Johnson Outdoors Inc. (JOUT) Q2 2018 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the Johnson Outdoors Second 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. [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 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 second 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 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 releases 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. Thank you for joining us. I'll begin with an overview on the quarter and year-to-date results and share perspective on the performance and outlook for our businesses. Dave will review key financials and then we'll take your questions. During the first 6 months of the year, we are in preseason ramp-up and sell-in period for the primary retail selling season for our warm weather outdoor recreational products. We had a great first quarter with sales up 24% versus the prior year. That positive momentum continued through the second quarter with net sales ending about 11% ahead of last year's second quarter. So during the first half of the year, net sales are up 16% or nearly $40 million. Growing profits faster than sales is our main goal, and we're delivering on that. Profit -- operating profit for the quarter advanced 27% to $26 million, bringing year-to-date profit to $33 million or 58% above last year at this time. Net income during the quarter increased 55% to $21.6 million or $2.15 per diluted share and was up 21% to $21.9 million or $2.18 per diluted share year-to-date. Dave will discuss how earnings were affected by the new U.S. tax legislation in his remarks. Outstanding new product performance is propelling the growth as we continue to benefit from a dedicated focus on consumer-driven innovation. Deeper, richer consumer understanding helps us uncover the insights that drive innovation, inspire new products and technologies and bring clarity and focus to the biggest opportunity. The unprecedented growth in fishing over the last 2 years demonstrate how important consumer intimacy is to our brands' ongoing success. Minn Kota and Humminbird are powerhouse brands and the technology leaders in their fishing category. And consumer insights have enabled us during this 2-year period to expand both the brand technology leadership position and leverage the unique combination of their groundbreaking technology portfolio to deliver record growth. For example, in Minn Kota, we came out with the Ulterra, the first auto stow and deploy motor; and Ultrex, the first electric steer motor for foot pedal control enthusiast with GPS and wireless capability. At the same time, we completed a major technical restate across our entire electric motor line. In Humminbird, we introduced our patented Side Imaging sonar to a whole new angling audience through our small and midsized screen Helix series of fishfinders, which was followed by our new ultra-big screen SOLIX series of fishfinders. And our new state-of-the-art MEGA sonar technology, providing a virtually picture-perfect underwater view. And the legacy innovation like i-Pilot and i-Pilot Link technologies as well as the Talon shallow water anchor continue to outpace expectations. This year, preseason sell-in across our fishing channels has been exceptionally strong. In the third quarter, we'll see how closely consumer demand matches customer expectations. Long term, smart, strategic investment to sustain our technology and market leadership in fishing is a top priority. In diving, our most global business, key dive markets have gained strength and grown this year. New core life-support products from SCUBAPRO such as Hydros Pro buoyancy compensator and G2 dive watch computer with wireless transmission and heart rate monitor are doing well, helping to sustain SCUBAPRO's position as the most trusted dive equipment brand in the world. On a year-to-date basis, sales are about 12% ahead of last year and are up 6% excluding currency exchange. We're determined to sustain this positive momentum going forward while also working to optimize efficiency to protect profitability. On the flip side, market challenges have restrained new product momentum in our other 2 businesses. Both watercraft recreation and camp/hike markets are dealing with the lingering effects of major sporting goods retailer bankruptcies and consolidations over the last 18 months. These markets have been hit hard, both reporting overall declines year-over-year, particularly in bricks-and-mortar retail channel, where historically our brands have been strongest. At the same time, the online channel has continued to grow in reach and importance to a wider outdoor rec consumer audience. We have good innovation in these businesses. For example, the Old Town Predator series of fishing boats, the brand-new Ocean Malibu Pedal paddleboat for fun and fitness in the water as well as a full line of matching accessories to complement these brands. Over in camping, Jetboil remains the market leader with its full line of personal cooking systems. And we're working hard to reposition Eureka! for an emerging younger camper -- camping audience with new consumer needs and expectations. Our goal going forward is to align channel strategies with our consumer shopping and purchasing behavior. The disruption in distribution channel experienced in these markets underscores the critical importance and the urgency of our company-wide digital transformation. The digital ecosystem is a superhighway of information and data of commerce and communication. It is a powerful marketing platform and rapidly growing outdoor recreational channel. The evolution of the digital marketplace presents one of the biggest growth opportunities in our market. We are transforming our digital footprint to maximize our success in this marketplace. In doing so, we are leveraging our unique understanding of outdoor consumers to forge more relevant, more intimate relationships and greater loyalty and trust in our brand. We are recreating our digital and social media presence to reflect the face and voice of our consumer with state-of-the-art capabilities that make shopping and purchasing faster and easier. All of our new brand sites are now e-commerce-ready and mobile compatible. We're also redesigning online advertising and promotional programs in the same way, ensuring our marketing reaches the right consumer at the right time, in the right place, in the right way. The digital foundation we are building today will provide us the capability and capacity to adapt to changing consumer expectations for great online experience. We have great brands, great innovation and are working hard to transform our businesses for greater success in the evolving marketplace of the future. At this time, excitement for our 2018 product lineup remains strong, giving us a great start to the year and positioning our brands for continued success. Ongoing investment against our 3 key strategic plan priorities -- richer consumer insights, enhanced innovation processes and digital sophistication -- are essential to ensure further progress to our goal of delivering accelerated sustained profitable growth. Now I'll turn the call over to Dave for an overview of the key financials.

Thank you, Helen. Strong innovation has helped expand margins and operating profit for the quarter and year-to-date period. Gross margin improved 1.9 points in the first half of the year, benefiting from value-added new products as well as overhead absorption from higher sales. Increased sales has also led to an increased operating expense and higher working capital over -- year-over-year. During the first 6 months of the year, sales volume-related expenses accounted for nearly 60% of the increase in operating expenditures. Higher discretionary compensation expense and increased labor force cost also contributed to the uptick. While up in dollars, operating expense is down 1.2 points as a percentage of sales this year. Excitement around last year's new product lineup in fishing and diving continued through the first half of this year, driving higher inventory levels in both businesses and largely accounting for the increase in the net working capital. On trailing 13-month basis, working capital as a percent of sales has improved year-over-year from 26% this year -- last year to about 24% this year. We closely monitor working capital throughout the year and take appropriate measures to keep it in check in every business. In the second quarter, net income benefited from a lower effective tax rate of 26.6%, which was 9.5 points under last year's second quarter. In the current year, U.S. tax reform has triggered a revaluation of tax-deferred assets on the books, a onetime transition tax on previously tax-deferred foreign earnings. Together, these items have resulted in $6.7 million in charges year-to-date and a higher 6-month tax rate compared with the first half of last year. Excluding these unusual tax items, we would expect our full year tax rate to be in the mid-20% range. Overall, a strong start to the fiscal 2018. Importantly, the balance sheet remains strong, and our growing cash position enables us to continue investment against strategic priorities and opportunities to expand our business and growth potential. We're confident in our ability and plans to create long-term value and consistently pay dividends to shareholders. Now I'll turn the call over to the operator for the Q&A session.

[Operator Instructions] And our first question is from George Kelly from Imperial Capital.

So first question just within the Fishing business. Wondering if you're seeing growth across Humminbird and Minn Kota or is most of it coming from one of those brands?

Actually, we are excited that we are seeing growth across both brands. So they're both kicking into the good result.

That's great. Is there -- are there a couple of products you could highlight? I believe you mentioned Ulterra in the prepared remarks, but anything else you could highlight that's selling especially well?

Well, it is the -- we've got the Ultrex product from Minn Kota. And that has been able to get into a segment of the market that has been challenging for us in the past. And it's doing very well. And it's got some legs on it so we feel good about that. Humminbird has got -- introducing both new technology and larger screens. So again, they've got some very good innovation. But also, we did -- we had a launch of our whole -- we relaunched a lot of our products in Minn Kota and upgraded them to Bluetooth. So we had a lot of innovation. And the good thing is, it was spread across multiple products.

That's great. And what are you seeing so far with sell-in -- or excuse me, with sell-through?

Well, obviously, the numbers are reflecting a very excited customer base. And they're buying, which is great for us. I think we're starting to see -- it's really just the beginning of the season and all we can say is, the initial read is that the sell-through is solid. And we'll have to see. As we said, it's all about whether the consumer pull-through lives up to the excitement that the trade has had.

Sure. And -- but the inventory situation at retail seems reasonable currently? Do you feel like much more comfortable than you were last year? I remember there were a lot of out-of-stocks last year.

Absolutely. We have definitely geared up for a solid year. So inventory, we've not had any issues with that.

Okay. Okay. And then I remember -- I forget if it was last quarter or the one prior when you talked about operating margin expectations for this year. And you expected them at that time to decline. Is that still the case?

With the growth we've had year-to-date, obviously, we -- that has not been the case, but we still expect some moderation of that operating profit margin balance in the year. And of course, it is dependent on the sales volume. But as we're investing in the digital strategy, we could be close to last year's operating margin, but there'll be some pressure downward on that with our spending.

Okay. So could be close, but exceed last year's level, but the kind of growth you've seen should moderate in the back half?

Yes. That would be our expectation.

Okay. Okay. And then just a question about acquisitions. Wondering what the pipeline looks like there. It's been a few years. Are you seeing -- what's interesting? What do valuations look like? Any kind of commentary on that would be helpful.

We -- again, we are always looking for potential acquisitions. I think -- and you must see it now. The multiples are pretty high. And we're all about innovation. And so we want to make sure whatever we look at and consider plays to that. So at this point, we continue to look and assess opportunities as they come. It's just multiples are high these days. And it has to be the right fit and the right price.

Okay. Great. And last question for me, back to the Fishing business, Humminbird. Has operating margin in that brand improved a lot in the last couple of years? Do you feel like there's still opportunity left to improve the operating margin there?

With the innovation, yes. We've seen a lift in the operating margins in Humminbird. So we're pleased with the innovation there and where we are with that brand.

Our next question is from Anthony Lebiedzinski from Sidoti & Company.

So obviously, you guys have done a tremendous job with your Fishing segment. So just wondering what percentage of your sales, either in a quarter or year-to-date, have come from new products? And just kind of wondering about the typical upgrade cycle of your customers. Just wanted to get some more color on that.

Yes. We count trailing 24 months. And that measure is above 50% right now just because of the strong fishing numbers. Usually, we target something above 1/3. So we're at a high number right now. And as Helen mentioned, we've had innovation in a lot of different segments. So we'll have to see how much we filled in terms of the purchase cycle versus kind of ongoing innovation. So we'll have to see how that number plays out over the next 18 months.

Got it. Okay. And also, so obviously, you have the digital sites -- so the e-commerce sites up and running. I know it's still early on, but can you guys give us a sense, are those -- did those -- the rollout, did that go as expected? Any kind of early read as far as from an end consumer point? Anything you can share with us about that?

Well, we are very glad we have all the sites up and running. It obviously is a huge transformation for any company. And it's been a lot of resources put behind that. I would say, it's -- there's a lot of learning and a lot of development that we have to do in that area, the e-commerce aspect of it. There's both the front end to the consumer and the back end of operations in the fulfillment side that we have to get our arms around as well. So I would say, we feel very good about where we are. We're glad everything is up and running. The early read, we're doing better than -- no major catastrophes, so I would say that's good. We still have to get out there and reach our consumers and market. But the sites themselves are, I think, a great first step for us. And we'll always be evolving as we go forward, but it's a great place to be. We got a lot of upward momentum on that area.

Got it. Okay. And I guess some of the other companies that we follow have talked about the cooler weather. Obviously, there's no discussion of that so far. But I was just wondering if the sell-through at retail, I think -- is that anything to be concerned about or I mean, doesn't sound like based on what I've heard so far, but just wanted to clarify that.

The weather has been a little bit strange on the regional basis. So I think, if anything, it's been a little tough from a weather standpoint. So the consumer pull-through is going to be a little bit delayed. But right now, I think we're going to actually see some summer weather so that's a good thing.

Got it. Okay. And then as far as the merger between Cabela's and Bass Pro, has there been any other impacts that you guys have previously talked about or just more or less kind of as expected?

There's a lot of evolution happening in the market. And I would say the one thing is, the private label emphasis has been -- there's an increasing emphasis on behalf of our retailers to push their private label. So I would say that is, to some degree, and it is an impact with the merger of Bass Pro and Cabela's because Cabela's wasn't much of a private label entity. And now Bass Pro's influence is going to be influencing what Cabela's does. So I think there's a little more competitive pressure on that standpoint. I think they're still working through how to integrate, how to be -- how to function as a customer. So we'll see. That's still yet to work its way through. But in general, I think we saw sporting goods channel go through a lot of disruption in the recent months. But this is a time of tremendous change in distribution and channel. And I think that's what we're negotiating right now.

I would just add that our Fishing business is still very strong in both of those entities. So it hasn't necessarily affected that business. But I think maybe disproportionately some of the Camping and Watercraft brands has been.

And I think the Fishing business too is, I think, less impacted because of the nature of the product by the digital transformation. So they've got very solid bricks-and-mortar distribution. And we had -- we have good diversity in terms of channels as well. And the marine channel is certainly strong and continues to have momentum. So it varies across the businesses.

Our next question is from Brian Rafn from Morgan Dempsey.

Give me a sense, do you have -- with kind of the preseason buildup, do you have any sense that within the -- that amongst the retailers that you're seeing them take on more inventory or do you see that the sales gains have really been for maybe a broader distribution across more retailers? I'm just trying to see if you got any anecdotal idea as to how much inventory they're taking down.

Well, it kind of depends on the business. In Fishing, we've seen our customers take on more inventory because of our new products. I mean, they -- we were kind of hand-to-mouth last year. And so they've built up their inventory levels kind of going into the season. But as we kind of alluded to in Watercraft and Camping, the disruption in the marketplace with the kind of the big box retailers' consolidation, bankruptcies, et cetera, has affected our distribution points in those businesses in particular.

Yes. Dave, do you get -- are you getting any rebound in Gander Outdoor taking over the Gander Mountain bankruptcy?

Yes. We've had some sell-in to that new entity. So we've seen that start. I think they've opened up 56 locations or something like that. So we're starting to fill that pipeline, which is great.

Just trying to see that. Okay. All right. And on the Camping side, with military budgets, anything in military for Eureka!?

It's funny. It's not a big piece of our business anymore, but it does tend to be choppy quarter-to-quarter. And so it was a weak quarter for the military, and that kind of affected the numbers in that business unit. But it will be kind of status quo, we believe, this year versus last year.

And what's kind of the range between a weak year and a -- is a weak year being a couple of million and a good year being $8 million or $10 million? How big is that number?

We've kind of plateaued around $7 million to $10 million.

Okay. Okay. You got a CapEx number for this year?

I don't have a number for you. I mean, we're up about $5 million year-to-date. And I think we signaled to expect that. So I think, probably for the balance of the year, we'll have incremental spending versus last year. I think last year we ended up about $12 million in CapEx, something like that.

Okay. And what are you guys relative -- from the standpoint of inventory replenishment and kind of cycle times of reorders? I'm sure that's different for different businesses. What -- how -- do you see that trail off as you get into summer or do you see constant reorders in Humminbird or Minn Kota? How does that kind of reorder pattern play out?

Well, again, by business, I think in the Fishing area, they have done a great job of building inventory early on so that they have the product for the season. I would say as -- depending on the consumer takeaway, they will see and experience ongoing reorders as they go into the third and fourth quarter. But I think last year, we saw the last half of the year was -- the pacing was a little stronger than normal. I think this year, we could see the first 6 months are a little stronger than normal given they're preparing for the season. So it just depends on the consumer. I think, again, in Camping and Watercraft, there's hesitation on part of our customer base to build up inventory. It's just very disrupted right now. And that will be more based on waiting to see what the consumer is doing this year. I think Diving is a less seasonal business, but we've been able to handle the demand from the dealer standpoint, but that's really an ongoing -- it's very fragmented so you've got a lot of little orders coming all the time, but...

Yes, right. No, I got you. I got you. I think you answered that the Fishing is kind of front-loaded. Okay. I got that. With -- marvelous number, a trailing 24-month with 50% from new products. How much cannibalization -- you guys always innovating in new models and in new technology and new specification, functionality. How much cannibalization is there?

Actually, I would say, we are very good at managing that. And you expect to have cannibalization. And so all of our new product forecast take into account significant amount of cannibalization because we really are moving our consumers up to products with enhanced features. And they, in the most part, replace the existing product that's there.

Got you. Got you. Dave, anything on either raw materials inflation? Or does all of this -- with Trump -- with the TPP and redoing NAFTA and the potential -- the tariffs with the Chinese, is any of that disrupting your logistics supply chain?

Not yet. We look at imports of some of the -- like steel and aluminum. We -- obviously, a consumer of some of that stuff. So it has not affected yet, but we have our eye on it to make sure that we understand what's happening there, if we can.

Okay. Okay. And I missed the opening. What was -- any new products in the scuba diving area?

Well, we do have our -- it's to some degree the continuing launch of our new regulator. We have a new computer. And it's our Hydros BC, which is truly a revolutionary BC in the market and has really built momentum. So we feel good about that. It's all about innovation in diving as it is with every other business, too.

Yes. And are your world diving markets getting any better given the Middle East and terrorism and the refugees and all that you said?

I think we are -- in terms of Europe and the Middle East, we are -- things are looking better. The Asian markets are showing growth. But I think there is still -- the participation in diving continues to be same. We foresee that, that's going to be the same. But I think the diving markets, we think are more stable than they've been in the past.

Okay. And then Dave, the second part of my question on anything in raw materials inflation, feedstocks, ex trade?

The only thing -- I think I mentioned this last quarter too was, we are seeing some pressure on resin for our boats. We're managing all that. I don't think it'll be a material impact.

[Operator Instructions] Ladies and gentlemen, at this time, I'm showing no further questions. I would like to turn the call back over to Helen Johnson-Leipold for closing remarks.

Thank you all for joining us today and have a great one.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.