Johnson Outdoors Inc (JOUT) 2009 Q1 法說會逐字稿

Hello, everyone, and welcome to the Johnson Outdoors first-quarter 2009 earnings conference call. Today's call will be led by Helen Johnson-Leipold, Johnson Outdoors' Chairman and Chief Executive Officer. Also on the call today 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). Today's call is being recorded. Your participation implies consent to our recording this call. If you do not agree to these terms, please simply drop-off the line.

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

Thank you, operator, and good morning, everyone, and thanks for joining us for our discussion of Johnson Outdoors' results for the first quarter of fiscal 2009. If you need a copy of the news release that was issued this morning, it is available on 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 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 but could cause actual results to differ materially late 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 SEC. If you have further questions after the call, please give either David or me a call at 262-631-6600, and it is now my pleasure to turn the call over to Helen Johnson-Leipold.

Good morning. Thank you for joining us. I hope you have had an opportunity to review our first-quarter earnings announcement. I will start off with comments on results in the marketplace and provide details on our plans for direct future challenges. Dave will cover some key financials. Then we will take your questions.

Historically first-quarter results are not indicative of the total year performance. This is the period when we are gearing up for the primary selling season for warm weather seasonal products, which occur in the second and third quarters. I will not rehash the numbers in the press release, but it is clear the results reflect continued deterioration of the economy both in the US and overseas.

The entire industry is feeling the impact, all businesses, all markets. No one has a crystal ball, but at this time, it looks like 2009 will be just as challenging as 2008 if not more so. Disappointing holiday sales and declining consumer spending and confidence levels have definitely made retailers more focused than ever on keeping inventory levels down. As a result, customers tell us they are adjusting the timing of their orders to coincide more closely with the consumer purchases of our seasonal goods.

We have moved quickly to minimize the impact of this on operations and cash flow while protecting our competitive position in the marketplace. First, we are working to align production with the timing of orders, and we have made a lot of progress by focusing on our most popular and profitable models. The goal is to be in a position to meet market demand throughout the season and end the year with dramatically lower inventory levels than in the past. It is a careful balancing act, and the investment we have made in better systems and improved processes and improved our ability and flexibility to monitor and scrutinize data and make adjustments as needed.

It is important to note that in some plants we assemble and in others we manufacture; in some finished goods are soured. So there's no one size fits all approach or solution, rather we are employing a combination of measures such as temporary layoffs or reduced hours to keep inventory levels in check.

Second, we have instituted a temporary 10% reduction in employee pay and a 15% reduction in executive pay. No one likes to cut wages and salaries, but under these business conditions and our focus on preserving cash, options are limited.

The third step we have taken is based on the realization that the ongoing success of a Company is predicated on its ability to grow and meet its needs today without compromising its ability to do so in the future. So we are proactively assessing the future landscape and making strategic decisions to help strengthen long-term competitiveness and eliminated 21 positions this month. All aspects of the organization are being carefully evaluated in tandem where the Company has the financial analysis in order to streamline and focus resources against those areas that we believe are most vital to long-term success.

We expect to identify further opportunities to significantly reduce our cost structure and increase our capacity to invest in key growth areas once our strategic analysis is completed. These are uncertain, unprecedented times, but we are taking charge of our destiny. We continue to be excited by the future. We remain the innovation leader in our markets. We have a three-year pipeline of impressive new products on the horizon. Our brands' equities continues to be strong. Our distribution channels are broad and deep, and our sales and marketing programs are focused on capturing share.

In summary, we are taking prudent practical and decisive steps to help ensure Johnson Outdoors remains in the best possible position to deliver sustained profitable growth when the economy and the markets rebound. We believe 2009 will be challenging, and I'm confident we're doing the right things to ensure we weather the economic storm and emerge a stronger, better Company on the other side.

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

Thank you, Helen. As noted in our press release, in addition to economic conditions, revenues were impacted by unfavorable currency translations due to weakness in the US dollar in European and Asia-Pacific markets.

Gross margins dropped 2 points from the prior year quarter for a couple of reasons. First, closeout pricing on discontinued products in Watercraft, which helped bring inventory levels down in that business. And second, a manufacturing hiatus in our Indonesian operation where we have consolidated globalized computer production. This planned shutdown was for final trap and training prior to scheduled startup of production in November. So lower adsorption, lowered margin.

We expect to see savings of $1 million plus in the year ahead due to this restructuring effort. The amended debt agreement was completed on January 2, which led to higher interest costs than in the past, $1.6 million this quarter compared to $1.1 million in the prior year. The continued support of our bank group was much appreciated and demonstrates the confidence they have in our future.

Despite the economy we're making solid progress against working capital targets, specifically in regard to inventory levels. This is not easy, particularly in the area of finished goods where accurate forecasting is so critical and very difficult in this environment. We feel very good about where we are and in the steps we are taking to keep levels in check through the year, preserving cash and improving profitability as a result.

We are closely monitoring and carefully managing accounts receivable at this time. Like other companies, we're being judicious and extending credit to our customers. Overall we're confident in our ability to achieve the 12% reduction in peak working capital target announced last month.

We also announced an aggressive $20 million cost savings target at that time, and those efforts are proceeding on schedule and in line with expectations. There are three primary buckets of savings. One, discretionary spending, which is down significantly from last year. Two, material and purchasing related cost savings, which combined total about $5 million. And three, restructuring, which includes savings from manufacturing consolidation and diving operations, select outsourcing and of course, the position eliminations resulting from these and other efforts.

In closing, let me reiterate what Helen said -- we continue to work hard to drive costs out for the long-term so that we emerge a stronger, better Company on the other side of this turbulent economy.

Now I will turn the call back over to the operator for questions. Operator?

(Operator Instructions). Scott Hamann, KeyBanc Capital.

This is [Angela Cassandra] calling in for Scott. I was wondering, first of all, with the operating expenses, do you happen to have a breakdown of them in front of you?

Not by sub-line, I don't. I can get that to you, though.

Okay. All right. And then with the cost savings since they seem to be on track, could you give us an idea as to the timing if you think like you're more than half complete, or how do we think about that?

Well, I mean the difficult thing with the cost savings is it is really dependent on the season as well because a lot of the cost savings are built into cost of goods sold, and it will vary with the sale. So I would think that by the March earnings release, we will have a very good sense of -- I can give you more of a sense of where we are.

Okay. And then with like the inventory reduction, do you have a target as to how much you want to reduce inventory year-over-year?

Well, the target in the networking capital is the 12% reduction at peak. I would expect most if not all of that to come from inventory.

Okay. All right. And then looking at your segment performance, could you talk a little bit more about like specific products? And I'm looking more at the Outdoor Equipment since it was up so much this quarter.

If you look at our Outdoor Equipment section, we had a big military order that came in. We did have growth, though, across all segments, but the big significant growth came out of a military order. And that is more just pacing, you know, it just happened to come in the first quarter of this year.

Okay. And then could you talk a little bit about like on the international front, were there any country or regional differences that you saw, and maybe what are your expectations for this year? I understand that everything -- it is a difficult environment -- but are there any differences regionally speaking?

I think at this point outside of the US there was a little lag in terms of how the economy hit, but it definitely hits in all areas. And so we are experiencing the same challenges outside of the US.

And then lastly, just thinking about the last time we had our conference call, has anything -- I guess things have deteriorated, but is there anything in particular that you would point out in terms of your expectations for achieving profitability this year that may be changed from last quarter?

I think we feel like it's going to the a challenging year on the top line. I think the cost savings program that we have in place, we would expect to achieve profitability, even in these challenging times.

Okay. All right. Thank you, guys.

Justin Orlando, Dolphin Management.

Can you just go quickly through how the borrowing base works, and then where the peaks are on receivables and inventory and how that kind of interacts?

You're talking the borrowing base specifically on the new debt agreement?

Yes.

Yes, it is basically a formula on receivables and inventory globally. So we do not expect that borrowing base to be a limiter for us in terms of our availability. And, as you know, we have a kind of trough to peak working capital that will peak around March/April. So we would obviously run a lot of the models and evaluation in our targets to reduce working capital, and we should be okay.

Okay. And so are there other covenants that are theoretical limiters for you in '09 that you are paying attention to?

Yes, well, we are paying attention to all of them. I think obviously the profitability covenants are important, and also just managing cash flow in terms of the debt capacity that we have, the total debt capacity, it was reduced from $135 million to $90 million. So those are the two things that we are very, very focused on.

And then what is the profitability covenant if you could refresh my memory?

There is a couple. There is a senior debt to EBITDA covenant, which I will not go into the details because quarter by quarter it changes, as well as a minimum EBITDA covenant, which again changes quarter by quarter. For instance, in the December quarter, I think the trailing 12 months is about $19 million in EBITDA. So again, I will not go over each quarter. But if you take a look at that amendment, you can see it laid out there.

Sure. So your December LTM EBITDA was $19 million?

That is the covenant.

That is the covenant? And where were we based on the numbers, the add-backs that you are allowed in the credit limit?

We should be slightly north of that, so we should be okay.

And that moves as the quarters move and you need to stay north of it as the quarters move?

Yes.

Maybe we could talk a little bit more about the savings, the $20 million of savings you all have talked about a little bit here. I'm not sure I understand if you have added some additional items to the $20 million cost saves or if this was all part of the plan. Because I know you have made some moves here in this quarter, actually in this month.

Yes, we did make some moves this month. It is incremental, but I would stick to the $20 million program. The reason why that is, is with the challenging environment we have on the top line, some of the savings, and I mentioned this before that would be associated with cost of goods sold, may not be as much. So I think the $20 million is still a good target for us.

So I see it is $3.5 million on the operating expense lines in the quarter. Can you help me out with what we achieved on the COGS line?

Not for the quarter. I do not have that detail. I'm sorry. I could try to get that for you.

That would be great. I appreciate it. And then the breakdown of the discretionary spending, I was hoping you could help me out with the biggest piece here was your sort of -- this discretionary spending, as you put it, and it is down kind of significantly. I assume that most of that is coming in that SG&A line or in the $3.5 million line. Can you just talk to us a little bit about the breakdown, kind of some of the bigger components that are in there?

Well, I could not break down the quarter for you, but -- (multiple speakers)

No, for the year I think. That would be great, the year.

Advertising promotion is probably 30% to 40% of that number, and of course, we are doing everything else on travel, consulting expenses, just everything that would go into a discretionary type spending number. But advertising and promotion would be the bulk of that.

So on the travel and consulting, can you give me an idea on what that number looked like ballpark for '08?

I don't have been in front of me. I'm sorry.

Fair enough. Fair enough. All right. I will try and get you afterward on that. The reason I asked obviously is because the numbers are kind of moved up '06 to '08 in these couple of categories. The way I'm counting it, and maybe I don't have the all the onetimes -- I think I have tried to get them -- it kind of went from ballpark 36 to ballpark 40 in admin expenses from '06 to '08 and 91 to 101. So I'm trying to get a handle on how the numbers are going to come back down and how far into the bone you're trying to be, so that is kind of what I'm asking.

Okay.

I think that is all I have got for the moment. I appreciate it.

At this time we have no other questions standing by on our question roster. I would like to -- forgive me, we do have a question from [Michael Schechter] with [Mentor].

The interest expense, are there any fees or non-recurring items in there, or is it all just rate increase?

For the most part, it is the rate increase. There is a little bit of fee in there, but not much.

And the reduction in working capital, if I look at your peak working capital, it looks like you're trying to bring it down $20 million or so? Is that the number?

Yes, that is pretty close to the target. Yes.

Okay, appreciate it.

And we have no other questions standing by. I would like to turn the program back to our speakers for any additional or closing comments.

Well, thanks, again, for joining us. If you have further questions, please give either David or Cynthia a call. Thank you very much.

Thank you, everyone, for your participation in today's conference, and you may disconnect at this time.