Johnson Outdoors Inc (JOUT) 2009 Q3 法說會逐字稿

Hello, everyone, and welcome to the Johnson Outdoors third-quarter 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 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 from Johnson Outdoors. Please go ahead, Miss Georgeson.

Thank you, operator, and good morning, everyone, and thanks for joining us for our discussion of Johnson Outdoors' results for the third quarter of fiscal year 2009. If you need a copy of the news release 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 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, please give either Dave for me a call at 262-631-6600. It's now my pleasure to turn the call over to Helen Johnson-Leipold. Helen.

Good morning, thank you for joining us. I hope you've had an opportunity to review our third-quarter earnings announcement. I'll start off with comments on the marketplace and our results and discuss the actions we are taking to further improve performance going forward, Dave will cover some key financials, then we'll take your questions.

The third quarter is the primary retail selling period for our warm weather seasonal products where we gauge consumer response through customer reorders. Like every industry the outdoor recreational marketplace is still feeling the effects of the recession. Consumer spending is down and as a result customers are keeping inventory levels at a minimum.

There is a greater movement in entry level to midprice segments with premium priced products feeling the most impact from the stalled economy. Clearly the outdoor rec consumer is more discerning than ever, carefully looking for the best value before making a purchase.

This year our goal was to maintain our market presence with sales programs that gave our products early and prominent in store visibility along with highly targeted cost effective marketing programs to draw consumers into the store and incentivize purchase. We have a great portfolio of market leading consumer preferred brands and believe we have been successful in holding or gaining shares in virtually every market this year.

So the sales decline this quarter and year to date demonstrates just how tough the outdoor rec marketplace is and the decline in corresponding operating profit is due entirely to lower sales. The significant progress we've made in reducing costs and improving efficiency helped offset a great deal of the topline erosion caused by the economy, but not all.

Despite the challenges net income and earnings grew about 15% to $9 million or earnings per diluted share of $0.98 in the quarter. Dave will walk you through the tax and interest expense items that impacted earnings. We have also strengthened the balance sheet and improved our cash position. We're pleased with the progress we've made and remain vigilant in our efforts to improve performance and enhance shareholder value.

We expected that 2009 would be as challenging as last year and remain confident that we are doing the right things to position Johnson Outdoors for a stronger better future. No one has a crystal ball and no one knows exactly when the economy and marketplace will rebound. That's why our efforts have both focused on transforming our businesses for sustained profitable growth in both up and down economies.

We are being disciplined and highly strategic in everything we do. For example, cost savings initiatives were specifically designed to provide maximum near-term and long-term benefit. As a result we expect 60% of these savings to carry forward in future years. Also, the decline in inventory is due largely to SKU analysis and rationalization plans put in place last year which targeted a 20% reduction in SKUs this year. All businesses have exceeded that target and processes are a place to keep SKU levels in check going forward.

Likewise we carefully considered the short-term and future benefit in our streamlining and restructuring plan. We've reduced our current and ongoing cost structure by focusing on our core strengths and eliminating positions in headcount accordingly. The greatest benefit will be realized by our longer-term restructuring efforts most notably in Watercraft.

This is a business with a strong foundation on which to build for the future -- broad distribution, great brands and solid innovation -- but the infrastructure was stifling profitability. In March we combined leadership of Watercraft and Marine Electronics under a single group vice president to leverage the synergies and the strengths of both businesses and began work against a plan to improve the performance and cash generating capacity of Watercraft through simplification and consolidation.

First, simplification -- we are focusing on Watercraft product lines on the most popular and most profitable models and SKUs. This enables us to excel at what we do best, making and marketing the best boats, paddles and PFDs. We've also made changes in the organization which clarify roles and responsibilities, remove layers of management and streamline processes.

Second, consolidation -- six years ago Watercraft had 16 different locations across the US which we rationalized into two production and distribution centers on either coast. However, dual site manufacturing continued to drive cost and complexity went further, focus and simplicity were needed. Last month we announced plans to make Old Town, Maine the single site hub for paddle sport production, distribution and all business and customer support services.

The benefits of these changes go beyond the bottom line. For instance, by combining Watercraft with Marine Electronics sales we now have a larger sales team that can expand the reach of all these brands beyond their traditional channel. Also in the past, our Watercraft customers were dealing with different people for a different brand to place orders. Schedule shipments and manage invoices. Our customers now have single points of contact on all brands which will make it much easier and simpler for them to do business with us in the future.

Importantly the changes better ensure we have the resources needed to invest in exciting new projects products and targeted sales and marketing programs that we believe will grow sales for us and our customers. Costs associated with the changes in Watercraft are expected to impact earnings during the fourth quarter, but will generate annual cost savings in excess of $4 million going forward.

In the future Watercraft will be a more compact, more competitive, more profitable and cash generating business. Transition is underway and should be completed well ahead of the first shipments for the 2010 season. A highly capable team is leading this initiative with a great deal of experience in business integration efforts. We are confident they will deliver on time and on budget.

Work to improve our diving business also continues, we believe there are further opportunities to refine the business model of this unit to be more flexible, more adaptable to the economic landscape. Plans for this business should be final by the end of fall.

The actions we are taking reflect a fundamental shift in the way we look at the future and the way we will do business going forward. We are in a period of transformation that will ensure we're a stronger, more competitive company, better positioned for sustained profitable growth for the long term. We feel good about where we are and continue to be diligent in our efforts to further reduce cost, improve efficiency and enhance shareholder value. Now I'd like to hand things over to Dave.

Thank you, Helen. As noted in our press release, we've made great progress against the cost reduction targets we announced last December. Particularly working capital, which is down 27% year-over-year.

Inventory management contributed significantly to the decline and continues to be a key driver behind balance sheet improvements. This year we sat and monitored progress against aggressive inventory reduction goals and for strategic disciplined forecasting and align production accordingly. And minimized older product in our warehouses before the primary retail season for our products got underway.

As a result inventory levels are down 36% which compares very favorably to a recent outdoor industry report which showed inventory levels had declined about 8% across the industry year to date.

Account receivables are also done consistent with lower sales. This is a tough period for retailers and we're working closely with our customers to keep credit at manageable levels. There have been a few bankruptcies in the outdoor retail sector, but none have had any material impact on our business. The depth and breadth of our distribution channels gives us added protection in times like these.

Helen mentioned that we expect about 60% of the cost savings realized this year to carry forward. Which primarily reflects the savings realized from restructuring across the business units and at the corporate level, as well as some ongoing material and purchasing related savings.

Moving on to net income, as you saw in the press release, two separate tax items had a positive impact during the quarter and year to date. First, an Alabama state income tax credit; and second, a deferred tax valuation allowance which benefited net income by $1.4 million and $2.2 million respectively.

For perspective, these helped offset the non-cash accounting charges related to the interest rate swap set forth in our loan agreement during the quarter. However, on a year to date basis the non-cash accounting charges on the interest rate swap and the increase in our bank term debt interest rate partially offset the favorable impact from tax.

While borrowing expense has grown we have reduced debt and improved our cash position and remain in compliance with the covenant set forth in our existing debt agreement. We're also working with lenders on an improved debt structure that better reflects our seasonal needs and stronger balance sheet.

In summary, strict inventory management and production planning processes along with disciplined cash management and spending controls throughout the year have helped drive cost and inefficiency out of our operations, improved our profitability overall and strengthened our balance sheet. I'll now turn the call over to the operator for Q&A. Operator?

(Operator Instructions). Scott Hamann, KeyBanc Capital Markets.

Good morning. I had a broad question about the retailer landscape right now. Just in terms of what you're seeing with placement of specific products at retail, your expectations for the general appetite to take inventory. I mean is this going to be kind of an ongoing thing that you see going into next year? And then I think, Dave, you kind of touched on part of it, but we've heard about some credit issues at some of the smaller outdoor retailers and their ability to take inventory. I'm just kind of curious as to what you're seeing and what your expectations are for going forward?

I'll take the first part of that question. I think the whole phenomenon with retailers reducing inventory, I think that's here for the long term. I think the whole challenge with the credit situation is part of that. What we're doing about that is trying to just keep as close a contact with our retailers through our sales force and through the mechanisms that we have so that we can react as quickly as possible. But we really think that reduced inventory across the whole supply chain is here to stay and I'll let Dave comment on the credit situation.

Yes, I just got it on the credit side. As Helen said, we're staying as close as possible to our customers. Probably more discussions than ever in terms of how they're doing and how much business we'll do with them. I've been pleased so far that we haven't had any huge issues. But that obviously doesn't mean going forward we won't have some more, but we're staying as close as possible to it.

Okay, great. And the $4 million Manufacturing, the consolidation that you're doing and the $4 million benefit, is that incremental to the $20 million cost saves that you already announced?

For the most part, yes. There's a little bit in that $20 million, but on a go-forward basis we'll see that starting next year.

Okay, and that's mostly a gross margin impact, right?

It's both, Scots. I don't have the breakdown with me, but there's overhead reduction as well as factory consolidation in there.

Okay. And then just on the Watercraft business, do you'd expect it to be profitable by the end of this year or are you shooting for fiscal year 2010 profitability and ultimately what level do you think based on the things that you've done can operating margins get to in that segment?

Well, we do -- we are planning and hoping that Watercraft will be profitable next year. And so that's a huge improvement from where we've been in the past. I think in general the margins in that business are tougher than others, but at this point I'm not going to give a specific number but we are very optimistic about where we can get to.

Okay, thank you.

(Operator Instructions). Justin Orlando, Dolphin Management.

Helen, Dave, good morning. I just have a couple of questions. Was there any effect or what was the effect of cash in the quarter from the two $1.4 million and the $2.2 million? So the working capital charge -- the Watercraft charge and then the income tax credit and the deferred tax? Was there any cash effect there?

On the tax side, no. That's all non-cash. On the restructuring, a minimal amount of that restructuring was cash, probably a couple hundred thousand.

Will you feel some in the fourth quarter though, along with the other (multiple speakers) rest of the charge?

Yes -- with the rest of the charge, yes. Probably in the fourth quarter there's -- of the charges we expect there's probably $1 million of non-cash in there and the rest would be cash associated with severance and movement and that kind of thing.

Okay, so the $4 million is incremental. So it's fair to say that round about $24 million versus 2008 is your annualized cost reduction target?

Well, for next year we've said 60% of our cost reductions would be carrying forward. So you can take the 60% of our $20 million that we had this year and add the Watercraft on top of that.

Okay, so you're planning to keep all of the $4 million and then -- and so it's 60% of the $20 million. So what's the -- what's in the $8 million that's not going to stay gone?

There's a variety of things that we're not counting on being sustainable. There's trade shows and travel, marketing expense has been cut, bonuses, hopefully if we do well next year, will come back. So there are some things in there that we think on an ongoing basis will come back.

Sure. Okay, well that makes a lot of sense. What were the cash taxes in the quarter?

Cash taxes in the quarter, I don't have that handy with me. I think it's fairly minimal.

I'll follow up with you on it anyway, it's no big deal.

Okay.

And then where are you on your LTM EBITDA using the credit agreement formula?

Yes, we should have about -- using the credit agreement about $15 million of EBITDA reporting to the bank group, which should give us actually a little bit more than $15 million, a couple million dollars of cushion in EBITDA.

Okay, that's great. And you mentioned that you are working with banks. This is my last question, sorry for rapid fire. But you're working with the banks on a better capital structure. How is it that progressing and do you have a timeline for when you think that's going to successfully conclude?

I don't have a timeline; I can tell you that we're active right now. So I'm hopeful that we'll have some news soon on this and as soon as we do we'll let you know.

Okay, thanks very much.

(Operator Instructions). Scott Hamann, KeyBanc Capital Markets.

I've kind of always thought about you guys as a premium product company. And I'm just curious if your R&D focus might be shifting given the uncertainty in the environment and if you are thinking a little bit more about entry level or those mid-level price points for products next year and if that might be a pressure on your gross margins.

Well, we have not just been premium, we've also been mid price point, but our whole focus has been the best price value at whatever price point we're at. But we do believe that the consumer is becoming more discerning and so we're putting a lot of emphasis on cost of sales and also meaningful innovation that will really help us with improving our price value situation.

But across the board if you look at our different businesses, we don't just offer premium but we also provide the mid-price point as well and some of them we have a pretty wide range. So your point is well taken and we certainly -- looking at cost of sales and improving our price value.

Okay, and then, Dave, just on the operating expenses, do you happen to have a breakout by line item?

I do. So, for the quarter marketing and selling $23.3 million; admin, management, finance and IT $9.5 million; and R&D $2.7 million.

Okay, great. Thank you.

Thank you. And with no final questions we'd like to turn it back -- actually we'll go one more time. (Operator Instructions). With no further questions I'd like to turn the call back over to Miss Johnson-Leipold for any additional or closing comments.

Okay. Thanks, everyone, again for joining us. If you have any further questions please give either Dave or Cynthia a call. Thanks again.

That does conclude today's conference. Thank you for your participation.