Johnson Outdoors Inc. (JOUT) Q3 2019 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the Johnson Outdoors Third Quarter 2019 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 2019 third quarter results. If you need a copy of today's news release, it is available on our website at 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. I'll start off by reviewing quarter and year-to-date results and then provide perspective on our markets and business performance, Dave will review key financials, and then we'll take your questions.The warm weather outdoor recreation season is in high gear during the fiscal third quarter, giving us valuable insights into consumer response to our products and programs. Continued success of new products in Fishing during the quarter powered a 3% increase in sales to $176.3 million. The unfavorable comparison in operating profit quarter-to-quarter reflects our continuing strategic investment in digital capability and the ongoing impact of tariffs on Chinese components.Net income in the quarter was $22.1 million or $2.19 per diluted share. Year-to-date, net sales were $458.4 million, a 1% increase over the same fiscal nine month period last year. Total Company operating profit for the nine month period was $61.9 million, and net income advanced 4% to $47.5 million or $4.72 per diluted share.Dave will provide more detail on the financial drivers behind the results. This quarter's performance reinforces the critical importance of innovation to continued growth and success of our brands.Johnson Outdoors' legacy is built on pioneering category-creating innovation that inspires adventures, spurs growth in our markets and fuels sustained market leadership by our brands. Successful innovation begins with inspired consumer insight and spans the whole experience from researching online to shopping and purchasing to actually using the product.Being the best of what we do is a constantly moving target. And in recent years, the pace of change everywhere for everyone has accelerated significantly, continuously raising the bar on what defines the best. One of the most important shifts in outdoor consumer demographics is the rapid rise of millennial engagement in outdoor recreation.Today, millennials comprise the second-largest outdoor consumer segment. While baby boomers remain the largest consumer segment as of now, future success is dependent on our ability to compete and win with this emerging younger consumer base.Our ongoing investment in understanding consumers' evolving needs and expectations and translating unique consumer insights into bigger, better, new product success gives us a key advantage in our increasingly competitive outdoor markets just as it has for nearly 50 years.The success of our Fishing brands is a great example. A continuous stream of technology, first, from Minn Kota and Humminbird have led to an unprecedented growth in our brands.Beginning with the first clean, quiet electric fishing motor to remote hands-free steering as well as Spot-Lock on-the-boat networking and side-imaging technologies and more, our innovation leadership is unmatched, sustaining our market leadership against competitors, large and small.Our most recent innovation, the new MEGA 360 Imaging from Humminbird captured Best in Electronics at ICAST, the world's most prestigious fishing show, marking our eighth award in this category in the past 10 years.MEGA 360 Imaging is the only sonar option that sweeps 125 feet around the boat, providing a high-resolution 360-degree view with unmatched detail and coverage. With MEGA 360, anglers don't have to move their boat over a spot to know what's under water. They can make every cast count by targeting directly in front of the boat, the fish don't even know what's coming.We're always looking for new ways that our products can seamlessly integrate and communicate, and advancements in GPS and wireless technologies coupled with our deep consumer insights and technological expertise enable us to constantly reimagine and redefine what will anglers catch more - what will help anglers catch more fish. MEGA 360 Imaging does just that, enhancing the performance of both the trolling motor and the fish finder, so anglers have an effortless command of their boat.Humminbird also leads the industry in ice fishing technology. Our newest ICE HELIX launch with our proven Dual Spectrum CHIRP sonar brings the exciting new feature of AutoChart Live Ice, which allows ice anglers to quickly map the terrain of remote or unmapped lakes and more easily locate productive fishing holes. And the all-new ICE HELIX won the Best of Ice Fishing award at ICAST this year.Sustaining our innovation and technological leadership position in fishing market is our top priority, and we have an exciting pipeline of new products on the horizon. Innovation is also critically important in our watercraft recreation business, where there has been a dramatic shift in the traditional pedal market dynamics.Importantly, engagement in watercraft recreation remains steady, and the emerging participation of millennials provides new opportunity in the future. Our greatest success in the marketplace has always been embedded in our ability to deliver best price value going forward.A key focus will be on transitioning product lines to capitalize on the evolution of this market. At the same time, we will continue working to accelerate growth in both Fishing and propulsion segments, both of which remain on a positive growth trajectory.Camping is the largest outdoor recreation activity, an all-important gateway marketplace that touches more outdoor recreation consumers than any other. Participation in this outdoor activity is strong and growing among millennials, which sets the stage for new innovations tailored to their needs and expectations.In addition, the avid wilderness camper continues to be strong, and our acquisition of Jetboil, the technology leader in portable outdoor cooking systems, gave us a foothold with this avid Camping consumer. And the sales for the brand have nearly doubled since joining our portfolio.Looking ahead, we will continue to invest in enhanced digital marketing and e-commerce to engage even more with our Camping consumer segment.In Diving, positive momentum in our North American business has been driven by our enhanced digital footprint, resulting in positive trends in e-commerce and retail sales. We will continue to work with - work to strengthen our Diving business in other markets by expanding our digital presence globally as well as continuing to simplify our business model.These efforts along with sustained innovation will enhance growth and profitability in Diving and strengthen SCUBAPRO's position as the world's most trusted dive equipment brand.In summary, the rapid pace of change we're experiencing is the new normal for the outdoor recreation industry. Our ability to anticipate and address changes will be critical to our ongoing success.At Johnson Outdoors, we take the long view, working to position our brands and businesses for growth well beyond the next quarter or next year to being a thriving enterprise that's built to last and deliver long-term value creation.Our continued focus on our five key strategic drivers, consumer understanding, sustained innovation leadership, new sources and paths of growth in our markets, accelerated digital sophistication and e-commerce, helps enable success in the constantly evolving marketplace.Going forward, we will continue to make smart, strategic investments to sustain technology and market leadership positions in an increasingly competitive outdoor recreation industry.Now I'll turn the call over to Dave for more details on financials. Dave?

Thank you, Helen. Good morning, everyone.I wanted to highlight a few items from the quarter. As Helen mentioned, sales for the third quarter improved 3% over the prior year and improved 1% on a year-to-date basis, driven by growth in Fishing.Gross margin for the quarter was 45.2%, down from the prior year third quarter, due primarily to tariffs on Chinese components. We continue to estimate a potential impact of $5 million to $7 million on profits this fiscal year, net of the exclusion we were granted last quarter.While we wait to hear on tariff exclusions for other affected components, we're continuing to pursue other opportunities to help mitigate the effects of tariffs going forward. Total company operating profit was $28 million for the third quarter compared with $32 million during the prior year's third quarter.Operating expenses during the quarter rose $4.3 million versus the prior year, driven by an increase in bad debt expense, higher sales volume relate - and higher sales volume-related expenses. In addition, we continue to strengthen our brands and position them for future success with increased strategic investments on our digital capability.Net income during the quarter was down 7%. And on a year-to-date basis, net income improved 4% benefiting from an effective tax rate of 24.9%. This was significantly lower than last year's nine month tax rate of 34.4%, which reflected charges associated with the initial implementation of the new U.S. tax reform act.For the full year, we're expecting the tax rate to be consistent with the current year-to-date tax rate. In closing, the debt-free balance sheet remains strong, our growing cash position is healthy, providing us with financial capacity and flexibility to strategically invest to drive future growth while continuing to pay out a cash dividend to our shareholders.Now I'll turn things 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 just - Dave, I just wanted to clarify, as far as the tariff impact. So was the exclusion that was granted by the government, was that actually included in the just-reported quarter? Or will that be in the next quarter?

That was included in the quarter, yes.

And then as far as the just-announced tariffs yesterday, that 10%, will you guys be impacted by that?

We will, I can tell you that tranche is less impactful to us than the first three that are out there right now. So more to come on that, but it will impact us, but just not to the extent that the other three did.

And Helen, you mentioned that you have an exciting pipeline of new products. Could you provide us with some - with a sneak preview without sharing too much of the secret sauce?

Well, I probably can't give you too much of a sneak preview. But all I can say is that, historically, our Fishing business has been great at planning ahead and having a full pipeline of new products, and it's gotten more competitive, and we are planning ahead.So all I can say is that's been one of our strongest weapons that we have. But you have to - you'll have to see it when it comes out.

And as far as the competitive landscape, obviously, has changed over the past few weeks here, so other than new products, is there anything else that you plan to do in light of the competitive landscape now?

Well, certainly, when we get new competitors in any one of our segments, we pay attention and work very closely, and we try to anticipate as much as possible. But we are very aware of it, and our biggest tool in our toolbox is the strong innovation, but obviously, we look to provide whatever support is needed to at least launch those products and address the competitive threat.

And lastly, Dave, as far as the higher bad debt expense, is this just isolated to one customer or more? And do you think this was just isolated for the quarter? Or could that possibly continue?

Well, it's interesting because we've had a really great track record on bad debt throughout all the retail gyrations. And so actually, there's a couple things, last year in the quarter, we had a credit, so we took some bad debt expense earlier and then we - we brought that back. And then there was just one incident here this quarter that drove that. So I would characterize it as isolated. But for retail environment, we're continuing to be very diligent monitoring that.

And our next question from the line of George Kelly with Imperial Capital. Your line is open.

So just a few for you. What - you mentioned that several times in your prepared remarks, the digital investments, and I know that's been ongoing now for maybe a year-and-half. What are you still - what's still being done? And how much longer - what's the timeline with whatever is coming next?

Well, I would say that the digital environment is always changing. I think what you're seeing to date, I mean, even investing in new tools that allow us to target our consumers, that's ever-changing and ongoing, and it will continue to be ongoing.Also, in our capability to use those tools, we - so I would say digital investment is going to be a continued expense, and our investment in making sure that we can use it in the best way possible is also an investment. And I think it's just necessary to compete in today's world. And also, this could be a significant competitive advantage. So we'll do whatever it takes to keep ourself or to get to the leadership position in our categories as far as digital goes.

Just to - maybe wondering a bit more about that. What - how do you view your digital investments as a competitive advantage? What is the biggest area of opportunity that you see within digital?

Well, it goes - every category we compete in has different levels of digital sophistication. So I think keeping that in mind, but with the channel shift, certainly, we have to have e-commerce capability, we have to have targeting capability, we have to have - understand our consumers and know what and where they are using the digital network, and we have to be as good or better than our competition in doing that.And I think the traditional media vehicles have - are shifting, and they are not as strong as they used to be. We have to be good at using this new tool, and our millennial target as well is - are more and more in tune with using digital, and all the information is showing that they go first to research products online and then make decisions even for in-store purchases. So it's absolutely a critical area for us.

And then on your Fishing business, I was impressed to see it grow in the quarter, despite what's been a pretty challenging weather early summer. So how do inventories look at retail? And can you talk at all about weather and what you've seen more recently? Maybe, if you could share anything after the quarter?

Yes. The weather was pretty spotty early on, but we've had a good run here. So I mean, things, at least, for the Fishing business looked good. I think inventories are fine in - at the retail channel. So I expect us to kind of end the season on a decent note.

But also, the fisherman kind of plan ahead as well. And so they're not as spontaneous. So they're hoping and planning for weather to be good. So they do kind of do it ahead of - even though it might be bad weather, they're already planning on when it gets better.

And then two last questions. Can you quantify the impact in the quarter from the tariffs?

Yes. It was about $1.9 million.

And that's all in the gross - in the cost to goods sold line?

Yes.

Okay. And then last question from me, and this has come up before. So $150 million of cash. I was just wondering how you think about that. And I'm not asking about M&A or anything specific, but there's a dividend that's very small, $5 million annually. And so what's - how should - there hasn't been much change in it just accumulating. Should I just keep planning on that going forward? Or how do you think about the cash?

Well, I'll let Dave chime in as well, but I would say we - again, you've heard this from us before, but we are always looking for opportunities for acquisition. And I think historically, our success has been that we are patient and we are strategic.And I do think that there will be an opportunity going forward when we will see more things come on the market and at a price that makes sense, but we are continuing to do strategic research on an ongoing basis and evaluating opportunities. So that is ongoing.I - again, we are not growing to be big, we are growing to get the right kind of sales and the right acquisition. And I think we could make big mistakes if we decided that we just have to use the money that's sitting there. I agree with you, it's a lot of cash.It's actually better than being in a different situation, but we're not going to use it in a way that does not put us in a better position going forward. So Dave, I don't know if you want to add to that.

I think that's perfect. I think we will continue to try to grow the dividend. That will be one of the levers we pull. But as Helen said, we continue to look for opportunities to invest that.

[Operator Instructions] And at this time, I'm not showing any further questions on the phone line. So that does conclude today's question-and-answer session. I would now like to turn the call back to Helen Johnson-Leipold for any further remarks.

Just want to say thank you, everybody, for joining us, and have a great day.

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