Johnson Outdoors Inc (JOUT) 2013 Q3 法說會逐字稿

Hello, everyone, and welcome to Johnson Outdoors' third-quarter 2013 earnings conference call. Today's call will be led by Helen Johnson-Leopold, 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 with 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 2013 fiscal third-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 may differ materially from those 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 SEC.

If you have additional questions following the call, please contact either David Johnson or me. It is now my pleasure to turn the call over to Helen Johnson-Leipold. Helen?

Good morning. I hope you have had an opportunity to review our third-quarter earnings announcement. I will start off with comments on the marketplace and our results and then share perspectives on the future. Dave will cover some key financials.

The third quarter is when the warm weather outdoor recreation season kicks into high gear. The breadth of our Outdoor Equipment portfolio provides us insight across a wide range of outdoor markets. While each is different, all have been impacted by an unseasonably cold and rainy spring which delayed the start of the season, and to some extent the long tail of the recession. None have returned to pre-recession highs, which is why our emphasis on gaining share is so important.

Our Johnson Outdoors 2015 three-year strategic plan was based on a continued, steady moderate growth landscape across our markets. Consistent with that outlook, third-quarter and year-to-date revenues were up 1% and 3.5%, respectively. Our plan's major focus is on growing profits faster than sales and we are doing that; delivering 13% and 24% growth in operating profit year over year for the quarter and first nine months, respectively.

Net income rose dramatically largely due to a lower effective tax rate and was up 52% and 71% year over year during the quarter and the year-to-date period, respectively. So solid results overall.

Marine Electronics was the primary growth driver, bolstered by a strong lineup of new products which accounted for nearly half of sales during the quarter in the year thus far. This was a record third quarter for our fishing business and our outdoor gear business, notably consumer camping segment, contributed to growth, primarily due to the addition of Jetboil, the leading camp stove brand, which we acquired last November.

Declines in Watercraft sales were anticipated as we continue to focus on higher margin SKUs and strategic restructuring overseas. Guiding sales reflect the impact of bad weather in Northern Europe and tough economic conditions in Southern Europe, which are major diving markets. However, system and process improvements helped to minimize the impact on the unit's profitability.

We are reaping the benefits of efforts over the past three years to build a strong foundation for sustained profitable growth in each of our businesses. Clear strategic focus and disciplined execution are key factors in the progress achieved. Investment in innovative products and technologies have been and will be a core driver to continued success.

For the ninth consecutive year our new product performance is on track to generate a third or more of total company sales. Innovation is who we are; it is part of our DNA. Innovation drives growth for us, our markets, and our customers. Breakthrough innovation, like proprietary Humminbird Side Imaging sonar, Minn Kota i-Pilot Link, and Jetboil FluxRing push the technology envelope to expand the marketplace by creating whole new categories of products.

While not all innovation is breakthrough, in order to be successful it has to be meaningful and provide a unique point of difference that enhances the outdoor enthusiast experience.

In July, two of our latest innovations were named best in show in their categories at ICAST, the world's premier fishing show. Competition for ICAST awards is fierce because winners are selected by ICAST attendees, who are the elite of the fishing enthusiasts. Everyone from professional anglers to avid amateurs to fishing journalists and, of course, industry members.

For the third straight year Humminbird walked away with top honors in the electronics category with the 360 Imaging bow-mount technology. What makes 360 so unique is that for the first time anglers can get a full spectrum picture below the boat, front, back, and both sides, whether moving or standing still. A true breakthrough technology.

The other big winner at ICAST was our new Old Town Predator fishing kayak series, which was named Best in Show Fishing Boat. The fishing kayak segment has been the fastest growing paddling segment for a number of years and the ICAST award recognizes that the Predator bring something better than what is out there to this important category.

From concept to design to commercialization anglers were intimately involved every step along the way, clearly a boat created for anglers by anglers. These boats are stable and easy to paddle and have a unique, new three-point Element seat easily adjustable to the angler's preferred fishing position. Six accessory plates allow outfitting with all the latest gear, electronics, or tackle accessories without ever having to drill into the hull to outfit the boat.

The Old Town Predator is meaningful innovation at its best, delivering design and features that truly enhance the fishing kayak experience.

We also just picked up another new product honor at this week's Outdoor Retailer show, which is the major camping, hiking, and paddling tradeshow. The new Jetboil [Jewel] was named a prestigious Gear of the Show Winner by the year Institute. The Jewel has a larger burner, cook pot, and fry pan so you can cook a wider variety of food in a lot more ways. Both the cook pot and the frypan have integrated proprietary FluxRing technology offering the same push-button start, fast heating time conveniences, and lightweight, easy-to-store design the Jetboil family of stoves are known for.

Both ICAST and Outdoor Retailer show awards are important in this industry to our dealers and consumers who follow the show religiously looking for the latest and greatest products and gear. As a result, these recognitions give us a nice competitive edge heading into the next year.

Innovation like this doesn't happen overnight. It is an iterative process that begins with a deeper, richer understanding of our consumers, markets, and recreational activities combined with our technical and design expertise to translate what we know into products that are better than what is out there. This takes focus and discipline, and it is getting harder, not easier, because expectations are growing due largely to the rapid pace of technology advancements. Nowhere is this more evident than in fishing electronics.

20 years ago trolling motors were clunky, loud, and tough to steer and deploy. Today they are sleek, easy to deploy with hands-free steering and virtually silent running. Likewise, fishfinders. I remember when the depth finders first came out and fish looked like blips on a screen. Today we can see fish in their habitats in detailed video-like underwater imaging.

You used to use a compass or landmark onshore to get back to your favorite fishing spot. Today fishfinders utilize sophisticated GPS and cartography to take you there and to help you find even more productive fishing places. That is why our acquisition assessment process includes both companies and technologies that can further enhance the fishing experience.

Recently we acquired a technology that enables an angler to map his own favorite body of water. We call it AutoChart. There are a lot of smaller private waterways off the beaten path that aren't charted. With AutoChart the angler can map his favorite spot on his Humminbird fishfinder and then apply LakeMaster's patented features highlighting shallow water and depth as well as water offset to create a detailed map of his or her favorite fishing hole. And with the Minn Kota i-Pilot Link he can set his own contour courses and his fishing motor will follow those automatically.

Clearly, we are pioneers and leaders in fishing electronics and now in fully-integrated fishing systems that enable multiple technologies to communicate and work together to be the best fishing buddy around. And we should be, because not only do we know fishing better, we are also the only fishing equipment company with such a broad spectrum of technologies and technical expertise in our portfolio. We will continue to invest to keep the pipeline in this business full and exciting.

The goal of our 2015 three-year strategic plan is to ensure that Johnson Outdoors is a healthy, thriving portfolio of businesses consistently growing profits faster than sales. We are targeting a 3% to 5% compound annual growth rate in sales and 6% to 7% operating profit by the end of 2015. While we are pleased with financial performance this year, we have more to do to achieve the balanced portfolio we envision.

We remain excited by the future and are confident in our ability to enhance value for our stakeholders long term. Now I would like to turn things over to Dave to discuss the financial highlights. Dave?

Thank you, Helen. Good morning, everyone. Financial performance is solid for the quarter and year-to-date, particularly operating profit. As Helen pointed out, we are benefiting from significant efforts over the past two years which have improved operational efficiency enabling it to drop more to the bottom line.

Going forward, we will realize additional benefit from two key initiatives this year. First, the scheduled closure of European Watercraft operations. When we established a footprint in Europe 10 years ago the paddling market was really starting to take off. Despite healthy revenue growth early on, margins were pressured by consistently rising costs.

Initially we planned to move to a local distributor business model in the region, but with the state of the economy being what it is in Southern Europe that just isn't viable. So we are closing the doors there at the end of September. Total Watercraft restructuring costs this year are expected to be about $1.6 million and we are projecting around $2 million in annual savings going forward.

Second, a new satellite production facility in Mexicali, Mexico, supporting our motors business. The goal here is to protect and strengthen our competitive position in entry-level motors by enhancing features in our offering while controlling labor costs. We are moving carefully and methodically in getting this facility up and running and have been diligent in our efforts to ensure high-level quality processes and controls.

Our Marine Electronics business has been growing steadily and we are expecting that trend to continue. As a result, the Mexicali operation is an adjunct to, and not a replacement for, our global Minn Kota production hub in Mankato, Minnesota, so there has been no impact on jobs in Mankato.

Pilot assembly testing is complete and we expect the facility to be in full production mode for the next fiscal year. We are projecting at least $1 million in annual savings going forward from this project.

Just a couple of comments regarding working capital. As reported, inventory is up year-to-date versus prior year. This isn't surprising given the higher demand in Marine Electronics and the addition of Jetboil, which we acquired during the first quarter of this fiscal year. That said, cash to cash days have improved by six days year over year. We are watching inventory very closely and doing what we can at this point in the year to manage levels down.

Last year the season started very early and ended early. This year the season started late, and if the weather holds up, it could in later. Right now movement at retail is strong for the first time of the year which is a good sign.

Last, but not least, I want to touch on net income, which as Helen pointed out is ahead of prior year by 71%. A key driver behind the favorable comparison is the significantly lower effective tax rate year over year. Recall that last year net income was impacted by an effective tax rate of nearly 50%.

We told you we were evaluating strategic -- strategies to return the tax rate to more historical levels. During the quarter and year-to-date period changes in the Company's foreign tax valuations brought the effective tax rate down and thus less of a drain on earnings this year.

Just to reiterate what Helen said, we are making good progress but there is more work to be done to create a more balanced contribution to profits across the portfolio. Now I would like to turn things back over to the operator for the Q&A session. Operator?

(Operator Instructions) James Fronda, Sidoti & Company.

Dave, could you I guess talk about the commodity prices? I mean do they still seem in check?

Yes, they seem to be in check so far, so we will end the season in pretty good shape with that.

Okay. Could you give us a little more insight on I guess your Marine Electronics for the fourth quarter? Last year revenues were slightly down, but the year before that they were significantly up. So do you have any insight?

On the fourth quarter?

Yes.

I don't know. It is hard to say because, again, the season started late, so if the weather holds we could have a decent fourth quarter. But it is hard to say right now.

All right. Any cash flows you have got going forward I guess will be used to pay down debt. Have you guys thought about a dividend at all?

Yes, we have been having lots of discussions on what to do with our cash going forward, so all options are on the table, dividends, and we will continue to look at other things.

All right. Thanks, guys.

Brian Rafn, Morgan Dempsey.

Back to the question, Dave, when you talked about commodities would you say your supply chain commodity cost are flat; would you say they are up slightly incrementally? Can you put kind of a number on it?

You know, overall there hasn't been a ton of movement. I mean pockets here and there are up, but overall I would say flat.

Okay. Is there anything from the standpoint ex costs? Would there be anything in delays or longer leadtimes or anything for materials?

I don't understand the question, Brian. Can you clarify that?

Relative to if the supply chain costs for materials, if there really hasn't been much plus or minus in inflation in cost, are there any delays or leadtime changes in getting critical subassembly parts or materials?

It is always a challenge on the electronics side with long leadtimes. There hasn't been necessarily, though, a big change in that so we continue to manage that pretty closely, but again it is always a challenge.

Okay. I missed your opening comments. I had to dial in three times; the operator couldn't find the call. So the closure of the Watercraft plant in Europe, what was the -- I missed the dollar amount and severance costs or closure costs?

$1.6 million this year is what we expect in restructuring.

Okay, okay, okay. As your business has built what are you seeing relative to kind of the, maybe not so much Marine Electronics since that is a little more big-box, but kind of the scuba diving, camping, Watercraft, some of the mom and pops, the specialty guys, what is their sentiment to build inventory? Is it strictly kind of just-in-time based on their demand or are they building any channel inventory?

They have always been very concerned about building inventory so they always keep it very tight and that certainly isn't changing.

Okay, okay. Anything from the standpoint of headcount changes where it would be kind of your -- are you guys doing any hiring? Are you kind of maintaining? Give me a sense on your labor pool.

Overall, it is flat. As we will go into next year we will do some investing and some hiring here and there where there are growth areas.

Okay. Then what are you seeing salary, wages kind of low single digits? Anything out of the norm?

Nothing out of the norm. Right now we are looking at low single digits and pretty much the same that we have seen over the past couple years.

Okay. Dave, the foreign tax valuations, the things that you have done to kind of get that back to more of a normal statutory rate, is that things that you can continue in the future or were you availing yourself of one-time tax provisions? Give me a sense of if that is ongoing.

Yes, this year year-to-date we are at a 22% rate. I don't think that will continue. I think in the future we will get back up into more a normal rate. Now there are opportunities internationally that we will take advantage of, but most of the stuff we have done on the US side is pretty much behind us.

Okay, okay. I missed your opening comments; what has kind of been the trend in the scuba diving area for this year?

Well, you know we have a significant piece of our business is outside of the US and in Europe, and Europe is still being impacted from economic turmoil plus there has been bad weather, not just in Europe but across the board. So it has been a challenge. I would say that we are certainly holding our own. It is hard to read on the shares but our feeling is that we are at least maintaining our share or growing it.

Okay. Is there much, Helen, relative to the scuba diving side -- we ask it on the camping side with the military with I think Eureka! Is there much, I don't know, Navy Seal or scuba diving for the military or for dive, like sheriff departments, rescue units, that type of thing? Is there much of that law enforcement for SCUBAPRO?

That is not a significant segment for us. We do sell into that group as they need it, but it is not a specific area that we develop unique product for. So we are used by them but not anywhere close to what we had done in our camping business.

Okay. All right, thank you very much.

Thanks, Brian.

(Operator Instructions) Michael Schechter, Mentor.

Dave, what is a normalized tax rate?

Our US federal tax rate is about 35% and we will pay another point or two on states probably. So I usually think about 35% to 37% as kind of a standard.

Okay. Just going back to the dividend concept, the balance sheet for the last six quarters on a four-quarter average run rate has been positive cash so there is no debt on the Company. And the cash flows -- free cash flow after CapEx is running $2 a share.

Have you thought about a dividend as well as -- I mean conceivably putting a turn of debt on the Company and paying out a special dividend just to bring this back to some financial discipline and capital allocation?

Just to reiterate, I think we have had active discussions about what to do with the good balance sheet that we do have. So I can't commit to anything right now, but just everything is on the table and we are looking at a lot of different options.

Okay. I mean you know there are ways -- I know you have got cash offshore, but you could pay a preferred if you didn't want to pay the tax on the cash. Certainly looks, given the way the cash flows are now, that you could easily support a dollar a share constant dividend and easily a $5 special dividend and have room to grow the Company with acquisitions.

Yes, those are good ideas, and like I said, we will continue to look at those kind of things.

Okay, thank you.

Brian Rafn, Morgan Dempsey.

Follow-up question on cash flow. Your capital funding rates, if you look at property, plant, and equipment to depreciation and amortization, Dave, if you look at the next three, four years how would your kind of CapEx to D&A ratio run?

You know, that is a good question because this year we are investing so CapEx will be a little bit higher than depreciation. I usually say obviously in the long run it is going to equal out, but probably over the next year or two as we continue to look at opportunities that will translate into probably a higher CapEx number.

Where would you be kind of targeting that CapEx across your business the next couple years?

Helen said in the remarks we are always looking at technology and we are very active in that in trying to find the next technology level so -- particularly in our fishing electronics business. So that is where it could translate to.

Okay, okay. Is the debt deleveraging or is debt paydown would that be specifically -- that wouldn't be accelerated, that would be based on term structure maturity?

Yes, we have got term loan out there with a fairly long maturity and we probably won't do a whole lot with that. That is not a big number anyway; it is about $8 million in debt. The rest is all revolver.

Okay. Let me ask the cash dividend question a different way, which is probably annoying on your side, but when you talk about that kind of being open for discussion would that be something that you would say would be a policy that might be formalized within the next couple of quarters, within the next two years, we won't have anything for five years? What is kind of your horizon maybe?

I can't really answer that, Brian. All I can tell you is that it is active, the discussion is very active.

Okay, okay. Then on acquisitions, from the standpoint of kind of your next three-year plan, how do you view the market for acquisitions on pricing the EBITDA multiple or an attractiveness for things that you could -- maybe in nice extension a line extension or something that you might look at for Johnson Outdoor?

I would say that it certainly varies by business and what we are looking at, especially if it is a company versus technology. But we are always looking externally and we evaluate opportunities as they come across our desk, plus we proactively look at areas that are strategic for us. We do not specifically incorporate numbers for an acquisition into our plan, but we are always looking and it will become incremental.

There are companies for sale out there. There is also a lot of dollars on the sidelines waiting to invest. We evaluate every opportunity individually and we try to be very, very disciplined in our approach to it.

Helen, would you say the current environment is robust for acquisitions or would you say, yes, there is some stuff out there but it is a little pricey? Can you put a flavor on it?

Well, there are certainly companies in the market out there. We are not specifically interested in looking at something that needs a 100% turnaround. It has to be strategically aligned, and if it is, we will pay the right price for it.

So I think it has more opportunities than it has been in the last 12 to 24 months, but it is an ongoing assessment that we do.

Okay, thanks much. Appreciate it.

I'm not showing any further questions at this time. I would like to turn the conference back over to Helen for closing remarks.

Thanks, everyone, for joining us. We look forward to speaking with you again at the end of the year. Thank you.

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