Johnson Outdoors Inc (JOUT) 2017 Q2 法說會逐字稿

Hello, everyone, and welcome to the Johnson Outdoors Second Quarter 2017 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 recording this call. If you do not agree to these terms, simply drop off the line.

I'd like to turn the call over to Ms. Khalaf Khalaf from Johnson Outdoors. Please go ahead, Mr. Khalaf.

Thank you, Amanda. Good morning, everyone, and thank you for joining us for our discussion of Johnson Outdoors' results for the 2017 fiscal second quarter. If you need a copy of today's news release, it is available on our website at johnsonoutdoors.com under Investor Relations.

I also need to remind you that this conference call may contain forward-looking statements. These statements are made on the basis of our current views and assumptions and are not guarantees of future performance. Actual events may differ materially from those statements due to a number of factors, many beyond Johnson Outdoors' control. These risks and uncertainties include those listed in our press release and filings with the Securities and Exchange Commission.

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

Thanks, Khalaf. Good morning, everyone. I'll begin with an overview on the quarter and year-to-date results, then provide our prospective on the performance and outlook in each of our businesses.

During the first 6 months of the year, we are in the preseason ramp-up and selling period for the primary retail selling season for our warm-weather outdoor rec products. We have a great first quarter, with sales up 10% versus the prior year, and continued that positive momentum throughout the second quarter, with net sales ending about 12% ahead of last year's quarter. On a year-to-date basis, net sales grew 11% year-over-year to $243.5 million, so top line performance is quite good.

Our main goal is to grow profits faster than sales, and we're doing that. Operating profit for the quarter grew 35% to $20.5 million. On a year-to-date basis, operating profit increased 47%. Net earnings during the quarter increased 50% to $14 million or $1.39 per diluted share and more than doubled for the year-to-date period, ending at $18 million or $1.80 per diluted share.

Innovation is our lifeblood and what Johnson Outdoors has delivered consistently for nearly 50 years. It is the driving force behind our legacy of continuous growth and success, and excitement in the market for our innovative new product lineup is giving us such a great start to the year.

Fishing remains a primary engine of growth for us, with sales 15% above last year's quarter and first 6 months. New product innovation is driving revenue and share gains from Minn Kota and Humminbird brands. Importantly, we are leveraging the pioneering technologies of both brands and our ability to uncover unique fishing consumer insights to maximize the growth potential in this business.

A great example of this is Minn Kota's revolutionary i-Pilot Link, which has continued on a strong steady positive growth trajectory since its initial introduction 5 years ago. Only Johnson Outdoors could conceive and deliver this remarkable smart fishing system, the marriage of Minn Kota's propulsion and auto-steering and Spot-Lock innovation with Humminbird's patented sonar and proprietary mapping technologies. We are the only company that has navigated this technological hurdle to provide anglers a significantly better fishing experience.

This year's new Minn Kota Ultrex brings this technology to a whole new fishing audience, bass anglers, who prefer foot-pedaled motor control to keep their hands free for fishing. This is a large fishing consumer audience who've been eager to have the edge over the fish that wireless connectivity gives them out on the water. Now for the first time, they can have that edge. The patent-pending Ultrex is the first electric cable-steer motor and the most technologically advanced one, providing our breakthrough steering and navigation features at the tap of a foot.

At this time, orders remain very strong in Fishing, and we feel good about the plans and programs we're executing to drive consumer sell-through. Right now, it's all hands on deck to ensure we can keep up with the marketplace demand.

Moving on to Watercraft recreation, where sales are outpacing the competition to maintain the positive profitable growth trajectory of this business. The Old Town Predator series of fishing boats have propelled the turnaround in this business. And the latest in the series, our new patent-pending Predator PDL pedal craft, which was last year's ICAST Boat of the Year, is the hottest selling pedal kayak on the market so far this year. The Predator series was created for anglers by anglers every step along the way. From concept to commercialization, their insights and feedback gave us the guidepost we needed to bring forward meaningful and relevant innovation. New products that are priced to the true value they deliver. This has helped improve margins and strengthen the profitability profile of Watercraft recreation. We're not where we want to be yet, but very pleased by the progress we're making.

We feel the same way about our Diving business. The last couple of years have been very tough for the diving industry. Global turmoil took a big toll, further dragging down a market that had not yet fully rebounded to prerecession levels. At this time, we're seeing initial signs of market stabilization, the first step towards market recovery.

In Diving, the goal is to strengthen performance, and plans are focused on reinvigorating innovation and growing share in core life support categories. We're starting to benefit from these efforts, with great new products, like the Hydros Pro buoyancy compensator and the 620 Ti ultralight -- ultra-easy breathing regulator, which are on track with expectations. So good progress is happening but more work lies ahead.

Continued efforts are designed to accelerate the pace of innovation and speed to market for every new dive product, with concentrated focus and resource alignment against the best new product opportunities with the greatest potential for success. SCUBAPRO is the most trusted brand in the diving marketplace, with a reputation for unsurpassed quality and innovation. And we are committed to growing and sustaining our leadership position.

In Camping, performance is being affected by very challenging market conditions. Retail restructuring in the marketplace made it difficult to bring down higher-than-normal preseason customer inventory levels before this year's selling. At this point, we're anticipating Camping sales to be flat or slightly lower versus last year. We have great innovation potential around Jetboil's proprietary FluxRing technology and are confident in our ability to maintain Jetboil's position as the world's #1 personal cooking system brand.

Eureka! has a proud history of technology. First, from 4 season to wind resistant to all weather, Eureka! made it happen. However, the current challenging market conditions underscore the importance of our strategy to reposition Eureka! against the new emerging camp consumer. Work is already underway to tailor innovation to these consumers, target specific wants and needs and to align go-to-market strategies consistent with our expectations. We are moving forward aggressively, and it will take time before we begin to see results.

As we head into the season, the #1 priority is flawless execution behind our plans to finish the year strong. Performance through the first 6 months has positioned our Fishing, Diving and Watercraft rec brands for continued growth. We believe consumer demand is the truest measure of new product success, and we'll see that in the next quarter.

At Johnson Outdoors, we take the long view looking to a growth horizon extending well beyond the next quarter or the next year to be a thriving enterprise that's built to last and deliver long-term value creation. Our strategic plan reflects how critically important sustained innovation leadership is to achieving that, and the plan's 3 key priorities focused on ensuring a continual pipeline of meaningful new product innovation with even bigger, better marketplace success.

Those priorities are: one, keeping our finger on the pulse of consumers to gain ever-deeper, richer consumer understanding, consumer insights are innovation guideposts, helping us identify the best new product ideas as well as shaping marketing and selling programs that are wholly in sync and in touch with our consumers. Nothing is more important to winning in our highly competitive marketplace. Number two, revamping our new product development process, and we are consistently translating our unique consumer insights into marketplace winners. We're more disciplined, more fact-based in our decision-making and involve consumers every step along the way, from concept to commercialization and beyond. Number three, building stronger, better relationships with consumers through enhanced digital sophistication. For most consumers, the purchase journey begins online, and we need to be more connected and better connected with them along that journey. Across the board, we're transforming our consumers' experience with our brands and our company.

We are moving forward aggressively against all 3 priorities. Ongoing focus and investment in these areas are essential to ensure continued progress towards our goal of delivering accelerated, sustained, profitable growth long term.

We remain very excited about the future for Johnson Outdoors. And now I'll turn the call over to Dave for his comments. Dave?

Thank you, Helen. Good morning, everyone. I just want to highlight a few items during the quarter. As Helen noted, new products are doing very well this year, and pricing to the true value of these innovations is giving margins a good lift. Total company gross margin grew 2.3 points in the second quarter. Every business is posting higher gross margins, driven largely by new products as well as improved operating efficiencies and a favorable mix of products.

Operating expense increased $4.6 million in the quarter, with higher volume-related costs accounting for about half of that increase. Consistent with our focus on innovation, R&D investment was up about $700,000 in the March quarter. A couple of other items contributed to the increase in operating expense. First, $700,000 in deferred compensation, which was offset in the other expense line. And second, bad debt expense, which was up about $400,000 versus the prior year. Working capital is up about 4% versus last year's second quarter. This was driven entirely by an increase in accounts receivable, which are up about 19% due to higher sales during the period.

On the flip side, inventory is down about 17% from last year, indicating strong preseason sell-in this year. Net income in the first 6 months benefited from a 17.3% effective tax rate, which reflected approximately $4.2 million of foreign tax credits generated by the repatriation of about $22 million in cash from overseas in the first quarter.

The decision to bring cash back when we did was due to favorable foreign exchange, combined with our ability to utilize these tax credits. As we noted last quarter, we anticipate a mid-20s effective tax rate for the full year as a result of the repatriation. We expect to use the cash to curtail debt and invest in targeted growth strategies and opportunities.

So in summary, the balance sheet is strong and our cash position is growing, enabling us to continue to invest in strategic priorities and opportunities to expand our business in growth potential. We remain confident in our abilities and plans to create long-term value and consistently pay dividends to our shareholders.

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

(Operator Instructions) Our first question comes from the line of George Kelly of Imperial Capital.

A couple of questions to start on the Fishing business. I'm wondering if you could give any more clarification around retail inventory levels and sell-through. And just how that trended now that the fishing season is kind of just getting started.

Well, this is Helen. We do get point purchase data from some of the accounts, and we are seeing the sell-through starting to gain momentum. So we feel good that what we have sold-in is starting to move up.

Okay. So it seems like the inventory levels at retail, are you still having to catch up? Or do you feel comfortable with what's at retail currently?

I think we feel good at this point, but we are definitely putting everything on a fast pace, so that we don't run into out-of-stock problems. But this is a pretty exciting sell-in so far, so we'll have to see how things move.

Okay, okay. So you still continue to have to really push your production volume to keep up with what you're seeing so far?

Yes. Yes.

Okay, great. And then another question on Fishing. Pricing keeps moving higher on your newest products. Have you seen any kind of evidence that -- it doesn't sound like it from this call, but are you seeing any evidence that it's getting hard to grow that per-unit pricing from previous years?

With the innovation that we have, that the price value is -- we make sure that it matches up with the price point. But from what we've seen, if we deliver what they're looking for, that there's the core fishing group that will pay whatever we put on the -- not whatever, but what reflects the value. I think one of the strategies is that we offer full line of products. And so we do accommodate those that are not willing or can't go up that high. So we do cover a range of price points, so we do have something for everything.

Okay, okay. Last question on Fishing is the margin. Operating margin was up nicely year-over-year. Is that just incremental margin? Or is there any subsegment, whether it's Humminbird or Cannon or anything that has improved more than normal year-over-year?

Yes. I mean, the margin just really reflect the new product gross margin. We were able to drive kind of a cross support, so nothing unusual there.

Okay, okay. And then your balance sheet, a nice problem to have, lots of cash. Do you feel like you're getting closer on whether it's an acquisition or returning cash to shareholders? Should we expect some coming in the next couple of quarters on that front?

We're active. We're always looking. So we're going to continue our strategy. So I can't tell you anything more than that, really. And we're happy with...

Okay. Could you prioritize, I guess?

I can't really prioritize because we -- acquisitions are part of our strategy, so it kind of depends on the market.

And the next question comes from the line of Brian Rafn of Morgan Capital Management.

Give me a sense, you guys talked about -- you certainly talked or Helen has talked about innovation that if you were to go back, say, last, I don't know, 5, 7, 8, 10 years, and you look at the cycle time between engineering concept, design, rapid prototyping, inventory build, to getting new product out into the market. If you go across your 4 business lines, I'm sure they're going to be different by Fishing from Camping to scuba diving. How much cycle time compression or gains have you gotten? Or is it about the same?

Well, I would say that we are planning ahead better, so we've got -- we plan out years as to having significant launches. And I would say that if that's -- with this new process that we're putting in place, I think there's -- I think we're putting ourselves through some more hurdles, but we've got an efficient process in place that will make it happen fast. I think it was a different competitive environment. I think innovation is getting harder and harder, but with the process in place, we are still being able to identify those consumer gaps. So I would say, it's -- we were good back then. I would say that now, it's much more systematized, and it's planned and it's paced. But we get more done in a shorter period of time, but we still are very careful about what we launch and make sure that it's quality and it's delivering against the consumer needs. So I think we will be more consistently in the market with successful new products.

Okay. Can you describe just in quantitative or -- being an analyst, would you say the product development cycle between concept and having inventory selling in, would that be a period of years? Or months? Or it certainly isn't weeks. I mean, how long is that to get -- is it a 3-year type thing with your specific end markets? Or is it 18 to 20 months? Give me a sense if you can kind of -- or even by business, if you had a better idea.

Well, if it is truly breakthrough technology, I mean, that doesn't happen overnight, and you spend a lot of time. You have to plan way ahead for that. I think if it's a line extension or an added benefit, we can do that on potentially an annual basis if we're planning ahead. But the one thing we don't want to do is the market can only handle a certain amount of new products. Per season, we can only -- we can -- so we want to pace it, and each business is different in terms of the capacity of the market to handle. So I would say, we try to come out with new products every year, but it's more than -- you don't start on the concept 12 months before that. You have to -- you need more lead time on that.

Yes. So it would be years then basically is what you're saying, a couple of years maybe. And then if it's an iteration or a line extension, then you might be able to do that within a year, right? Okay. That makes sense. You mentioned any -- was the inventory surplus just on the Camping site in that channel? It wasn't it scuba or something else?

Yes. We saw it mostly in Camping, yes.

Okay. What -- when you look at your production across the 4 businesses. What might you be running capacity utilization? Or maybe you could frame it by shifts, would you be doing 3 shifts plus 10% overtime on Fishing but maybe 1 shift on scuba? Give me a sense across your businesses, kind of where you're at, either capacity utilization or maybe by labor shifts.

Yes. It's hard for me to answer that because a lot of the pinch point in Fishing is really the long lead time of raw materials. So that's really kind of what we're working with right now is to make sure we get the raw materials in place to turn. So we're working pretty much fully out with -- in Fishing, but we're limited by the raw materials we have right now.

So with full out, I'd be 3 shifts, 2 shifts, 1? I mean, I'm just trying to understand what's normal for you.

Yes. It's really a shift, and then maybe like a shift and a half is overtime involved there with the Fishing business.

Okay, okay. And then scuba, for everything else, is probably kind of normal, kind of 1 shift?

Yes. Yes, that's fair for the shift.

Yes. And then kind of on a cost of goods sold, Dave, from an inflation standpoint, are you seeing aluminum, resins? Is there anything that you're seeing as giving any percolation relative to inflation or demand? You certainly spoke on Fishing with the ability to source, okay? There's a timing one there, but anything on the cost side?

Nothing significant, Brian. Resins have been percolating up here lately, but it's nothing huge.

Okay, okay. When you look at just the seasons, and again, obviously, the country is different. We've had a lot of rain in the West. Here in the Great Lakes, it's been kind of a milder season, less maybe ice fishing, early melt. Has that had all gotten fishermen out earlier on the lakes, from a Great Lakes perspective, for you? And have you seen any more pull-through demand, from a weather standpoint, I guess, would be the question?

I don't think we've seen any difference or people getting out there earlier than normal. The kind of sell-through right now that we're getting is fairly standard, but they buy in anticipation of the fishing season. But at least, it's not the other way around, which is the lakes are not frozen.

Yes, right. No, yes, I was just looking to see if there's -- anytime you get crazy weather, sometimes is an issue that nobody looked at. Your -- what would you kind of -- if you look at you guys are very centered certainly with the demographics and geographics and psychographics and all the insights you talked about as guideposts and the pulse of the consumer. What is kind of your -- because Fishing and electronics have done so well. What is your demographic profile of your U.S. fishing -- fishermen or fishing lady?

Well, we try to stay away from the true demographics, and we get to more to psychographics and motivation for purchase. But we truly are targeting the fishermen that is -- values the fishing experience and values the equipment that helped him catch more fish. And so there is a core passionate group of fishermen, and they're scattered regionally. And they're different North to South, but -- and the type of fish they catch, but it's really more of an attitude and a motivation. And they just really value product that delivers a benefit that helps them have a better experience. So that's -- to me, that is -- they put a high priority on fishing and are always looking for the latest and greatest.

Yes, no. I come from the boating side, so in the early days, you didn't need a 300-horsepower Merc to get to a fishing spot. Now you do. So I do understand that psychographics side. Would that core passionate fishing guide, Helen, be -- would that number or that market be millions of fishermen or tens of millions?

Well, we know the participation rate. I mean, we've got -- the numbers vary between 13% to 15% of the population fish. And then we sell to those who own boats, so you get it down to that level. But I would say, it's -- there's a large faction of fanatical fishermen out there, and there's a little variation year-to-year. But demographically, they are getting a little older, but they seem to be bringing the family on board, which is key for the future.

Yes. So you're seeing that between generational shift, you're not -- because you're kind of -- answering the question, you're not seeing an aging where this is a dying group. You're actually seeing the participation to the next generation. So that -- obviously, that's certainly good.

Well, I think if you really look at just the trends in fishing licenses, I think it's gone down very slightly. So it's either flat -- it's flat or down. But there's obviously a lot of dynamics going on, and you've got new boats coming in, new fishermen coming into the market every year, obviously, because we see that in our purchases. And then you've got some on the other end are moving out of the market. But for now, I think it's a pretty strong dynamic market.

Okay, okay. From the standpoint, Dave, anything on military on the Camping side?

No, not really. Military is not a significant mix of the business.

Okay, okay. And then, I just caught the kind of tail end of your scuba diving side. How has the new product introductions been on the diving side?

We actually have had some great response, and it's quite an important year for us because we feel it's important for us to lead in the life support categories, and we introduced a new innovative buoyancy compensator, which there hasn't been a lot of innovation in that segment of the market for many, many years. And the response has been outstanding on that. And we also introduced a new high-end reg -- regulator that has better performance. It's lighter weight. It's more comfortable. And that, the response is doing really well. I think this does prove that the innovation does drive market excitement. And our target diver is the same kind of thing as fishing. There, a core group of passionate divers that -- especially in life support, you want the best and the latest and greatest, and innovation drives those sales.

Okay. And then I'll just ask one more. What has been the -- and correct me if I'm wrong, there was some disruptive relative to diving patterns in the Mediterranean area with what's been going on in the Middle East. Is that -- is 2017 better or worse? Or is that still an issue?

Well, I think it's -- we feel it's stabilized. It's not declining. It doesn't mean that it's going to start growing. I think the Red Sea is still an issue. It was a big dive destination. I think the -- we are putting plans together to address growth opportunity in that challenging market. But I would say that because our consumer is the higher price point buyer that they will also be the ones that are going to -- the Red Sea is not working really well, I'm going to travel and I'm going to go to a different location. So I think as being the one of the leads in the premium segment of that market, we are, I would say -- and we can only guess on that because we don't get the data. But we would most likely be less impacted by the Red Sea because of the type of diver that we attract.

(Operator Instructions) And we do have a follow-up from Brian Rafn of Morgan Capital Management.

Short line. Dave, you talked a little bit or somebody commented on bad debt, accounts receivable. Are you seeing that -- it's been kind of a tepid economy? Do you see that across any of your channels?

The retailer environment is challenging. We had a bankruptcy of a customer, actually a couple of customers, so that's reflected in that number, and we continue to keep an eye on it. I think where we're positioned right now, the season is fine, but in the future, we'll have to make sure we understand what's happening out there.

Yes. When -- Dave, when you look at that kind of boutique and we've got a lot of the sporting goods business, whether they're gun stores or whether they're watercraft or rock climbing, there's these kind of nichey mom-and-pop's as well as big box. Is -- what is the encroachment in your product lines with an Amazon? With the cyber in that? Or does your customer really need that physical, tactical interaction with the product?

I -- Dave, you pipe in, too, but it depends on the category. But certainly, it varies, but there is -- we are high-ticket items, and people would like to touch it and feel it. I think they use the Internet for research and information. I would say, if they're avids and they know exactly what they're looking for, then they will look for the best price they can get. But I do think more activity and more -- our goal in our digital website is really to give the consumer access to the information and exposure to the product line that we offer. And if we can help them make some decisions and then they go into the store and buy, that's great. But I do think, because of the -- some of the complexity of our business is that it's a little more, I want to touch it and feel it, and -- but I think the Amazons of the world are touching every industry and category. And if you're confident and know what you want, I think it serves the purpose and it's easy.

Yes, no. I mean, that makes some sense. Is there a challenge in either -- Helen or David, is there a challenge in store closures of retail chains or one-offs? Or is it maybe a shift if you see a big box? We've seen, certainly on the gun side, seen consolidations with big box, Bass Pro or Cabela's. Do you pick up more mom-and-pop single-proprietary shops? Or I'm just wondering, from the standpoint of if we see closures in door fronts and stores and smaller little one-offs, where does that -- where does your market go? And obviously, in fishing, with boat dealers or some of the big box, how do you kind of see that navigate with the assault that's on retail?

Well, we do have specialty dealers in Diving. We have a lot of a specialty dealers in our Watercraft business. And they tend to -- they do play a role. You have to get certified through the dealers in diving. And then in paddle, you want to see the boat and get in it. In fishing, I think they obviously, with -- between Bass Pro and Cabela's, they -- we have other channels that they can go to. So I would say, Camping probably is a little more of a struggle because it's of -- many of the closures that hit that industry and there's a lot of online options. So I think it's a little more challenging in Camping. But I think the other businesses, there is -- they will find a way to get the product. So I don't think it will be lost sales, but I think, again, Camping is a struggle. But Dave, you can...

No, I mean, the key is that the consumer can find our product. And as Helen alluded to, sometimes that could be difficult in some businesses. But as long as they can find our product, we'll use our product innovation to drive that sale.

Yes. Okay, okay. All right. Anything, as you guys -- sorry, I don't want to -- have you kept headcounts about the same? Or are you adding people or engineers anywhere in the business?

Yes. Well, we're adding functionality here and there. But overall, headcount is pretty stable.

Okay. And what's -- I don't have a (inaudible) what's the headcount about, Dave?

It's about 1,200.

About 1,200. Okay, okay. Any expansions of property plant equipment, Dave? Your budgets, any expansions, and any of your manufacturing facilities or consolidations or anything with a physical fiscal footprint?

Nothing significant, no.

And at this time, I'm showing no further questions. I'd like to turn the call back over to Ms. Helen Johnson-Leipold for closing remarks.

Thank you all for joining, and I hope you all have a great weekend.

Ladies and gentlemen, thank you for your participation, and this does conclude the program. You may now disconnect. Everybody, have a great day.