Johnson Outdoors Inc (JOUT) 2008 Q4 法說會逐字稿

Hello, everyone, and welcome to the Johnson Outdoors fourth quarter 2008 earnings conference call. Today's call will be lead 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. Good morning everyone, and thank you for joining us for our discussion of Johnson Outdoors' results for the fourth quarter of fiscal year 2008. If you need a copy of the news release we issued this morning, it is available on the Johnson Outdoors website at www.johnsonoutdoors under Investor Relations, Investor Information. 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 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 fourth 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 Johnson or me a call the 262-631-6600. It's now my pleasure to turn the call over to Helen Johnson-Leipold.

Thank you, Cynthia. Good morning everyone. Thank you for joining us. I hope you've had an opportunity to review our fourth quarter and year-end earnings announcement. I'll start off with comments on 2008, share my perspective on 2009 and provide details on our plans to address future challenges. Dave will cover some key financials, then we'll take your questions.

I'm not going to rehash the numbers in the press release. Obviously, it was a challenging year; however, it didn't start out that way. In fact, 2008 first quarter projections indicated a year of strong growth ahead. Apart from a weak marine market, orders during the first six months were solid, and we built inventory capacity to meet the demand. Then just as our season began. the economy took a nose dive. Consumer and customer purchases slowed considerably, eroding margins, lowering profits and net income significantly. Despite the fact that most of our brands were holding or gaining share in key markets, and even though we acted immediately to reduce overhead, cut costs and control spending, results fell short of the prior year. Overall outdoor markets declined about 8% but we fared better than the markets and the competition. The marine market was hit the worst by economic downturn with a 25% year-over-year decline, but our marine electronic sales were only down about 12%. The paddle sports market dropped 8%, but our canoe and kayak revenues were essentially flat with prior year. Our 2008 new products certainly helped us outperform the market, and we have a very strong new product lineup for 2009. Strong innovation is key to helping our leading brands gain share in the coming year, which we believe will be at least as challenging as 2008. We also need to protect profitability, enhance our cash position by scaling our cost structure with the current economic environment. We have comprehensive plans to cut costs and capital by more than $30 million across three areas: First, we have specific cost saving initiatives totaling about $20 million. This includes headcount reduction and wage freezes totaling more than $6 million, manufacturing consolidation of dive computers along with other raw material and product sourcing initiatives are expected to net almost $9 million. The remainder will come from distribution efficiency programs, reduced discretionary spending in a number of areas and less use of external consultants.

$20 million in cost savings is a very aggressive target for a company of our size. We are committed and are working very hard to capture every penny. The second area of cost reduction is working capital, where we've set a target of reducing peak working capital by 12%. Restructuring in 2008 has resized operations and functions so that we are leaner and more flexible. To achieve our working capital reduction target, we are being conservative and disciplined in our forecasting models to keep inventories in check and as of last week, our inventories were down 12% compared to the same time last year. The investments we have made in upgrading systems and processes over the past few years have helped us do this. In addition, we are decreasing safety stock levels and we have an aggressive excess and obsolete movement program. We are also working with our vendors to repace the size and frequency of our orders. Importantly, our bonus program has been revised to align management and operational incentives with our working capital reduction objective. Our third area of cost savings focuses on capital spending, which we're reducing by 26%. This is the area where we invest in the future. We have and will continue to spend wisely in what I call game changing innovation. For instance, side imaging sonar technology, which catapulted the distant number two Hummingbird fish finder brand into a neck in neck race for the number one market position. Also, the Galileo Sol dive computer which revived the Uwatec brand and set a newer higher bar performance in the category. And this year Minn Kota is introducing the next generation fishing motor, the Fortrex. It's revolutionary in styling and performance, the smoothest, quietest trolling motor ever. While anglers may not be in the market for a new boat, the Fortrex can make an old fishing boat feel new again. These are game changers for the marketplace and for the company, and that's what we'll be focusing resources against. Importantly, targeted cost savings and spending reductions are highly strategic, intended to scale our cost structure to the current environment while maintaining our competitive position in the coming year and beyond.

In summary, the inherent challenge of doing business amid such economic volatility demands a readiness and committment to take actions necessary to preserve the long term sustainability of the enterprise. We believe in the future of Johnson Outdoors, and we are doing the right things to insure we weather the storm, maintain our market leadership, and prepare for growth once the economy and marketplace rebound. Now I'd like to turn the call over to Dave for the financial highlights.

Thank you, Helen. Now as you saw in the press release, the board voted to suspend quarterly dividends at their meeting yesterday. They felt it was a prudent action at this time. At Helen has just outlined, we're working very hard to insure the future for Johnson Outdoors and ultimately, to enhancing shareholder value for the long term. Now I want to talk about the two non-cash items, goodwill impairment charges and deferred tax asset valuation allowance that had such an impact on the quarter and full year earnings. Let me explain how these occurred. Consistent with FAS number 142, we are required to annually test recorded goodwill to determine whether or not there is an impairment. Impairment exists when the carrying amount of goodwill exceeds the fair value. This test is done by reporting unit. A key element of the fair value calculations is projected future cash flows of each unit, which were impacted by the economic turbulence and declining markets in primarily the fourth quarter. Projected future cash flows hit their lowest levels concurrent with our annual goodwill assessment, deflating the value of the unit at that point in time and does not take into consideration the potential for positive future changes in the economic environment. As a result, we were required to writedown about $41 million of goodwill and other intangible assets in the fourth quarter. By reporting unit, diving had about $27 million in charges, marine electronics roughly $7 million, watercraft about $6 million and outdoor gear, less than $1 million dollars.

Now, additionally, there was a $3.5 million inventory writedown across all businesses. Although impairment charges are non-cash items, they hit the bottom line and severely impacted earnings, resulting in a significantly higher than normal net loss for the quarter and in turn, the year. The deferred tax asset valuation allowance was in turn triggered by the net loss pursuant to FAS 109. This accounting rule deals with whether a valuation allowance should be established against deferred tax assets based on consideration of all available evidence, positive and negative. Obviously, the net loss was a big negative and the impact of goodwill impairment was included in the assessment. Ultimately, this lead to the valuation allowance of $29.5 million in the quarter. While intangible asset impairment charges in the deferred tax valuation allowance are non-cash accounting charges with no impact on our day-to-day operations, they are reflected on the company's balance sheet and are used to help calculate various financial performance measures included under our debt agreements. As a result of these non-cash items, the net worth covenant of these agreements has been breached, and we are working with our banks to amend those agreements.

In closing, let me reiterate what Helen said. We're working hard and committed to delivering against our plans to protect profits and hedge cash flow during the year. We believe we're doing the right things for today and for the future. Now I'll turn the call back over to the operator for questions. Operator?

Thank you. (OPERATOR INSTRUCTIONS) Our first question today comes from Scott Harmann with KeyBanc Capital Markets.

Good morning, Helen and Dave.

Hi, Scott.

Just a couple questions on the cost reduction plan. What's the timing that you have in mind? Is this off of a base year this past year, and are there any -- what are the costs to achieve on those initiatives?

Well, the timing on the cost reductions will be throughout the year, and most of those have been put in place already, so I think we can expect to see those cost reductions over the full amount of the year. I think importantly to realize is we went into the year with our plan of about a $15 million cost reduction to offset input costs as we went into our planning season and so obviously, as input costs change, there could be some changes in the savings, but the input costs were contemplated when commodity costs were really high, so I feel pretty good about the fact that we can achieve some level of economics on this.

So the $20 million is expected for fiscal year 2009?

Yes.

Okay. And the currency benefit that you had in 2008, either in sales or operating income?

Yes, on the sales line, it was about -- I'm sorry, I've got it right here. It was about a 5% benefit. And on the operating profit, there was a negligible effect. We got some translation benefit, but that was offset by transactional profit loss in US and Asia.

Okay. And then in terms of what you're seeing with the retailers and their inventory and what their comfort level is in taking new inventory, what are you seeing right now?

We have been constantly in touch with our guys and our sales force, and it's kind of mixed. You have to talk about it by business unit, but we're getting pretty good orders in. We do think their inventory level is low because they were very conservative last year, so there is an opportunity to get some product in, but we're getting the orders, but this is only our first quarter and our peak season, it comes into next fiscal, so we'll get a much better indication going forward but so far, there's an optimistic outlook.

Okay, and based on what you're seeing right now, do you think that you can be profitable in 2009?

I believe we have a shot to be profitable in '09. We've got plans in place to react to the market and as you see, we've got a pretty aggressive cost savings program in place, so from what we're seeing, I think we've got a shot to be profitable.

Just let me add to that. We feel very good about our new products that we're introducing and certainly, we're going to have a struggle with the industry in general, but what we've seen from the past is that innovative products do drive sales even in a down market, so our big push for this coming season is share gain, share gain, share gain and in places where we got hit last year, it was somewhat weak new product areas and we're coming back and filling that gap. So from a business standpoint and a lineup of products, I think we're in good shape. Obviously, it's still a huge challenging market, but that part, we have to certainly generate the top line in order to generate the bottom line.

Okay, and then Dave, finally, just can you kind of run through the covenant situation and what covenants we need to be looking for and what the ramifications are if you don't get an amendment or renegotiate this thing, what's it going to look like?

Well, the first item is the net worth covenant which has been breached and was not included in the omnibus agreement that we put in place for the September quarter, so the first level of business is to take care of that with the banks. We still also need to reach an amendment that puts us beyond the December quarter in our debt agreements. The omnibus agreement that we put in place after the September quarter goes through the December quarter and can be extended at the banks option, so we're working through that with the banks right now. If we just get a waiver that extends us into the next quarter, our debt will be classified as short-term, because the auditing rules are that you have to get a waiver, an agreement in place for the next fiscal year, so those are some of the dynamics we're working with.

And if that goes to short-term, what amount is that going to be and obviously, it's probably going to increase your borrowing cost?

It won't necessarily increase our borrowing costs. That will be contemplated in the debt agreements -- or in the amendments, but what's on our books right now is about a $60 million debt as of September, and that would be classified as short-term.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS]. We'll take our next question from Justin Orlando with Dolphin Management.

Hi, Helen and Dave. Good morning.

Good morning.

I just wanted to commend you for the quick action on the cost side. I'm sure it was very difficult to come up with these numbers on such a small base. Can you help me with what the current book value is as of 9- 30?

Yes. About $122 million.

Okay, and then what's the intangibles ? Something like 23?

$18 million.

Okay. So am I doing the math right, that we have over $10 of tangible book value on the balance sheet today?

Yes, that seems about right.

Okay. Thank you for the break down on the $20 million in costs. How are you working through, specifically on the working capital side to get these changes. and what's the timing that you think are there? We talked about it last quarter as a goal that you all had, that the economy was going to be -- was going to affect. How are you going to do that specifically, and what kind of timing are you looking at?

Well we are already seeing a reduction versus year ago in our working capital, especially our inventory, so we feel good about that. A big piece of this is going to be conservative and disciplined forecasting and production planning and obviously, production planning drives the inventory build, so we are watching that very closely and our business heads are very, very focused on that. So that's in process and happening as we speak, and that is one thing that's going to be contributing to the working capital reduction. We're working on how we place orders, the frequency of that and the size of that. We've got safety stock levels that are down. I mean, these are all happening right now. The other thing is our bonus program is aligned with reducing working capital, which is just kind of icing on the cake there. We also did already have a very aggressive program to reduce our excess and obsolete products, so things are in the works and in place to, as we said, 12% below peak as we get into the season.

What was the peak -- Helen, I'm sorry to interrupt. Just could you refresh my memory as to what the peak was last year, ballpark on the working capital side?

Yes, it was around $180 million.

So the sort of $18 million, $20 million reduction you're targeting here ballpark, that would include the 3.5 in the inventory writedown that we took this quarter?

Yes. Yes.

Okay. I got it. I want to talk a little bit more about the goodwill impairment, and I understand that it's business unit by business unit which is very helpful in understanding that, so if I have it right, those impairments are done based with the DCF analysis, is that right?

Well it's done in a variety of ways. DCF is one of the methods that we use to evaluate that.

But you're evaluating cash flows on a going forward basis, is that right?

Yes.

And then taking that value of cash flows and measuring it against the goodwill value that you have on the books to decide which is greater and how much you need to writedown?

Yes, but part of the equation is also the value of the enterprise in total and then bumping that up against what the value is of the reporting units including the goodwill. So there's a reasonability check in terms of what the value of Johnson Outdoors enterprise is.

Okay, and does that enterprise for the entire -- the value of the entire enterprise, is that a DCF analysis, or are you using multiples based on comps, or how are you arriving at that?

We're using the market price.

Using the market price.

Yes.

And the auditors wanted you to use the market price?

Well, again, we use a variety of methods, and the market price is one of the reasonableness checks that we use.

So you've got -- did I do the math right, that if you add back -- if you take out the one time charges here and the one time expenses for the year and add back the comp costs, the non-cash comp costs that were roughly $18.5 million of EBITDA for the year?

You're pretty close to that, yes.

Maybe a little more if you do all of the add backs?

Yes.

Right, so what I'm trying to understand is, you've got $18.5 million of EBITDA on an LTM basis, and I'm trying to understand how that -- and then you tell me that we're looking at, we've got $20 million of cost saves that we're going to capture and again, I commend you for that, and so that kind of means -- and then yet you tell us there's a good shot of -- there's a shot, you said, I won't say anymore than what you said, but there's a shot of being profitable for the forward year, which would be the most valuable year in any cash flow analysis. So I'm trying to understand, those kind of three things don't gel with 60% or more reduction in goodwill, so I'm kind of trying to understand, maybe you can help me understand how that goes, how all of those things together work. Well admittedly, it's tough to piece it all together to say in the goodwill evaluation that we ought to have this huge impairment but again, it's a triangulation and DCF does come into play and the economic volatility that we're in right now and our projections that we use in our goodwill valuation, I think that taking that into account and also the valuation of the enterprise, it all pointed to the fact that we should be prudent and take the goodwill valuation allowance. Okay. So the big piece it sounds like -- because if you back out in the diving, give the piece that you've written down, diving was EBIT positive, is that right? For the year?

Yes.

Okay, so diving was EBIT positive for the year, and it was the biggest chunk of your goodwill writedown, but it sounds to me like the stock price was the biggest enforcer in this analysis in getting these write downs.

I wouldn't characterize it as the biggest enforcer. It was just another piece of data that we needed to take into consideration.

Okay, well maybe I can chat with you offline about it to get there, because it's still confusing me a little bit. But the bottom line here is still more than $10 of tangible book value, even after the writedown on the business and $20 million of cost savings coming in '09 and the potential for being profitable even off of your, what I assume are down sales projections going forward from '09 to '08?

Yes. I think that's a fair characterization.

Okay. Thank you very much.

[OPERATOR INSTRUCTIONS]. We'll go next to Michael Schechter with Mentor.

Dave, not to beat a dead horse, but the DCF analysis and the goodwill writeoff, is it done line-by-line, meaning the goodwill associated with a brand or a particular acquisition and it's not a consolidated basis?

It's done by reporting unit, so by diving, marine electronics, etc.

But if the cash flow or EBITDA from one part of diving doesn't reflect -- isn't reflected in the goodwill that was created from an acquisition, meaning if there was a dud acquisition that's contributing no EBITDA don't you have to write all that off anyway? Or is it really consolidated and it doesn't matter where the EBITDA was generated within the unit?

Yes, it's by reporting unit, so we looked at the diving reporting unit and the cash flows and the other inputs and said okay, what's the value in the goodwill valuation allowance?

Okay. Thanks.

And with no further questions in queue, I'd like to turn it back to Helen Johnson-Leipold for any additional or concluding comments.

Thank you to everyone for joining us and we wish you a happy holiday season and look forward to speaking with you again early next year. Thank you.

That does conclude today's conference, ladies and gentlemen. Again, we appreciate your participation today. You may disconnect at any time.