Johnson Outdoors Inc (JOUT) 2012 Q2 法說會逐字稿

Hello, everyone, and welcome to the Johnson Outdoors second-quarter 2012 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 of our recording of 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 of Johnson Outdoors. Your line is open.

Thank you, Tyrone. Good morning and welcome to our discussion of Johnson Outdoors' results for the 2012 fiscal second quarter. If you need a copy of our news release 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. These statements are made on the basis of our views and assumptions at this time and are not guarantees of future performance. Actual events or results may differ materially from those statements due to a number of potential factors, many of which are beyond Johnson Outdoors' control. 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 following this morning's call, please contact either Dave Johnson or me. It is now my pleasure to turn the call over to Helen Johnson-Leipold, Chairman and CEO.

Good morning. I hope you have had an opportunity to review our second-quarter earnings announcement. I'll begin with comments on our results and marketplace and give you our perspective for the remainder of the year. Dave will cover some key financials; then we will take your questions.

In last year's second quarter, we reported record sales and profits. This quarter, revenue matched the prior-year high and operating profit grew 22% due to a favorable settlement with our insurance carriers to resolve a long-standing dispute. Including the benefit of the settlement, operating profit would have been flat with the prior year's quarter's record profit.

The decline in net income this period was due to a substantially higher effective tax rate, and Dave will cover accounting for taxes in a few minutes. Overall, we are pleased with the quarter and year-to-date performance.

Our two largest businesses, Marine Electronics and Diving, are heading into a warm weather outdoor rec retail selling season in strong positions. In these markets, innovation is critical to winning at the shelf with key target consumers, avid fishing and diving enthusiasts.

These enthusiasts are trendsetters. They want the latest and greatest, and they are willing to pay a premium for it. Exceptional new products in these two business units have created strong preseason momentum across all channels, particularly in North America and Asia.

First Marine Electronics, where the goal is to drive technology to enhance the fishing and boating experience. This year, new products represent nearly 60% of revenue for our Minn Kota, Humminbird, Cannon, and LakeMaster brands.

For example, the Minn Kota Talon. The Talon is a shallow-water anchor competing in an estimated $30 million segment. Shallow-water anchors are used primarily by bass fisherman, the largest contingency of anglers in the US. The bass anglers often rig their boat with two anchors, one in the front, one in the rear, and our anchors run about $2,000 each at retail.

Talon was introduced in 2011 and by year-end had grabbed the number-two market position. We have set our sights on becoming the number one. This year we made some design enhancements, and increased marketing and promotional support to generate additional share gains.

The Minn Kota i-Pilot is on a similar upward market trajectory in a category we created, wireless GPS steering, plotting, and positioning. A newly redesigned remote control and additional plotting and Waypoint features have been added this year.

I-Pilot was initially envisioned as a stand-alone, plug-and-play accessory for our trolling motors, a nice-to-have addition to the angler's toolkit. We also felt there was an added price value to anglers of having the option to purchase i-Pilot preinstalled with a Minn Kota motor. This year these high-margin combo units are major drivers behind i-Pilot's continued growth.

Eight years ago when we acquired Humminbird, we immediately began to unlock the brand's technology potential, which has had an explosive effect on our business and the Marine Electronics marketplace as a whole. We now command the number-one global market position, with patented Side Imaging sonar technology which continues to drive growth this year.

Our newest innovation for Hummingbird is the 360 Imaging. This is a remarkable new sonar technology providing for the first time a complete around-the-boat unobstructed underwater image.

It has the same sharp detail anglers have come to know with Side Imaging. With a single sweep, 360 Imaging has the ability to cover a 300-foot diameter.

Anglers have numerous options when viewing the 360 image. They can view the entire circle or break it down in segments.

For instance, they can select just to see what is in front or back or either side. Split-screen viewing is also available so the image can be displayed with a chart or a traditional SwitchFire sonar.

360 Imaging is a plug-and-play accessory, and it's exclusively compatible with current Humminbird Side Imaging sonar units that are ethernet capable. We don't start shipping this product until later this summer, and already demand is very high.

We are hearing from retailers and boat manufacturers alike that the early spring-like weather has given a jumpstart to the fishing season this year. Point-of-sales data for our unique inventory management partnership with major retailers confirms what we are hearing. Aggressive advertising and strong national promotions have spurred early consumer purchase, and we are optimistic about the Marine Electronics' ability to continue to deliver solid results.

Moving on to Diving, we're also getting a healthy bump from new products. Year to date, they represent about 30% of unit sales.

Our premier flagship Diving brand, SCUBAPRO, holds the number-one position in masks, fins, gauges, and regulators in the US and is the number-one dive equipment brand in the world. This year we have launched the new SCUBAPRO Meridian dive watch, the first step in efforts to recapture a leading position in the dive computer segment.

We have had very good response to the product, which was designed and is manufactured in-house. Additionally, demand for SUBGEAR, our midprice line of dive equipment launched over the past two years, continues to grow.

In the US, Diving sales are up 20% year to date in a domestic market that is essentially flat. In Asia sales are up 9%. The gains in North America and Asia more than overcame declines in Southern Europe, which is an important dive region. Looking ahead, we have confidence in our ability to gain share and drive growth in Diving that outpaces the market.

Our other two units are addressing issues which impacts profitability. In Outdoor Gear, military sales have diminished further, resulting in unfavorable sales and profit comparisons year-over-year. We have always said that military is a niche, non-core business; and structured Outdoor Gear for the [valley] is enabling it to remain profitable even with fluctuations in military orders.

Obviously, Watercraft results are disappointing and reinforce just how successful implementation of our specialty channel strategy really is. Why focus on specialty? Because specialty retailers make up the largest paddle sports channel, and specialty retailers are where higher-spending avid paddlers shop.

Historically, when our paddle brands are strongest in specialty, our Watercraft business does well. Our specialty strategy is focused squarely on improving Watercraft's profitability profile by building on our core strengths, quality innovation, and unbeatable price value.

We are not satisfied with where we are yet, but firmly believe we are on the right track. Although a lot has been accomplished in the past two years, more work lies ahead.

In summary, while we continue to address challenges in some areas, we believe Johnson Outdoors is clearly more competitive and better positioned than ever to deliver sustained profitability and enhance shareholder value now and in the future. Now I would like to hand things over to Dave.

Thank you, Helen. Helen gave you a good picture of what is happening in our markets and our businesses, so I will just take a couple of minutes to give you a little more perspective on the key year-to-date financials.

I'll start with accounting for taxes, which resulted in a 57.4% effective tax rate for the quarter. The reason for this is simple.

In those countries where income is being generated, like the US, we are being taxed. In countries where losses were incurred, tax valuation allowances exist, so no tax benefit was derived. Importantly, end-of-year actual cash taxes are expected to be well below what is currently being booked, based on projected utilization of net operating loss carryforwards and other applicable tax credits.

Our gross margins declined for the quarter due to two primary factors. First, inventory reserves were taken related to the closure of a facility in Southern Europe. Second, unfavorable product mix in both Watercraft and Marine Electronics.

For perspective, sales of lower priced entry-level products into Wal-Mart more than doubled during the first six months of this year. At the same time, lower selling costs on these products helped reduce operating costs as well.

Moving on to operating expense, which is $5 million favorable to last year's second quarter. Excluding the $3.5 million favorable settlement from our insurance carriers, operating expense in the quarter was still $1.5 million below prior year. On a year-to-date basis, increased healthcare costs and bad debt in Europe offset the benefit of the favorable settlement.

Next, working capital. We continue to focus on keeping inventory in check as we work to meet demand for our products. Working capital has declined 8.5% since this time last year, so a good job by all the businesses.

Overall, our balance sheet remains strong. Debt is down $21 million or 22% year-over-year. We are in good shape heading into the final six months of the fiscal year and feel good about our position heading into the third quarter, where we will see consumer response at shelf.

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

(Operator Instructions) Brian Rafn, Sparta Capital.

Good morning, everybody. Dave, could you go back and talk a little bit about the mix issue? You talked about Wal-Mart. Was that camping or kayaks or canoes, or what was that specifically about the lower mix?

That is mostly Marine Electronics entry-level product. So we have seen that particular customer get more into the sporting goods over the past couple years, and so we've got more volume going through there.

Okay.

And it goes beyond just Wal-Mart too. There's other products that -- lower entry-price level products are more of the volume in both Watercraft and Marine Electronics.

Okay. Some of the lower mix, Dave, is that just Wal-Mart, or would that be Cabela's, and Dick's Sports, and Bass Pro Shop? Or is it just the big-box retailer?

Yes, it goes beyond Wal-Mart. It is mostly big-box type stuff, though.

Okay, okay. What is the ability, when you come out with like 360 sonar and that electronic -- the anchor that you guys talked about. Is that something -- or i-Pilot.

Is that something a big-box retailer might stock? Or is there a favorable difference -- that's something a Cabela's would stock but not a Wal-Mart?

Hi, this is Helen. You know, the higher-end, truly the higher-end items are most likely to not be in the Wal-Marts. But we do find that depending on what the item is -- like i-Pilot is very appealing and does cross channels.

So it really depends on the item. But primarily the higher end goes into the sporting goods channel.

Okay. Helen, would it be fair to say that when you come out with something innovative that the first-movers or the first innovators are going to be those specialty boutiques, not certainly the big box?

Well, I wouldn't define them as specialty boutiques. I think the Cabelas and the Bass Pros of the world certainly get out there ahead in the sporting goods area.

Okay, okay. Then, Dave, some conversations over the last couple of quarters, with some of the smaller retail channel -- I might go back and use the word specialty. Given the fact of some of these people that might have had a very tough season in snowboarding or alpine skiing or downhill, has that continued to affect their ramp up in either orders or inventory build for the summer season?

I think initially that might have been an issue, but we have seen that our retailers have done a very good job of managing their inventory. Certainly the fishing category is an area that they try hard to get product in early on. So I would say it is probably mixed; but in general our customers have done a good job of managing their inventories.

Okay, okay. Then just one on -- Dave, you mentioned about the healthcare. Is that an issue where you are meeting those episodic expenses? Or are you seeing higher premiums? Or is it a structural cost? Or is it just case-by-case employee issues?

Yes, it tends to be more case-by-case. We had a really good -- we did a good job last year controlling it, and this year we are just seeing a few more incidences of costs coming in, claims coming in.

So over the long run I think we are doing a good job managing things. It just so happens over this first six months we are seeing a little bit more activity.

Okay. Anything on cost of goods from the standpoint of raw materials, Dave? Anything -- any of your basic feedstocks, plastics or metals, aluminum, anything that you are seeing, a trend maybe as you go into the summer?

We haven't seen anything significant either up or down. So I think that is good news as we fulfill the season here. We will keep our fingers crossed as we finish the fiscal, though.

Okay. Thanks, much.

(Operator Instructions) Showing no further questions at this time, I would like to turn the call over to -- I apologize, we do have a question that just came in. Brian Rafn, Sparta Capital.

Hi, I will just keep going. There was a comment about some weakness. You talked about inventory, maybe a writedown or close of a plant in Southern Europe. Is that a SCUBA diving specific with the Mediterranean or Southern Europe, or is that a different product category?

It was a Marine Electronics office in Italy.

Okay, okay.

Yes.

Okay, all right. Then, tell me, what is the sense -- a little more color on -- what is that -- it is not SCUBAPRO, but the more -- the lower-end SCUBA gear. What has been the ramp-up of your second product category? (multiple speakers) .

The second brand is SUBGEAR, and it is an entry into the mid-price-point category. We have seen very strong acceptance, and we have seen significant growth year-over-year. So it is doing well.

Okay. I'm curious, and maybe you can't quote this off your head, top of your head. How many SKUs might you have in SCUBAPRO versus SUBGEAR? I mean would SUBGEAR be 20% of what you'd offer in SCUBAPRO? Or would you have as many SKUs?

Well, I think just because of the length of the time that the brand has been on the market we have certainly a very full offering of SKUs in SCUBAPRO. But SUBGEAR, we made sure that when we came out we had a full line of products.

We tend to emphasize more the non-life-support product and have a little more offering in that area. But at this point, it is a young brand and has fewer SKUs, but still a full offering.

Okay. Then I didn't catch -- I didn't get the -- because I am on the road traveling -- the press release. What -- do you have a dollar amount for the drawdown in the military sales for the tents and the camping stuff?

It was -- it ended up being most of the Outdoor Gear decline. So I'm not going to give you an exact number, but it is most of the decline.

Most of the decline? Okay. Dave, any forward vision on as forces rotate back from Iraq and Afghanistan? Do you get any sense of reorders or equipment replacements?

A lot of times forces will leave equipment, a little lower value, maybe not tanks or helicopters, but they will leave equipment in the theater and then come home and then re-up with a new purchase. Anything you are getting from the Marines or the Army?

No. I think we expect this fiscal year to be comparable to last year's sales. So right around flat.

Okay. All right.

Yes.

Okay. Thanks much.

Thank you. There are no further questions at this time. I would like to turn the call over to management for any closing remarks.

Thanks, everyone, for joining us. Again if you have any questions, you can give either gave Dave or Cynthia a call. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.