Johnson Outdoors Inc (JOUT) 2010 Q2 法說會逐字稿

Hello, everyone, and welcome to the Johnson Outdoors quarter two 2010 earnings conference call. Today's call will be led by Helen Johnson-Leipold, Johnson Outdoors Chairman and Executive -- 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 with these terms, simply drop off the line.

I would now like to turn the call over to Cynthia Georgeson, Vice President, Worldwide Communications for Johnson Outdoors. Please go ahead, Ms. Georgeson.

Thank you, Operator. Good morning, everyone, and welcome to our discussion of Johnson Outdoors' results for the 2010 fiscal second quarter. If you need a copy of the news release we issued this morning, it's 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 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 additional questions after the call, please contact either Dave Johnson or me at (262) 631-6600. It's now my pleasure to turn the call over to Helen Johnson-Leipold.

Thank you, Cynthia. Good morning. Thank you for joining us. I hope you've had an opportunity to review our second quarter earnings announcement. I'll start off with comments on our results on the marketplace and give you our perspective for the remainder of the year. Dave will cover some key financials, then we'll take your questions.

We had a very good quarter. Sales were up 6%. Operating profit grew 40%, and net income increased to $6.2 million or $0.64 per diluted share. Year-to-date results are following the same trend. And at the end of the first six months of the year, earnings were $0.20 per diluted share, a dramatic swing versus the prior year loss of $0.49.

There were three key factors driving the results. First, improved economic conditions, particularly in Europe and North America are having a positive impact on most of our markets. Although outdoor equipment sales were down throughout the recession, consumers were still enjoying outdoor recreational activities, which is one of the reasons we expected the outdoor recreational market would begin to recover this year. Importantly, it appears customers have worked through old inventory. So what we're seeing are orders for new stock to meet the expected seasonal demand. That brings me to the second factor behind our second quarter results. We knew we would be facing a tough competitive environment, so we focused on growing share with new products that delivered enhanced price value, particularly in the mid price points, and creating sales and marketing programs to drive customers into stores. Our strategy was to leverage and maximize the strength of our brand equities to grow share in the marketplace.

Here is what's happening. This year, although retail marine boat markets continue be soft, fishermen are upgrading electronics and accessories on their boats. Minn Kota and Cannon have strengthened their number one category positions, and Humminbird is in a neck-and-neck race to become the number one fish finder brand in the world. Our patented Side Imaging Sonar has been game-changing technology that brought energy, growth and momentum to the Humminbird brand among recreational and professional anglers alike. Kevin VanDam, one of our biggest names in fishing, made history earlier this year by winning the Bass Master Classic for the third time in a boat outfitted with Side Imaging which he credited as a big reason for his victory. Right now, orders across all our marine electronic brands remain very strong, and our challenge will be keeping up with demand.

Moving on to camping, Eureka! consumer year-to-date sales are up 25%. And the retail data shows we're definitely increasing share in the camping segment. Tent sales are up, driven in part by our redesigned mid-priced family tent, the Timberline, which is doing very well. Eureka! camping gear, furniture and sleeping bags are also up year over year. Product availability has been an issue for this segment. But due to improved forecasting and inventory controls, we have succeeded in meeting increased consumer demand. The pace of growth in the consumer segment is likely to slow through the remainder of the year. However, Eureka! is on track to have one of its best years ever.

Moving on to diving, while the diving market is flat, our brands are reporting double-digit growth. According to the most recent retail data in North America, Scubapro has the number one selling regulator, the number one selling dive computer, the number one selling buoyancy compensator and the number one selling fin. Orders throughout Europe and key Asian markets are equally strong. At this time, we believe significant share gains have been achieved on a global basis and that Scubapro is the number one dive brand in the world. We recently launched Subgear, a complementary mid-priced line of scuba equipment to offer a full range of Scubapro quality at an appealing price point for our dealers and new divers. As a result, we expect to realize both increment tall sales and for our overall share of the dive market to increase even more.

Finally, watercraft, last March, we announced plans to dramatically improve the profitability of the business. Those plans have moved forward on time, on budget, and are almost completed. We restructured consolidated operations and aligned R&D sales and marketing efforts behind a more focused yet more profitable line of products. Consistent with our improved on-demand manufacturing flexibility, sales programs were designed to encourage orders closer to the season to help customers keep their inventories at a minimum. But the paddling market is rebounding, and we've given up ground to the competition whose programs incentivize preseason orders, particularly in the specialty channel. We've moved quickly to better align our programs with the pace of recovery in paddle sports markets. And April orders are strong and on track with expectations. I am also meeting and speaking with the specialty dealers to ensure we do a better job of meeting their needs and expectations going forward.

At this time, we continue to believe watercraft will be profitable this year, which leads me to the third and final factor behind our improved results, and that is aggressive cost reduction strategies and efficiency improvements to ensure we drop more to the bottom line and position our businesses for sustained profitability going forward. Restructuring in watercraft and diving alone are expected to deliver more than $6 million in annual cost savings going forward. Streamlining and restructuring efforts aligned our cost structure with the new normal of the marketplace and are having a positive impact on profitability, short and long term.

Corporate staffing is down 5% versus a year ago, and total company headcount is down 6% versus last year. As a result, productivity measures continue to improve. At the end of the second quarter, year-over-year sales per employee increased 11%. We have reduced SKUs, significantly reduced inventory, leveraged synergies across our businesses, optimized our assets and dramatically improved operating efficiency. At the same time, we've kept spending in check while also investing wisely in our brands and meaningful innovations. New products accounted for more than a third of second quarter net sales at a better-than-average margin.

And finally, balance sheet management, which encompasses every aspect of our work around inventory and cash management, has been outstanding. Dave will talk to you more about this in his remarks. We feel good about where we are and will remain vigilant in our efforts to further grow share, reduce costs and enhance shareholder value. I am confident we are taking the right steps to ensure we remain on track to deliver our three-year plan financial target.

Now I'd like to hand things over to Dave.

Thank you, Helen. Helen gave you a good picture of what's happening in our markets and our businesses, so I'll just take a couple of minutes to give you a little more perspective on our key year-to-date financials. Debt levels during the period grew consistent with our working capital needs. However, borrowing costs were down significantly as a result of the debt agreement put in place last September, which better reflects the seasonality of our business. Also, short-term measures were taken last year to preserve cash such as delaying payables for a brief period, which we have not done this year. As a result, we believe this period's debt levels have normalized. As noted in the press release, inventory levels continue to decline, and we remain disciplined and diligent in our efforts to keep inventories at manageable levels that enable us to meet demand for the remainder of the year, minimize end of season excess and increase cash flow.

At least 60% of last year's $20 million of cast reductions are carrying forward this year. More than $4 million of additional savings are expected through restructuring and consolidation in our watercraft business. Global ERP system implementation in diving has begun, and more long-term savings are expected to be realized once that is completed. Gross margin improvement of 2.2 points year over year reflects the success of our cost reduction efforts as well as the significant improvement in operating efficiency across all of our businesses.

Operating expenses grew in large part to variable costs associated with the growth in sales. In addition, last year, we did not accrue for bonuses, and this year we are, although accruals are below historical levels. In closing, I want to second what Helen said. We feel good about the work we've done to reduce costs for the long term and position Johnson Outdoors for sustained profitability going forward.

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

(Operator Instructions). Our first question comes from Scott Hamann from KeyBanc Capital.

Hey, good morning, guys. How's it going?

Good morning.

Good morning.

Just a couple questions. Starting off with gross margin, you talked about some of the improvement being efficiencies that you kind of put in place last year. Was there any product mix benefit? Or what's your expectation for the year along some of the big drivers with gross margin on a year-over-year basis?

Yes, Scott, there is definitely product mix going on. We had to do some discounting last year. And we're not seeing that as much this year, discounting product in lower inventory. So I would say that there's a fair amount of the point differential, let's say 40% to 50% due to the savings and probably 40% or so due to rate. And the rest would just be due to the volume impact, just driving more through the factories.

And is it fair to say that that's kind of a similar mix to what you expect to happen for the last two quarters of the year?

That's hard to say. It's really hard to say. Certainly, we don't expect the discounting to come back into play. And certainly, if we hit our expectations, we'll be able to still drive volume through the factories and drive some operating efficiency there. So I'd hesitate to say what's exactly going to happen over the next couple of quarters.

Okay. And then just on the OpEx, it looks like it's running pretty much flat as a percent of sales year over year. Is it fair to assume that that's a pretty good run rate for the balance of the year?

I think, yes, we wouldn't expect anything different to happen over the next couple of quarters versus what we've seen in the first six months.

Okay. And, Dave, on the tax rate, it looked pretty low for the quarter. What was driving that? And what should we think about for the rest of the year as being a good effective tax rate?

Yes. On the quarterly basis, it really depends on where the profit is generated. And we've got a valuation allowance on our federal asset in the US, so we show effective tax rates on state and also non-US entities. I think we're going to have a -- probably fairly below normal effective tax rate for the year, something probably in the mid 20s as opposed to mid 30s or so.

Okay. And on the tent, the military tent sale for the quarter, could you quantify what it was and what you expect the timing to be for the other quarters of the year to get to that $1.5 million to $20 million?

Yes. Military for the quarter was just -- $6.3 million for the quarter. And I can't necessarily pace it quarter by quarter. But like we've said, between $15 million and $20 million, the target for the end of the year.

Okay, great. Thanks a lot.

Our next question comes from Michael Chester from Mentor.

Good morning.

Good morning.

Good morning.

Dave, what was the military last quarter -- last year quarter?

Last year's quarter was about $3 million.

Okay. And, Helen, can you -- you had talked about going sort of upmarket with marine electronics to compete on larger boats. I was wondering where that stood and what your thoughts were about all the noise around the Raymarine and Garmin trying to buy them and somebody else trying to buy them as well.

Well, in our mind, that's still an opportunity for us. We are launching boats in the US and Europe in this calendar year. So it's hard to tell at this point, but we still feel good about the opportunity. We have product that we feel has product plus. You know, the big competitors are struggling, and I think there's room for someone new to come in, especially if we have good price value in the product. And we have got -- we've got a good reputation for marine electronics, so we think, in general, that it should be a positive start for us.

What do you make of what's happening with Raymarine and Garmin and what they're trying to achieve there?

Well, in general, that the boat market -- the big boat market is soft. And so if you are a significant player in that arena currently, it's going to be a challenge. But I think the weakness of some of those big players opens up a great opportunity for a brand with innovation and a reputation to take share.

Yesterday, listening to West Marine and Brunswick and before that, some of the other dealers, it seems like the recovery is coming out of the Northeast and the Great Lakes as opposed to Florida and the coastal California area. Are you seeing that as well --

Yes, we are --

-- from a marine perspective?

We have the same perspective on that.

Do you think we're going to get the reorder volume that we haven't seen in two or three years, that pull through the -- makes some --

Well --

-- (inaudible) years?

Well, we can say that we feel pretty comfortable that our dealers have worked through existing inventory and that we are seeing repeat orders. So we feel there will be slow recovery. But we don't think, at this point, that things will get back to normal. We kind of feel there is going to be a new normal, and there will be a new environment going forward. So, again, we do see that recovery is happening, but it's going to be slow. And we don't think it's going to get back to the way it used to be.

Congratulations on a very good quarter.

Thanks.

Our next question comes from Justin Orlando from Dolphin Management.

Hi there. Dave, can you hear me okay?

Yes, Justin. Thanks.

Really quickly, would you mind just giving me the -- some of the current liabilities numbers that I'm going to see in the queue later; accrued wages and accounts payable?

Yes, Justin, just a second here. So accrued salaries wages, about $9.7 million. I don't know if you can get this granular or not, but accrued discount, $6.8 million. Other accrued liabilities $14.9 million.

Yes, what's in that?

I'd have to go back and make sure I know what the --

That's all right. We'll talk about it later.

-- big buckets are, yes.

Yes, that's fine. Not a big deal. And then what was payables?

Payables, $26.9 million.

That's a big different, $26.9 million. Okay. I was just wondering where my differences were to yours. And then you talked about the OpEx. Sorry for the frog in my throat. On the OpEx, you said that the -- kind of running a $3 million difference for the six months, but it's really mostly in the quarter here, I think. So that OpEx is mostly bonus, you said?

Yes, there's -- we're accruing for bonuses. That's probably, for a year-to-date number, a couple million dollars. R&D spending is up. It's like $500,000 or $600,000. Volume is a big chunk of that too. Obviously, the variable costs with volume is a big chunk of that too.

Yes.

And then it's offset with savings.

Sorry. What hits the -- on the variable side, is it just sales commissions and things, or is it --

Commissions and freight are the big pieces that vary with sales.

Okay. That's pretty much what I have. I echo the other callers. This is a very good quarter. I think things are turning around for you guys. Maybe one last thing, Helen, could you remind the callers what the three-year target plans were so --

Yes. We had average annual growth rate of 5% annually, and we had a target of a 6% OP number.

Really appreciate it. Thanks very much.

Thanks.

(Operator Instructions). Our next question comes from Scott Hamann from KeyBanc Capital.

Hi, Dave, just on the operating expenses, can you give us the quick breakdown by line item?

Sure. For the quarter, marketing and selling is $24.9 million; admin, finance, information systems, $9.2 million; research and development, $3.2 million.

Okay. And then in the release, it says that in the watercraft business, sales were down because of, it looks like, a timing shift on when retailers are going to be ordering. Should we expect that to pick up here mostly next quarter?

I think we will meet expectations for the season. I think whether or not we make up what we missed earlier in the season, that's questionable. But we feel it will be a good solid season for watercraft.

We have seen orders pick up here in April.

Okay. And then, Helen, just maybe a big picture. Acquisitions have been a big part of what you guys have done in the past. And I can appreciate the hunker-down mode and kind of "get the house in order" the last couple of years. But what's it kind of look like out there in your pipeline now, and how are you thinking about that as a way to grow the business going forward?

I think acquisitions will always be a key aspect or key strategy for growth. For us, we are -- we continue to review options that exist out there. And I think that the big initiative at this point is really just to develop the relationships with key companies out there and be ready when the right opportunity comes along. And we certainly have to get our financial situation in good condition before we go forward with something. But we are very actively evaluating, and continue to consider it a long-term strategy for us.

Okay. Thanks a lot.

(Operator Instructions). I am not showing any questions at this time.

Thanks again for joining us. Once again, if you have any questions, please give us a call.

Ladies and gentlemen, this does conclude today's program. You may now disconnect, and have a wonderful day.