Johnson Outdoors Inc (JOUT) 2014 Q4 法說會逐字稿

Hello, everyone, and welcome to the Johnson Outdoors' fourth-quarter 2014 reporting conference call. Today's call will 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 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 Patricia Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Thank you, Nicole. Good morning, everyone, and thank you for joining us for our discussion of Johnson Outdoors' results for the 2014 fiscal fourth 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 today's press release and our filings with the Securities and Exchange Commission. If you have any additional questions following the call, please contact Dave Johnson or me. I'd now like to turn the call over to Helen Johnson-Leipold.

Good morning, everyone. Thank you for joining us. I'll start off with comments on the quarter and full-year results. Dave will review keys financials, and then we will take your questions.

The outdoor recreational industry is highly seasonal and extreme weather can be impactful on performance. This year's harsh weather across North America and Europe put a freeze on consumer spending and customer orders during the first half of the year. During the first six months, sales were off about 7% from the year before. We expected the weather to turn in the second half and that demand for our products would be high. That's exactly what happened.

Strong market momentum in the second half of the year almost overcame the sales decline in the first six months. Fourth-quarter sales were up 10% year-over-year, bringing full-year revenue $425.4 million, just shy of last year. Despite the second-half comeback, operating profit of $16.7 million fell short of last year's record high, due largely to non-cash impairment charges taken in the third quarter. Dave will provide more on this in his remarks.

Excluding impairment charges, operating profit would have been $23.6 million. The effective tax rate more than doubled year-over-year and brought earnings to $0.90 per diluted share, which Dave will also cover. Despite a challenging start to the year, we once again benefited from the power of our market-leading brands and dedication to delivering innovation to our outdoor recreation enthusiast. And we saw continued share gains for many of our flagship brands, including Minn Kota, Eureka!, Jetboil, and Old Town.

A key focus of our plan is to ensure a better balance of profitability across our businesses in the future. This year's bottom-line results masked the progress we've made to that end, notably in our camping and watercraft recreation units. For one, we successfully integrated Jetboil into our camping portfolio, which is a significant achievement. Jetboil brings a completely new proprietary technology and is a great complement to our Eureka! brand. It's also a profitable addition to our portfolio that provides an exciting platform for growth in the years ahead.

For example, the new Jetboil Joule took coveted Gear of the Year honors at this year's Outdoor Retailer show. The Joule has all the benefits of the original patented Jetboil personal cooking system, lightweight design with fully integrated cooking vessel and combustion elements, quick start pushbutton ignition, and fast, even heating, with the new added benefit of being large enough to cook for a whole campers. The pipeline is filled with even more exciting new product ideas that will bring great cooking to the great outdoors in the years ahead.

Over the past two years, we have worked hard to create a business model for our watercraft business that will ensure consistent performance against the ebb and flow of market consumption. We recognized and consolidated global operations into Old Town, Maine, exited unprofitable markets in Europe, and moved to a local distributor model in Australia and New Zealand. By moving R&D, marketing, and production under one roof, we aim for greater focus and alignment to help increase the velocity of innovation and speed to market. And rather than try and be all things to all consumers, we took a highly targeted approach directing our efforts towards the most profitable channels and fastest-growing segments, such as fishing kayaks.

We told you it would take time for our strategy to gain traction and it has. The highly successful introduction of the Old Town Predator fishing kayak last year, and this year's new Predator XL powered by Minn Kota, demonstrate it was well worth the wait. The Predator was a big driver in the year-over-year double-digit increase in sales for the Old Town brand. And we are very pleased to report that watercraft turned profitable in 2014, a full year ahead of schedule. The plan now is to build on the positive momentum that has been created and continue to steadily improve the profitability profile of this business.

We are very pleased by the performance of our marine electronics units this year, our largest, most profitable, and fastest growing business. Minn Kota has shown again that it is a powerful growth engine for Johnson Outdoors, posting record sales and generating profits almost equal to last year's record high. New products drove sales growth for the unit. This included the introduction of Humminbird's much awaited new ONIX operating platform. ONIX makes using a fishfinder simple and easy. Along with the Cross Touch control, ONIX units come with patented side imaging and down imaging sonar technologies, and are fully compatible with our revolutionary patented 360 sonar.

Even more important, ONIX unlocks the future potential to bring a host of new innovative features and upgrades to anglers faster, simpler, and easier. ONIX was introduced in higher-end models this year and will roll out to mid-price units next year. ONIX development was an important investment to remain competitive in an increasingly tough fishfinder segment.

Diving, our most global business, faced challenges across many fronts this year, the weather, weak European economies, geopolitical unrest, all of which took a toll on sales and profits. New product delays also played a role in the results. Clearly, we have more work to do to strengthen operations and build consistent momentum in diving.

We've started the heavy lifting on this, taking a hard in-depth look at all aspects of the business, internal and external, to ensure efforts and resources are focused on all the critical drivers of operational excellence and marketplace success. SCUBAPRO is probably the number one dive equipment brand in the world, and we plan to do whatever necessary to protect and grow that leadership position.

So in summary, 2014 was a challenging year, yet one where progress was made in key areas. 2015 will mark the final year of the current three-year strategic plan and work is already underway on our next long-range plan. We look to build on our strengths and market opportunities with an across-the-board focus on continuous improvement in everything we do.

We've been dissecting our markets, our brands, our businesses, and our organization. We've looked at where we are and where we need to be and identified three initial key priority areas. We believe that by enhancing our capabilities in these, we will be better positioned to take our game to the next level and bring even more value to our markets and create greater value for stakeholders well into the future.

First, consumer insights. We have to know our consumers almost better than they know themselves. Who they really are, what makes them tick, and what will make their entire fishing, diving, camping, and watercraft recreation experience the best it can be, everything from shopping to the actual activity. More sophisticated market research capabilities will enable us to both connect with consumers in new more meaningful ways, and identify those richer, deeper insights that enable us to consistently deliver the best all-around outdoor recreational experience.

Second, innovation process. There is no doubt that we have a great track record of innovation. And as I have said before, innovation is getting harder all the time. That's why it's so important that we have a full pipeline of new product ideas, coupled with a concept to commercialization process, that ensures we're working on the right ideas with the greatest chance of success.

Third, digital arena. Web and digital technologies have become our most important marketing tools. Each of our businesses is working to keep pace with what consumers and customers expect when they connect with us in the digital realm. And we're explore opportunities to maximize our overall investment through best practice strategies that will strengthen our individual and collective brands, share a voice in this key marketing arena. Over the next year, we will be finalizing the new plan and laying the groundwork required for successful execution.

Looking forward, our commitment to long-term value creation and sustained consumer loyalty demands added focus and investment to further expand and grow our brand equities and market positions, and consistently strive for improved operational performance. In doing so, we will continue to be an even smarter, stronger, and better Company overall. We hope you share our excitement for the future of Johnson Outdoors. Now, I will turn the call over to Dave.

Thank you, Helen. There are lots of moving parts that had an effect on financial results this year. Helen already talked about the weather, which shifted the pacing of orders driving the bulk of sales into the third and fourth fiscal quarters.

We're in a highly seasonal industry and a shift of this magnitude posed a significant challenge. The good news is that we benefit from the efforts over the past five years to strengthen operations in every business through discipline, working capital management, and ongoing costs and spending controls. These enhanced operational flexibility and helped protect profitability against the ebb and flow of market demand.

Inventory and working capital are in great shape and were key factors behind our ability to drive over $33 million in cash from operations this year, which is about $3 million above last year. The outdoor recreational equipment industry overall was affected by this year's harsh winter weather conditions. As a result, we've reset 2015 financial targets at 2% to 3% compound annual growth in sales, and a 5% to 6% operating profit margin to reflect this year's impact on our markets.

Despite a very strong fourth-quarter performance, full-year operating profit and net income were negatively affected by $8.5 million in non-cash impairment charges recorded by the outdoor gear unit during the third quarter. The majority of these impairment charges were not tax deductible, contributing to a significantly higher effective tax rate for the year. The tax rate this year with 46% compared to 22% last year. For perspective, a more normal tax rate for us is in the mid- to upper-30% range.

Heading into next year, the balance sheet is in excellent shape and our strong cash position enables us to invest in the future when the opportunity or need arises. And as the weather patterns follow a more normal path this year, we've got a solid lineup of new products to sustain positive market momentum for our brands.

Now, I'll turn the call back over to the operator for the Q&A session. Operator?

(Operator Instructions)

James Fronda, Sidoti & Company.

Hey, guys, how are you? I guess, just on the OpEx line, I mean, it was a little marginally higher than last year. Is that related to the shift in terms of the traction that you got towards the end of the year?

Yes. Are you including the impairment charges in there? Because that is a big driver for that.

I'm not. The $35.3 million compared to $32 million last year. I mean, it's a little bit marginally higher.

I was expecting it to be a little flatter. Was there anything into that that I might be missing?

You're talking about for the quarter then, right?

Right.

Okay, sorry. Yes, there's -- it's sales related, so there is volume related expenses in there.

Okay.

We did have a little bit more in terms of outside cost for professional services and legal expense.

Okay, all right. And I guess you said that the operating margin for FY15 would be down to the 5% to 6% range. Is that related just because you had such a strong fourth quarter of this year, is that what you're saying?

Well, we're about there for 2014, so I think we will enhance the margin a bit, but were not calling for it to increase significantly.

All right, okay. All right, that's all I had. Thank you, guys.

Thank you.

Brian Rafn, Morgan Dempsey Capital management.

Good morning, everybody. Yes. Give me a sense with the slow pace on with the weather in the first polar vortex we had January, February margin net, what was your sense across your distribution channels relative to the inventory build, replenishment?

You think that there was any just business that was lost, whether that be a category superstore like Bass Pro Shops, or Cabelas, or maybe a boutique? I'm just getting a sense of how you -- or do you think you probably recovered us much in the back half as you lost in the first?

I think it was so significant an impact in the first half, I think we feel we almost lost a turn that we could not make up. So, I think it had that kind of impact.

Okay, all right. Looking on the outdoor gear side, were there any significant or maybe a delta change in any military purchases in the camping side, the tents and that?

No, there hasn't been much of a change really in the military business. We were up for the quarter in military slightly and up for the year slightly, but it is not significant.

Okay. What, and I don't know if you guys comment when you look at, maybe a question on, for a guy that doesn't fish, on the Minn Kota and the Humminbird side for the fish sonar, do you guys have any idea or will you talk about what your market shares are in those two brands?

And then what, that whole fishing sonar fishfinder, how big is that market or what's the compound and growth for in sales for you guys? What size, how fast does that market grow?

Well, we don't get real good information on shares, so we have to take a guesstimate on that. But I think we've got one major competitor at this point, which is Lorants, and we are, I would say, it is close, that we both have close to 50% of the market. There's some other smaller players, but we're pretty head to head on that.

The market growth, it is interesting, it does, it has growth because innovation is it drives the cost per unit up, and so innovation is the key creator of the market growth itself. I don't know if you want to take a guess at the size of the market?

Yes, it's tough to call the size of the market. But, and we've talked before, too, Minn Kota is a huge player in the trolling motor side of things, so we feel like we've got a fairly large share there. We are seeing a lot of growth, as Helen said, through the innovation and the fact that fishermen are just, they're willing to pay whatever it takes to find fish and have a good experience.

And we do know that the fishing licenses every year have remained pretty constant, so we know then that the new fishermen coming in are pretty much are the same rate every year. There's also an outside the US business for Humminbird that is not included in this. We do a decent amount of business in Europe, so the numbers don't exactly work out.

But fishing seems to be one of those activities where there's some, certainly, a group of passionate people and it is an activity that is continuing.

Okay. How much, over the years, Helen, how much seasonality, or maybe better, how much cyclicality is to the fishing business? Is that fairly bulletproof relative to economic recession? How secular is that business from a cyclical standpoint?

Well, we can't say that it's bulletproof, and we've seen that it's gotten hit when the -- usually if the boat market gets hit, a big purchase is when people by new boats and they put motors and they buy fishfinders. But, to that point, though, when the market is tough, they consider, they may not buy a new boat, but they might buy a new accessory, and our Minn Kota motors and the fishfinder are considered accessories.

We're not as cyclical as boat market itself. And there's a pretty passionate group of fishermen that sometimes you go fishing more when it's a tough, if it's a tough year.

Right.

But it is cyclical, but not as bad as the marine business.

Okay. All right, I think that's fair enough. If you look at the marine electronics there, you guys have done a fabulous job in that, what type of capacity utilization do you have there?

Or how many shifts are you running between Humminbird and Minn Kota? Just getting a sense on the manufacture side?

Yes, we're not 24/7, so we have capacity in both operations. Having said that, we do tend to be constrained a little bit in our supply chain, especially on the electronic side of things. I don't want to give the impression that we could have just double our business right away because we rely on our suppliers for components.

Okay. Would you be running two shifts, Dave, or a shift and a half, or a shift at once over time, or -- ?

In season, it tends to be a shift and a half to two shifts. But off season, it is just a shift.

Okay, all right. Question for you Dave, where are the cash equivalents domicile? What do you have that invested in?

Right now, it's just short-term stuff. We haven't done anything that's aggressive at all. It's readily available.

All right. On the debt leverage, which is negligible, miniscule, are you just letting that run off on maturation? Are you going to prepay that off or what's your plan?

We keep talking about what we want to do that. I mean, it's nice long-term debt, but of course it is floating rate, so we've got some plans in place to keep our eye on that.

Okay. I didn't hear it from Helen, did you guys breakout, because you guys have always done a fabulous job in new products as a percentage of trailing -- the composition of trailing 12-month sales. Can you talk what new products over the last, I don't know what it was, two, three years, whatever bogie you guys use, it was as a percentage of sales?

Yes, it is about a third of our sales volume.

Oh, okay, all right. When you guys look at it, you guys are always fine tuning, across your four different businesses, scuba diving, outdoor gear, watercraft, and marine electronics, are there any changes that you guys are looking, and maybe even in your next strategic three year plan, relative to distribution channels logistics, supply chain, are there any or are you pretty satisfied with the distribution on those four channels or those four product lines?

We are looking, certainly, at all aspects of the business on this round of the strategic plan. And distribution, one of those areas that has gone through significant evolution.

We are certainly diving into that aspect of thing. And it's a very different situation by business, so each one we are looking into for ways to improve our distribution.

Okay. Dave, anything on cost inflation pressures on raw materials feedstocks?

The resin market is kind of tight. So for our watercraft business, that's a little bit of, we will keep our eye on that. But obviously on the flip side, cost of oil is going down and we're looking forward to fuel costs being down because of that.

Okay. And what is that, is that polystyrene, polyethylene? What's the plastic there?

Polyethylene.

Polyethylene, okay. Let's see here, Helen, you talked a little bit about, and you guys have again done a good job relative to innovation. What, from the standpoint, we hear what a lot of companies have spent time with that, that there's shortages of design engineers and they always seem to be racing to build up design teams, whether it's firearms or you name your product.

How are you guys, when you look at innovation and you look at technology formation and conceptualization of that, how important is the labor component of design engineers? Or is that not in issue for you guys?

Well, in certain businesses that's a key discipline for us and we're always looking for new talent there. But I think, in general, this is more the emphasis on really understanding the consumer and how they've evolved and what their needs are and developing and designing the products for them.

So it's getting that innovative idea that we are really putting the focus on because we haven't found that it's the lack of designers to pull it together. It's really we have to come up with the concepts that are meaningful and valuable to the consumer.

Okay. And when you look at, and you try to you talk about trying to understand whether it be a demographic or psychographic or geographing, you trying to understand the customer, like you said before, they understand what they're looking for.

Is that different when you look at maybe a big box category superstore customer or versus a boutique? Or do you have to craft your intel by channel? How do you run the science of that?

Well, it isn't by really where they shop as much as their psychographics and how they interact with the product and what is important to them. You tend to end up with some kind of correlation between where they shop, but the real driver is the different segments of consumers and what is meaningful to those segments. And then understanding where they shop so you can be at the right place with the right product at the right price.

This is all about data. It doesn't necessarily have to be quantitative, but qualitative and its new research techniques. And, I mean, we totally realize the consumers can't tell us what they need.

Sometimes they don't even know what they need, but it's about doing the research in the right way and being out there and with them in person and understanding and observing how they use the product, how they interact with it. And that, to me, is a very, very exciting part of what we're focusing on today, and it really drives those very special insights that are the foundation to new product development.

Okay. You also talked, and again, with some of the global chaos that has affected the scuba diving market. You guys had an initiative to bring up sub gear as that middle market. How has that process or that program been at all impaired by the weakness in the global diving markets?

We are really looking closely at that. I think with the market being as challenging as it is, we are just making sure to put the most focus and the most resources against our key brand, which is Scuba Pro, and that is protecting, building, enhancing our core franchise is the number one priority that we have right now.

Okay. One more question, Dave, CapEx for 2015?

Yes, I don't expect big change versus what we were going to report in 2015, around to $13 million mark.

Okay, sounds good. Have a good holiday, everybody. Thanks.

Thanks, Brian.

Thank you.

Thank you.

(Operator Instructions)

And I'm showing no further questions at this time. I'd like to hand the call back over to Ms. Johnson-Leipold, you may begin.

I just want to thank everybody for joining us. Again, if you have any questions, please give Dave or Pat a call. Goodbye, and I hope everybody has a happy holidays.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may disconnect. Have a great day, everyone.