delivered to the entire season versus in the front end?

Well, Dave you can pipe in too, but I think it depends on the weather. If there's a lot of things, I think we have -- we will see orders throughout the season. I think what we’re what we're seeing today is that, given they’ve had one year of experience with the product, they're pretty confident in the new products in our ordering a lot more upfront. So, you may not see, the immediate re-order because they got a lot of inventory as we sometimes see in past seasons. But, it's not just one heavy-up or one reorder, it's - they tend to continue to build behind sales until they get to scene.

Got you. For the fishing guys in open water, what is really that season for the consumer guys, is that kind of an April to September for - what is that season in North America?

Well you’ve got the northern and the southern and obviously the seasons longer in the south. But I think., if you time up that when the consumer buys the product they actually buy it before potentially summer or the spring season is starting because you get their boats all ready to go. And I would say that, you know you end up in the fourth quarter there's a little less of a purchase of the product but they're out there fishing. So, the fishing season continues, but I think they do most, they do more of their purchases in our second and third quarter and less in the fourth quarter just because the season is winding down for them.

Right. No, I get it. Let me ask you relative fishing, I'm not a fisherman, so I'm asking the study ignorance. Do you see consumer trends or demands for Christmas holiday? Is that Christmas-giving gift or is it primarily because here in Milwaukee obviously the boat show started in January and guys are trickling out their boats. How early do you see that consumer buying you know for your products and maybe a better question is, when you really launched those new -- when is your new product cycle starts you know for your different shows?

Well, we actually have our fishing show in the summer. So, we show our products in the month of July and then we are working on our customers and you know their big order timeframe is our first quarter which we just -- until December. So, they've seen our product and now is the time where they load up, but you know the consumer really isn't out there buying until they kind of like the winter is over and we they are getting the its definition. So, they do end up, if they're buying boats they might tend to buy those a little earlier and then the you know the associated products that go with it come aftermath.

Yeah, I that's the answer. Let me ask you the same question Do you see, is there a demand for scuba diving equipment for the Christmas holiday, is that, I'm just trying to filling your fourth quarter. Is that at all do you see any demand not maybe orders from your manufacturing to the retail channel but just by consumers? Well, I am try to think of things that you know people might buy from Johnson outdoor and as consumers in the fourth quarter?

We haven't seen diving product as a Christmas purchase as much but it's less seasonal than our fishing business. We tend to see purchases way down when they're planning and vacationing or when they're getting certified. But what we're seeing in the first quarter reflects the fact that we have some new product in the pipeline that the dealers are excited about.

Okay. Talk a little bit about my background is powerboat racing. I am not a canoe paddle guy. And you’ve had some, I think some net guarded pessimism but how tough is that market at retail? I think you talked a little bit about vender's looking for maybe continued weakness in the season. What is that – because when I think of the power boat market that's a big-ticket item. The paddleboard, the canoe side not so much a big-ticket item. What's been the malice so to speak over the last couple of years?

Well, I would put the power boat and the smaller boat in very different categories and I think we are actually seeing that the bigger boats, the fishing boats are doing well, what you call the power boats. I would say that, you know the paddleboat industry in general is you know it's a big item and it takes a lot of space. It's been, I think it's hard for some of our specialty guys to keep a lot of product in the store. They also have trouble putting dollars through for inventory build. I think they're being very cautious and when they're cautious you know they'll wait till the last minute to buy and you know the bigger retailers are struggling with this channel evolution. So, we've got both the channel situation, plus the wait and see kind of attitude by some of the more specialty dealers. So, we've got both of those things playing out. I think the fishing aspect of the small boat market has been showing growth, innovation, drives growth and you know we - that's our whole focus is innovation and we are just digging into who our consumers are and what they're looking for and we feel the new process that are putting in place is really helping us you know where are the opportunities going forward. But it's a challenging market place for the personal watercraft, just from a logistics channel evolution and some of the hesitancy on the part of the dealers. But water recreation is here to stay. Everybody goes to the water for a vacation. And that's the market we are excited about.

Yeah and I appreciate that. If you look at that watercraft to paddle market, are there differentiating strains between the fiberglass you know that you have the Predator and the Neki versus kind of the old-time wood, the old-time canoe was out there separate and market demographics is one better than the other or is one cannibalizing the other?

No, they are very separate markets. canoes and kayaks are very separate end users and you know canoes business has become a big rental market as well. And we play in that. But you know consumer behavior has changed overtime. And I think the evolution is more towards the kayak market and the recreational fishing area as well. So, behaviors change and we’re addressing that.

Yeah. I appreciate that. Let me ask Dave anything, you coming in 2018 commodity inflation, seamless aluminum, resin, anything that you like to highlight?

No, I think similarly last quarter, I think we’re in pretty good shape from what we see with the exception of resin is little bit of upward pressure but not significant.

Single digit type?

Yeah.

Okay. Okay. And then a curiosity expectation, SG&A everybody in America is now giving up big raises and 401-K bonus and stock and what do you guys kind of see your kind of SG&A salary, wages and then maybe a comment on healthcare costs?

Yeah. I think for the compensation side of things you know we go through a process every year and looking at our compensation programs and we'll continue to do that. We’ll stay competitive with the marketplace. So, I don't expect big changes for this fiscal year, but we continue to look at that. Healthcare costs continue to be maintained, it's moderated you know some increases there. So, we continue to monitor that understand what's happening with the health care costs. But it's not a change in pattern versus previous year.

Okay. And then with specifically the CapEx you've talked, I think Helen talked a little bit you guys in the past on your whole digital transformation strategy and that arm can go in some more detail relative to, is that call centers, or is it a website design, or what kind of the functionality there?

Well it's really the whole digital ecosystem that we -- that's how we refer to it. But it's really about our website. It's about our marketing. It's about our creative. It's about our eCommerce online. So, obviously as you have more opportunity to interact directly with the consumer, you have to also be prepared to respond to their enquiries and requests we are learning and growing as we go. But I think the big expense is really the technology itself and the system to run the digital platform and it's the expense in the marketing aspect. And I think we are evolving to becoming more of a marketing company than historic and that requires incremental expense on our part and I think, we've got great innovative product. The key is that we are able to reach our consumers and let them know we have it and that is something I would say that certain businesses have done well in the past, but others have not. And I think, look it's an expense, but it's also a great long-term opportunity, but -- so it's a variety of things. But all focused on providing better access for our consumers in many ways. I think Dave you can talk to the JDE investment.

Yeah. Just to be clear that the enterprise risk or the enterprise resource platform at JD Edwards, that's capital spending related. So that's part of the increase that we expect in our capital spending and what kind of drove the capital spending increase in the first quarter.

Okay. And that’s primary enterprise that's accounting systems and that type of thing.

Yes.

Okay. Dave, you talked a little bit about some challenges in the long lead time. I'm thinking of components subassemblies that type of thing. Are those challenges becoming easier or is it -- is it just by the sheer popularity and growth of the fishing electronics? I think you guys are up 19.3%, $327 million last year on that side. What kind of -- how is that -- is that logistics challenge the same, is it getting better or worse, are you finding different ways to deal with it?

We continue to be as creative as possible to deal with it, but it continues to be a challenge.

Okay. And then what -- out of curiosity with the demand certainly in the sell-through cycling on the fishing electronics side what -- why aren’t you guys be running labor ships at Minn Kota and Humminbird? What are you do over time? Two shifts, one and half, flex bringing in temporary people. How do you hold -- where are you on that manufacturing side now?

Yeah. We tend to ramp up with temporary labor and overtime during the season. So, we're running slightly more than a shift a day. We're not doing two shifts a day, typically, but we have -- we settled with temporary labor. So again, we're very busy but bottleneck is not our own assembly.

Okay. Okay. All right, that's good for me. Good quarter guys and keep up the good work. Thanks.

Thank you. And that does conclude our question-and-answer session today. I would like to turn the call back over to Helen Johnson-Leipold for closing remarks.

Okay. Well thanks for joining us and I hope everybody has a great day.