Johnson Outdoors Inc (JOUT) 2006 Q4 法說會逐字稿

Good morning, everyone, and welcome to Johnson Outdoors fourth-quarter earnings call. Today's call will be led by Helen Johnson-Leipold, Johnson's Outdoor Chairman and Chief Executive Officer. Also on the call is David Johnson, Vice President and Chief Financial Officer. Prior to the question-and-answer session all participants will be placed in a listen-only mode. (OPERATOR INSTRUCTIONS). Just a reminder, ladies and gentlemen; this conference is being recorded. Your participation implies consent to our recording this conference. If you do not agree to these terms, simply drop off the line.

I would now like to turn the call over to Ms. Cynthia Georgeson, Vice President, Worldwide Communications, for Johnson Outdoors. Please go ahead, ma'am.

Good morning, everyone. Thank you for joining us for our discussion of Johnson Outdoors' results for the fourth quarter of fiscal year 2006. If for some reason you didn't receive a copy of the news release that we issued this morning, it is available on the Johnson Outdoors web site at www.JohnsonOutdoors.com, under Investor Relations.

Before I turn the call over to Helen, I need to remind you that this conference call may contain forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical fact are considered forward-looking statements.

These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond Johnson Outdoors' control, that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. These risks and uncertainties include those listed in our media release from today and our filings with the Securities and Exchange Commission. If you have further questions after the call, just give either Dave Johnson or me a call at 262-631-6600.

It's now my pleasure to turn the call over to Helen Johnson-Leipold.

Good morning. By now I hope you've had an opportunity to review our fourth quarter and year-end earnings announcement. I will start off with a few comments on the quarter and full year results, and then share my perspective on our business and future outlook. Dave will cover some key financials, and then we will be happy to take your questions.

The fourth quarter results reflect the slowdown of our seasonal business, but we certainly ended the year strong with net sales this quarter 4% ahead of last year. Net sales for the full year were also 4% ahead of last year, finishing just shy of $396 million.

Operating profit for the year increased 30%, and net earnings were up 23% to $8.7 million or $0.95 per diluted share. It was a very good year in investments in our core consumer brands, our key drivers behind the topline growth. We put more resources against market research and product development than our competition. That's important because we compete in markets where innovation is rewarded.

As a result of those investments, we are clearly recognized as an innovation leader in our markets, and new products represented a full third of total sales this past year. Importantly, we've supported our brands with breakthrough marketing and sales programs and excellent customer service. This is the big reason why our core consumer brands realized topline growth of almost 10% year-over-year.

Our portfolio of winning brands is one of our greatest assets. We are working hard in investing it appropriately to keep our brands strong and fresh and growing.

Another key driver behind the year's topline growth -- the successful acquisition. Humminbird has exceeded expectations, due primarily to investments we have made since acquiring the brand 18 months ago. Although Humminbird remains the number two fish finder brand, we believe the gap between number one and number two is smaller than a year ago.

The Cannon brand is also doing very well, and we expect to see more growth from this brand due to investments we've made this year. Acquisitions are an important element of our growth strategy going forward. We made our first one this year with Lendal paddles, announced last month. The purchase was small in terms of dollars, but the opportunity for growth is big. Lendal is a premier brand with a unique point difference and a perfect fit with our other premier paddle brands. With Lendal in the mix, we will go to market with a total premium paddle sports package, from boat to accessories, which we think gives us a real and meaningful competitive advantage.

We are constantly looking for and evaluating opportunities against very specific strategic criteria. Aside from the obvious financial criteria, acquisitions must bring us leading brands and leading technology in existing or related segments, and the ability to leverage our assets as we expand our playing field in the outdoor recreation marketplace.

We are looking to make the right acquisitions, and we have got a good track record of doing that. Our solid cash position gives us the ability to move quickly when the right ones come along.

One last point before ending my comments on our topline performance. In the past couple of years we have spent a good deal of time talking about military sales. We don't expect to do that going forward. As I've said many times, military is not a core business, rather an opportunistic segment requiring little or no dollar investment that provided us cash. We needed to invest in the strengthening of our core businesses. Military sales will decrease further next year, with growth in our core consumer brands expected to more than offset the decline, once again.

Now we will continue to bid on military contracts and [purchase] orders when appropriate, but unless expectations change significantly from the projected $25 million to $30 million in sales anticipated in 2007, we won't have other specifics to share regarding this segment.

Moving on, at last year's annual meeting, I outlined the profitable growth strategies we were focused on to further improve profitability and earnings. We made solid progress against all of these. Companywide, cost savings efforts enhanced operating efficiency, and pricing programs helped us more than offset much higher commodity costs and freight charges this year. We further consolidated purchasing where possible and improve processes and systems to keep operating expenses down.

Looking ahead for our businesses, we expect more of the same from Marine Electronics. It's hard to believe that five years ago this business was in the red and sales were not even half of what they are today. Our growth strategy for the future mirrors exactly what we've done to successfully transform Marine Electronics into our largest and most profitable division, where we have grown from a single brand in a single category to a leading competitor across five segments.

We expect Watercraft to continue on the upswing, particularly paddle sports, where we have a very strong lineup of new boats and new accessories on board for next year. Unfortunately, the investments in our award-winning electric boat masks just how well paddle brands did this year, and a new business model for Escape is now in place, which better targets a very important growth opportunity for this brand in the resort and the rental marketplace.

This year we saw a better balance in the Outdoor Equipment portfolio, and we expect that to continue next year.

On the consumer side we introduced the first wired Eureka! tent at the outdoor retailer show in August, and it was a big hit. This tent has built-in lights and plugs and a rechargeable power source for consumers who want to go camping and want to bring along some of the comforts of home.

One of my favorite new products is our Silva Air Pod, which was just featured in Popular Science magazine for its innovative technology. This is for skiers and snowboarders and skateboarders who want to measure their air time.

Commercial tents was having a solid year until the flood in Binghamton shut down production. I look for this business to pick up where they left off as inventories grow and we are able to ship to meet customer demand once again.

Our work in diving will continue next year at a bit slower pace than originally planned, in order to further minimize the effective restructuring in Europe. Right now it appears as if North American Asian markets are on the upturn but European market conditions remain uncertain.

Despite the cost and the impact of restructuring, our diving business has still outperformed the competition this year. Once systems implementation is complete in 2008, we expect efficiency improvements to drop right to the bottom-line.

Overall, next year we expect total company sales growth equal to this year and further improvement in our core consumer operating margins. We believe we have the right plans and the right team to drive us to $0.5 billion in sales in the next few years. Our long-term commitment remains the same -- to deliver profitable growth and enhance shareholder value.

I will turn things over now to Dave Johnson, our CFO, to take you through some of the key financial highlights.

First a recap of the key financial drivers for the fourth quarter. As Helen mentioned, net sales were up 4% in the fourth quarter. Growth was solid across our consumer brands, which was tempered by the expected reduction in military revenues. Growth was also higher than key retailers in our channels. Net income growth also compared favorably to our competitive set.

At the gross profit level, margins were 42.4% in the fourth quarter, up over five points from the prior year's quarter. Higher margin product mix, cost savings and pricing strategies drove the increases in gross margin versus last year's quarter.

Operating expenses for the quarter ended at 43.3% of net sales, up slightly versus last year's quarter. While we have been able to decrease overhead costs, the benefits were offset by the higher mix of non-military sales and a $300,000 charge related to the Binghamton flood.

The quarter's operating loss improved versus last quarter by $3.9 million. Net loss of $900,000 was favorable by $2.5 million to last year. This quarter's net income margin also improved by over three points of net sales versus last year's quarter.

For the full year net sales grew by 4%. Foreign currency translation had a negative effect of 0.3% on sales for the fiscal year. Military sales were $16.3 million lower than last fiscal year; but, as Helen mentioned, we have been successful in growing our consumer brand revenues to more than make up the military effect on sales.

Gross margins finished the year at 41.7%, up 0.6 points from the prior year. Higher commodity costs offset the positive effects of margin-building new product introductions, cost savings efforts and pricing strategy.

Operating expense percent of net sales decreased 0.5 points to 36.5% of sales. Last year's numbers included $2.7 million in go-private costs. Additionally, declines in Sarbanes-Oxley costs and lower restructuring costs in Watercraft helped offset the unfavorable impact of the Binghamton flood cost. We are also benefiting from an overall focus on reducing overhead expenses companywide.

Net income for the year was $8.7 million, up 23% from the prior year. Higher net interest expense for the year was driven by higher working capital balances. Additionally, last year's net income benefited from currency transaction gains that were not repeated this year.

The tax rate for the year is 44.7%, up from 41.3% from last year, as we recognized charges this year from overseas tax audits.

The Company ended the year with $51.7 million of cash and $37.8 million in debt. Operating working capital ended the year higher than last year and frankly, higher than we would prefer. The key driver to the increase was the growth in non-military sales volume, but we do have higher inventory levels in Marine Electronics and Watercraft that we will manage into the next fiscal year.

Capital expenditures of $8.9 million for the full year are up over $2 million, due primarily to the increased investment in Marine Electronics' new products. Additional key financials can be found in our press release.

Now I would like to turn this back over to Helen.

That concludes our comments. We will take your questions now.

(OPERATOR INSTRUCTIONS). [Josh Gruss, Gruss Asset Management].

Talking about doing further acquisitions, I was wondering, with your cash balance and everything and where your stock's trading, if you considered buying back stock as opposed to going out there and buying a brand new company. It just seems like your stock is trading at a level where it would be hard pressed to find something as attractive as your own stock.

Our key focus is really growing the business, and we've got what we think is very strong strategies in place. Certainly, acquisition is a key part of that. As we assess all the options, we feel strongly that the best choice is to move forward, look for acquisitions, grow the core businesses. We feel that that's the way to maximize shareholder value.

It seems like you're growing the business really nicely and you're creating some really innovative products. It's just that it doesn't seem like the share price of the stock is really reflecting a lot of improvement that you see in the business. I was wondering if you can just comment on why you think that's happening?

Well, it's hard to, obviously, speculate on that. But we've had a little bit of a volatile track record. Right now our focus is to just generate the top and bottom-line performance, and I think with that, hopefully, steady result, that that will have the impact. But I think at this point we're just trying to prove it by the results itself.

Last question is, last time we spoke, I brought up the liquidity issue. You guys mentioned being aware of that. I'm wondering if you've thought anything further on the stock, on the sheer liquidity?

The profile of the Company is it is what it is. Certainly, that is an issue that we're looking at, but I think that's kind of the profile of Johnson Outdoors. But we are always looking at options.

Just to add to that, we have put forth efforts to be more proactive in our outreach to potential investors. We haven't, obviously, done a ton of road shows or anything like that; we are a small cap Company and we have limited resources. But we have put forth a program to do some more outreach with investors who are attracted to our story. I don't think it's going to be -- it's not going to solve the liquidity issue overnight, but we're very focused on it, and we're going to try to do something about it.

It just seems that there's a discrepancy between the Company's performance and the share price, and I just think there's some simple levers that you guys could pull in order to change that. That's really all for me; thanks.

[Mark Hellwell, Spectrum].

Helen, congratulations on your appointment to the Home Depot board. I'm sure that's going to be an interesting experience for you.

Also, on a magazine article in a magazine, which I can't recall right now, which was very flattering -- that raised one question in my mind. How much of your working hours would you estimate that you will be spending on Johnson Outdoors business as opposed to other family businesses and your new directorship, which is a very demanding one, by the way, if you're not aware. Could you just give us an estimate of that, please?

Well, I am involved in quite a few entities. But my day-to-day operation and my focus is Johnson Outdoors. So, if I were to give you a percentage, I spend 90% of my time on Johnson Outdoors and rolling up my sleeves and getting involved.

Can you comment on the likelihood that internally developed products are going to help reach your goal in sales? What percentage of your sales gain would you expect when you reach the billion dollar mark would be from internally developed products as opposed from growth of your existing line and the acquisition such as Lendal, which gave you the new form of paddle and the like?

Well, we put a significant amount of focus on organic growth as well as acquisition. Our estimate is approximately a third of the growth will come organically. It's kind of split, we think, evenly. One-third will be from expanding our existing product lines, and the third will come from acquisitions.

(OPERATOR INSTRUCTIONS). Justin Orlando, Dolphin Management.

Congratulations on a very good year. I just want to follow-up. I have a couple of quick things. It looks like we're sort of $16 million above last year on accounts receivable and inventory. You mentioned that Marine and Watercraft have inventories a little higher than you would like them to be. What percentage of those numbers are Cannon and Bottomline, if any, of that $16 million?

Probably about 25% of that delta, roughly, off the top of my head. We did have higher inventory in Humminbird as well at the end of the year -- for, I think, all the right reasons.

Well, that's good to know. On the Marine Electronics EBIT line, it looks like the margin came in a bit. I was wondering if you could give us some color on that and how you expect that to change going forward?

In Marine Electronics this year was an investment year on the Minn Kota brand. That's reflective on the EBIT margin. I think the other thing is the mix of the gross with the Cannon acquisition and the Humminbird growth, which was very successful, affects that margin level a bit.

So how should we kind of think about Marine Electronics with a couple of these moving pieces and your investments? How should we kind of think about it on a going forward basis? Maybe I could ask that question in conjunction with -- hopefully, you guys could give us maybe some operating margin targets, whether they're for the Company or for the segments, that are similar in timeframe to the revenue growth targets that you've given us?

The only thing I can tell you is that we are focusing on enhancing our operating margins in our core consumer brands. So that's really the guidance we're willing to give right now on that. We have to, obviously, manage the military effect going into next year, but that's really where we're willing to commit right now.

Can you give me some help on your outlook? Or, Helen, what have you thought about commodity costs? I know it was ahead (indiscernible) this year, is it an opportunity for next? I was wondering if you could help us with that?

I'll go ahead and answer that. I think commodity costs remain a concern for us although I think some of the commodities that are key to us have softened a bit. So I do think that we're cautiously optimistic on managing that.

Ladies and gentlemen, this concludes the question-and-answer portion of today's conference. I will turn it back to Ms. Leipold for any closing remarks.

Thank you, everyone, for joining us. We wish you a happy holiday season and we'll talk to you again early next year.

Thank you for your participation, ladies and gentlemen. Have a wonderful day.