Johnson Outdoors Inc (JOUT) 2011 Q4 法說會逐字稿

Hello, everyone. Welcome to the Johnson Outdoors fourth-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.

Thank you, Operator. Good afternoon, everyone. Thank you for joining us for our discussion of Johnson Outdoors' fourth quarter and full-year 2011 fiscal year. If you need a copy of the news release issued this morning, it's available 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 today's news release and our filings with the SEC. If you have additional questions after the call, please give either Dave or me a call at 262-631-6600.

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

Good afternoon. I hope you've had an opportunity to review our full-year and fourth-quarter earnings announcement. I'll start off with the comments on our results and the marketplace, and give you our perspective for the future. Dave will cover some key financials. Then we'll take your questions.

After an outstanding performance in the first six months of the year, economic weather and political factors stalled recovery in most outdoor rec markets during the second half of the year. Despite the challenges, the strength of our brands and the diversity of our portfolio enabled us to grow total Company revenue 7% year over year. Innovative new products accounted for 40% of sales this fiscal year, most notably in Marine Electronics where both Minn Kota and Humminbird surpassed $100 million in sales for the year. Diving experienced modest top-line growth this year, which in and of itself is remarkable, given the impact on key diving markets from the Japanese tsunami, flooding in the US, and economic turmoil in Europe. SubGear, our new mid-priced line of diving equipment, delivered double-digit growth without cannibalization of our flagship SCUBAPRO brand.

Reduced military spending in the US led to a significant decline in military tent orders, resulting in lower revenue in outdoor gear. And Watercraft, which has built momentum in the paddle specialty channel, could not overcome lost sales due to delayed and abbreviated season caused by a cool, rainy spring. Importantly, we adjusted quickly to marketplace fluctuations, maintained a strong balance sheet, and continued to grow profits faster than sales, a key objective of our three-year plan. As a result, year over year, operating profit increased 21% to $17.7 million.

Reported earnings were up significantly compared to prior year, due largely to the reversal of our tax asset valuation allowance. Nonetheless, excluding this non-cash item, adjusted net earnings still increased nearly 70%. Dave will cover the specifics in his remarks in a few minutes. We remain focused on implementation of our three-year plan where our continued success hinges on continued recovery of outdoor rec markets. Share gains are also key. And in innovation, quality, and service, must continue to deliver unbeatable price value for our customers and our consumers.

So, let me outline the priorities for each business in 2012, the final year of our current three-year plan. First, Marine Electronics will continue to be our growth engine, with the greatest breadth of distribution and deepest penetration of any market in which we compete. 40 years ago, when we acquired Minn Kota, fishing electronics was small. It was a niche market catering to a small group of avid fishermen. Today, we are a recognized leader in sophisticated and growing the fishing electronics market that caters to millions of fishing enthusiasts around the world.

As you know, advancements in electronic and digital technologies move at a rapid pace. And today's techno-savvy anglers look to us for the latest and greatest to give them an edge on the water. We have never let them down, and investment in future innovation is key to our continued success. Our new product pipeline is brimming with possibilities currently in development. Some of the most exciting come as a result of our acquisition of LakeMaster, a regional brand that is gold standard for electronic charts and maps for fishing and boating. This has opened the door to new growth opportunities for all of our Marine Electronics brands, just the way Humminbird did when we acquired that brand seven years ago.

Next, Diving, we have two key priorities -- share growth and improved margins. We leveraged the power of the SCUBAPRO brand to gain initial distribution of our SubGear. Now that SubGear is an established, proven mid-priced brand, we can focus on expanding its distribution beyond our elite SCUBAPRO dealer network. As we've told you before, the two brands are complementary, not competitive, which enables us to broaden penetration of SubGear into dive outlets which cater more to recreational drivers with entry-level and mid-priced gear selections. Importantly, the mid-priced dive equipment segment is the largest and the fastest growing dive gear segment, and SubGear enables us to grow share effectively and efficiently.

Supply chain optimization is a key focus in our efforts to improve margins. This year we began phase 1 implementation of a common ERP platform in Europe, which is expected to give us the added visibility needed to drive costs out of the system and enhance margins. We are moving ahead carefully with this to insure operations remain stable through what will be a year-long transition.

Finally, I want to talk about Outdoor Gear and Watercraft. Obviously, we were disappointed by the units' results, particularly in Watercraft, where our restructuring and strategic refocus returned that business to profitability last year. While fishing and diving markets have rebounded, camping and paddling are recovering at a much slower pace. However, we have identified a potentially significant and longer-term growth opportunity for these businesses through a concerted focus on the specialty class of trade. Let me explain.

Recent estimates show that paddle specialty and outdoor specialty channels represent about half of the $1.5 billion marketplace for our camping and paddling categories. And, even more importantly, these channels cater to an even higher percentage of our target consumers -- price value enthusiasts. Specialty channels are comprised of small business owners with unique needs such as sales programs in terms that reflect their size and scale, as well as marketing and product support that enables them to compete effectively with larger retailers. These small retailers are the heart and soul of the camping and paddling markets. And, today, there's a lot of room for us to grow in scope and presence in these outlets.

Our plan is to leverage the obvious channel synergies and concentrate the combined sales and marketing expertise and resources of both businesses on specialty retailers to maximize the growth opportunity for both businesses. We believe this is a strategy where the sum of the whole is greater than that of the individual parts. This is a long-term strategy. Growth will not happen overnight, rather over time.

To drive focus and dedicated resources, Watercraft now reports into Outdoor Gear Group Vice President, Bill Kelly, a seasoned veteran with a proven track record of success in working with specialty class of trade. Priority one during fiscal 2012 is to maintain the momentum both businesses have created in their respective specialty channels, while developing channel-specific plans and programs for the launch in fiscal 2013 against an ultimate goal of becoming the partner of choice for the specialty dealers in our markets. Operational synergies will also be evaluated to insure we continue to deliver against our customers' price value expectations for innovation, quality, and service.

In summary, we have made significant progress in transforming Johnson Outdoors. While more work lies ahead in some areas, we are clearly stronger, more competitive, and better positioned to deliver sustained profitable growth and enhance shareholder value, now and in the future. Johnson Outdoors is poised for an exciting future in the coming months. I look forward to sharing our plans for what lies beyond 2012.

Now, I'd like to turn the call over to Dave for the financial highlights.

Thank you, Helen. This was the year of all years for Marine Electronics. It's our largest business and it's growing. A lot of that growth is coming from Humminbird, which we acquired in 2004 and have built into a sonar technology powerhouse. For perspective, Humminbird sales have more than doubled over the past six years. During that same period, margins have improved 540 basis points, reflecting the enhanced value of the brand and technological advancements.

Just a couple of comments on operating expense. This year, total Company operating expense is lower as a percentage of sales at $6 million higher on a dollar basis. Higher volume and R&D spending were factors, as well as higher legal costs which accounted for about half the dollar increase, driven in part by our efforts to protect our patented Humminbird site imaging technology from infringement.

Average working capital was 30.8% of net sales versus 29.8% last year on a trailing 12-month basis. There are a lot of moving parts here which played a role in the modest increase. Higher volume and continued demand were factors. The tsunami in Japan and the flooding in the Northeast US tied up inventory in Diving and Outdoor Gear, respectively. At year end, total working capital dollars were below prior year. So, overall, we feel good about our ability to keep working capital in check, despite unforeseen fluctuations in our markets.

Operating cash flow grew significantly. Cash from operating activities increased 50% over the prior year, and all units contributed to positive cash generation. Now, let me talk about taxes. As you saw in the release, earnings skyrocketed due to a reversal in our deferred tax asset valuation allowance. That allowance was established in fiscal 2008, due in part to the significant loss and impact of goodwill impairment that year. However, based on our recent history of income generation and future profit projections, we now anticipate being able to utilize these assets in the future, which led to a $21.9 million reversal of our tax asset valuation allowance this year.

It's also important to point out that, excluding the non-cash tax asset reversal, adjusted earnings per diluted share nearly doubled, emphasizing again our continued commitment to sustained profitable growth and enhanced shareholder value. Looking ahead, the need for added investment and innovation, coupled with the unpredictability of factors which could impact recovery of outdoor rec markets, achievement of 2012 financial targets is uncertain at this time. That said, we end fiscal 2011 with a strong, healthy balance sheet, a threefold improvement in net cash year over year, and confidence in our ability to withstand the economic tides.

Now, I'll turn the call back over to the Operator for the Q&A session. Operator?

(Operator Instructions) James Fronda with Sidoti & Company.

I just had a question in terms of the military segment. Do you expect further declines going forward, or any type of flattening out in 2012 or maybe 2013? What are your thoughts on that?

We're actually being conservative because it's very uncertain what's going to happen, and what decisions the government will make. So, we're going to, I think, shoot for a flat budget for next year.

And in terms of big retailers, do you have any sense of any of those big retailers filling up their inventory levels, or anything on that end?

We do have some proprietary visibility to some of our big retailers. And so we actually do get the data from them. And it looks like, although they did have a great season, they were also conservative in making sure not to build inventory before the sales were really moving. So, I would say on that end, inventory is in good shape.

Okay, thanks, guys. Appreciate it.

(Operator Instructions) Brian Rafn with Morgan Dempsey Capital Management.

I got in a little late, and so I missed the opening comments. If you guys look at cost of goods sold, can you look across the different components -- commodity feedstocks, plastics, resins, metals, maybe fabric for the camping side, relative to commodity inflation?

Yes, we did see commodity inflation this year in different areas. And I count age of sourced goods in that bucket. We probably had 1 point to 1.5 points of headwind with commodity costs. But we were able, for the year at least, to sustain a gross margin that was comparable to last year despite that.

Would you say, Dave, that that was -- was it an erratic, was it a compounding inflation? Has it plateaued? Are you seeing, perhaps in 2012, a continuation of that? Or is it accelerating, decelerating?

Great questions. It seems as if it slowed down late in the year, but with everything that's happening out there in the marketplace, it's really hard to tell. We're ready either way, and we've got a good cost savings program in place. We have taken pricing selectively in different markets, so we're ready either way.

If you look at your sales revenue growth, is there any bias, are you getting any pricing ability at all? Or is it primarily sales revenue or driven by unit volume growth?

We have taken pricing selectively. And again, it's part of our price/value equation, and what we're bringing to the marketplace. So, I think we're able to get some pricing ability there. However, with the economy the way it is, we'd love to have more pricing power.

Certainly you have premium brands; you do have some of that. Do you guys have any ability, as you look at your distribution, to have any more flexibility in pricing with specialty mom-and-pop retailers versus an 800-pound gorilla like Wal-Mart?

With the specialty group, we do have more pricing flexibility. They put value on the customer service that we provide, and the innovation that we bring. That's a channel that is more conducive to taking our higher-margin product. We feel we have a little more flexibility there.

I missed your opening comments about the military sales. Could you just reiterate that maybe for me?

Yes. We saw a significant decline in military this year, close to 75% decline. So, right now we're running around an $11 million revenue level, and we're looking to keep that as a plateau going forward.

Is that primarily tents and things for ground forces?

It's almost all exclusively tents. And, yes, it's for ground forces, but overseas as well as in the US.

I'll ask one more question and get back in line. Your CapEx budget for 2012?

CapEx should be comparable to this year. We usually run nominally $10 million to $11 million in capital spending.

And how much of that would be maintenance, Dave?

Really, most of it is maintenance. We invest, we had some IT CapEx. We also have molds that we have to turn every once in a while, but there's not a ton of growth CapEx in there.

Okay, thanks, guys. Appreciate it.

(Operator Instructions) I'm showing no further questions. And I'd like to turn it over to Helen Johnson-Leipold for any closing remarks.

Thanks for joining us today. And we wish all of you a happy holiday season. And we'll talk to you in the new year. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect. Everyone have a great day.