Johnson Outdoors Inc.
Q1 2018 Earnings Call Transcript

Published: 4 May 2018

[Operator:]

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 Johnston, 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.

[Patricia 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.

[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 selling period for the primary retail selling season for our warm weather outdoor recreational product. We had a great first quarter, with sales up in 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, sales were up 16% or nearly $40 million. Growing profit factors and 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 of 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 products 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 this insight that drive innovation, inspire new products and technologies and bring clarity and focus as the biggest opportunity. The impressive ending growth over the last 2 years demonstrates how important consumer intimacy is to our brand on success. In call it dynamic for a powerhouse brands and the technology leaders in their fishing category, and consumer insights have enabled us during 2-year period to expand both the brand technology leadership position and leverage the unique combination of the 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 , the first electric steer motor for foot pedal control enthusiasts with GPS and wireless capability. At the same time, we completed a major technical restate across our entire electric motor line. In Humminbird, we introduce our patented sonar to a whole new angling audience to our small- and mid-sized screens helix series of fishfinders, which is followed by our new ultrabig screen series of fishfinders. And our new state-of-the-art mega sonar technology, providing a virtually picture-perfect underwater view. And as legacy innovation, like i-Pilot and i-Pilot Link technologies as well as the Talon show water anchor continues to outpace expectations. This year, preseason selling across our fishing channels has been exceptionally strong. In the third quarter, we'll see how closely consumer demand matches customer expectation. Long term, smart, strategic investments to sustain our technology and market leadership in fishing is a top priority. In guiding our most global business, key markets have gained strength and growing this year. New core light support products and SCUBAPRO Hydros Pro buoyancy compensator and or energy to David West 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. We're determined to sustain positive momentum going forward while also working to optimize efficiency to protect profitability. On the flipside, market challenges have restrained new product momentum in our other 2 businesses. Both monograph 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 decline in serial year, particularly in brick-and-mortar retail channel, where historically our brands have been strongest. At the same time, the online channel has continued to grow and reached an important tool by the outdoor 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 in and the water as well as a full line of accessories to complement these brands. Over in camping, Jetboil remains a 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 expectation. Our goal going forward is to align channel strategies with our consumer shopping and purchases behavior. The disruption in the distribution channel experienced in these markets underscores the critical importance and the urgency of our companywide digital transformation. The digital ecosystem is a super highway of information of data and commerce and communication. It is powerful market platform and rapidly growing outdoor recreational channel. The evolution of the digital market place 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 our consumer would with state-of-the-art capabilities in shopping and purchasing factor this year. Our new brand size are now e-commerce-ready and mobile compatible. We're also redesigning, advertising and promotional programs in the same way, ensuring our marketing 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 in the future. At this time, excitement of our 2018 product line remains strong, giving us a great start to the year and positioning our brand for continued success. Ongoing investment against our 3 key strategic plans priorities

[David Johnson:]

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 increase in 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 costs also contributed to the uptick. Will up in dollars, operating expenses are down 1.2x a percentage of sales this year. Excitement around last year's new product line up and fishing and diving continue through the first half 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 -- or last year to about 24% last -- this year. We closely monitor working capital through the appearing 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 taxed-deferred foreign earnings. Together, these items have resulted in $6.7 million in charges year-to-date and a higher a 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:]

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

[George Kelly:]

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

[Helen Johnson-Leipold:]

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

[George Kelly:]

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

[Helen Johnson-Leipold:]

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 on it so we feel good about that. Hummingbird has got introducing both new technology and larger screens. So again, we've got some very good innovation. But also, we did -- we had a launch of our full -- we relaunched a lot of our products in Minn Kota and upgraded them to Bluetooth. So had a lot of innovation, and the good thing is it was spread across multiple products.

[George Kelly:]

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

[Helen Johnson-Leipold:]

Well, obviously, the numbers are reflecting a very excited customer base. 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 that's up to the excitement that the trades had.

[George Kelly:]

Sure. And -- but the inventory situation at retail seems reasonable. Currently, do you feel like much more comfortable than they were last year remember there were a lot of other stocks last year?

[Helen Johnson-Leipold:]

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

[George Kelly:]

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

[David Johnson:]

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 of the year. And of course, it is dependent on the sales volume, but I was investing in digital strategy, we could be close to last year's operating margin, but there'll be some pressure downward on that with our spending.

[George Kelly:]

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?

[David Johnson:]

Yes. That would be our expectation.

[George Kelly:]

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 much interesting what do evaluations look like any kind of commentary on that would be helpful.

[Helen Johnson-Leipold:]

We -- again, we are always looking for potential acquisitions. I think you might 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 place 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.

[George Kelly:]

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

[David Johnson:]

With the innovation, yes. We've seen a left in the operating margin in Hummingbird. So we're pleased with the innovation there and where we're with that, brand.

[Operator:]

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

[Anthony Lebiedzinski:]

So obviously, you guys have done a tremendous job with your Fishing segment. So just wondering what percentage of your sales, either in the 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.

[David Johnson:]

Yes. We have trailing 12, 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 at all our different segments so we'll have to see how much we fill in terms of purchase cycle versus kind of ongoing innovations. So we'll have to see how that number of plays out over the next 18 months.

[Anthony Lebiedzinski:]

Got it. Okay. And also, obviously, you have the digital sites of e-commerce sites up and running. I know it's still early on, but can you guys give us a sense, are those roll out -- did not go as expected? And any kind early read as far as consumer point? Can you share with us about that?

[Helen Johnson-Leipold:]

Well we're very glad we had all the sites up and running. It's obviously, 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 e-commerce aspect, think, there's both the content of the consumer and the back-end that operations in the fulfillment side that we have 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 you could -- no major catastrophes, so I would say that we still have to get out there and reach our consumers in market, but the sites themselves are, I think, a great first step for us and you know we'll always be evolving as we go forward but it's a great place to be with a lot of upward momentum on that area.

[Anthony Lebiedzinski:]

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 is it sounds like it is based on reference so far but I just wanted to clarify that.

[Helen Johnson-Leipold:]

The weather has been a little bit strange on the regional basis. So I think, if anything, it's been a little tough on a weather standpoint. So the consumer take -- 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 good thing.

[Anthony Lebiedzinski:]

Got it. Okay. And as far as the merger between DeBellis 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?

[Helen Johnson-Leipold:]

The -- there's a lot of evolution happening in the market, and I would say the one thing the private label emphasis has been increasing emphasis on behalf of our retailers to push the private label. So I would say that is, to some degree, is an impact with the merger of Bass Pro and DeBellis, and DeBellis wasn't much of a private label entity, and now Bass Pro's influence is going to be influencing what DeBellis . So I think there is a little more competitive pressure on that standpoint. I think they're still working through how they integrate, how to be -- how to function as a customer. So we'll see that still yet to work its way through. But in general, I think we saw sporting goods channel you 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.

[David Johnson:]

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, disproportionately, some of the - it can be Watercraft brands [indiscernible]

[Helen Johnson-Leipold:]

And I think for Fishing business, 2 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 channel as well in the Marine channel is certainly strong and continues to have momentum. So it varies across the business.

[Operator:]

Our next question is from Brian Rafn from Morgan Dempsey.

[Brian Rafn:]

Give me a sense. Do you have was kind of the preseason build up do you have any sense that within the minds of retailers that you are 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 ideas to how much inventory there taking down?

[David Johnson:]

Well, against the defense business, in Fishing, we've seen our customers take on more inventory because of our new products. I mean, they -- we were kind of handyman last year, and so they have 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 kind of the big box retailers consolidation and bankruptcies, et cetera, has affected our distribution points and those businesses in particular.

[Brian Rafn:]

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

[David Johnson:]

Yes. We've had some sell-in to that you entity. So we have seen that start. I think that opened up 56 locations or something like that so we're starting to feel the pipeline, which is...

[Brian Rafn:]

Great to see that. Okay. All right. And on the Camping side, with military projects anything on the military for Eureka!?

[David Johnson:]

It's funny. It's not a big piece of our business anymore, but it does tend to be choppy quarter-to-quarter. 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.

[Brian Rafn:]

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

[David Johnson:]

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

[Brian Rafn:]

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

[David Johnson:]

I don't have a number for you, but we were 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 went about $12 million in CapEx, something like that.

[Brian Rafn:]

Okay. And what do you guys, relative from the standpoint of inventory replenishment and kind of cycle times or reorders, I'm sure it'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 Hummingbird or Minn Kota? How does that kind of reorder pattern play out?

[Helen Johnson-Leipold:]

No. Again, by business, I think in the Fishing area, they have done a great job of building inventory early on if they have the product 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, you can see the first 6 months are a little stronger than normal, and given there are preparing for the season. So it depends on the consumer. I think again, in Camping and Watercraft, the -- there's hesitation part -- our customer base builds up inventory is just a 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 lot 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...

[Brian Rafn:]

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

[Helen Johnson-Leipold:]

Actually, I would say it's -- we are very good at managing that, and you expect to have cannibalization. And so all of our new products 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 products that's there.

[Brian Rafn:]

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

[David Johnson:]

Not yet. We look at imports of some of the steel and aluminum. We, obviously, consume 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.

[Brian Rafn:]

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

[Helen Johnson-Leipold:]

Well, we do have our, in some degree, the continuing launch of our new regulator. We have a new computer, and it's our Hydro CC, which is truly revolutionary. You see in the market and have a really build momentum. So we feel good about that. It's all about innovation and guidance as every other business do.

[Brian Rafn:]

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

[Helen Johnson-Leipold:]

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. And it's I will perceive it as that's kind of the same. But I think the diving market, we think, are more stable than they've been in the past.

[Brian Rafn:]

Okay. And then Dave, the second part of my question. Anything and raw materials inflation, feedstocks, x trade?

[David Johnson:]

The only thing I think I'm missing we're seeing compression on for boats. We're managing all that and there'll be a material impact.

[Operator:]

[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.

[Helen Johnson-Leipold:]

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

[Operator:]

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