Johnson Outdoors Inc. (JOUT) Q4 2018 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the Johnson Outdoors Fourth Quarter 2018 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. [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, Brigitte. Good morning, everyone, and thank you for joining us for our discussion of Johnson Outdoors’ results for the 2018 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 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 for joining us. I’ll begin with an overview of our results, give perspectives 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 2018, annual sales grew 11% to $544 million, profits grew 38% to $63 million and net income expanded 16% to $40.7 million or $4.05 per diluted share. Strong positive momentum continued into our fiscal fourth quarter which is the period when the outlook rec industry is in ramp down mode. Total company net sales were $91.1 million a slight decline versus last year's record high fourth quarter revenue. Dave will discuss the impact of taxes for the year and the quarter in his remarks. Overall, we had a great year, continued new product successes in our flagship Minn Kota, Humminbird and SCUBAPRO brands drove outstanding results behind strong growth in every segment and channel. This was largely due to an extraordinarily high level of new products in our Fishing portfolio. Our Fishing brands delivered against our goal of bigger, better new product success. The pioneer in Minn Kota Ultrex fishing motor is a great example. The award winning patented Ultrex is the most technologically advanced electric cable steered motor, the first and only to get foot pedal control anglers all our breakthrough steering and navigational features and technology at the tap of a foot. This is a group of avid anglers who have flocked to this technical leap and made it their motor of choice. For perspective, Ultrex has exceeded expectations in both year one and year two in the market. Additionally, last year's restage of electric gear motor which upgraded wireless and GPS technology in these units covered growth across this entire line up. Legacy technology innovations, i-Pilot and i-Pilot Link also added to Minn Kota success with another year of double-digit growth. Humminbird had an equally good year driven primarily by strong market price demand for large screen fish finders and double-digit growth year-over-year of our patented side imaging sonar technology. Additionally, pioneering MEGA imaging in second generation Helix model continued to generate excitement in this fish finder series. As a reminder, MEGA launched fish finding sonar technology into the megahertz range to provide the greatest underwater clarity, detail and definition ever seen. Together, Minn Kota and Humminbird create a unique one boat network for effortless navigation positioning and entrance. This is an integrated network system that enabled Humminbird and Minn Kota products including talent shallow water anchored to talk and work together in unison to provide anglers and even better fish finding experience. Net, net another incredible year for our Fishing brand. Looking ahead, we see growth in Fishing to continue at a more moderated pace. Together Minn Kota and Humminbird are key profitable growth engines for Johnson Outdoors and we will continue to invest in sustaining the technology and market leadership with these brands. Moving on to Diving. Our successful innovation sustained positive momentum in SCUBAPRO, the world's most respected dive equipment brand. Continued demand for new Hydros Pro buoyancy compensator and Galileo G2 dive computer strengthening SCUBAPRO share in core life support category. This year’s new product successes gave a boost to top line sales and our infrastructure reduction to help improve bottom line performance. Going forward, we look for greater emphasis and more resources against the fast growing digital market place focused on driving more dive consumers into our elite dealer network at the same time further simplification is key to maximize efficiency and profitability. Lastly, Watercraft Rec and Camping have been facing strong headwinds due to market disruptions from retailer bankruptcies and restructuring over the past couple of years, resulting in overall softness in both markets. In Camping, the new and improved Jetboil flash personal cooking system beat expectations, driving a nice uptick in specialty chain and international sales. And our work to repositioning Eureka! for success with new emerging camp consumer targets is continuing. Ongoing progress in the digital arena where more and more consumers go first for the outdoor need is a key focus. For perspective more people camp and hike than any other outdoor recreation segment particularly among millennials by a wide margin. So, there is a real opportunity for growth of more time and more investment will be needed to maximize value and performance in our camping business. In Watercraft our emphasis is on ensuring we are well positioned to compete and win when the overall kayak market stabilizes. We have great brands and great innovation particularly in fishing and paddles segments both of which are still growing. For instance, our new Old Town top water angler series which provides large fishing kayak performance in the more compact nimble and lightweight design that’s easier to transport and navigate. And our new Ocean Kayak paddle drive series which sets the bar higher for fun and business on the water continues to grow in popularity. We believe we have the right plan to drive long-term success of our Watercraft recreational revenue. Looking back, bigger better new products success is in fishing drove this year's record high financial results. Our goal is to consistently deliver this kind of consumer driven innovation across our entire brand portfolio. Deeper, richer consumer insights is at the core of everything we do, every touch point with our outdoor consumer likes M&A from an intimate knowledge of exactly who they are and what they want, need and expect for on overall great outdoor experience. Going forward, our ability to connect with more consumers in new more meaningful ways will enable us to fully leverage and maximize investments in digital transformation, marketing sophistication and e-commerce to improve performance in all segments and channels. We have built the foundation for our brands future success in a rapidly changing market price for Johnson Outdoors continued sustainable growth and profitability. Now, I'll turn the call over to Dave and a review of our financial highlights.

Thank you, Helen. Increased volume, higher average selling prices and relatively tame cost increases drove gross margin to 44.4%, an increase of nearly 1.4 points year-over-year. Year-over-year operating expense for the full year increased $13.5 million, but declined as a percent of sales. Volume related expense drove more than half of the dollar increase. Investment in digital infrastructure and compensation costs accounted for the rest. Operating margin in 2018 was 11.6%, a 2.3 point improvement versus last year. A recently imposed tariff had a minor impact on cost in fiscal 2018. In 2019, we expect the tariffs could negatively impact profits in the range of $6 million to $9 million. That estimate includes implementation of foreseeable mitigation actions. Net income for the year reflected an unusually high effective tax rate of 40.3%, compared to a tax rate of 27% last year. Two factors led to the unfavorable year-over-year comparison. First, last year net income benefited from foreign tax credits created by the repatriation of approximately $22 million in cash from overseas. And this year, we have recorded $8.4 million in one-time charges resulting from changes in accounting for taxes prompted by the U.S. tax reform legislation enacted during the fiscal year. We expect our fiscal 2019 tax rate to decline, reflecting the reduction in the U.S. Federal Corporate income tax rate. At the end of the year, cash and short-term investments grew $40.2 million from a year ago to $150.6 million. Our growing cash position enables continued investment in organic and new growth strategies for our brand. As always, targeted strategic acquisitions remain a growth strategy for Johnson Outdoors with the goal of strengthening capabilities, enhancing our connection to outdoor consumers and expanding our playing field. There is no timetable on when acquisition opportunities may emerge. 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 applications to our segments. Ultimately, we're looking for acquisitions at a reasonable valuation that deliver on 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 dividend to our investors. Now, I will turn the call back over to the operator for the Q&A session. Operator.

[Operator Instructions] Our first question comes from the line of Anthony Lebiedzinski with Sidoti & Company. Your line is now open.

So, first, just touching on the quarter actually, so Dave as far as the tax expense was this essentially at year end true up that you had in the fourth fiscal quarter?

Yes. That's exactly. We -- some deferred tax assets were higher than we expected, so they have to get revalued at the new tax rate and there was some other clarification from the IRS that we have to recognize.

And as far as the tariff impact that you've quantified in the press release and again on the call, just wanted to get a better insight as to make be, I don't know, how specific you want to get, but just wanted to get a better sense to, what percentage of your components actually come from China and what percentage of your finished goods come from China?

I won’t share percentages necessarily. I will just say that this range reflects mostly the China impact on imports of componentry coming in.

Okay. And are you assuming that the 25% tariff goes into effect on March 1st in that guidance?

Yes, we put the 90 days delay, and yes, in that guidance.

So, if hypothetically a deal is made, let’s say maybe a 10%,I mean any, can you give us a ballpark estimate if they say, okay, well, keep tariff at 10% instead of 25, what would be the impact then?

There are three layers of China tariffs and they're all impacting us. So, going from 10% to 25% is definitely an impact, but it would help to stay at 10% for the year, but it's not going to materially change our range just because there still China 1 and 2 in place.

Okay, got it. And then as far as the revenue guidance, I know you expect growth for the full year now you're facing a rather difficult comparison in the first fiscal quarter. So, would it be safe to say, you would expect a bit of a decline in the December quarter followed by growth through rest of the year?

I think what’s safe to say is, for the full year, we expect the growth rate to moderate. I’m not going to get into the quarter numbers, but for the full year I don't think we should expect double-digit growth again.

And lastly, I guess the Watercraft segment was challenged in fiscal '18. Is this a segment that you would consider perhaps maybe divesting as the things don't go out as planned?

We are always evaluating options, but I would say that we are actually very bullish on this segment. We got caught in this kind of disruption in the market, but our plans that we have in place we feel very good about the path forward and the focus and our ability to break through this timeframe and move towards long-term growth. So again, we will always looking at what are the best options, but in this case I think we are definitely committed to the Watercraft segment.

Our next question comes from the line of George Kelly with Imperial Capital. Your line is open.

Hi, first to follow up on one of the previous questions about growth next year. So, it just sounds like you are confident that growth will continue especially in the Fishing segment. What will get you there? Is there anything aside from just continue to strengthen in the products that are already out there? Can you point out any new products or anything else going on in that segment?

The team has a very solid new product pipeline. We feel that the launch cycle of new product is not just one year. It's multiple years just given the dynamics of the business. So, yes, you are right that we will continue to benefit from the products that we have launched, but you have got both Humminbird and Minn Kota, and we don’t have a massive new product launch every year, but we kind of stagger them so that it gives a chance for each new product to build. So, we continue to have good innovation but also we see growth across all segments of the business. So, it's positive. Again, we have some breakthrough records, years, and so it's just a matter of doubling up on that is kind of hard. So, I would say growth will continue and it's based both on base business and new products, but it won't be as Dave said at the double digits level.

And then next question on the cash balance and this comes up occasionally, but I understand you're out looking for acquisitions. But would you consider using the cash for special dividends or share repurchases you have not historically, the cash just continues to build your dividend, isn't anywhere approaching the size of the cash, so should it just keep building?

Yes, all options are on the table. We talk about that. And it's definitely something that we are very cognize about. So, right now, our strategy is to continue invest back into the business, look for acquisitions and build that dividend. I would never say never on any other options though.

Just to add to that, I mean, I'm not sure about stock buyback kind of is not right for our profile of the business given what we have, but we’re definitely looking for those key acquisition. It's not exactly buyers market it’s a sellers' market though but also historically we been very strategic and very focused on where we win and where we play. And so, we have to keep very diligent on that because we hate to do anything that was not the optimal decision, but I will say that we’re looking at all options for the best use of that cash.

I guess my separate question would be. What kind of leverage would you be comfortable with? And wouldn’t it be easy to finance an acquisition? I mean, in the past this M&A has been relatively small. So I guess cash of 150 million, it seems like a big balance.

It's not necessarily just that the multiples are high out there. The issue is what gives strategic company that would be a great fit with us. And if we came across the fit for us, we would consider the long-term growth opportunity and we’re not afraid of leveraging our situation, we do have a lot of cash so I don’t, we would be able to finance that. So I think it's more about the strategic fit of the acquisition and not necessarily that, it is -- the multiples do happen to be high, but if it was the right one, we would figure out a way to get it done.

Okay and then just two other quick ones from me. What is your expectation for GAAP tax rate next year? And second one on Diving, you mentioned simplification just wondering what that, I didn’t catch your exact language but something about simplification this year so wondering what that meant?

So, the tax rate next year should normalize. And so we would expect kind of the U.S. federal tax rate, plus a few points for state and foreign tax. So, that would be the expectation next year.

And let me add to the simplification, the simplification is that we have great product in our line, I think there would be, we get a hard push on really focusing our product offering and very clear segmentation, making it easier for consumer to buy I think when you do go from bricks-and-mortar to online and you see all the products at the same time you really have to be clear about the differentiation and why you buy one and not the other. So, I think it’s a push through line simplification as well as we did do a little simplification with our Japan diving. We went to a distributor model there which reduced complexity. So, we’re always looking for ways to reduce complexity, simplify and focus.

[Operator Instructions] I’m not showing any further questions, I will now turn the call back over to Ms. Johnson-Leipold for closing remarks.

Thanks everyone for joining us. Hope you have a great holiday. And we look forward to talking to you next year.

Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone have a great day.