Johnson Outdoors Inc (JOUT) 2011 Q2 法說會逐字稿

Hello, everyone, and welcome to the Johnson Outdoors second-quarter 2011 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 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 from 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 2011 fiscal second quarter. If you need a copy of the news release we issued this morning, it's available on our 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 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 SEC. If you have additional questions after the call, you can reach either Dave Johnson or me at 262-631-6600.

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

Good morning. I hope you've had an opportunity to review our second-quarter earnings announcement. I'll start off with comments on our results in the marketplace and to give our perspective for the remainder of the year, and Dave will cover some key financials.

Our fiscal 2011 second quarter marks the midway point of our 3-year plan to deliver enhanced profitability. We've got a great quarter -- sales were up 14%, operating profit increased 42%, and net income grew 37% in the quarter.

On a year-to-date basis, sales are up 13%, operating profit increased 124%, and net income more than tripled compared with the prior year. And on a trailing 12-month basis, revenues have surpassed the $400 million mark. While ongoing cost structure reductions and improved efficiencies across all operations are helping to improve our profitability profile, it's the continued recovery of the outdoor recreational market along with our ability to grow share and outperform both markets and competition that are the key drivers to achieving our 3-year plan goal.

Clearly, outdoor recreational products markets are recovering. Recent data from the Outdoor Industry Association showed sales grew 4.5% in March to significantly outpace overall retail market growth.

As you can see from our results, thus far the pace of recovery differs across outdoor markets. However, retail inventory tracking coming from our exclusive TPI partnership with customers representing about 40% of the total sales shows our brand portfolio's leadership positions are expanding.

Marine Electronics is experiencing the sharpest upturn this year due to pent-up demand in a market place catering to avid anglers with a passion for the sport. Recall that the marine marketplace was negatively impacted by the staggering drop in under 25-foot boat sales a couple of years ago. There are positive signs that new fishing boats sales are on the upswing, and we've had a 67% increase in year-to-date sales to boat manufacturers in the OEM channels.

The increase in OEM sales is mirrored by strong double-digit revenue growth for Minn Kota and Humminbird in all channels, in all geographies. As we enter our critical warm weather retail selling period this spring, major accounts are bullish about the season and based on TPI data, Marine Electronics retail inventory is up 18%. Innovative new products like the Minn Kota Talon, our new award-winning shallow water anchor and Humminbird down imaging sonar technology are bringing excitement and growth to their categories. And this year, Minn Kota i-Pilot revenues are on track to outpace 2010 year 1 sales of this revolutionary automatic wireless steering and positioning technology.

The big question is how long can this last. It's difficult to predict. However, the demand we're seeing across the Marine Electronics market is unusually high. And we believe it's likely to slow a bit in the next 6 months. Importantly, we've taken great care to meet customers' needs, without overloading our distribution channels and to keep our own inventory at appropriate levels to fulfill replenishment orders for the remainder of the season.

Moving on to Watercraft, where the seasonally sensitive paddle sport market is moving forward at a much slower pace. We've done a lot operationally to mitigate the impact of weather and resulting revenue ebb and flow on profitability. And we're working hard to maximize the benefit of these efforts by building sustainable top-line momentum which will take time.

Last quarter, we told you about Watercraft's new go-to-market strategy that customizes brand and profit and product offering by specific channels, and how we have aligned programs in terms more closely with the paddle sport's retail selling period during our fiscal third quarter.

We're coming off a long hard winter and spring has yet to bloom in many parts of the country. National and regional accounts with a broader geographic footprint are preparing for the onset of warm weather. And TPI data shows retail inventory of our brands in these larger customers is up 10% year over year, which helped drive the 18% quarterly revenue growth for the unit.

We're working hard to improve performance in the independent specialty channels, and we'll have a better read on progress with these customers by mid-July. Regardless of the level of top-line growth this year, we expect Watercraft to be profitable again.

Now let's talk about diving, our most global business where we compete with SCUBAPRO, the world's number 1 dive equipment brand; and SUBGEAR, a complimentary mid-priced line of dive gear.

Strife in the Middle East and tragic natural disasters in Japan have put the brakes on continued recovery of the worldwide dive market. Most divers travel to enjoy the sport, and popular Red Sea dive locations for European tourists have been negatively affected by political upheaval in the region. Although export sales to the Middle East are off minimally thus far, the uncertain political environment makes for an uncertain economic environment with no quick end in sight.

Japan is a major dive market and the devastating earthquake, tsunami, and radiation threat had a ripple effect throughout the Asia-Pacific region. Our Japan dive business accounts for less than 2% of total Company sales, but the value of our employees is priceless. That's why our immediate concern has been their well-being and that of their families. There are resilient and loyal groups who resumed operations within days of the initial tragedy. Although the disasters had virtually no impact on second-quarter results, Japanese dealers are struggling to survive the seriously depressed local economy, and popular dive vacation spots in the South Pacific are suffering from the resulting soft tourist trade.

At this time, we are evaluating our options to minimize the impact of these global events on diving profitability. We believe Mid-East and Japan market will rebound. However, we expect a challenging business environment in both regions for the foreseeable future.

There is some good news here in the US where dive market recovery continues. Strong new products and programs are enabling us to grow faster than the market overall, with revenues up 12% year to date, and to gain share in core dive equipment categories.

Finally, Outdoor Equipment, where we compete in 3 distinctly different markets -- military, commercial tents, and consumer camping. Commercial tent markets are opening up again as rental dealers and event production companies are starting to replenish outdated big tent inventories.

On a year-to-date basis, Eureka! has had double-digit growth in commercial tents. And we have had a strong order position heading into the second half of the year.

The consumer camping market bucked the downward momentum in other outdoor rec segments during the recession, and is coming off 2 strong years of growth, fueled by the emerging vacation trend and tent sales to Haiti. Market stabilization rather than market recovery is the expectation here, and that's what we're seeing.

Consumer camping revenue is about flat with prior year, with TPI data showing retail inventory is up 16% year over year, driven in part by the popularity of new Eureka! camping accessories like chairs and tables.

In 2010, Eureka! fought all year to stay up in step with demand. This year, retailers are filling in early to make up for out of stock so no sales are missed when the season hits its stride. There were some excess tent inventory carried over from last year and the uptick in point-of-purchase sales could indicate a steady flow to and off the shelf.

The strength of commercial and consumer camping is unfortunately masked by the drop in military sales, which are off more than 20% year over year due to continued budget gridlock in Washington, which is delaying orders. Given where we are in the year, any revolution in DC is unlikely to have a significant impact on military sales this fiscal. At this time, we are expecting 2011 military sales to land at the low end of our projected sustainable level of $15 million to $20 million.

In summary, transformational efforts over the past 2 years have resulted in a more focused and more flexible and more disciplined business model and a leaner sustainable cost structure, enabling us to significantly enhance our profitability profile.

At this time, we remain on track to achieve 3-year financial targets of cumulative annual growth in sales of 5% and a 6% operating margin by the end of fiscal 2012.

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 the key year-to-date financials.

I'll start with gross margins. We've been able to improve gross margin this year despite pressures from rising commodity costs. Cost savings and overhead leverage and volume increase has helped offset an upward trend in oil, resin, copper in Asia-sourced goods prices. Going forward, we expect these cost pressures to intensify. We're working closely with vendors and customers to do what's right to minimize the impact on margins for everyone, and share the cost increases appropriately throughout the supply chain.

Now let's talk about operating expense. Variable operating expenses have grown in line with higher revenues. However, operating expenses have declined in the percentage of net sales from 36.7% in the first 6 months of fiscal 2010 to 35.4% in the first 6 month of 2011. We've maintained our fixed expense structure while sales have increased, and we will continue to be disciplined in this area. Our goal is to bring operating expense to about 34% of net sales over the next year. We're making solid progress against that target by higher spending in R&D and higher accruals for discretionary comp programs this year.

Higher volume is also driving the increase in working capital. While we will continue to closely monitor inventory against orders and retail activity, we're also watching cash-to-cash days so we can adjust quickly to any fluctuations in the marketplace and keep working capital in check. Year to date, working capital days had declined about 5.5 days, compared to the prior year. So a positive trend line particularly before the primary retail season kicks into full gear.

In summary, the balance sheet is strong and healthy. We're generating cash, paying down debt, and benefiting from a reduction in borrowing costs of 142 basis points year to date. We are off to a great start this year and feel good about our position heading into the third quarter where we'll see consumers' response [itself.]

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

(Operator Instructions). Michael Schechter, Mentor Partners.

Thank you. Good morning, Helen, congratulations.

Good morning. Thank you.

Just through the Outdoor segment since it seems to be split, pro forma, if you knock military out, were you essentially flat or slightly up for the year -- for the quarter on a revenue basis?

Are you talking about in a particular segment, in Outdoor?

Yes. Just in the Outdoor segment.

Yes. For the quarter we were up just a bit, excluding military.

Okay. And how -- the acquisition of the large boat technology that you did a year or so ago, you were going to rollout some new products shortly, how is that going or is it going?

We did launch -- this season, we were a little bit late, but we've got our initial product offering out there. And it's not the full line; we will get the full line out there in the next season. But I would say the reaction is pretty good. That fact that we got out late, our volume isn't where we wanted it to be, but I think with the customers that saw the product and got a chance to interact with it, it was positive. So that piece was good. It's slower than we thought, but I think when we get the full line out there, we feel it will have a much bigger impact.

Is there a lot of R&D expense running through the income statement to support this at this point?

Well, we do have R&D. It's a combination of R&D that works -- also supports the Humminbird line and we're eventually going to end up that the electronics are basically the same platform, which is a very positive thing. So it is kind of split there, but there is initial R&D that we did that, yes, will hit this year separately from Humminbird.

Got you. Well, it looks like a very good quarter. So thank you and congratulations.

Thank you.

(Operator Instructions). Lisa Brozewicz, KeyBanc Capital Markets.

Good morning, guys. Congratulations on a good quarter. I was wondering if you could talk a little bit about military orders in your Outdoor business for the back half of the year so we can think about that for the next 2 quarters.

Yes, well, I think what our projections are that we're estimating the low end of our range, which is around $15 million. And we kind of hover around $15 million to $20 million. So this year, it's going to be a little slower because of the hang-up of the budgets.

Okay. Great. And then, with rising input costs, are you guys able to increase prices? And if so, to what magnitude is that offsetting rising input costs?

It's a great question. We've had lots of discussions about pricing and it's a bit challenging because we're -- mid-season it is hard to adjust. We have done it, though, in certain areas. And we'll continue to look at that as we head into next season. And it also depends on the business unit. The electronics market is very competitive and usually prices don't go up in electronics, they tend to go down. But we have adjusted mid-season in a couple of areas, and we'll continue to look at that for next year.

Okay. Great. Thank you.

Thank you. And I'm showing no further questions at this time. I like to turn the call back over to Helen Johnson-Leipold.

Okay. Well, thanks again for joining us. And if you have further questions, please give either Dave or Cynthia a call. Thank you.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.