Johnson Outdoors Inc (JOUT) 2007 Q4 法說會逐字稿

Hello, everyone, and welcome to the Johnson Outdoors first-quarter 2007 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. Prior to the question-and-answer session, all participants will be placed in a listen-only mode. 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 Cynthia Georgeson, Vice President Worldwide Communication for Johnson Outdoors. Please go ahead, Ms. Georgeson.

Thank you, operator, and good morning, everyone, and thanks for joining our discussion of Johnson Outdoors' fourth-quarter and full-year results for fiscal 2007. If you need a copy of the news release that we issued this morning, it is available on the Johnson Outdoors website 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 for liability established by the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical fact are (technical difficulty) 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 any further questions after the call, please give either Dave or me a call at 262-631-6600.

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

Good morning, everyone. Thank you for joining us. I hope you have had an opportunity to review our fourth-quarter and year-end earnings announcement. I will start off with a few comments on our full-year results and share my perspective on the future, and Dave will cover some key financials, and then we will certainly be happy to take your questions.

We had a good year of solid growth with a total Company net sales of $432 million in fiscal 2007. It is a 9% increase over last year. Investments in the future and other onetime items brought operating profit down slightly; but net earnings were up 6% above the prior year to $9.2 million or $1.00 per diluted share.

Marine Electronics overcame labor, efficiency, and component availability issues to post record sales, just shy of $200 million of this year. And it's official -- Minn Kota is Johnson Outdoors' first $100 million brand.

The numbers really don't tell the whole story. In Watercraft for instance (technical difficulty) business has really turned around. It is stronger and healthier than ever. At the same time, we have invested in developing the resorts and rental channel behind the Escape brand; and those investments have masked the improvement on the canoe and kayak side of the business.

This year's $4.4 million legal settlement hit the unit's bottom line and was pretty much too much to overcome. We continue to believe in Watercraft and think it will be one of our largest businesses in the future.

Diving did a 180-degree turnaround in Europe, largely due to growth in Germany from the Seemann Sub acquisition in April. Outdoor Equipment generated positive momentum in both consumer and commercial segments, as military sales have returned to more historical levels, as anticipated.

There were three key drivers of growth this year -- innovation, acquisitions, and geographic expansion. Innovation is who we are and what we are. For the fourth year in a row, new products contributed 30% or more to total Company revenues, and we've got a healthy pipeline of new product ideas and concepts across all of our businesses for the next three years and beyond.

Let me just go through a few of our exciting new product launches that we did in 2007. In Marine Electronics, we introduced the Minn Kota Terrova, the most successful trolling motor launch in our history. The Terrova was three years in development and is the most powerful and strongest trolling motor we make.

Cannon introduced the new Cannonlink downrigger system which enables controlled depth fishing of multiple downriggers, all tied directly into Humminbird fishfinders. The Humminbird 700 series side imaging products made the benefits of this amazing technology more affordable for more people. All three of these new Marine fishing products took top innovation honors at major fishing and boating shows in 2007.

In Watercraft, we introduced new fishing kayaks like the Ocean Kayak Big Prowler and women-specific models like the Necky Eliza. We saw good uptick in sales of high-performance kayaks from Necky. We have introduced some really beautiful Necky kayaks made with our patented advanced composite carbon technology. These boats are super-light yet super-strong and a joy to paddle. My favorite is the Necky Chatham, which was just awarded the best gear honors by both National Geographic Adventure and Men's Journal magazine.

In Diving, we began to roll out the GALILEO, our next-generation dive computer. Results to date indicate the GALILEO is on track to become our largest dive computer launch ever. The GALILEO is very high-tech but incredibly easy to operate and easy to read. That is pretty important for a recreational diver 20 feet below the surface, or a technical diver 100 feet down.

In Outdoor Equipment, the new Eureka! N!ergy tent catalyzed double-digit growth in the consumer segment. The N!ergy tent is the first fully-wired camping tent. It has a built-in light and fan, and comes with its own E!Power battery pack. I like it because my kids can bring along their computers and games, and I can keep my cell phone charged when we are out camping in northern Wisconsin.

So, a great year for winning innovation across the entire Johnson Outdoors portfolio.

The second growth driver was targeted acquisitions. Humminbird and Cannon acquisitions have exceeded expectations in a very short time. Lendal is meeting targets, and Seemann Sub was a significant contributor to Diving's improved performance in 2007. In total, these acquisitions represented over a third of new growth this year.

Early in 2007, we invested in a comprehensive analysis of the outdoor recreational universe. The goal was to identify strategic opportunities to expand our footprint in the marketplace. Our most recent acquisitions have resulted from our proactive outreach to targeted companies.

Everyone likes to announce a big deal, but our primary focus is on making the right deal to drive sustained profitable growth, and size is not always the best measure or criteria for that. The fact is that we have proven track records of successful acquisitions, and our strong cash position gives us the flexibility to act quickly when the right opportunity becomes available, like with Seemann Sub in April and Geonav earlier this week.

Which brings me to the final growth driver, geographic expansion, specifically Europe. Five years ago, we decided to dip our toe in the water in Europe with our Marine and paddleboat brands. We thought it might be a $10 million opportunity. We were wrong. After five steady years of double-digit growth, year-over-year, we now know Europe is a much larger opportunity for these businesses, particularly Eastern and Northern Europe.

But it will take different business models, a different business model than what we have currently to grow significantly and profitably in this region. That is why Geonav made so much sense. In addition to adding complementary brands to our Marine portfolio, Geonav has local resources and established distribution channels across key countries in Europe that will allow us to grow quickly and smartly. We know innovation and marketing; and now we have presence and insight in Europe that should help us seize more white space opportunity.

We also believe there is more growth to be realized in European Diving. But again our business model needs to change. We did the right thing by slowing down restructuring and system implementation in Europe Diving earlier this year. It gave us the chance to integrate Seemann.

And it gave us time to do a thorough supply chain optimization analysis, to better understand the local regional and global opportunities for improvement. Clearly, Seemann Sub gave us a big boost in Germany this year, and we think it has the potential to help drive more profitable growth throughout the rest of Europe.

I wish there was time enough to cover all the highlights in detail, like the new media and direct marketing programs we tested and hope to expand next year, or the pending launch of our new paddle sport gear line that is overdue but we think could be the next big growth engine for Watercraft. I will be happy to take any questions on any of these during the Q&A session.

In summary, over the past five years we have simplified, streamlined, and strengthened operations and become truly the innovation leader in our market. Our commitment to enhance shareholder value is stronger than ever, and we are proving that with consistent market-leading growth and performance.

Now I would like to turn the call over to Dave for the financial highlights.

Thanks, Helen. I am sure you have read our earnings release, so I won't rehash what you have already seen. But building on what Helen said, I want to point out how significant the year-over-year revenue comparisons are.

Now in 2004, military sales were at $60 million. Since then, military revenues have declined steadily -- or rather, made a steady return to historical levels this year. We ended fiscal 2007 with military sales of $25.7 million versus the prior year of $32.5 million. So if we exclude military in both last year and this year, revenues would have increased 11.8%. We said military was a niche and our results proved that out.

Additionally, we do have some unusual profit-affecting items in this year and last year that I want to make clear. Last year we took $1.5 million of Binghamton flood-related expenses. In this year's fourth quarter, we recovered $2.9 million on our flood insurance claim, which has now been closed out.

As Helen mentioned, there was the $4.4 million in legal settlement costs recognized in this year's third quarter. Also this year, we invested $2 million in strategic profitable growth plans and initiatives.

These items, along with the slowdown in military sales and the nonrecurring specialty sales in last year's outdoor equipment business, all contributed to the unfavorable profit comparison versus last year. Keep in mind we were still able to growth net income year-over-year.

Now one of the biggest financial factors this year was working capital. Yes, it was higher than it ever has been. And yes, we believe we can bring working capital levels down. The fact is, we are on an accelerated growth curve and, frankly, we have to manage growth more efficiently.

That is why we have brought in supply chain optimization experts to work our businesses to identify improvement opportunities. Inventory management, SKU reduction, forecasting, and capacity planning are all well within the scope of this work. A key goal is to further leverage existing assets to grow profits faster than sales.

As you saw, gross margins were down about a point versus the prior year. Labor and efficiency in Marine Electronics and Uwatec supply chain issues contributed to the unfavorable comparison.

Now let's talk about tax rate reduction. Last year we told you tax management would be a key focus. That focus netted a 12-point reduction in our effective tax rate for the year. A combination of better planning and favorable overseas audits drove the reduction. Next year, we do expect our tax rate to return to a more normalized level in the high 30% range.

Successful tax management for any global company is a moving target, subject to changes in tax codes from country to country. I do see tax planning remaining a major focus for us in the years ahead.

Finally, as Helen said, driving shareholder value is a key priority for us. While our main focus is on delivering value through business performance, we are returning profits to shareholders through quarterly dividends and continue to meet with potential investors and analysts.

We're pleased that the market is starting to recognize our results; and as of September 30, we have outperformed our peers for total returns to shareholders on a one-, two-, four-, and five-year basis. Now I will turn things back over to Helen.

Thanks, Dave. Going forward, we look to maintain top-line momentum by creating more demand for our product innovations through new media and direct marketing programs. At the same time, we will be focused on enhancing profitability through supply chain optimization and improved operating efficiencies. We are working hard to deliver sustained profitable growth and enhance value to our shareholders by executing our strategic growth plan.

We have an exciting future ahead, and I want to thank you for your continued support. With that, we will open up the call for questions. Operator?

(OPERATOR INSTRUCTIONS) [Michael Shwetler], [Pimento] Partners.

Good morning. Just looking at the working capital, how much can you squeeze out of inventory in the working capital line and what is your target, since there have been some acquisitions?

Yes, Michael, that is a good question. You know, as we look through the year, inventory is up about $24 million year-over-year. About half of that is due to growth and the other half is due to just days of inventory being on hand higher than last year.

Our target would be to get that $12 million back. I can't guarantee that is going to happen next year, though, because we still have a lot of work to do internally on our supply chain optimization. But that's certainly the goal.

How much of the inventory is, say, pushed back from your -- the stores wanting you to hold inventory longer?

That was definitely a factor in Watercraft this year. Watercraft inventory is up a few million dollars year-over-year. I don't know exactly how much of that is due to the pipeline being shifted to us. But it is certainly a factor in the Watercraft business.

On a separate note, what is running you to be a public company? What are the Sarbanes-Oxley exorbitant costs and the other costs of running as a public company these days?

Yes, it's -- you know, we haven't really looked at that in-depth in a long time. What I can tell you is the largest cost of being public is our external audit fees, and that runs in the $1 million to $1.2 million range. Now, you know, just theoretically going private that wouldn't all go away, certainly; but it would be reduced.

So without actually going through a whole lot of [deep], I can't see it necessarily being a huge amount of money.

But the Sarbanes-Oxley ballooning costs from a year or two ago have come down?

Yes, definitely. Yes, the first year of Sarbanes-Oxley, we were spending closer to $2 million on audit fees; and that has come down significantly.

Terrific. Thank you.

Justin Orlando from Dolphin Assets.

Hi, there. Another good quarter. Dave, I was wondering if you could go through the raw material outlook, and if there was any raw materials cost effect in the quarter that you could identify for us.

For the fourth quarter? There was a significant effect of commodities on the fourth quarter. We do have our eye on obviously oil, natural gas, copper, and aluminum costs going into the season. We have (technical difficulty) on a copper on a go-forward basis, and we do buy forward on resin as well for our boat making.

What would you say that the headwind was on your commodities, all of them, in '07 in dollars, if you had to ballpark it?

Yes, it is difficult to say. I believe it was certainly less than $1 million. I would say $500,000 to $750,000 total.

So on a comparative, sort of like '06 to '07 basis, you would say somewhere between $500,000 and $700,000?

Roughly, yes.

Okay. Are we looking at cost saves into 2008 that we have identified and we are trying to get?

Yes, yes. We have talked about the supply chain work. Diving has some active projects we are working on that we hope will bear fruit in 2008.

Kind of in the same ballpark as the commodities, is that something we could think of as a target?

It would be difficult for me to tell you in '08 that would be a target. I think overall, it is reasonable; it is just a matter of timing.

I got it. Then, we talked last quarter, about in July, we talked about a couple of things from a shareholder perspective. One of them was liquidity; and the other was getting analyst coverage or talking with analysts and going to some meetings. You said that was kind of the next thing on your list to do in July. Have we made any progress on either of these two issues?

Actually, we have. You know, we have had conversations with potential analysts. So is the progress as quite as maybe we all would like? Maybe not.

But we again -- our focus is on the fundamentals of the business. We do, as we can, try to get our message out to the Street, and we will continue to do that.

So you have had some conversations with some analysts, and you are still working through the possibilities of people picking up the Company. Is that accurate?

That is accurate.

How big was the Escape investment that you guys made this year on the Watercraft business?

It was close to $2 million.

How should I think about -- should I think about that as a onetime investment? Or is -- how should I think about it?

Let me talk to that. Escape was an investment that we made in the resort and rental channels. It's our electric boat line. We -- obviously (technical difficulty) a little slower than we thought it would. But, we still think it is a big opportunity.

What we are looking at is when 2008 rolls around, we're going to do an evaluation, and we will be able to understand what the market opportunity and what our investment should be going forward.

Okay, so it is fair to say that the $2 million was done this year in the hopes that it would generate, it would yield a lot of returns; and it wasn't what you had hoped on the return side; and that you are going to re-evaluate it and maybe invest a little bit more or maybe not?

That's correct.

Okay. So, I guess is that the business that is really holding up Watercraft here, as we are kind of still in a lossmaking position on the EBIT line?

I would say yes it is, and if you took that out of the numbers and also the litigation expense, paddle would have made money this year.

That's great. Then we didn't -- one thing we didn't talk about was on the liquidity front for the shares. Has the Board made any decisions on -- I am sure it hasn't, because you haven't told us. But have we made any progress on ways to generate increased liquidity on the shares for the shareholder base?

As of now, Justin, we're going to keep doing what we're doing. You know, deliver our plan. You know, we will obviously look at the dividend after four quarters and see if we ought to enhance that or not, but there is absolutely no decision made on that.

Sure.

We'll just kind of keep going that way.

Okay, thank you.

We have no further questions at this time.

Okay. Well, thank you, everyone, for joining us. Have a happy holiday season, and we will look forward to speaking with you again. Thanks.

This concludes your presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful and safe weekend.