Johnson Outdoors Inc (JOUT) 2018 Q1 法說會逐字稿

Hello, everyone, and welcome to Johnson Outdoors First Quarter 2018 Earnings Conference Call. Helen Johnson-Leipold, Johnson Outdoors' Chairman and Chief Executive Officer, will lead today's call. Also on the call is David Johnston, 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. Good morning, and welcome to our discussion of Johnson Outdoors Fiscal 2018 First Quarter Results. If you need a copy of today's news release, it is available on our website at www.johnsonoutdoors.com under Investor Relations. I also need to remind you that this conference 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 releases and filings with the Securities and Exchange Commission. If you have additional questions following the call, please contact either Dave Johnson or me.

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

Good morning. I'll begin with comments on performance this quarter and outline key priorities for the year ahead. Dave will review key financials, and then we'll take your questions.

During our fiscal first quarter, October through December, the warm weather outdoor recreational industry is in ramp-up mode, preparing for the primary selling period during the second and third quarters. Sales in each quarter reflect preseason selling to customers. We'll begin to see initial consumer takeaway in the spring.

This year, first quarter sales were $117 million, a 24% increase over last year's first quarter. And operating profit improved significantly to $7 million. Tax reform legislation led to changes in accounting for taxes, which lowered net income, resulting in earnings per diluted share of $0.02 in the quarter. And Dave will provide more detail in his remarks.

Overall, it was a good start to the fiscal year. We're pleased by performance in our Fishing and Diving brands. One of our key priorities and an ongoing focus is to ensure we have a robust innovation process, with the ultimate goal of delivering bigger, better new product successes, bringing forward new products that provide distinct, meaningful added value for our target outdoor recreational consumers. Products with value that continue building launch momentum beyond the 12-month period like last year's outstanding new products in Minn Kota and Humminbird brand. In this quarter, we benefited from their continued momentum with preseason orders trending up across all channels for both brands.

The 2017 new product line-up in Minn Kota was a mix of new motors and a major technology restate of our entire electric steer line. As a result, new products represented over 60% of the total brand offerings, which was unusually higher than the norm and not repeatable every year. Importantly, Value Plus innovation has expanded margins and given a nice lift to the entire Minn Kota brand portfolio, including i-Pilot and i-Pilot Link, our legacy remote wireless steering and navigation technology.

The Minn Kota Talon Shallow Water Anchor series is also benefiting. This year, we've added a new Talon, the first ever with a 15-foot depth range and added technology capabilities, such as wireless remote deployment and retraction. Since Talon came onto the market, the Shallow Water Anchor category has modern doubled in size, which highlights how important innovation is to the overall growth of our market.

Humminbird's newest series of fishfinders continue to grow in popularity, offering the full range of our patented sonar technologies in medium- and large-screen fishfinders. The Helix series provides crystal-clear screen clarity and advanced intuitive touchscreen control. Now coupled with our new pioneering MEGA Side Imaging and MEGA Down Imaging technologies, Helix brings unmatched value in the market and is driving ongoing positive momentum in year 2. And anglers who want everything Helix provides with an even bigger screen display are flacking to our new SOLIX product.

Fishing is our largest and most profitable business, and we are making smart, strategic investments to sustain our position as the technology and market leader. And while we expect the pace of growth to slow somewhat, fishing will continue to be our primary engine of profitable growth.

Moving on to Diving, where our emphasis is on driving share gains in SCUBAPRO through enhanced innovation, primarily in our core life support segment. This quarter, new products were a key factor in Diving's strong results. The revolutionary Hydros Pro buoyancy compensator, the most comfortable, lightest-weight and fastest-drying BC ever; and the new G2 dive computer both started off the year with solid gains. We also began to see an uptick in key international dive markets, reflecting the steady improvement in global economy. We're pleased by the positive momentum in Diving, but there's more to do to get where we want to be to ensure sustained growth for SCUBAPRO.

Market conditions in both Camping and Watercraft Recreation continue to be very challenging. The impact of retailer bankruptcies and subsequent restructuring across the sporting goods channel hit camping categories early last year, driving tightened retail inventory controls that weighed down tent and gear sales all season.

In Camping, Jetboil is targeting innovation that meets the growing wants and expectations of our outdoor foodie. This year's MilliJoule is the latest in our line of compact, lightweight, portable and push-button start personal cooking systems. Jetboil is holding steady against the market headwinds and remains the #1 personal cooking system brand in the world.

In Eureka!, we're focused on the future for prospective camping is one of the largest outdoor recreation markets and also an important gateway to our other outdoor recreational activities. Camp consumer demographics and dynamics are evolving, and so are their expectations for overall great camping experience. We're positioning Eureka! to deliver against those future expectations. Over time, we'll begin to realize the benefits of these efforts.

Now on Watercraft Recreation, tightened retail inventory controls began to affect the paddling markets late last year. Preseason orders suggest retailers are anticipating continued market softness this year. We've got great brands, great innovation, unmatched expertise and are in a great position once the watercraft market rebounds. Right now, we're moving quickly to strengthen operational efficiency to protect margins and reduce impact on profits.

Just a quick reminder that first quarter results alone are not indicative of full year performance. As the season kicks into gear we'll start to see consumer sell-through, which we believe is the truest measure of new products' success.

In closing, we feel good about our plans for the season and our ability to deliver against our goal of accelerated sustained profitable growth.

Now I'll turn the call over to Dave for more details on the financials.

Thank you, Helen.

The 24% increase in revenue was a key driver in the year-over-year dollar increase and operating expenses. Expenses are up about $5.7 million, however, down 2.7 points as a percent of sales. A portion of the expense increase was due to cost associated with this year's implementation of our digital transformation strategy. The impact on distribution channels from tough market conditions in Watercraft Recreation and Camping further emphasizes the critical importance and urgency of our investment. Cost for implementation will continue over the course of the year.

Capital spending was also higher this quarter. This year, we'll start rolling out a new enterprise system upgrade across operations, with a target completion sometime next year. Also, we're making some longer-term investments behind digital. Both contributed equally to the increase in capital spending.

Lastly, net income. The U.S. tax reform law triggered a revaluation of tax deferred tax assets on the books. In addition, it calls for a onetime transition tax on previously taxed deferred foreign earnings. Together, these items resulted in a $6.4 million charge, which lowered net income to about $250,000. Excluding these unusual tax items, we would expect our full year tax rate to be a blended U.S. tax rate in the mid-20s plus a few points for state and foreign taxes.

In closing, while it's too early to predict how the full year will go, we do expect a slower rate of top line growth throughout the year versus the prior year. Preseason sales suggest customers are positive about continued consumer demand, but we believe actual consumer takeaway is the truest measure of marketplace success, and we won't see that until the spring. Our balance sheet is strong, our cash position is healthy, enabling us to invest strategically in growing our business while continuing to pay cash dividends to shareholders.

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

(Operator Instructions) And we have our first question from the line of George Kelly from Imperial Capital.

A few questions for you. So first on the Fishing side of it. Wondering if the sell-in -- did it surprise you how strong the sell-in was?

Dave, you can answer as well. But I think we were a little surprised because this is a second year of launch. But I think as we look at it, the inventories were fairly low coming out of last year. Plus, I think the -- our customers want to make sure that they have product in stock. The high demand we had last year, some of them got caught a little short. So I think they're all just making sure they have the right amount of products to get going in the season.

Okay. And then you sounded not cautious. But you said, again, and I think for the second quarter in a row, that you expect the growth to be at a lower pace in Fishing than it was last year. And just based on the sell-in, and in my checks, I see continued out of stock in some of your products. And it seems like they're still really popular in the markets, doing well. I was wondering if there's anything you're seeing in purchase -- the data that you get -- the tracker data that you get. Is there anything you're seeing that's making you feel more cautious? Or does it still look like a healthy environment?

Well, it certainly is a healthy environment at this point, and it's too early to really look at the consumer takeaway data. It's really preseason. The big growth is in our customers ordering and filling whatever voids they had. So our caution is just that we had such significant growth last year, and we will continue to grow. We feel good about that. It's just duplicating a year, like that is a big challenge and a hurl. If we do that, that would be great. But I think just based on past experience, that was a very unusually positive year we had, and we will continue that momentum. But we're just saying it's going to be at a slower pace than last year, but we'd love it if it went the other way.

Yes, yes. And then on Minn Kota, did you raise pricing on any of your products there, any other major ones?

We -- when we introduce new products, we tend to raise the prices to reflect the value that we're providing. And usually, the new products also have a higher cost of sales as well. But we -- that -- we do that really in the launch period, so that was -- we wouldn't do it in the second year of the launch.

Okay, okay. And then last question on the Fishing business, or I guess 2 last questions. Do you feel like you have enough capacity in Minn Kota to handle? Is your production up to what you expect to do this year? And then can you talk at all about Humminbird? Have you seen more margin gains there? Or what does it look like in '18 for Humminbird?

Yes, just on the first question, George. We are constrained more with long lead time items on Minn Kota. Our capacity ourselves, we're in good shape. We're very busy, but we're in good shape. So it's more about the supply chain and making sure we have the products coming in that we can put into our finished product. So we'll continue to be very busy, making sure we meet demand. On Humminbird, things are looking good. I think the new products are resonating. And I think the profitability of that brand is good, so we feel good about where we are with Hummingbird.

Okay. Great. And then just a couple last questions from me. Last quarter, you had guided for this year's operating margin to be down slightly, I believe, versus 2017. Is that still your expectation?

Yes, the caveat being the top line. But given kind of where we think the top line is, I think we'll see a bit of a haircut on the operating profit margin because of the investment in digital.

Okay. And then I guess that's my last question or about. So your digital strategy, can you lay out what is the incremental expense and amount of CapEx for 2018?

Yes. We're not going to give clear numbers on that. I apologize for that, but it's -- the CapEx spending will be incremental to what we did last year. And again, on the expense line, the operating expense line, we expect spending there as well. That's what's really going to drive that haircut in operating profit margin.

Okay. And most of that is around your smaller segments, is that correct? The Camping and Watercraft and...

No, we're spending across the board, and we're enhancing all of our sites, including Fishing. We've also got an investment in our JDE system as well, so there is a couple of -- we have a new added expense. We have to do an upgrade across the board on -- in all of our global locations and that's another piece that's adding to the expense. But we are putting all of our products on the same platform and so it's a spend across the board.

And our next question comes from the line of Anthony Lebiedzinski from Sidoti & Company.

So certainly, your big sales increase runs counter to your December 8th cautious commentary about the sales growth, the deceleration. I was wondering if you could give us maybe some more color as to -- looking at the quarter, how much of the sales increase was units versus pricing? If you can't share any specific numbers, that's fine. But I mean, just some color, that would be great.

Yes. If -- the caution is this is preseason. So we said it, but it is a sell-in into the retail channel. But it's both. It's units, and importantly, the new products that we've alluded to have a higher price per unit in both the trolling motors and the Fishfinder business. So both are contributing to that increase in revenue.

Got it. Okay. And then was just wondering if -- considering the challenges you've had in Watercraft Recreation, would that be some -- if that business doesn't turn around as you would expect, I mean, is that a segment that you would possibly consider divesting at some point?

Well, we are always evaluating every business we have for what's the best option long term. I would say that given our expertise and our strategic emphasis and plans for the future, I think at this point, we feel there's opportunity for growth long term. But to your point, we're not ever ignoring the evaluation of all of our businesses. But the recreation in the water is not going away. We're one of the global leaders in the space. I think what you're seeing now is, there is a disruption in the marketplace not only, I think, in soft market but you've also got the trade and the channel evolution that is impacting. And we have to let that play out, and hopefully, we will be in the right position when things kind of work themselves out. And with the innovation we've got planned, we feel very optimistic about the business.

Okay. Got it. And then do you have any update outlook for acquisitions at this point?

We are actively looking. And we -- as we said, we've had a strategic planning process that really helps us kind of hone in on the growth opportunities across our businesses. We are looking. And I think one of the things that has kept us successful historically is that we are very strategic about the acquisitions, and we don't do acquisitions just for growth. We do it because it is a long-term value to the company and it's something we can add value to. And so we're looking. And when something that is right for us comes along, we're right there.

(Operator Instructions) And our next question comes from the line of Brian Rafn from Morgan Dempsey Capital Management.

Let me ask you guys relative to -- you had a great, certainly, sell-through stockpiling in the first quarter on the Fishing Electronics side with Minn Kota and Humminbird. How much in that business, with your retail channels, your vendors, whether it be at the big box category, the superstore sporting goods or some of your smaller boutiques selling Minn Kota or Humminbird; how much in-season replenishment orders or EDI -- or how much -- or is it really just -- is there a big surge in the front-end of the season and then maybe less weight on replenishment? I'm just trying to see how much inventory delivered -- gets delivered to the entire season versus in the front-end?

Well, I -- Dave, you could pipe in to. But I think it depends on the weather. There's a lot of things. I think we have -- we will see orders throughout the season. I think what we're seeing today is that given they have 1 year of experience with the product, they're pretty confident in the new products and are ordering a lot more upfront. So you may not see the immediate reorder because they've got a lot of inventory, as we sometimes see in past seasons. But it's not just one (inaudible) or one reorder. It's -- they tend to continue to fill behind sales until they're going to get through the season.

Got you. For the fishing guy in open water, what is really that season for the consumer guy? Is that kind of an April to September for -- what is that season in North America?

Well, you've got -- we've got the northern and the southern, and obviously, the season is longer in the South. But I think if you're talking about the -- when the consumer buys the product, they actually buy it before potentially the summer or the spring season is starting because they're getting the boats all ready to go so (inaudible). And I would say that you end up in the fourth quarter, there's a little less of a purchase of the product, but they're out there fishing. So the fishing season continues, but I think they do most of -- they do more of their purchases in our second and third quarter and less in the fourth quarter just because they -- it's -- the season is winding down for them.

Right. No, I get it. Let me ask you relative to this fishing guy. I'm not a fisherman, so I'm asking this out of ignorance. Is -- do you consumer trends or demands for Christmas holiday? Is that a Christmas giving gift? Or is it primarily -- because here in Milwaukee, obviously, the boat show starts in January, and guys are tricking out their boats. How early do you see that consumer buying for your products? And maybe a better question is, when do you really launch those new -- when does your new product cycle starts for your different shows?

Well, we actually have our fishing show in the summer. So we show our products in the month of July, and then the -- we start working on our customers. And their big order time frame is our first quarter, which we just -- October through December. So they see in our product, and now is the time where they load up. But a consumer really isn't out there buying until they tend to feel like the winter is over, and they are getting the fish. And so they do end up -- if they're buying boats, they buy -- tend to buy boats a little earlier, and then it's the -- all the associated products that go with it come after that.

Yes, no, I get it. That's a good answer. Let me ask you in the same question. Do you see -- is there a demand for scuba diving equipment for the Christmas holiday? Is that -- I'm just trying to think of filling your fourth quarter. Is that at all -- do you see any demand not maybe orders from your manufacturing to the retail channel, but just by consumers. Well, I'm trying to think of things that people might buy from Johnson Outdoor in the -- as consumers in the fourth quarter.

We haven't seen diving products as a Christmas purchase as much, but it's less seasonal than our Fishing business. We tend to see purchases based on when they're planning on vacationing or when they're getting certified. But what we're seeing in the first quarter reflects the fact that we've got some new product in the pipeline that the dealers are excited about.

Okay. All right. Talk a little bit about -- my background is power boat racing. I'm not a canoe or a paddle guy. And you've had some -- I think some guarded -- yes, it's not guarded pessimism. But how tough is that market at retail? I think you talked a little bit about vendors looking for maybe a continued weakness in the season. What is that? Because when I think of the powerboat market, that's a big ticket item. I -- the paddleboat, the canoe side, not so much a big ticket item. What's been the malaise, so to speak, over the last couple of years?

Well, I would put the powerboat and the smaller boats in very different categories. And I think we're actually seeing that the bigger boats, the fishing boats are doing well, the -- what you call the powerboats. I would say that the paddleboat industry in general is a big item, and it takes up a lot of space. It's been -- I think it's hard for some of our specialty guys to keep a lot of product in the store. They also have trouble putting dollars through for inventory build. I think they're being very cautious, and when they're cautious, they'll wait until last minute to buy. And the bigger retailers are struggling with this channel evolution. So we've got both the channel situation plus the wait-and-see kind of attitude by some of the more specialty dealers. So we've got both of those things playing out. I think the fishing aspect of the small boat market has been showing growth. Innovation drives growth, and we -- that's our whole focus, is innovation, and we're just digging into who our consumers are and what they're looking for. And we feel the new process that we're putting in place is really helping us understand where the opportunity is going forward. But it's a challenging marketplace for the personal watercraft just from a logistics, the channel evolution and some of the hesitancy on the part of the dealers. But water recreation is here to stay. Everybody, they go to the water for vacation, and that's the market we are excited about.

Yes, no, I appreciate that. No, I think it -- if you look at that watercraft to paddle market, is -- are there differentiating strengths between the fiberglass, the -- you guys had the Predator and the Necky, versus kind of the old-time wood, the Old Town Canoe. Are there separate kind of end market demographics? Is one better than the other? Or is one cannibalizing the other?

No, they are very separate markets. Canoes and kayaks are very separate end users. And the canoe business has become a big rental market as well, and we play in that. But consumer behavior has changed over time, and I think the evolution has been more towards the kayak market and the recreational fishing area as well. And so behaviors change, and we're addressing that.

Yes, no, I appreciate that. Let me ask Dave. Anything coming in the 2018 commodity inflation? Stainless aluminum, resins, anything that you might highlight?

No. I think similar to last quarter, I think we're in pretty good shape from what we see, with the exception of resin. There's a little bit of upward pressure, but not significant.

Single-digit type?

Yes.

Okay, okay. And then just curious to the expectations, SG&A. Everybody in America is now giving out big raises and 401(k) bonuses and stock. And what do you guys kind of see your kind of SG&A salary wages? And then maybe a comment on health care costs.

Yes, I mean I think for the compensation side of things, we go through a process every year looking at our compensation programs, and we'll continue to do that. I -- we'll stay competitive with the marketplace. So I don't expect big changes for this fiscal year, but we continue to look at that. Health care costs continue to be managed. It's moderate to some increases there. So we continue to try to monitor that, understand what's happening with the health care costs, but not a change in pattern versus previous years.

Okay. And then specifically the CapEx, you're -- you've talked -- I think Helen talked a little bit, you guys, in the past on your whole digital transformation strategy on that. Can you go in with some more detail relative to -- is it call centers? Or is it website design? Or what's kind of the functionality there?

Well, we say our -- it's really the full digital ecosystem that we -- that's how we refer to it. But it's really about our website. It's about our marketing. It's about our creative. It's about our e-commerce online. So obviously, as you have more opportunity to interact directly with the consumer, you have to also be prepared to respond to their inquiries and requests, and we are learning and growing as we go. But I think the big expense is really the technology itself and the system to run the digital platform, and it's the expense in the marketing aspect. And I think we are evolving to becoming more of a marketing company than historic, and that requires incremental expense on our part. And I think we've got great innovative product. The key is that we are able to reach our consumers to let them know we have it. And that is something I would say that certain businesses have done well in the past, but others have not. And I think -- I look it's an expense, but it's also a great long-term opportunity. But -- so it's a variety of things. And -- but all focused on providing better access for our consumers in many ways. I think, Dave, you can talk to the JDE investment.

Yes. Just to be clear, the enterprise risk or the enterprise resource platform at J.D. Edwards is -- that's capital spending-related. So that's part of the increase that we expect back in our capital spending and what kind of drove the capital spending increase in the first quarter.

Okay. And that's primarily enterprise, that's accounting systems and that type of thing?

Yes, yes.

Okay, okay. Dave, you talked a little bit about some challenges in the long lead time. But I'm thinking of components, some assemblies, that type of thing. Is -- are those challenges becoming easier? Or is it just by the sheer popularity and growth of the Fishing Electronics side? I think you guys are up 19.3%, $327 million last year on that side. What kind of -- how is that -- is that logistics challenge the same? Is it getting better or worse? Are you finding different ways to deal with it?

We continue to be as creative as possible to deal with it, but it continues to be a challenge.

Okay. And then what -- out of curiosity with the demand, certainly in the sell-through stockpiling on the Fishing Electronics side. What -- once you guys be running labor shifts at Minn Kota and Humminbird? Would you do an over time? 2 shifts? 1.5? What's -- bringing in temporary people? How do you -- how -- where are you on that manufacturing side now?

Yes, we tend to ramp up with temporary labor in over time during the season. So we're running slightly more than a shift a day. We're not doing 2 shifts a day typically, but we have -- we supplement with temporary labor. So again, it's -- we're very busy, but the bottleneck is not our own assembly.

And that does conclude our question-and-answer session today. I would like to turn the call back over to Helen Johnson-Leipold for closing remarks.

Okay. Well, thanks for joining us, and I hope everybody has a great day.

Ladies and gentlemen, thank you for participation in today's conference. This concludes the program, and you may now disconnect. Everyone, have a great day.