Johnson Outdoors Inc (JOUT) 2008 Q2 法說會逐字稿

Hello, everyone, and welcome to the Johnson Outdoors Second Quarter 2008 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, there will be a question and answer session.

(OPERATOR INSTRUCTIONS)

This call is being recorded. Your participation implies consent to our recording of this call. If you do not agree to these terms, simply drop off the line. I would like to now turn the call over to Cynthia Georgeson, VP, Communications, for Johnson Outdoors. Please go ahead, Miss Georgeson.

Thank you, Operator, and good morning, everyone. And thanks again for joining us for our discussion of Johnson Outdoors' results for the second quarter of fiscal 2008. If you did not receive a copy of the news release that we issued this morning, it is available on the Johnson Outdoors website and that's 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 facts 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, please give either Dave or me a ring at 262-631-6600.

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

Thanks, Cynthia. Good morning, everyone. Thanks for joining us today. I'll start off with some comments on the quarter and share my perspective on the future. Dave will discuss the key financial highlights. And then we'll take your questions.

First, the quarterly results. For those of you who may be joining us for the first time, the second quarter is when our customers are gearing up for the primary consumer retailing period of our seasonal products. This is when we see the initial trade customer response to our new products.

Next quarter, we'll see the consumer response at retail and customer restocking, which will give us a much clearer indication of total year performance. Total company sales this quarter were $121.8 million, essentially flat with prior year, and operating profit was $3.6 million. Earnings per diluted share of $0.09 compared unfavorably to last year's $0.23 per diluted share.

Export sales, new products, acquisitions and favorable currency drove the top line performance. As of now, we believe we are holding or gaining share in every market due to the investments we have made in innovations to keep our brands performing ahead of competition.

And specialty retail orders are solid, which is key for us. The small box, specialty channel caters to the more engaged outdoor enthusiasts, who historically have shown a willingness to pay for innovation and quality, even during tough economic times.

Despite holding our own on the top line, profit comparison is unfavorable to last year for three reasons. First, the anticipated slowdown in military tests. This represents about a third of the profit decline for the quarter and even more year-to-date.

Our focus continues to be on rebalancing our outdoor equipment portfolio, put less emphasis on military and we have built positive momentum in the consumer segment of that business. However, our business-to-business large event tent segment, which had good growth last year has slowed this year due to customers' cost cutting measures.

Moving on, the second reason for the unfavorable profit comparison is geographic and product mix in our marine electronics business. Export sales are up significantly year-over-year, which helps the top line, but because exports are generally lower margin, our bottom line does not benefit as much. So while the volume is growing in Europe and Asia, it's not enough to overcome the lower domestic volume where margins are higher.

And third, a very soft U.S. boat market. When the boat market is slow and it is -- it certainly has been slow for the past two years, it affects boat manufacturers, distributors and marine dealers. And we're feeling the impact in all these channels. And more so with our Minn Kota brand than in our Hummingbird brand. And keep in mind that marine electronics is one of our biggest -- it is our biggest business.

Looking ahead, I'm sure I don't have to tell you that the macro economic condition is very volatile, which makes it even more difficult to predict the year's performance. Right now it's hard to determine when the outdoor retail environment will begin to improve.

I can tell you that most large outdoor retailers are reporting year-over-year same store declines and they are bracing for the worst, keeping inventories low and taking a wait-and-see approach entering our third quarter.

The question is, how can we minimize the impact going forward? First, we have to sustain demand in the marketplace for our products. As I said earlier, we believe we are holding or gaining share across our markets. We are working with retailers in a variety of ways to help drive traffic into the stores. We have special product demo days planned at key retailers across the southeast and new in-store merchandising designed to help our products stand out at retail even more.

We're also fielding some direct consumer and online promotions, as well as a product rebate program. E-Commerce or marketing and selling online is an important growth area for us. Our e-Commerce model is designed to help retailers by giving them the opportunity for incremental sales by filling online consumer orders. So we're doing what we can to partner with retailers in what looks to be a very challenging season.

Second, we have to tighten our belts and control discretionary spending. We are postponing all, but the most essential programs for the remainder of the year. However, innovation, brand building and talent are the future and we will continue to invest appropriately in each.

Lastly, we have to manage inventory down. This is a key priority for us and every business has an action plan to help right-size inventory levels in light of the slow economy. and Dave will take you through the specifics of those plans.

Despite the current economic climate, we continue to be excited by our future. We have strong brands and we have the foundation in place to support growth and enhance profitability when the economic situation improves and our markets rebound.

With that, I'd like to turn things over to Dave Johnson, our CFO.

Thank you, Helen. Good morning, everyone. Obviously this was a tough quarter. I won't rehash what was in the press release, instead I want to talk about the specific actions we're taking to manage inventory down this year and beyond.

As Helen said, inventory is a key priority. Working capital has been on the rise and the slowing U.S. economy has exacerbated the issue. Last year we worked with experts on plans to enhance supply chain efficiency across our businesses. The plan addressed both near term and longer term opportunities, all of which will help us better manage inventory, a big driver of working capital.

First, let me tell you what we're doing near term, all of which are tied to forecasting and planning process improvements we've been implementing across the businesses. These touch every aspect of the supply chain from sourcing to distribution.

Forecasts are being closely scrutinized regularly. As a result, production has been ramped down in virtually every operation to minimize additional build of finished goods. This has also reduced seasonal labor demand and related costs significantly. On the purchasing side, we're working with vendors and deferring orders wherever possible. All of this will help if the economy improves and market demand picks up. If not, working capital could remain high throughout the year.

Longer term, SKU rationalization is a major focus. We want to invest resources only against those products most in demand and most profitable. So we're evaluating every product line and every item against a strict set of criteria. We've set a 20% or more SKU reduction target for every business. We expect to see the benefit of these efforts, beginning next year.

Cost savings initiatives should also benefit us longer term. These have gained traction this year due to last year's strategic study -- strategic supply chain study. We are working on a long list of initiatives across the operations. The top ten represent opportunities of about $4 million. We're not there yet, but we're working hard to capture as many possible.

One last supply chain item that pertains to global diving. In February, we announced to diving employees that we will be consolidating dive computer manufacturing into Indonesia by the end of the 2008 calendar year. This should significantly reduce the cost structure of our diving operations and we'll realize the benefit in future years.

With that, I'll turn things over to the Operator.

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of [Scott Hamann] from KeyBanc Capital Markets. Please proceed.

In the marine electronics business, on the last quarter call, you kind of indicated that the orders were pretty strong at that point and that was the end of January. It looks like organic revenue growth, ex-Geonav was 12%. I mean, did something change kind of near the end of the quarter? Can you talk a little bit about that?

Yes, Scott, it's a lot of the order pattern, especially with our large retailers, are pretty much just-in-time. So obviously the read in January was okay, but with some of our big box retailers, they placed their orders and we deliver within the next two weeks or so. That's really been a big effect going into the season.

Okay. And then on the Geonav integration costs, is that anything significant?

For the quarter, it was about $400,000.

Okay.

In operating loss.

Okay. Outdoor equipment? I mean, I realize the military tent business is not core to your business, but with the 6.5 million down year-over-year, should we expect the back half of the year to be flat or further declines in that?

We are expecting about a flat versus last year for the balance of the year. Again though, it's difficult to predict with the military. But that's kind of what our expectation is.

Okay. And then in water craft, it seems like -- I mean, is there more work to do in that business? Because when you remove Escape out of there into disc ops, it still looks like the segment's not quite profitable yet. Are you doing anything else there?

Yes, let me answer that. We are taking a very close look at the watercraft business. Obviously innovation is key, but we're working on a lot of simplification initiatives. We do have a new DC that we put up.

Also, obviously, we have gotten hit this year by freight costs, so we're hoping long term that that will -- we will be helped by the economy turning around. But we are looking at freight differently. We're looking at supply chain opportunities. We are doing a strategic plan, we haven't started it yet, to really take a whole new look at that segment and how our business is operating.

The key part of the watercraft business too is that we've been investing in the accessories business and that grew -- it actually did very well in this past quarter and we feel that the accessory business, which is a higher margin business, will be one of the biggest growth areas for the watercraft business going forward. But again, we're looking at both the base boat business, plus investing in growing the accessory business. So we are taking a very hard look at watercraft.

Okay. And can you talk a little bit about how raw material costs and commodities might have impacted you and what kind of headwind you're up against?

Yes, it's -- right now, freight's been the biggest issue for us. And that will continue to be an issue. The other commodities that we closely track are resin and copper, and I think I mentioned this last quarter, we've purchased ahead for copper for the fiscal year, so we're okay there. We're locked in on copper.

Resin we buy ahead when we can. And we're probably two to three months ahead on that. We will probably see some impact of resin though as we get into the rest of the quarter and ending our fiscal year. Hard to say how much that's going to be, but I would expect some impact for that.

Okay. And then as we think about lower production volumes throughout the rest of the year, you -- that's going to be a benefit to lower -- kind of like lower expense? Or, do you -- I was kind of thinking that if you had a fixed cost structure that it would kind of compress margins a bit?

It has that potential. But we -- we're really focused on -- with the plan to cut spending, we -- we're not filling like some full-time positions in some of our plants. We really ramp up with the temporary labor force, especially in our marine electronics business and watercraft businesses. So those temporary labor forces will not be hired and so we'll be able to manage the costs.

Okay. So there's a little variability in those?

Absolutely.

Okay.

Also, we are pushing off -- we are going to test some marketing initiatives as well. But we're going to push some of those off until next year or when we can read how the economy's doing and the marketplace is performing. So we are postponing some of the non-essential initiatives.

Okay. And then the lower tax rate on the quarter?

Yes. That's really a function of where we think the profit is for the year and with our foreign locations being up, that's affecting the tax rate.

Where do you expect it to be for 2008?

I think the end of the fiscal -- 36% or 38% effective tax rate. In that range.

Okay. And then just lastly on the Swiss bank. Do you expect that to be an issue in future quarters? Or -- I mean, have you hedged that? Or, how do you -- how does that play over the rest of the year?

Yes. We have not hedged that. And that's -- those are -- that's currency in U.S. dollars that's in our Swiss subsidiary. And economically, it's the best thing for us to do, because we've used that historically to bring back to the U.S. on a temporary basis to fund our working capital build. It's really an accounting issue, and GAAP treatment of that says that as the franc increases in value, you take the P&L hit. So it's really -- it depends on what the Swiss franc does. And if the dollar strengthens in value versus the Swiss franc, that'll come back.

Okay. And can you break out the operating expenses by line item?

Scott, I don't have that right now with me, but I can certainly get some summaries for you.

Okay. All right. Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of Justin Orlando from Dolphin Management. Please proceed.

Helen, and Dave, good morning.

Good morning.

Did I do the math correctly on the one times here? Are we -- are all of -- is the Swiss franc above the operating income line?

No, it's not. It's considered other income expense.

And about -- and the 0.6? That was in the -- that was for the global diving restructuring?

Yes, that's part of the operating expense.

So that's in the operating lines. And then the 0.4 is also there?

Yes.

Okay. So we were looking 4.6 million apples-to-apples, versus 6.2 last year at this time, I think. Kind of apples-to-apples.

Okay.

Can you just help me out a little bit with the military sales? We saying we were going to be flat for the back half. Is that right?

That's -- that is our expectation, roughly.

Your hope. Your hope. Your hope. Yes.

Yes. Yes.

And so that number is roughly, what? Because I haven't broken that out in my model.

Well, we're still saying military can -- will be 20 million to 25 million for the year. Probably at the lower end of that range at this point.

Okay.

So --

And what are we to the year-to-date?

It's 9.5 million year-to-date.

Okay. I appreciate that. In the -- I already know, I think, basically the answer to this, but maybe you guys can go through it a little bit better with me. So the net debt number was about 24 million higher in the first quarter, and now it's kind of 31 million higher here in the second quarter. Can we just talk about some of the main contributors to that move, and where you see some of the opportunities there to convert some of that to cash?

Yes. I -- it really comes down to our working capital and I think we've got, I'd say, $10 million to $15 million of opportunity and inventory to drive that down. Obviously, foreign exchange is a factor in that as well. We've got about $6 million of incremental working capital because of the foreign exchange factor. But even still, I think we do have an opportunity and a challenge ahead of us to get our working capital down to where it needs to be. Obviously, the Geonav acquisition was a use of cash.

Sure.

So that's affecting it as well.

Yes.

The story really is, it's about getting our inventories where they need to be.

And I guess Seemann would be in that number as well, right? The Seemann Sub business?

Yes. Yes.

And, Justin, just in terms of inventory management, I think what Dave mentioned, which was our SKU reduction plans, we are really focusing on simplifying our business. And I think the fact that each business has put together a plan to, within the next couple of years, reduce SKUs by 20% on average, I think, is really going to help us manage our inventory going forward as well.

But in your mind, the 2008, $10 million to $15 million, there's a whole lot of wood to chop in that in order to get to that number? That's a challenge goal you guys have put out there for yourself that will not be easy to make?

I would agree with that.

Because of the economy?

Yes.

Agreed.

Okay. And then are we making some progress on the Escape business? I know that there's a lot going on inside the business and I know for sure now is not the best time to sell the business, but how are you progressing with that, and do you expect to not be talking about that anymore at the end of the fiscal year?

Yes, I would expect to not be talking about it by the end of the fiscal year. We're continuing to look at someone to acquire the business and that's in process.

Okay.

Yes.

And my last -- oh, sorry, go ahead, Dave.

I was just going to say we've got about $300,000 of assets on the balance sheet for Escape. There's not a ton of exposure left on that.

Yes. Then my last question, I guess, Helen, a year ago, we had -- well first of all, a year ago, the world was a lot different than it is today. But we talked about having a goal of being a 0.5 billion in sales in the next couple of years. And I'm wondering if you could chat a little bit with us about your goals for this business vis-a-vis a year ago's goals, and how we should all be thinking about this business because of how you're thinking about it.

Well I think we still feel that it's a viable goal. And one of the key things, and we haven't mentioned it in this call, but we continue to be very focused on acquisitions. And we have made a couple, they were smaller ones, but we feel there's an opportunity for us, but we're being very choiceful. But we are active in that area, so we think acquisitions is going to help.

The economy is obviously a hurdle for us, but we continue to invest in innovation and feel that when the economy comes back that we will be in good shape to generate the growth that we need. I think also our diving business, which used to be a -- it's had a turnaround and it was one of our biggest profit generators and one of our biggest businesses in general. And that is -- the things that we've done to that business, I think, really position ourselves for some growth in that area.

Also [MAG], which is Minn Kota, one of our biggest brands, this year we didn't put as much focus on innovation, so the top line growth wasn't -- it really showed that innovation is key. We focused more on Hummingbird, which did generate some significant growth this year, but we plan on getting back into focus on innovation on the base business of MAG, which again is significant.

So I think -- and again, watercraft, we're doing a strategic study to really understand the growth opportunities there, so again, the combination of that, we think that the goal we stated is still viable.

Is there a chance that your strategic look at the watercraft business will yield another potential sale of that business? Is that something that's on your list of things to examine with that? Or, is it really not? Is that kind of off the table with the way you're looking at that?

We're doing a very objective look at the business, and certainly our hope is to identify some significant growth opportunities and some areas of opportunity. But again, it's -- we can't tell at this point. We haven't -- we kind of pushed it. We're not starting it yet because of the costs associated with it, but we'll keep you posted on that.

Okay. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a wonderful day.