Johnson Outdoors Inc (JOUT) 2013 Q4 法說會逐字稿

Hello, everyone, and welcome to the Johnson Outdoors fourth-quarter 2013 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 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 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 from Johnson Outdoors. Please go ahead Ms. Georgeson.

Thank you, operator, and good morning, everyone, and thanks for joining us for our discussion of Johnson Outdoors' results for the 2013 fiscal fourth quarter and full year.

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 Securities and Exchange Commission.

If you have additional questions following the call, please contact Dave Johnson or me.

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

Good morning. I Hope you have had an opportunity to review our earnings announcement. I will start off with comments on the year and discuss priorities for each of our businesses going forward. Dave will cover the fourth-quarter results and key financials. Then we will take your questions.

Fiscal 2013 was the first year of our new three-year strategic plan designed to deliver sustained, profitable growth and enhanced shareholder value. Our plan targets 3% to 5% compound annual growth in revenue and a 6% to 7% operating margin by the end of fiscal 2015. While bad weather delayed the season this year and impacted every business, we succeeded in meeting financial targets for fiscal 2013.

Total Company revenue increased 3.4% due to the acquisition of Jetboil, and outstanding innovation. For the ninth consecutive year, new products generated a third or more of total Company revenue.

Operating margin grew 6% with operating profit of $25.6 million, a 20% increase year-over-year. Operating profit last year benefited from a one-time favorable legal settlement of $3.5 million. And excluding that, our operating profit would have increased 43% year-over-year.

Net income of $19.3 million resulted in earnings per diluted share of $1.95, a 90% improvement versus last year. Dave will discuss more about this positive comparison in his remarks.

Marine electronics continues to be our primary growth engine, posting record results, a 7.1% increase in revenue and a 28% jump in operating profit compared with last year. For the third consecutive year, our flagship Minn Kota and Humminbird brands each surpassed $100 million in sales with new products generating 40% of the units' revenue. Sustaining leadership in fishing electronics is a key priority going forward and that will require investment in new technology and new features to enhance the experience for fishing enthusiasts. What sets us apart from others in this space is unparalleled knowledge of markets, unique insights into fishing enthusiasts, and the technical know-how to turn those insights into winning products.

Importantly, we do more than create individual fishing electronics. We are the pioneer of fishing systems which leverage technology to enhance the fishing experience.

We have an exciting lineup of new products in 2014. For example, in Minn Kota, we have introduced the most powerful, most quiet and energy-efficient trolling motor technology into our most popular freshwater and saltwater fishing models. And Humminbird has just unveiled its new ION series of fish finders, which raise the bar on ease-of-use with our new touchscreen technology.

A big question is can marine electronics continue to grow at this pace? While the race for technology in this market has really heated up, the competition is fierce. While we feel good about our plans to sustain leadership in fishing electronics, our plan focuses on achieving a better balance of profitability across our portfolio as a whole.

Guidance is our most global business. This year's decline in sales reflected weak economic conditions in Europe, one of the largest stag regions in the world. Over the past three years, we have worked hard to drive complexity and costs out of the business while maintaining marketplace momentum and strong margins. As a result, we were able to limit the bottom line impact of volume declines this year.

SCUBAPRO is the number one dive equipment brand in the world and a recent independent study among dive dealers showed that SCUBAPRO ranks first in quality, performance and reliability even amongst dealers who don't currently carry the brand. We believe there is clear opportunity for us to further leverage our strong brand equity to grow share in highly profitable dive computer segments.

In October, we unveiled two new dive computers at DIMA, the world's largest dive equipment tradeshow. First, the SCUBAPRO CHROMIS, a full-feature, easy to use, easier to read wrist dive computer with a larger screen and higher clarity display. The CHROMIS also functions as a watch out of the water, a fashionable and functional must-have for the diving enthusiast.

Our second new SCUBAPRO computer, the Aladdin 2, targets the recreational diver in the high midprice range. Its appeal is in its simplicity. It has the essential features the wreck driver needs with an extra large square screen and extra-large character display for easy reading underwater. Initial response from dealers on both computers has been very good and we are optimistic about our ability to grow share in the computer segment.

Our camping business has also been built on tremendous brand equity. Eureka! ranks among the top 10 best known outdoor brands among consumers. Early this year, we added Jetboil to our outdoor family of brands. Integration has gone smoothly and we've put a new organizational structure in place to better leverage the complementary distribution strength of both brands and to further maximize synergies going forward. This year's growth in consumer camping, due to the addition of Jetboil, was offset in part by the continued decline in military orders.

New products for our outdoor gear business in 2014 target camping and hiking enthusiasts who prefer to shop in outdoor specialty stores. We are expanding our Eureka! base camp tent series, which exceeded expectations this year, along with the new Jetboil Joule, which won Gear of the Year honors from the Gear Institute at this summer's outdoor retailer show.

Lastly, watercraft -- results this year reflect the impact of global restructuring and our strategic emphasis on regaining a leadership position in the panel specialty channel and strengthening innovation. All are key to putting watercraft on the path to sustained profitability. This year we put together a new team of panels for industry veterans with a solid track record of success. Their first boat out of the gate, the Old Town Predator fishing kayak, is winning awards and rave reviews and orders are strong heading into the new year.

Innovation has been key to our success and growth to date and it will be even more so in the years ahead. Meaningful innovation requires what I call the aha's. These are the insights that come from deeper, richer understanding of our consumers' and customers' needs and expectations. Going forward, we plan to invest in market research tools and techniques as well as enhanced data analytics to help identify the aha insights that better ensure new product success and valuable perspective for our acquisition radar screen.

To summarize, good progress this year toward our long-term goal of sustained profitable growth, but more lies ahead to achieve a better balance of profitability across our portfolio. To do so, our priorities are to sustain leadership in fishing electronics, gain share in core dive equipment segments, and improve performance and key paddling and camping specialty channels.

Importantly, we end this year having grown profits faster than sales with a strong, healthy balance sheet. We are pleased to have achieved a cash position that now enables us to both invest in the future growth and pay a quarterly dividend to shareholders for the for seeable future.

Now I will turn the call over to Dave for his remarks.

Thank you, Helen. I will start with a quick overview of the fourth quarter. Results this quarter are consistent with the seasonality of warm weather outdoor recreation markets. While sales were up 3.4%, operating losses increased to $4.7 million in the quarter. Lower gross margins in certain end-of-life product lines in marine electronics increased SG&A costs due to the discretionary bonus accruals during the quarter, contributing to unfavorable comparisons and losses, as well as a $500,000 insurance recovery in the fourth quarter last year.

Despite the higher operating loss in the fourth quarter, as Helen mentioned, fiscal 2013 operating profit was up 20% year over year, the highest in more than 20 years. The higher operating profit and lower interest expense were key contributors to improved net income for fiscal 2013.

In addition, the tax strategies employed this year contributed to the favorable comparison. For example, we were able to recognize foreign tax credits in the US and we booked R&D tax credits when Congress retroactively enacted the credit in January of this year. We told you last year's effective tax rate was unusually high and this year's tax rate of 21.6% should not be viewed as the norm. Historically, in most years, our effective tax rate has been in the mid-to upper 30s%.

In September, we announced completion of a new cash flow-based loan agreement with more favorable covenants. Year-over-year interest expense declined by $1 million in fiscal 2013 and this agreement is anticipated to further reduce borrowing costs.

Operating expense year-over-year was down 0.6% as a percent of sales even with the addition of Jetboil. And you recall last year's operating expense benefited from a $3.5 million favorable legal settlement.

We ended the year with debt at $8.3 million, the lowest debt level in the Company's history, and with a strong cash position of $55.7 million. The balance sheet is in really good shape.

As Helen mentioned, we have achieved your one financial targets of our 2015 three-year plan. The challenge is to strive for consistency in total company performance going forward. It's important to note that the outdoor recreation markets have yet to return to prerecession levels and growth in dollars is not matched by the growth in unit sales in any of the markets in which we compete. At this time, with markets still in an unpredictable postrecession recovery scenario, we continue to believe our 2015 financial targets are stretched goals. We do feel good about where we are and we maintain a clear disciplined focus on growing profits faster than sales.

And we will turn it over to questions.

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

Good morning, everybody, and Merry Christmas. Give me a sense -- you guys talked -- your new product development as a percentage of trailing sales is what I am looking, certainly a third across most of your businesses. If you look at the four groups -- diving, marine electronics, camping, and watercraft, is there any one area that you see more product development, more technology innovation? Obviously, marine electronics and diving have that sophistication. Or do you look at more balanced product development across the different businesses?

We try to emphasize new product development in all our businesses. Certainly, the technology is skewed more towards marine electronics and diving. But innovation doesn't necessarily have to be technology. It's about developing products that better meet the needs of the consumer. And it can be modifications to the design or the experience, enhancing the experience for the consumer.

So certainly from a technology standpoint, that is skewed, but the emphasis on understanding the needs of our consumers and what we can do to enhance their experience is equally important across the board.

When you look at a lot of companies that have spend and have as robust a new product development as you guys have, I'm curious. Have you seen, say, in the last 10, 15 years, a compression or a cycle time between product design specifications, engineering drawings to an actual working prototype or an actual product? Is that important in your area, or is the time cycle of new product development less applicable to your business?

No, the time is very critical. And speed to market has been shortened and it continues to be shortened, especially in the area of electronics. And you not only have to develop speed in the development process and certainly identifying the need but it's also the ability to manage your product that's on the shelf because you now have to also make sure that you don't overload with SKUs and you take as many SKUs out as you do put in. So, the whole process has been sped up.

Let me ask you, on the diving and the marine electronics area where you have more technology-based product development, how much patent protection do you guys have in that area relative to maintaining market share?

It's very important for us to protect innovation, if possible, and it's a certainly a key strategy for us, given how quickly competitors are following and able to copy what we do. So, we spend a lot of time on that, we spend money on that, and we do have some key patents that are protecting things in those two businesses. But again, you can't go after protecting everything because it's an expensive and it's a resource draining process, so we are very selective in what we go after.

A question maybe for Dave -- have you guys formulated your CapEx budgets for next year?

I think it will be similar to what we ended fiscal 2013 in. You'll notice it was a party good increase in 2013 versus 2012 and that is really reflective of the investments we are making in some of these technology areas.

Okay. How do you look at across the businesses where you guys are relative to payroll, headcount? A number of manufacturing businesses are pressed for engineering, CAD/CAM design people. You have some of that, I would imagine, in your electronics and scuba area. How do you see headcount going forward?

Well, we would love to be able to spend resources on R&D area. That's obviously very important to us. But we have tried to maintain that and keep that at a level that is consistent and manageable, but we would consider investing in R&D. That is something that if we need to do it, we will do it.

Okay. I will just ask one more and get back in line. Dave, the $55 million in cash -- where is that invested in this low interest rate environment?

Yes, it's basically invested in low interest rate vehicles. That's a year end number, so of course we are going to use some of that cash to fund working capital. That's the plan, at least, going into the season this year. But yes, unfortunately it's -- to keep it liquid, and that's what we want to do, we are keeping it in low interest rate vehicles.

So is that treasury or bank deposit, FDIC?

Bank deposits, yes.

Michael Schechter of Mentor Partners. Your line is now open.

In light of the three-year plan, and we are a year in, and what has occurred with the Jetboil acquisition, etc., I look at the company. And it's really, to me, I look at it in two pieces. You have got marine and diving, which, Helen, you said are really the technology. And marine is growing stupendously, has been, has had tremendous success with multiple acquisitions, rarely missteps. And marine and diving provide the bulk and it's got to be 90% plus of the EBITDA and cash flow of the company.

And then outdoor and particularly the boat business for which we have been -- we are on our fourth attempt to try to right size this thing. And I just wonder whether the capital allocation to outdoor equipment and the watercraft business is the best use here, especially when one would consider the multiple for diving and marine electronics would be substantially higher than where the company trades in a public market vehicle. If you were just diving and marine I think were masked by the issues we've had in watercraft for 10, 15 years.

All I can say, Michael, is that for the watercraft business we are on plan. And we put a very disciplined plan in place together for a three-year plan and we feel good about where we are. So we are not disappointed at all where we are with watercraft. We know there's some work to do. We have done a lot of work on it and I think we feel good about where we are with them.

Our business model is having multiple platforms is a key benefit in this industry. The cyclicality, the seasonality, the different impact of the economy on the different businesses is significant. So the diversity is important to us.

It's a very fragmented industry in general. Watercraft is one of the largest single product areas that is out there that is within our space. So, there are characteristics of that business that are very good. We know how to do it.

I would say that recently we have spent a lot of time doing consumer research, understanding the market. And our latest launch has reflected our understanding of the market and is doing well.

So right now, we have dollars to do acquisitions. We are not not doing acquisitions because we have watercraft. I would say that our goal is to build it, and it is not an anchor around our neck. It is, at this point, we feel, moving forward. So, I know it's -- we've had it for a while, but I do think that we have the opportunity to get it right and we are approaching this in a different fashion.

Okay, I can appreciate the issue of seasonality and cyclicality and having a diverse portfolio. But you have got marine electronics, which is just a crown jewel business that runs 15%-plus EBITDA margins, has tremendous growth and, as far as I can tell, has almost never stumbled. It's just a consistent, wonderful business. Diving has some economic cyclicality to it, but it's just prime brand. It has got technological innovation. It has got barriers to entry based on patents and the issue of safety, whereas watercraft, it may be some counter cyclicality, but it is only worthwhile if it is profitable. If I go back over the 15 years and look at this company, it's operating margins and EBITDA margins have never, ever approached double digit. They have always been below 5%. And to have $50 million of revenue, $40 million of assets deployed -- and when you talk about capital allocation it's not just a dollars and cents. It's management time. There are only 24 hours in a day. And to have you spend the fourth iteration of trying to repair that business as opposed to growing the next piece of marine electronics or spending more time with diving or even looking at something else -- I don't understand how it has any benefit to the company.

You have got a perspective on this which I appreciate. I would just say that if you do go back, watercraft saved the motors business. And if we didn't have watercraft in the mix, we would not have the marine electronics business. So we are not --

When was that? Because I'm looking back to 2002 and I --

Well, it was like 12 years ago. Not that that's a reason. I'm just saying that this is strategically this, we feel, is a business we should be in and we should be winning in it. I am not making excuses for performance, but I would say that our understanding of the consumer and the needs is clearer than it has been, ever. And the whole launch of our new boat has shown success. So, with that, we can -- I think we agree to disagree on this. But your point of view is definitely appreciated.

How do we take -- the marine business and the diving business as a separate business would be 10 times EBITDA, 11 times EBITDA, big multiples of earnings. Yet I think it gets dragged down by the watercraft and outdoor equipment business. Assuming we are going to hold onto outdoor and watercraft, how do we get the world to recognize that the 90%-plus of our business is this high-end, defensible, growing, technologically IP-positive business that should trade four or five turns of EBITDA greater than where we have historically and are currently trading?

One comment and then I think we will go on. But you make it sound like there's no competition in those businesses. It is highly competitive and we work very hard every year to get where we are going. So nothing in this world is for sure, and we need to develop some other foundations. But Dave, I don't know if you have --

I believe it's a fair perspective. I think what we have is the portfolio we have we believe in. And the fact that we report these segments separately to investors and tell our story the right way -- hopefully, everyone recognizes what we have here. So, I think it's fair to question it, but I think we feel good. Like I said, we feel good about where we are right now. We feel good about where we are going with all four businesses and we will continue to have this conversation.

Okay. Thank you. Good luck into the spring.

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

Let me ask a question a little different way. Having grown up in Wisconsin, my idea of water is powerboats with Mercury Marine and chasing fishermen around. That being said, I don't know much about canoes and kayaks. How big is that market? And what is the organic growth of that, say, non-motorboat business?

Well, the canoe and kayak business has a steady penetration and participation rate. The growth recently has come from fishing. And so the boats, the new boat that we have introduced is the Predator, and it is specifically targeted at the fishing consumer. So there is growth from new activities beside the traditional canoeing and kayaking. So people love to recreate in the water. And the evolution has been in the sit-on-top kayak and the fishing and recreational aspect of it.

Okay. But again, how large in dollar terms might that whole business be? Maybe out of ignorance, are you really looking at that paddle business on a global basis or is this more of a North American market?

Well, we have actually just gone through some of the expense that has hit us in the watercraft businesses that we have restructured our European business to go to distributors only. We do feel that it's hard shipping boats, and we have a distributor that does it better than we can do it in Europe. But we did move that way. So, our focus is in the US and there in the specialty channel. And we have different consumer segments than just the traditional canoeer and kayaker. So right now the focus is in the US.

Okay. So with the growth forward, then, Helen, for Johnson Outdoor be vacuum the growth in the overall watercraft business? Or are you able to capture market share with innovative products like the Predator?

We are absolutely adding incremental consumers for incremental activities. And I think what we are seeing is that the fishing consumer is highly passionate and it's a large segment out there, and not everybody has a big fishing boat to go fishing. So, it is about adding new consumers and new activities.

Okay. Is that Predator just specifically for fishing or can that be for hunting or just standard water enjoyment, too, or is it designed with fishing pole holders? I've never seen the product. So --

Actually, we are being very targeted. And the Predator specifically, the one that we launched, was specifically for fishing, but we do feel that other activities on the water such as hunting is opportunities. And our ability to produce kayaks and canoes gives us a great foundation for which we can address these segments of the market. And that, I think, really is what has come out of a lot of our consumer research.

Okay. And from a cost of goods, COGS basis, what relative resins and the commodities side of the watercraft -- how has that played out in the last few years? And where are you on commodity spot prices for some of the plastics and things that I would imagine go into this?

We have not seen a lot of pressure in that market, in the resin market and the plastics market, recently. Things change quickly. But our plans right now aren't necessarily to have a ton of inflation there.

Okay. And then on the military side, Helen, you mentioned -- do you guys have any visibility either from the Army or Marines relative to returning from in-country, any replenishments, National Guard, anything on the camping side for the military?

No. I would say that it is -- first of all, visibility is very difficult in general with them. And we are predicting that it is not going to grow or have increased -- they are not going to have increased dollars allocated to this. So that is a very challenging area.

Okay. Thanks much. Great performance. Thank you.

Thank you. At this time, I'm not showing any further questions. I would like to turn the call back to Ms. Helen Johnson-Leipold for any further remarks.

Thank you, everyone, for joining us, and best wishes to all of you for a great holiday season. Thank you so much.

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