Johnson Outdoors Inc (JOUT) 2012 Q4 法說會逐字稿

Hello everyone, and welcome to the Johnson Outdoors fourth-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 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. Thank you for joining us for our discussion of Johnson Outdoors' results for the 2012 fiscal fourth-quarter and full year. If you need a copy of our news release 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. These statements are made on the basis of our views and assumptions at this time, and are not guarantees of future performance. Actual events may differ materially from these statements due to a number of 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 the call, please contact either Dave Johnson or me. It's now my pleasure to turn the call over to Helen Johnson-Leipold, Chairman and Chief Executive Officer.

Good morning. I'll start off with comments on our results in the marketplace, and discuss the focus of our next three-year plan. Dave will cover some key financials, and then we'll take your questions.

Our three-year plan ending fiscal 2012 focused on strengthening operations and enhancing marketplace performance, against the backdrop of a gradual recovery of outdoor recreation markets. We set the bar high and delivered, growing profits faster than sales and exceeding a 5% target of compound annual growth in sales over the three year period. Performance over this period outpaced competition in our markets. In 2012, total Company revenue for the full year was up slightly to $412 million, due to strength in US markets, which more than offset continuing economic issues in Europe. Innovation was key, with new products generating nearly half of sales this year.

Fishing, camping and paddling brands did exceptionally well among our largest retail customers this year. At retail in these accounts, marine electronics brands grew 19%, and outdoor gear and watercraft brands also experienced double-digit growth. Although point of sale data is not readily available for diving, at wholesale, diving shipments were 3% ahead of last year, excluding the negative impact of currency translation. Fiscal 2012 operating profit increased 21% to $21.4 million, due to improved sales and efficiencies, and net positive impact of one-time items. Despite the growth in operating profit, fiscal 2012 net income of $10.1 million or $1.03 per diluted share compared unfavorably to the prior year, due to accounting for taxes in both years. Dave will discuss this in his remarks a little later.

Moving on to the fourth quarter performance, where results historically reflect the seasonal slowdown of the warm weather outdoor recreational industry, this quarter sales dipped below last year, due to a shift in the pacing of shipments to marine electronics customers, which will be reflected in the next quarter, and operating loss this quarter compared favorably to last year; a 25% improvement year-over-year. Over the past three years, we've made significant progress toward our long-term goal of sustained profitable growth, and our commitment to enhanced shareholder value. We feel good about where we are and excited by the potential for future growth in every business. Looking ahead to 2015, our plans embrace our mission, to exceed the ever-growing expectations of outdoor enthusiasts and the channel customers that serve them. We will do this with the most innovative, most valued, and most sought-after brands and equipment.

Reaching and winning outdoor enthusiasts is essential. They are the heart and soul of this industry, representing about 40% of all outdoor recreation participants, with a disproportionately-higher contribution to the industry's profitability. Outdoor enthusiasts are passionate about their specific recreational activity, participating regularly and often. They are early adopters, constantly seeking out the latest and greatest products and technology to make the experience better and more enjoyable. Enthusiasts are not into fads, they appreciate meaningful price value and are willing to pay more for it. However, outdoor enthusiasts don't all shop in the same place. For instance, retailers like Cabela's and Bass Pro are outlets of choice for serious angler enthusiasts. Small independent dive dealers cultivate and cater to diving enthusiasts, and active outdoor enthusiasts like campers and paddlers prefer regional and local specialty shops. The breadth and depth of our distribution channels gives us an important competitive edge in reaching target enthusiasts and our ability and success in delivering innovation and meaningful price value will be critical to continuing to win their loyalty now and in the future.

Against that backdrop, we've identified key growth priorities in every business over the next three years. In marine electronics, where we are number one with fishing enthusiasts, we need to protect and expand our leadership position. In Minn Kota, our focus will be on integrated technology, innovation for high-end motors, delivering enhanced price value options in entry level motors, and growth and expansion in adjacent categories. In Humminbird, new to the world technology applications and platforms will provide the foundation for growth in the years ahead. In Diving, SCUBAPRO is the preferred premier brand for diving enthusiasts and SUBGEAR continues to experience solid growth in the mid-price segment. Our dual brand strategy has been successful in enabling us to gain share and build positive momentum for both brands. We're going to move forward to the next level of growth with continued innovation in core life support segments.

In camping and paddling, we need to rebuild our presence in the specialty class of trade, and reestablish ourselves as an important player in the channel. Our recent acquisition of Jetboil can help us do that, a premier brand which brings excitement and new technology and added dimension to our portfolio. Jetboil was on our radar screen for awhile. It's the leading brand of personal cooking systems; a category they created. Jetboil cooking systems are lightweight, simple and easy to use, and work faster and better than competitive products, even in the toughest outdoor conditions. Naturally, Jetboil is the brand of choice for active outdoor enthusiasts, and is well-known, well-respected and strong in the specialty class of trade where enthusiasts shop. Over time our camping and paddling brands will benefit from that, as well as Jetboil's international sales network. Likewise, we will leverage our well-established growing business in Canada and broader distribution in the US to expand and grow Jetboil.

In summary, going forward, investments will focus on sustaining leadership in fishing electronics, maintaining positive momentum in core dive equipment segments, regaining leadership in specialty camping and paddle channels, and maximizing opportunities to enhance the long-term profitability profile of every business. We are very excited by the future of Johnson Outdoors, and confident in our ability to deliver sustained profitable growth and enhance value for our consumers, customers, and shareholders long-term. Now I'd like to turn things over to Dave to discuss key financial highlights.

Thanks, Helen. Good morning, everyone.

Over the past three years, we've worked hard to keep operating expenses in check, and for the third straight year, operating expense declined as a percentage of sales. In 2012, there were a lot of moving parts. We benefited from legal and insurance settlements, and lower legal expenses year-over-year. On the flip side, there were higher bad debt costs related to Europe, plus restructuring costs, and $1.6 million of compensation expense, which was offset in the other income line. The net result is that functional operating expenses are down in dollars, and sales-related expenses declined as a percentage of sales. Overall, this contributed to a net favorable impact on operating profit. The other key driver behind the higher operating profit for the year was our success in maintaining a strong and consistent gross margin percentage on higher sales.

Now, as we mentioned in today's earnings release, pre-tax net income was about $8 million, or 63% above prior year. In addition to higher operating profit, pre-tax income benefited from a $1 million reduction in debt expense. Disciplined working capital management played an important role, as average working capital as a percentage of sales declined from 30.8% last year to 28.5% in 2012. The decline in working capital reduced borrowing levels, which helped reduce debt to an all-time low, and resulted in lower debt expense. Other income improved by $3 million. As I mentioned before, about half of this was due to the accounting for deferred compensation expense, which is offset in operating expense. The other half was due to favorable foreign exchange.

However, all the positives above the bottom line were not enough to offset the negative impact of taxes on earnings. Recall that at the end of last year, there was a reversal of our deferred US tax asset valuation allowance, a non-cash accounting item, which had a significant positive impact on reported earnings. Fiscal 2011 adjusted net income of $10.7 million provides the more appropriate comparison for 2012. Net income last year, both as reported and adjusted, set a record for Johnson Outdoors. This year, net income was hit by a significantly higher effective tax rate of 49.1%, which came as the result of losses outside of the US in jurisdictions where tax valuation allowances remain in effect, so no tax benefit is recorded. Despite the negative impact of taxes, fiscal 2012 net income of $10.1 million is the second-highest ever reported by Johnson Outdoors, even when compared to last year's record reported and adjusted net income. Going forward we're evaluating all opportunities to help bring down the tax rate to a more normalized level next year.

The balance sheet is in great shape, and every business is contributing to a healthy cash flow. We ended the year with cash net of debt totaling $50 million, a $20 million increase year-over-year. A solid cash position like this gives us the flexibility to pursue strategic opportunities and investments needed to strengthen and grow our businesses. Now, I'd like to turn the call back over to the operator for the Q&A session. Operator?

(Operator Instructions)

Our first question comes from the line of James Fronda with Sidoti & Company. Your line is open.

Do you have any visibility from big retailers, are they showing you anything in terms of building up their inventories for 2013, or are they being cautious?

I think everyone is being cautious. I think there's a little bit of uncertainty about how things are going to pan out, so it's day-by-day.

Okay, and David, in terms of the cost of goods sold, are you seeing anything going up, inflation-wise?

No, not significantly. We haven't seen that.

Okay.

And we're not forecasting anything significantly in the short-term.

Okay, and budget for CapEx for fiscal 2013?

It will be similar to what we're going to report for 2012, which I believe was around a $12 million number.

Yes, okay, and do you guys have any update with Asia? I know you said a couple quarters ago that was kind of helping offset what was going on in Europe. Is that still the case?

Yes, our Asian diving business is doing well and actually faring okay, given what's going on in Europe, but that is still the phenomenon that's going on.

Okay, that's all I have. Thanks.

Thanks, James.

Thank you. Our next question in queue comes from Michael Schechter with Mentor Partners. Your line is open.

A couple of housekeeping questions. Explain to me where you said there's a $1.6 million of comp expense in other, is that this year or last year?

Fiscal 2012. And that's a variance versus prior year.

Oh, it's a variance.

Yes.

And it's in other income over the line?

Yes, it's an income item below the line, and it's an expense item in operating expense.

Okay, and I know you called out what you think the acquisition will add for fiscal 2013, but what was it doing when you bought it? What was the revenue run rate, what was LTM revenue and LTM operating?

We'll have more details in the K, Michael, so that should come out within the next week to 10 days, if you can hold off on that. We'll put that in the K.

Okay. But these numbers are your estimates going forward for fiscal 2013?

Yes, that's our expectation, what will happen to our fiscal 2013.

Okay, and the non-recurring, you called out some in the quarter, but, or at least for the year, but there was $1.1 million in the first quarter and $1.2 million in the third quarter so I'm having a hard time getting it all to fit.

Well, we're calling out the legal settlement, that was about a $3.5 million gain, and that happened in the third quarter, and there's some flood variance, we got recovery from the flood in Binghamton, that's about a $700,000 gain, and there's other restructuring that has happened in the third and fourth quarter. I don't have those exactly with me, but they aren't huge.

Okay, just trying to make it all. And Helen, just looking at the Company and the balance sheet, whether you take it as a point in time or four-quarter trailing average balance sheet, the balance sheet is net positive, it is to some extent an inefficient capital structure and given what's going on with tax rates, why shouldn't we pay a special dividend out? Just in the last 48 hours, you look at Costco, Brown-Forman, Dillard's, Las Vegas Sands paying out $7, $4, $5, $3 a share. It would seem to make sense to me.

We always are considering all options, but I have to tell you, we've got a very solid plan in place. We still have some work to do in solidifying the three legs of our business. We're continuing to look at acquisitions. The future economy is somewhat still uncertain. I would say that we all agree here that it's in our best interest to continue with the plan that we have in place, and certainly at some point, we'll be in a situation where that could be the option we pick, but at this point we've got the right plan and the right direction.

But in 30 days, tax rates are going up irrespective, and we just spent $16 million and what's close to 11 times operating on a forward basis, which I assume includes a lot of the synergies and saves from doing this deal, and it's obviously going to be larger multiples when you look at it on a trailing basis, and our stock's not trading anywhere near those levels.

Well, that was a very strategic acquisition and it really complemented what we're trying to do in that area, so it was highly valued from that perspective. We are just building for the long term and we have a plan in place, and reacting on a short-term basis it is not what we would do. If we could lay out the plan for you and show you where we're going, I think you would positively agree with our decision on this.

The acquisition maybe, but we're still -- for a Company with $400 million-plus of sales and north of $30 million of EBITDA to have a cap structure the way it is, doesn't seem appropriate. And the use of capital for acquisitions versus purchasing your own stock, versus a special dividend, it's an important discussion long-term and short-term, and it just seems that we have the capacity to pay out $2 a share without really hurting the balance sheet at all, given the cash flows of the Company and everything else.

Point well taken. Just so you know, it is a topic of discussion on an ongoing basis. Dave, do you want to add anything?

I think that this is a really good discussion to have, and we have that at the Board level.

Well, you got 30 days to do it.

Michael, listen, we aren't doing anything for the short-term. I mean that's not how we do things at the Company.

I understand that, but if I go back, and let's go long term. Your balance sheet at one point had $50 million on a four-quarter average, since we've got some seasonality inside the Company. It maxed out at about $50 million, and we've subsequently marched it downhill to where we're at a net $12 million on a trailing four-quarter basis, and there's no leverage to the Company. You've got a tax rate that's substantially high, so you could use the deduction off the interest. Debt is, to some extent, a disciplining piece of the capital structure, and to come up planning long term to say we're going to pay dividends down the road at some point, when you know the tax rate on dividends is going to go up and it could go up higher than cap gains, a special dividend now is a long-term planning mechanism. It's not a short-term reaction.

You make a good point. We're considering all options, and I just want you to know that we have this discussion on an ongoing basis.

Okay, thank you.

(Operator Instructions)

Our next question comes from the line of Brian Rafn with Morgan Dempsey Capital Management. Your line is open.

Give me a sense, I think Helen talked a little bit about 19% growth in marine electronics. You talked about, I think, I don't have the press release in front of me because I'm traveling, but about 45% of sales were sourced from new products. Could you say then the marine electronics area with that group being up 19%, would the new products be plus or minus that of corporate average of 45%?

I would say that it's probably on the higher side.

Okay, and then there's been some consternation talking about Jetboil, but one of the issues of paying multiples at one point, if you can organically take a business like Jetboil, put it into your distribution channel, and double or triple or add an organic value to it, that does have a disintermediating effect on the multiples you pay on the front-end. What is your sense of how you can grow Jetboil within that entire Eureka camping section? Is there some positives on that, or how do you change the delta change in Jetboil's legacy organic growth?

Well, we have, both sites have some positive opportunities, and certainly our business can benefit from their depth and penetration in the specialty channel, which we are strategically focused on for our camping business. Then on the other side of that, we also have a very good foothold in Canada, which Jetboil does not have, so we can bring that to them, as well as we have the larger chains in specialty outdoor, in the hunt-fish class of trade. Then as well, they've got an international distribution network that we can benefit from, so we have both ways to benefit from this in a distribution standpoint.

Would you say, Helen, that Jetboil stands a greater chance of increasing its internal growth rate in top line sales under the Johnson Outdoors umbrella, than as a standalone?

Yes, we would definitely agree with that.

Okay. The question for you guys, you talk about outdoor enthusiasts. We've been a shareholder of Sturm, Ruger firearms for about 20 years. Are you seeing in any of the larger big box category super-stores like Cabela's, are you seeing any crowding out of them looking at -- they talk in their conference calls and our discussions with them about how they're placing a lot of inventory dollars into firearms and guns. Do you see that crowding out at all other areas of outdoor enthusiasts, be it camping or paddling or some of the other areas, hiking?

No, we don't see that. No, not in that kind of dynamic, no.

Okay. Let me ask from a standpoint, if you look at your internal allocation, maybe a question for you, Dave relative to free cash flow, would it be a fair statement to say that from a long-term strategic standpoint, that capital expenditures and M&A activity would take a priority over the cash dividend? Or special dividends?

Well that's hard to answer that question. I mean, capital spending is kind of a necessary to keep the business running so maybe, but it's just hard to say that. We look at each acquisition on an individual basis.

Okay, any sense of priority going forward on military sales on the camping side?

I'm not sure what you mean by priority, but military, we feel, is going to be at a level of $10 million annually, and that's where we've kept it in our planning process.

Okay, so you don't have any discussions as troops rotate back home, restocking, you haven't heard anything anecdotally?

Well, it's always a fuzzy conversation and hard to determine from what they say what's really going to happen.

Okay, fair enough. Given some of the consternation, you talked a little bit, everyone is looking with a jaded eye as to what 2013 and all of the government regulation. Are you seeing any elasticity from the standpoint of a very high dollar amount? Maybe you can sell a lot of fishing lures or fishing reels or something, an item that might be $200, or maybe a diving mask versus an entire scuba suit. Are you seeing any elasticity or resistance in the very, very high dollar end, maybe your high-end marine electronics? Are you seeing anybody from the standpoint of your SKUs, are you seeing lower-priced SKUs being stronger versus higher, or is there really no difference?

With our true enthusiasts, they are pretty dedicated to getting the right equipment and the high-quality equipment, and that segment doesn't seem to be reactive. So that part is very good for us, certainly in the marine electronics area, and the diving area.

In the diving area, you talked, I think you said wholesale level shipments were up like 3% globally. How much is the diving segment with you guys with SCUBAPRO and the two lines, is that primarily just a personal recreational dive, or is there any industrial diving, military, is there anything embedded in that?

Well, that's our total dollar volume. We do sales to the military, but more, they're buying out of our line. We don't make special product for them, and we are not -- we do not specifically make product for commercial use, but what we've got is basically our core enthusiast user base.

Okay, and then I missed the opening, Dave do you have a CapEx budget for the next year?

It should be similar to fiscal 2012, which is about $12 million.

How much of that would be maintenance?

Well really, almost all of it is, just in terms of what you're thinking about maintenance. There's a lot of software capitalization in there for new products, but the rest is maintenance.

Okay, and then one maybe to Helen. You talked, 45% -- we look for companies that have at least a 20% threshold in trailing new product development. 45% is outstanding. Is that a level that you think is a cadence that you're going to maintain, or was there some episodic events the last few years that created a level that high?

Well, I think it differs by product segment and business, but you always have a high level of new product and innovation in the electronics area, both in the marine and diving, so it will vary, depending on which business has the new product push, but I think our goal is to be at the 35%-plus kind of percentage, and we think that's very important.

Okay, sounds good. Appreciate it. Good work, good job. Thanks much.

Thank you. I'm not showing any further questions at this time. I'd like to turn the call back over to Ms. Johnson-Leipold for closing remarks.

Okay, thank you for joining us today and I hope all of you have a great holiday season. We'll talk to you next year.

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