Johnson Outdoors Inc (JOUT) 2019 Q1 法說會逐字稿

Hello, everyone, and welcome to the Johnson Outdoors' First Quarter 2019 Earnings Conference Call. Helen Johnson-Leipold, Johnson Outdoors' Chairman and Chief Executive Officer, will lead today's call. 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. Good morning, and welcome to our discussion of Johnson Outdoors' fiscal 2019 first quarter results. 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 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. Thank you for joining us. 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, the warm weather outdoor recreational industry is in preseason ramp-up mode, preparing for the primary selling period during the second and third quarters. Consequently, first quarter results alone are not necessarily 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 product success.

This year, first quarter sales were $104.4 million, and operating profit was $6 million. Both fell short of last year's record high first quarter performance. On the upside, net income was $3 million -- $3.5 million or $0.35 per diluted share, a nice improvement over last year at this time.

Dave will provide more details on what factored into the quarter's results in his remarks.

This year's exciting new product lineup, particularly in Fishing, is building strong favorable momentum heading into the major selling season for warm weather outdoor products. We said that the past 2 years of tremendous growth in Fishing was unprecedented and that we expect that this business would continue to grow at a more moderate pace going forward. And based on everything we're seeing at this time, we still expect year-over-year sales growth in fiscal 2019. And as we take the longer-term view beyond 2019, the future looks great.

Our new 2021 strategic plan builds on the foundation for growth we built to take all our businesses to the next level. First, we're playing in the right outdoor rec markets on land, on water and in the water. Participating in fishing, camping and hiking, paddling and diving continues to be strong. Second, we have formidable combination of unsurpassed knowledge, proven expertise and passion for delivering the best outdoor rec experience possible. Third and most importantly, when combined with our deep understanding of and focus on our target consumers, we have a distinct unique competitive advantage. In the years ahead, we'll build on our strength, grow our capacity and expand our capability.

There are 5 key drivers to future growth. Number one, a sustained and more intense focus on the high potential outdoor recreational consumer segments in everything we do, from product ideation to new product innovation, from distribution to marketing to consumer services and so much more. More than ever, our goal is to be at one with the consumers, knowing who they are, where they are and what makes them tick. It's all about uncovering the key insights that will lead to bigger, better new product success and deeper relationships between our consumers and our brands year after year. Importantly, these insights enable us to better target the right consumer with the right product in the right place and in the right way. That's a winning combination in every marketplace.

Two, accelerated digital sophistication. More and more people go online to learn about outdoor recreational activities and plan their trips. It's where they shop for gear, buy equipment and share their outdoor experiences. We've built the infrastructure and framework necessary to ensure our consumers have a great online experience in today's rapidly changing digital age. Now we're focused on strengthening our marketing and e-commerce resources to maximize these investments to drive growth across our distribution channel.

Three, sustained innovation leadership. We have iconic brands and the legacy of pioneering innovation in our space. We continue to refine and improve on robust innovation process to ensure continuous pipeline of new products that provide distinct meaningful added value for our target outdoor rec consumer, products with value that extend beyond a single new product cycle.

We're very pleased by the positive momentum that's been building behind our Johnson Outdoors' 2019 new product lineup. For example, we're getting great response to our new One-Boat Network platform in Fishing, which enhances the ease and fun for anglers by enabling Minn Kota and Humminbird products to work together in unison.

Also, on deck this year is the integration of Humminbird MEGA Down Imaging into select Minn Kota fishing motors, another first from Johnson Outdoors.

In Camping, our new generation flash cooking stove has the fastest boil and cooking time ever and is heating up that market. And in Watercraft Recreation, the new Old Town top water offers large fishing kayak performance in a compact and a nimble package, which is making waves in that segment.

Net-net, innovation is key to our sustained marketplace success, but we're not resting on past laurels, we're doubling down and investing for sustained innovation leadership.

The fourth key driver of our new plan is identifying new sources of growth in our market. We are looking at new organic growth, new applications of technology and, of course, new brands and technologies. We have got an active radar screen always giving us a view to the companies, the brands and the technologies that are out there. Importantly, our strong cash position provides us the opportunity to move when the right opportunity at the right price comes along.

Lastly, the fifth key driver of our new plan recognizes what has always been and always will be the secret sauce behind our 50-year legacy of continuous growth and success. Very simply, at our core, Johnson Outdoors is a family of adventurers, people with a passion to fish, camp, hike, scuba dive and paddle. Our love for the outdoor recreation is a unique common bond we share with outdoor adventurers everywhere.

We know what makes a great outdoor experience, and job number one every day for everyone here is to stay on the cutting edge of design and technology to deliver just that. Our ability to continue to grow our family of talented, inspired adventurers is key to long-term success.

Looking ahead, we're very excited by the future we see for Johnson Outdoors and believe we are on the right path to maximize our growth potential. In summary, we believe our brands are well positioned for long-term marketplace success and confident Johnson Outdoors' sustained industry leadership will continue.

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

Thank you, Helen. As Helen said, prior year comps were unprecedented and growth from such a high base was a challenge. Now a shift in pacing of new product releases was a key driver behind the revenue comparison, and we do expect sales to grow for the full year. Gross margin improved 0.5 point to 42.4% in the quarter despite the pressure from recently enacted tariffs, which had a negative impact of about $700,000 during the quarter.

While we continue working on various tariff mitigation efforts, at this time we're still projecting tariffs to have a potential $6 million to $9 million impact on the fiscal '19 profits.

Year-over-year, operating expense dollars declined $3.4 million, due in part to lower sales volume and also due to unfavorable market conditions, which lowered the assets of the company's deferred compensation plan and caused an offsetting loss in other expenses.

Net income benefited from a significantly lower effective tax rate of 18.7% in the quarter. Last year's first quarter tax rate reflected some onetime charges of about $6.8 million related to the 2017 Tax Reform Act. For the full year, we are anticipating the tax rate to be in the mid-20s range.

Lastly, a comment on inventories, which are $24.5 million above last year's quarter, primarily driven by Fishing. In anticipation of impending tariffs, we purchased some inventory prior to them going into effect, and we're building inventory for the seasonal demand. We expect comparisons to prior year will improve over the next few months.

In summary, we continue to benefit from our ongoing efforts to improve operational efficiency, enabling us to strengthen margins and keep working capital in check. The balance sheet remains strong, providing us the financial capacity and flexibility to strategically invest in growing our business, while also paying a cash dividend to our shareholders. Now I'll turn things back over to the operator for the Q&A session.

(Operator Instructions) And our first question is from George Kelly from Imperial Capital.

First, if we could start just on the Fishing side of the business. Can you talk about what gives you confidence in your -- the expectation that you will be able to grow revenue for the full year? And then second question on the Fishing business is just, can you help sort of frame the new product set that you have this year, and specifically, the integrated Humminbird and Minn Kota, the trolling motors? How big of a new product launch is that? It seems like it's a big new feature. So just trying to understand better if I'm thinking about that right or how big of a deal is it, I guess?

This is Helen. Let's start with why we feel good about the year. And I think, Fishing, in general, the new product launches have -- it's not just a 1-year cycle, it's a 2-year cycle. And I think some of the differences year-to-year have to do with, is it the second year of a lot of new products or is it the first year. And when we're in the launch phase, it's all about when we get the product ready and when we're ready to get it in the market. But again, the first quarter is really a lead into the big 2 season -- 2-quarter season. And so this year, we see the momentum, we know that there is a -- customers are excited about the product, but it's really about the consumer takeaway. So we're in more of the first year of some new product launches, then it's -- maybe it's more about pacing than anything. So the other piece of it is, we talk about the innovation. And again, it's not just one new product. We mentioned one new product, but you really are -- you're in the second year of other new products. And consumers are -- these are longer purchase cycle products, so you've got 2 to 3 years' worth of new products having a chance to grow and to find the consumers that are in the right time in the right cycle. I'm certain there's people who get a new motor every year, but the majority of them -- our motors are high-quality, last for a while. And so you've got recycling new consumers into the market every year. So it's not just a clean this year, last year kind of evaluation. So the momentum is what we see, and we -- the excitement about the new products and still we've got other products in the market that we launched already that have -- still have room to grow. So it's again back to, the first quarter is not indicative necessarily of the full year, but we do know that there's excitement behind the new products that we've launched. So Dave, you can add anything, if there is.

No, I think you're spot on. I think we've got some new products coming out that we feel good about. But -- and kind of get to your second question, I mean, I think we don't expect these growth rates that we hit last year. So we do expect growth, but it's going to -- it won't be as much.

Okay. That's all really helpful. And then just, I guess, one follow up to that is, and then I do have one other question. But it's just the inventory position at retail. Does it look pretty clear now?

Yes, from what we can tell, it looks pretty good. There's not any pent-up inventory there.

Okay, okay. That's great. And then so I had like 2 more quick questions. One, you talked about -- as one of your key growth initiatives, you talked about new sources of growth, and it sounded to me like ancillary products, things that you aren't currently doing right now. Do you feel -- that's come up a few times on these calls. Do you feel like you're getting close on anything? Can you say anything else there? And then the last question is just about tariffs. And have you applied for exemptions? Or is that still an ongoing process?

I'll respond to your first point. New sources of growth can come from a lot of different places. And I know where you're going, which is, are we looking at acquisitions externally? And I can tell you, we are always looking, and we keep a very comprehensive radar screen. So where we are, what's out there. And new sources of growth can come from the application of new technologies. New sources of growth can come from a new consumer segment within your same product array. So we are very much, we think, having more sources of growth, meaning they're true new sales, not cannibalistic, is very critical to our strategy long term, but it's not necessarily just buying a new brand or a new company. But again we are always looking and if there was a strategic fit, certainly we'd be all over it. So we feel good about innovation across multiple areas. And it includes innovation in marketing, it includes picking up new consumers, it includes applying new technologies to existing products. So it's more than just one area, but again, we have a lot of things going.

And just on the tariff question. We have applied for exclusions with the USTR, and waiting to hear. So I think the shutdown kind of slowed things down for a lot of people, and we're just waiting to hear on those exclusion requests.

Our next question is from Anthony Lebiedzinski from Sidoti & Company.

So first just kind of a clarifying or housekeeping item. I don't know if you can quantify this, but obviously, you'd called out the Fishing segment being impacted by a shift in pacing in terms of new product introductions. Can you perhaps give us a sense as to the dollar amount that you think was affected by this shift?

It's not a shift in pacing, it's just pacing in general. So there's no long-term trend or anything here. It's just a matter of when new products are available to get out there. But we can't quantify that, and -- unless Dave, you have any input?

No. Yes, we don't quantify it. Yes. So sorry, we'll just have to leave it at that.

Okay, that's fair. Okay. And then, Helen, you talked about the part of the strategic plan is to sustain innovation leadership. So how should we think about R&D spending relative to your revenue? Do you expect to spend more or kind of the same or broadly speaking, any sense that you can give us in regards to your R&D spending?

Well, from a specifically R&D, I think, we don't see significant changes in the spend. And I would say, innovation is not necessarily focused in the R&D area because it's a matter of -- there's a lot of research and understanding the segments and the consumers. And that's an investment in well, which is, we are certainly making that. So we can uncover the insights that then drive the R&D to develop the relevant products. So hopefully that answers your question.

Yes. No, that definitely helps, yes. And as far as for the quarter, the gross margin was up even though there were some noise with the tariffs. So what were you able to do to actually improve your gross margins on a year-over-year basis?

Yes, it's pricing and cost containment elsewhere really, and it's been -- it was kind of across the board. So and some discounting was down too for the quarter. So it's kind of a variety of things, but mostly strong pricing in the marketplace.

Got it. Okay. And can you also just give us a sense for priorities for your cash flow usage?

Sure. As Helen talked about, we're always looking for opportunities to grow. So that will be priority number one, both internally and externally. We're, again, very active out there in the marketplace, understand the opportunities. The dividend, we'll continue to look to try to enhance and strengthen that dividend. I think that's very important for us to keep that healthy and growing. And then beyond that, we always look at other things too. I mean, we look at other ways to get cash back to shareholders. And if any of those are attractive to us, we'll take a closer look and announce that.

Our next question is from Brian Rafn from Morgan Dempsey Capital Management.

What -- when you guys look at your new product launches, and you're talking about a 2- or 3-year cycle, how do you price the products off the launch? Are you building pricing? Is it a little more of a discount to get the early adopters? How do you take pricing with the new product launch?

Well, with our launches, our main goal is to provide a added value to the consumer. And I would say that is the opportunity to get the pricing because there's relevant value that they need. So it's definitely that with new product launches, you should be able to charge for the innovation and that's our approach. We certainly do not take the discount road.

Okay, okay. And what -- Dave, what's CapEx plans for this year?

It will be down. We expect it to be down. Last year -- we had a big bump up last year. So I'm thinking like mid-teens, like $15 million, $16 million versus I think it was $19 million last year.

Yes. And how is that allocated across the different segments? Is it -- are there any specific things that stand out?

Yes. No, it's pretty much the same, which is continue to drive growth with molds and other types of innovation. There's not a ton of capacity in there -- capacity growth in our CapEx. So it's pretty much the same as we've always done.

Yes. I missed just the first couple of minutes of the call. What are you seeing relative to new spring season trends in order patterns, be it with big box category superstores or some of the little boutiques?

Yes, we haven't seen any anomalies. I mean, I think it's been pretty much what we expected. The weather needs to hold, but -- and Helen kind of alluded to, I think for the most part, retailers are pretty excited about our lineup that's coming out.

Got you. Got you. And then what might you guys be from the standpoint of operating capacity? Are you running -- yes, obviously, earlier in the year, you're running how much overtime or 3 shifts or what are you doing on, specifically in the Fishing area electronics?

Yes. I mean, we're not running roofs super-heavy at least through December, but we're going to ramp up here in the season, and we'll really be running hard here in this quarter.

Got you. Got you. What, from the standpoint on the tariffs, are you continuing to order into the early part of 2019? Or was that inventory, safety stock margin safety, was that really just a onetime deal?

Well, we ordered ahead of the tariffs. So that was kind of a onetime deal. Now that with the tariffs are in place, we'll just continue to run the business as we can with that in place. Hopefully, that answers your question.

Yes. Okay. And then what -- I didn't see, from the standpoint, what are you seeing on the Diving side? Again, a little softer.

Well, again, it's the first quarter. We're excited about the future for Diving. We got -- there are some things going on in Asia, and Asia has been a key growth for us. We don't necessarily see that as a longer-term trend. It just hit us this quarter. But we've got a good new product pipeline that we're developing, and feel pretty good about that business for the long term.

Yes. Dave, did you mention what new product sales were in the quarter, whatever your barometer is, trailing 2 or 3 years?

Yes. It's -- we target 1/3, and I think we're above that target. I don't have the number in front of me, but I think we're at expectation with that for the quarter. And again, it's preseason, so it's hard to actually give that number.

(Operator Instructions) And our next question is from Brian Rafn from Morgan Dempsey Capital Management.

Yes, I just forgot one. What the -- anything on the Camping side relative to military sales?

No, it's pretty much steady for us. Nothing has happened so far, good or bad, in military. So we're kind of at a flat basis, basically.

Yes. Let me ask you on timing. While you're doing new product launches and you're doing the R&D for that, what's kind of the cycle time between maybe design, ideation, conceptualization, prototyping? What are some of the maybe the cycle time differences between Fishing electronics, maybe Camping, Diving and then Watercraft? If there are...

There's all -- given the higher technology aspects of some of the businesses versus others, I think that puts some variability in the time frame, but I -- we are trying to get ahead of the game in getting 3 -- a pipeline that's pretty continuous, but the true breakthrough kinds of products that have a longer development cycle than some of the line extensions obviously. But there's a significant investment in refining the idea and the concept and doing the prototyping. And again, it varies. So it's really hard to put any kind of -- it just depends. But they're not short -- these are not short development cycles, they are long.

Yes. And if you were to bracket a range between very high technology with a lot of electronics versus something that maybe just be aluminum paddles or something in the Watercraft, what might be that -- I mean, what's a very, very complex, maybe new product? What might that be? Would that be a period of years or months or quarters?

Definitely, it's not months. I mean, we have to -- yes, it ranges between 1 and 3 years of development, and that's -- so I don't think I would say months of any across the board.

At this time, I am showing no further questions. I would like to turn the call back over to Helen Johnson-Leipold for closing remarks.

Thanks, everybody, for joining us, and I hope you have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.