Johnson Outdoors Inc (JOUT) 2014 Q2 法說會逐字稿

Hello, everyone and welcome to Johnson Outdoors second-quarter 2014 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. (Operator Instructions). This call is being recorded. Your participation implies consent to our recordings 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 Dave Johnson from Johnson Outdoors. Please go ahead, Mr. Johnson.

Thank you, operator. Good morning, everyone and thank you for joining us on our discussion of Johnson Outdoors' results for the 2014 fiscal second quarter. Now if you needed a copy of our news release issued this morning, it is available on the Johnson Outdoors website at 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 today's press release and our filings with the Securities and Exchange Commission. If you have additional questions following the call, please contact me. I'd like to turn the call over to Helen Johnson-Leipold.

Good morning. I will start off with comments on second-quarter results and share perspective on the marketplace. Dave will review key financials, then we will take your questions. The outdoor recreational industry is highly seasonal and extreme weather such as we've experienced this year in North America and Northern Europe can impact performance. Reduced temperatures and harsh winter conditions began in the first quarter causing customers to delay orders. These same conditions extended well into the second quarter, which resulted in further delays.

While sales during the month of March were solid, they were not strong enough to offset slower sales in the first two months of the second quarter. As a result, our second-quarter sales were 6% off the prior year. Last year's record high second-quarter revenue also factored into the unfavorable year-over-year comparison. Historically, we ramp up production during the first quarter for initial customer shipments during the second quarter in anticipation of the primary retail selling period for our products. However, this year, there has been a shift in pacing of customer orders to align more closely with the warm weather retail season, which historically begins in April and continues through July. This shift led to a delayed ramp-up, which prompted strict inventory management efforts across our operations.

During the first quarter, we also began tightening our belts to control spending without jeopardizing investment in the future. Efforts over the past few years to improve operational flexibility enabled us to make adjustments to marketplace demand and help minimize the impact of this year's volume decline on operating margins. As a result, operating expenses in the second quarter declined 10% and operating margins remain solid at 9%. Finally, earnings per diluted share for the quarter were $0.67 versus $0.90 in the prior-year quarter. Dave will talk about the key factors behind the unfavorable comparison.

The good news is that the weather has finally turned and product demand is growing. Order positions are strong and point-of-purchase status shows retail movement is solid. Based on what we are seeing today, a key challenge this season may well be keeping up with demand. However, while data can help us adjust to marketplace trends, data cannot tell us just how long the season will last. If weather patterns hold true to what we have experienced, historically the result would be a compressed season with fewer inventory turns. The fact is that this year's unpredictable weather makes it impossible to predict the full-year performance with any degree of certainty.

The best news about our outdoor recreation market is that participation levels are high with a large number of outdoor enthusiasts who value outstanding innovation and great quality and service, enthusiasts who are constantly looking for the latest and greatest products and services to ensure they have the best fishing, diving, paddling and camping experience. Importantly, these consumers are looking for the best value, not the lowest price. They are the target consumers for our products. Being the best to them is at the core of our growth strategy. Unique consumer insights fuel our innovation efforts and staying closer to the consumer helps us identify the a-has that will keep our brands strong and the preferred choice for enthusiasts.

Results during the first half of the year masked the fact that we are on track to deliver the 10th year in a row where new products represent a third or more of total Company sales. Equally important is mining the wealth of data within and across our businesses for insights that can help us be a better, smarter partner for our customers. We have made significant progress in point-of-sale data analytics, most notably in Marine electronics, our largest and most dynamic business. And while this year's unusual weather has clearly impacted every company in the warm weather outdoor recreational industry, initial market data indicates that we are positioned to hold and in some instances grow share in key categories.

As we enter the second half of the year, we feel good about new product performance and our ability to capitalize on the growing retail momentum in our markets. Our number one priority is to strike the right balance as we work to manage inventory down and keep up with marketplace demand. The goal is to avoid both out-of-stock and overstock situations so trade-offs may be required. We are just now starting to see the all-important consumer response at retail and hope to have better visibility on full-year 2014 performance at the end of the third quarter. We look forward to speaking with you then. Now I will turn things over to Dave for his review of key financials.

Thank you, Helen. Lower volume is the key driver behind reduced operating profit and net income for the quarter and the year. We moved quickly and aggressively to reduce spending, which offset some, but not all the volume loss and also helped protect the bottom line. As Helen mentioned, inventory management was a key focus for operations this quarter. Every unit worked diligently to bring inventory levels down against the backdrop of delayed start to the season and they have done an excellent job reducing inventory by more than $2.5 million from the end of the first quarter and about flat with last year at this time.

Successful inventory management helped drive a 6% reduction in working capital year over year. The goal is how to keep up with customer orders and that is a real challenge, particularly for Marine electronics where we have a strong lineup of new products. On the year-to-date basis, net income declined about 40% reflecting the impact of lower volume, as well as a higher effective tax rate from 32.8% last year to 37.2% this year. Now the unfavorable comparison was due to valuation allowances in countries where losses were incurred, which preclude the Company from realizing any tax benefit on that line.

Overall, the balance sheet is in really good shape and our cash position is strong, enabling us to continue to invest in the future while also paying a dividend to our shareholders. We remain bullish on the future of the Company and committed to drive progress against our 2015 value plus plan and financial targets. I will turn the call back over to the operator now for the Q&A session. Operator?

(Operator Instructions). James Fronda, Sidoti & Company.

Hello?

Hi, James.

Hi, how are you? Just looking at this year compared to last year, I think you guys saw a big benefit last year in the second quarter because of warmer weather. I guess is it possible to see that this upcoming quarter in the third fiscal quarter depending on how the weather goes?

Well, I think if it gets warm, we will sell product, so that is the hope. And as we've said, demand right now is good.

Okay. That sounds good. I guess anything specific that you guys may be doing in the next couple months in the future regarding the watercraft segment to help boost that up a bit?

Well, we do have a very clear strategy that we feel good about. Right now, we are investing in ramping down our businesses outside of the US for watercraft, which is causing some of the hit on expenses in our P&L this year. But going forward, we feel pretty good about the new path and the focus on the fishing segment and we are seeing hopefully a lot of new product work in that area. So we feel pretty good about the future.

Okay, so the product work would come internally though rather than maybe another acquisition?

Yes, it would be internally because that is an area we know how to do and fishing is also a core competency of ours.

All right. Thank you.

Brian Rafn, Morgan Dempsey Capital.

The question is on the -- you guys talked a little bit certainly about the severity of weather and this might be an anecdotal question. What is your sense with some of your boutique suppliers, if they had the offset in winter and they were doing snowboards or Alpine or cross-country skis, I would imagine their cash flow position from an extended winter would be pretty good and their sellthrough would be pretty strong. Does that give you guys hope from the standpoint that they could very rapidly order fulfill their summer inventories?

Actually, yes, that is a positive. We are seeing the customers who actually do winter have done well with it and certainly from a financial standpoint, we appreciate the fact that they have cash that they can spend money on for us.

Okay. When you guys kind of look in the past kind of seasonally and you talked about it being a little more truncated a little more, but how are you guys from the standpoint of kind of a rapid, just-in-time inventory, kind of almost like a fast food, hey, I need it now, how is your response from a manufacturing standpoint? You have gone from being very careful managing inventory to now it is 911, you have got to get the product out.

Well, I would say we are certainly much better than we have been historically and depending on the immediacy of the demand, and it varies across business, but we are pretty good at making the orders, but we have a capacity and I would say that that is going to be the big issue is how big is the demand and how quickly do they want it. And certainly in the businesses where we manufacture our own products, which is the big ones, we have more control over that. When you source the product, there is a longer leadtime. But I would say that is going to be -- the big challenge is keeping up with the demand.

Yes, okay, I think that is a good point, Helen. What, from the standpoint, if you look at your four businesses, you look at marine electronics, scuba, the outdoor, camping and watercraft, if you look at Johnson Outdoors, where do you have -- you mentioned your larger where you manufacture yourself, where is your skill set where you control it? Is it in the marine electronics and the scuba where that is probably the area where you can respond as rapidly as possible?

In marine electronics, we manufacture our own product. In diving, it is a mix depending on which product category. I would say the biggest sources area is our consumer tents, but -- so in the big areas, we do have more control over our manufacturing.

Okay. Back on weather, and again, I am only going from your own historical experience, when you look -- if you have an extended summer period, you get into kind of Indian summer where you have got a fairly nice September and October, does the curtain fall on your summer business when kids go back to school or is it -- can be extended on a weather basis?

It can be extended. So if we by chance had a, which would be wonderful, a nice long summer, that would very much help us.

Okay, okay. And I am having a cardiac arrest here. Did the military actually buy some tents this quarter?

They did. Our big tent business was up this quarter.

Okay. Can you -- is that Army, Marines, National Guard or is it domestic, foreign?

Good question. I think a lot of it was domestic, but I don't know the branch. So yes.

Okay, okay. Is there any -- Dave, is there any visibility on follow-on or did they just show up and say this is what the PO is, do they say this is one of many, do they give you any kind of forward visibility?

We have some and so I do expect a little bit of growth there this year, but I don't expect significant growth.

Okay, okay, okay, all right. Did you have your CapEx budget for the year, Dave?

About $16 million I think is what we are kind of expecting this year.

Okay. How much of that -- maintenance would be what of that, Dave?

I don't have that number in front of me, Brian. Sorry. I can get that to you.

No, that's okay. I will follow-up. Helen, you talked a little bit, or maybe David, about new product. Can you go over maybe a couple of your business segments as to what you see as -- and you have done a fabulous job in driving -- you've mentioned I think 10th year in a row with at least a third of the trailing sales being from new products. That is a fabulous number. What do you have for the kind of 2014 season?

I will give you a couple examples and Dave can pipe in too, but we have got, in our Minn Kota business, we've got a new introduction to our shallow water anchor, the Talon, which is doing well. On that one, we are trying to keep up with demand. We have a -- our 360 degree Humminbird sonar that is out there, which is truly a great new innovation. We have a new computer, a watch for diving that was slightly delayed in the first quarter and now we are coming out with that. And we have [Jeff Boyle], new product. So each of the businesses has some good new products, which is helpful when it is the enthusiast that really keeps buying even when the weather isn't that great. But Dave, if I'm -- anything you want to add in here?

Just to add on the Humminbird side, the ONIX, as Helen mentioned, is a high-end fishfinder that has got very good reception out there in the marketplace, so we are very excited about that.

Okay, okay. How was the rollout of your -- you have your premier line in the scuba gear and then you are having a little more of a -- kind of a middle range brand product. How is that rolling out in 2014? You've only had it a couple of years.

Yes, I would say that it is not doing -- it has not got the energy as we expected, but the whole diving business in general has been challenged because of the economy. But we have -- this is kind of a key year because we have now got the full line of the SUBGEAR product in, so it is really a little bit early to tell on that, but hitting the mid-price segment for diving, that is a pretty big segment for us. We are hoping that it will come through.

Okay. And then, Dave, what are your kind of blended interest costs on your longer-term debt?

On the long-term debt.

Yes, it shifted out a little in Q1.

It's a little over 5%, I believe.

Okay, okay, okay. And then you talked -- I missed, I was writing so fast, the tax rate. Have you got any sense on visibility of tax rate for this fiscal year?

I think year to date we are about 37% and I think we will be around that for the full year. The challenge is where, like I mentioned, where we are -- we have got losses in foreign jurisdictions where we can't take the benefit. So I think 37% is probably -- plus or minus a point or two

Okay. And then, Dave, just a comment maybe on salary, wage, healthcare costs, anything that you can kind of look from an expense side?

In terms of headcount and wages, headcount is up slightly, wages are up slightly. We've seen a bit of a hit on healthcare, but that is just because of our experience rate. So I don't think a ton of movement necessarily, but we are up a bit.

Okay. And then anything on commodity costs, feedstock?

Nothing terrible. In the watercraft business, we have seen upward pressure on our resin costs and that has affected the watercraft gross margin. It's a few hundred thousand dollar hit so far this year.

Okay. All right, guys. Well, hey, good luck with the balance of the summer.

Thank you.

Thanks, Brian.

I am not showing any further questions at this time. I'd like to turn the call back over to our hosts.

Thanks for joining us. If you have any further questions, you can give Dave or Cynthia a call and again, thanks for joining us.

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