Johnson Outdoors Inc. (JOUT) Q3 2018 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to Johnson Outdoors Third Quarter 2018 Earnings Conference Call. Today’s call will be held by Helen Johnson-Leipold, Johnson Outdoors’ Chairman and Chief Executive Officer. Also on the call is David Johnston, Vice President and Chief Financial Officer. [Operator Instructions]. After the prepared remarks, the question-and-answer session will begin. [Operator Instructions] This call is being recorded. Your participation implies consent to our recording this call. If you do not agree to these terms, simply drop off the line. I would now like to turn the call over to Patricia Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Thank you. Good morning, everyone, and thank you for joining us for our discussion of Johnson Outdoors’ results for the 2018 fiscal third quarter. If you need a copy of today’s news release, it is available on our website at www.johnsonoutdoors.com in our Investor Relations under News & Reports, Investor News. Please note 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 these 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 Dave Johnson or me. It is now my pleasure to turn the call over to Helen Johnson-Leipold.

Thanks, Pat. Good morning, and thanks joining us. I’ll begin with an overview of results and provide perspective on our markets and our brands’ performance this quarter. Dan will review the financial highlights and then we’ll take your questions. The warm weather season is in high gear during the third quarter, giving us valuable insights into consumer response to our products and programs. We had a great quarter, sales increased 10% to $171 million, a new record-high third quarter for Johnson Outdoor. Our main goal is to grow profits faster than sales and we’re doing that. Operating profit grew significantly to $32 million, a 29% increase over last year’s quarter and net income quarter increased 44% to $2.37 per diluted share. Year-to-date is a similar story. Sales in the nine-month period were $453 million, a 13.6% increase over the prior year same period. Operating profit reached $65 million, nearly $20 million ahead of last year at the same time. Net income advanced to $4.54 per diluted share in the nine-month period, about 32% above last year’s first three quarters. Fishing remains our primary engine of profitable growth with sales up 17% for the quarter and about 22% ahead of last year’s same nine months. Clearly, this unprecedented performance by our flagship Minn Kota and Humminbird brands underscores the importance of our ongoing emphasis on consumer insights-driven innovation. Consumer insights are innovation guideposts, helping us identify the best new product ideas as well as to maximize their marketplace potential with marketing and selling programs that are wholly in sync and in touch with our consumers. They are the essential building blocks of the innovation with staying power, which is essential driver behind the outstanding results in our Fishing business over the past two years. Given the nature of distribution channels and our markets, our new product cycle is two years. For perspective in 2017 and 2018, Fishing new products accounted for about 60% of revenue. Normally, we target new products to account for about a third of the sale. Importantly, the new product lineup within this timeframe has been exceptional and market response has exceeded expectations. Leading the way has been the pioneering award-winning patented Minn Kota Ultrex, the first electric cable steer motor, providing our breakthrough steering and navigation features at the tap of a foot. The response from pedal-controlled fishing enthusiasts have been phenomenal, giving us with demand has been a challenge we welcome. We also did a technical upgrade across our entire Minn Kota electric steer line, which sparked excitement and growth in this category. Overall, these technological advancements gave us a nice lift to legacy innovations like Minn Kota Ulterra motor with wireless stow and deploy as well as i-Pilot and i-Pilot Link add-on accessories. During the same period, Humminbird MEGA Side Imaging and MEGA Down Imaging took sonar technology to a whole new level, providing the greatest underwater clarity, detail and definition and drove significant growth in our mid to larger screen Helix series of fishfinders. Year two has been equally strong, and SOLIX, the biggest display fishfinder ever has done very well. Competition in this market is fierce and consumer expectations are at a high bar, as we are for every other consumer electronics category. It’s a fast pace market where new isn’t new for very long. Our knowledge of fishing and and fishing consumers coupled with our technical knowhow is what gives us the edge to sustain a leading position in this market. The unusually high percentage of new products across both brands within this two-year period led to the extraordinary escalation in pace of growth in fishing. Going forward, we anticipate fishing will continue to grow at a slower pace. Next year’s new fishing products include another award-winning first, the Minn Kota Ultrex with built-in MEGA Down Imaging, which grabbed the Best Boating Accessory honors at the 2018 ICAST, the world’s most prestigious fishing show. Beginning next year, select models of Minn Kota bow-mounted trolling motors will be available with the Humminbird MEGA Down Imaging transducer and wiring fully integrated to provide clean rigging protected from wear and tear, and giving anglers crystal clear viewing directly below the boat. Once again, this innovation is only Johnson Outdoors’ can be delivered through the unique combination of our two powerhouse Fishing brands.. In Humminbird, we also, taking our popular Helix series into the ICE and giving anglers the option to use it all year long. The new HELIX 7 G2N is a complete network of all fishing fishfinder pack equipment with ICE chip along with transom mount tranducer chip for both mounting and open-water use. ICE anglers are clearly passing when it comes to fishing and this will mark the first big news in a few years. Delivering the same level of continuous new product success across our entire brand and business portfolio is a key priority, and we are working to further strengthen organizational capacity and capability to do so. And we’re seeing progress and beginning to see the benefit of our concerted innovation focus. For instance, in diving, new products in core license for categories are further strengthening brand equity and competitiveness for SCUBAPRO, the most respected brand in the world. For instance, the S620, the breathing regulator on the market and the award-winning lightweight body sculpting foot drive Hydros Pro buoyancy compensator, new products represent more than a third of total sales year-to-date in diving. In Camping, new products are starting to gain traction in a market that is coming of two very challenging years due to retailer customer bankruptcies and consolidation. Consumer Camping segment sales grew above prior year, led by double-digit gains in Jetboil. Jetboil is the technology leader in the growing Camping segment with an expanding line of new products leveraging our unique lightweight and compact design, easy push button start and Fluxring heat control advancements. New products from Jetboil are on track to account for a third of brand sales this year. And new products in Watercraft are enabling us to maintain market position against the tide of a very weak market and challenging conditions. Consumer insights are driving new product innovation and go-to-market strategies. Future plans will also focus on targeted sales and marketing programs design to fully leverage our company-wide digital transformation and data analytics to enhance accelerated profitable growth for all channels long-term. Without direct consumers increasingly heading online to shop and purchase, e-commerce is more important than ever for both our customers and our brands. Over the past two years, we’ve invested in building the foundations to provide consumers a great online experience and strengthen relationships with our brands. We moved into the implementation phase of our digital transformation, and we’re already beginning to see an uptick in e-commerce sales for every brand. Looking ahead, we will continue to advance progress against our three key strategic priorities, richer consumer insights and enhanced innovation processes and digital sophistication. These are the cornerstones of foundation for success in delivering accelerated sustained profitable growth long-term. Now I’ll turn the call over to Dave, an overview of the financial highlights.

Thank you, Helen. As Helen noted, innovation was a key factor and performance in both the quarter and year-to-date period. Our strategic focus on delivering great new products that drive strong demand, combined with pricing that reflects the value of the innovation we’re bringing, is keeping margins healthy and growing. Gross margins improved a point in the quarter, and 1.5 points in the nine-month period due to the record-setting sales volume and a strong mix of products in Fishing. The significant growth in sales resulted in higher sales-related costs in a $1.5 million increase in operating expenses in the quarter. On a year-to-date basis, operating expenses increased $10.9 million, due largely to the higher sales-related expenses as well as increased compensation expense, R&D costs and digital marketing-related expenses. While operating expenses were up in dollars, it declined 1.9 points as a percent of sales for the quarter and 1.4 points during the nine-month period. Looking ahead, we’re in the process of determining the net impact of the recently announced tariffs, and we’re formulating plans to mitigate and address them. In closing, the balance sheet remains strong and our healthy growing cash position enables us to continue investment against strategic priorities and opportunities to expand our business and growth potentials. 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 back over to the operator for the Q&A session. Operator?

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

Hi, guys, congrats on another really strong quarter.

Thanks, George.

Thanks.

So to start with a few questions on the Fishing segment. First, I’ve read recently about something, I believe it’s called the one-vote network and the connectivity between your different brands. I was wondering if there is sort of major areas where you still feel like there could be improvement made to your network? And are there still – it seems like a lot of your products are already connected. So is there anything you can tell about sort of where that – where that’s going?

Well, the network, I think, is one of the big advantages we have because it connects our Humminbird with our Minn Kota product. And I think our innovation strategy is ongoing and whatever we can do to enhance that, we work on every year. So it’s an important part of our business model. And right now, it’s working pretty well, but we’re always looking for ways to enhance that product. And I think, it’s a good partnership between Humminbird and Minn Kota.

Are there new products for you currently, or are there products where you currently do not have an offering where you don’t compete that you think would make sense to be a part of that platform brand extend, or is there an opportunity to extend into new areas?

No, I mean, we are always looking at that and always evaluating. So we’re not keeping anything out of the equation as far as what we’re considering, but always looking.

Okay. And then, how is your manufacturing capacity? Do you have room to – if as we’re looking to next year, if the same kind of growth or even if growth is more modest next year, do you – are you able to handle it?

Yes. I mean, we don’t expect the same level of growth next year. But we feel good about our capacity. I know we’ve been kind of chasing orders this year a little bit. But we – we’re actually adding under our Mankato facility and consolidating some space there, which will give us a little bit more flexibility.

Okay. And do you currently have a large backlog, just for the remainder of this fishing season?

There is a backlog there, it’s been diminishing a bit. But yes, there’s still a backlog.

Okay. And then outside of fishing, just more general, can you talk more about tariffs? Any early indicators on what you think it will do to – just more specifically in the Fishing business and if there’s a broader impact? Any kind of early sign of what the potential operating income it could be?

Yes. Unfortunately, we can’t give you any kind of indication yet. I mean, we do import products from China, raw materials and electric components. So we’re still assessing that impact in our plants to help kind of mitigate that. So there’ll be more to come on that.

Okay. And then what was CapEx in the quarter and expectations for full-year?

Actually, I don’t have a quarter number, I’ll see if I can get that. But I think for the full-year, I think it will be up about $6 million versus last year. So I’m looking – I think, we’re looking at $18 million to $19 million in CapEx for the full-year.

Okay. And then, I guess, just a last question, kind of a 10,000-foot view question of your Fishing business. It’s been so successful, and you’ve really re-rated these products in your own margin over the last couple of years. It seems like technology – you’re just able to charge for it. What gives you confidence as we look out to 2019 and 2020 that this isn’t sort of one-time, people refreshing what they have on their boat? And how can you keep this going, I guess, is the question?

Well, and that’s a very good question. But this is – the fishing core consumer is a very passionate fisherman and it values innovation highly. So what we’ve seen is that with every new product launch that has meaningful point of difference that they’re willing to step up and purchase it. So, the key and the challenge to our group is to continually innovate, and we have different Fishing segments within the larger group. And we have to make sure that we hit those different segments, not the same group year-after-year, but try to move it around. But I think, your point is well taken, it’s a challenge, and we benefit not only from the unit sales but also the dollar sales will be incremental cost to the technology. So we feel like these past couple of years have been everything has hit at once. We’ve had a great economy. We’ve had both Humminbird and Minn Kota kicking in with great new products. That is something that most likely is not going to be I’m willing, but we are all about innovation, and we’ll seek that going as much as we can.

Okay. And I guess, I do have one last one. You mentioned – so there will be a new Ultrex next year. Is that the most substantial new product, or anything else you can talk to for next year?

Well…

Oh, go ahead.

I’m sorry. It’s not a new Ultrex. We’re actually – we have a new integrated transducer on the Minn Kota motor. So again, it’s again enhancing kind of that networking where you have a Humminbird fishfinder and you can actually have the transducer on the Minn Kota motor and see MEGA Down Imaging.

And that will be across the different models of Minn Kota?

Yes.

Okay, great. Thank you very much.

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

Yes. Good morning, guys. Thank you for taking the questions. So I guess, first, just wondering as to your expectation about the lengths of the product cycle kind of going forward. I mean, do you expect it to remain consistent with what you’ve lately or perhaps shrink or get longer, just wanted to get your thoughts on that?

You’re talking about the purchase cycle. With innovation, we condense the purchase cycle motors. We make motors that last for long time, but the innovation is what gets them to – give up the motor and having to buy the new one. But given the nature of our – the category, it’s a two-year launch, I would say. And then depending on the innovation, it determines the length of its kind of growth cycle. But it’s always been a longer launch time just because of the seasonality and it takes a couple of seasons to get the fishermen aware and using and then – but, again, I think, what have changed is the purchase cycle of the consumer and given the innovation, I think, we condense that over time. But I think, the launch cycle will stay the same.

Got it. Okay. Thanks for that explanation. And also, within the Fishing segment, I was curious if you could provide any color either for the quarter or for the year-to-date the units versus – volume of units versus pricing, if you could just give us some color that would be helpful?

Yes. I mean, both for the quarter and year-to-date, we did see unit growth. And that makes up – I’m hesitant to give you you the exact numbers, but it’s meaningful unit grow, and then the rest of the growth was from value-added doing the price up because of the innovation. So it’s both. We’ve seen both – growth in both units as well as the pricing.

Okay. Thank you for that. And also as far as Camping, I mean, what spark the turnaround there, that’s a cycle there has long struggled and so obviously nice increase in sales there. What is your expectation going forward there?

Yes, it was a good quarter for Camping. I think, Jetboil kind of led the way with our new flash product. So we’re very happy with that innovation. It was a restage of our core product there. Again, a good quarter as well and hopefully, we’ll continue to see that. But there is more work to do there.

Got it. Okay. And two more questions, if I may. Also as far as the e-commerce websites that you have now for your brands, can you give us any early sense as to how that’s tracking?

It’s still early in the game here and we’re learning and we’re experimenting. But every brand is up versus a year ago, but last year it was kind of the launch year. So I would say that we’re still in early stages and learning as we go. So we feel good about the direction, we’re getting momentum. So we feel good about the future, but it’s really still launch time.

Okay. Thanks for that. And lastly, what is your appetite for M&A activity? We haven’t seen anything as of late that you certainly have a tremendous balance sheet there. So just wanted to get some color from you about that? Thank you.

Yes. And now M&A is – it’s front in center and we’re always looking. I think, we’re looking for the right strategic fit. It’s a competitive market out there and the multiples are pretty high. But we really are – we’re not about buying to grow the volume, we’re about buying to enhance our product lineup and what we offer. So it’s a matter of what’s available and we thought and it’s about we are looking.

Okay. Thank you and best of luck.

Thanks, Tony.

Thank you. [Operator Instructions] And speakers, I’m not showing any additional questions at this time. I would now like to turn the call back over to Helen Johnson-Leipold for any closing remarks.

I just want to say thanks to everybody for joining us, and have a great day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone, have a nice day.