Johnson Outdoors - Earnings Call - Q2 2019

Transcript

Speaker 0

Hello, everyone, and welcome to the Johnson Outdoors Second Quarter twenty nineteen Earnings Conference Call. Helen Johnson Leopold, 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. Prior to the question and answer session, all participants will be placed in a listen only mode. After the prepared remarks, the question and answer session will begin.

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, Penman.

Speaker 1

Thank you. Good morning, and welcome to our discussion of Johnson Outdoors fiscal twenty nineteen second 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 Leopold.

Speaker 2

Thanks, Kat. Good morning. Thank you for joining us. I'll be giving an overview on the quarter and year to date results, and then I'll share perspectives on the performance and outlook for the businesses. And Dave will review key financials, and then we'll take your questions.

Last fiscal year, we experienced unprecedented growth. We expected growth would eventually moderate, and it has. During the first six months of the fiscal year, we are in preseason ramp up and selling period for the primary retail selling season. In the second quarter ending March, new products drove higher sales in Fishing, bringing year to date revenue slightly ahead of the prior year's first six months. Sales were $177,700,000 during the quarter and 7% ahead of last year's record second quarter.

At the halfway mark of this fiscal year's total company year to date sales, they stand at $282,100,000 which is on par with last year. Total operating profit for the quarter was $27,800,000 up 7.1% versus the previous quarter. And total company operating profit increased 2.4% to $33,800,000 compared with the prior fiscal year to date period. Current quarter's net income was $21,900,000 or $2.18 per diluted share and was slightly higher than second quarter last year. Dave will discuss the key financial drivers later in the call.

Performance this quarter as well as year to date results reinforce the importance of innovation. New products consistently drive a third or more of our annual sales and they are key to strengthening brand equity, building customer loyalty, enhancing margins. We want to give consumers the absolute best outdoor experience possible and this means we have to dedicate the time to really understand who they are, where they are, how they use our products and what they want. We are continually fine tuning our innovation process to better help us understand the needs of our target and maximize the opportunity for us to uncover new insights, which are key drivers behind successful innovation. Throughout the process, even after we are in product development phase, we loop back with the consumer for input on design and relevant messaging.

For the past two years, new product success has driven unprecedented growth in fishing. And so far this year, preseason selling across our fishing brands continues to be strong. Connectivity between Minn Kota and Humminbird is one of the drivers to this success. Our One Boat Network platform enhances the ease and fun for anglers by enabling Minn Kota and Humminbird products to work together in unison. Our new MinnCota down imaging motor is this year's launch of another connected product that integrates Humminbird down imaging transducer into select MinnCota bow mount motors.

This easily allows anglers to see what's directly below the bow of the boat. Johnson Outdoors is the first and only company to offer this pioneering innovation in fishing. We constantly look for ways that our products can seamlessly integrate and communicate, unlocking more features, capabilities and potential for anglers everywhere. We are also seeing success with our SOLIX and HELIX series of fish finders. The ultra big screen SOLIX series with our state of the art megasonar imaging provides an extended depth range while enhancing the clarity of the image.

The small and mid sized Helix series offers our patented sized imaging to even a larger group of fishing consumers. The award winning Minn Kota Ultrex, the first electric steer motor for pedal controlled enthusiasts with GPS and wireless capability was Minn Kota's most successful motor launch and sales continued to impress in its third year on the market. In diving, our most global business, sales are up in the second quarter due to significantly improved performance in our North American market. New products continue to drive about a third of ScubaPro sales with particularly strong sales in our dive computer category. Our G2 DiveWatch computer with wireless transmission and a heart rate monitor is doing well, helping to sustain Scuba Pro's position in the most trusted dive equipment brand in the world.

We're seeing more sell through in the diving market, which we believe is the truest measure of new product success. In diving, we're also excited to see the beginning of a positive trend in terms of our digital efforts in e commerce and direct to consumer sales, which are driving sales both online and in retail. Our investment in e commerce and digital sophistication is important to the future of all our brands and businesses, and we're working towards this being a meaningful contributor to overall sales and profitability. Challenging market conditions in both watercraft and camping emphasize the critical importance of continuing investment in enhanced digital marketing and e commerce effectiveness. Work is underway to tailor innovation to our consumers' target specific needs and wants and to align go to market strategies consistent with their expectations.

We're trying new things and applying what we learned. Our investments in these areas will give consumers the ability to see the full range of equipment we make for each of our brands during the season. They can use it as a purchasing tool in the off season and they can use it as research and planning tool. We're committed to the long term opportunity of these two businesses, and we anticipate that we will see benefits from these investments in the future. Across all of our brands, we are working hard to position them for continued success in the evolving marketplace, ongoing investment into understanding our consumers, sustaining innovation leadership and identifying new sources and paths of growth in our markets as well as investing in accelerated digital sophistication, e commerce and marketing excellence are key to ensuring progress toward our goal of delivering sustained profitable growth.

We feel good about where we are heading in the as we are heading into the season and our focus now is on strong execution to finish the year. Now I'll turn the call over to Dave for more details on the financials.

Speaker 3

Thank you, Helen. Good morning, everyone. I want to highlight a few items from the quarter. As Helen mentioned, sales for the quarter improved 7% over the prior year and were fairly flat on a year to date basis. On a constant currency basis, sales for the first six months would have increased approximately 0.6% versus the prior year.

We're pleased that we're granted an exclusion for a component subject to Section three zero one tariffs that's used in products assembled in The United States. Now we previously projected that tariffs on Chinese goods will have a potential 6,000,000 to $9,000,000 impact on fiscal twenty nineteen profits. Now we anticipate a lower potential impact of 5,000,000 to $7,000,000 on profits this fiscal year. We're also continuing various tariff mitigation efforts with respect to other affected product components. Operating expense declined during the first half of the fiscal year due primarily to lower warranty expense.

Operating expense during the quarter increased 6.4% year over year due primarily to higher deferred compensation expense resulting from a $2,000,000 upward adjustment in the valuation of the plan's assets. However, an offsetting gain was reflected in other expense. The year to date effective tax rate of 25.9% was significantly lower than last year's six months rate of 42.1%, which reflected charges associated with initial implementation of the new U. S. Tax Reform Act.

For the full year, we're expecting the tax rate to be consistent with the year to date tax rate. Looking ahead to the rest of the year, we continue to expect moderate sales growth and we expect profitability to be affected by Section three zero one tariffs on components. Nonetheless, we continue to benefit from our ongoing efforts to improve operational efficiency, enabling us to protect margins and effectively manage working capital. The balance sheet remains strong and our cash position is healthy, providing us with the financial flexibility and flexibility to strategically invest in growing the businesses, while continuing to pay out the cash dividend to our shareholders. Now I'll turn things back over to the operator for the Q and A session.

Operator?

Speaker 0

Thank you. You. Our first question comes from George Kelly of Imperial Capital. You may proceed with your question.

Speaker 4

Hi, guys. Thanks for taking my questions.

Speaker 3

Sure.

Speaker 4

First, Dave, a question about the guidance that you're the kind of general guidance that you provided. I didn't hear you say that you expect operating income to be down as I thought you said in prior calls. Am I hearing that correctly?

Speaker 3

Yes. With the sales growth, that will help us with profitability, but the tariffs will be So we don't expect necessarily growth in that number, in the profit number.

Speaker 4

So just to clarify, I thought you said in prior quarters that you expected operating income to be negative year over year? Is that still the case for the full year?

Speaker 3

Yes. Think it's fair to say that there could be some decline in profit this year,

Speaker 4

yes. Okay. Okay. And then really strong Fishing segment quarter and even year to date, it's just like the it continues to happen in that business. Can you give any kind of quantify any detail about what you're seeing this year as far as the Humminbird, Minn Kota and everything else?

Is the mix of that business changed at all versus a couple of years ago? And I guess what I'm trying to get at is, has Humminbird has the profitability there continued to improve?

Speaker 3

Sorry, George. The last part of the question, has the profitability continued to improve? Was that your question?

Speaker 4

With Humminbird, specifically, Well, is it becoming more of an even

Speaker 3

we're seeing strength with both brands. So I think overall, just both brands are in really good positions. And yes, I mean, mix, good pricing with the innovation. And so we're pleased with the performance of both brands.

Speaker 4

Okay. And then last question for me, still on the Fishing segment. What are you seeing so far with point of sale data? And how is the inventory how is the retail dynamic? Is inventory at retail a reasonable level, etcetera?

Speaker 2

This is Helen. We're just we're seeing a good solid pull through at retail. Again, it's still preseason, but it looks good.

Speaker 4

Okay. Thanks.

Speaker 0

Thank you. Our next question comes from Anthony Lebiedzinski of Sidoti and Company. You may proceed with your question.

Speaker 5

Yes, good morning and thank you for taking the questions. So I know you provided some data for diving as far as percentage. It looks like about a third of that coming from new products. Can you give us a sense as to what percentage of your fishing sales for the quarter and year to date have come from new product introductions?

Speaker 3

Well, we count the last twenty four months basically. So still pretty strong with phishing. And we've had good innovation this year. Last year, we had really extraordinary innovation. So it's still strong really due to the last couple of years of intros.

Speaker 2

And just to add to that, we consider that it's more than a one year launch cycle that in the fishing industry, you would you know, you'd put two years as considered a launch period just because of the purchase cycles given the nature of those businesses.

Speaker 5

Got it. Okay. Thank you for that. Now as far as the diving segment, I know you have done some streamlining of operations. Are you done with that initiative?

Or is there still more to come on that side?

Speaker 2

We have more to come. And, you know, this is what you're seeing is just preliminary expenses to lead up to some, you know, initiatives that we've got going. You know, Dave, you can add to that if you want

Speaker 3

Yeah, mean, continue to look to try to simplify that business. And there's a lot of initiatives in that area to do that, both from a product line segmentation to operationally those kinds of things. So yes, there's more that's on the horizon.

Speaker 5

Got it. Okay. Thanks for that. So as far as the other, you know, the two smaller segments, watercraft recreation and camping, it sounds like from your prepared remarks that you're willing to be patient with those. Just wanted to make sure that I heard that correctly.

Speaker 2

Yes, you are correct. I think they're both businesses certainly camping is a growth segment in terms of participation. And a lot of changes have happened there not only in channels, but also with consumer behavior and how they camp. We do think that it is an opportunity for growth long term. Maybe we're a little bit took us a little longer than we thought to identify how things are actually changing with the consumer.

But our plan going forward is to really be right on top of it with our product and take advantage of the fact that we do see millennials are camping and are driving participation levels in that segment. And camping is one of the biggest segments up there with fishing. So that's a key. I think in watercraft, again, you ever thought about change, what happened to that market? And certainly channels have changed.

And as well competition has changed and the consumer behavior has changed. But, people will never stop recreating in the water and we know that business. So yes, we will be patient. Maybe we didn't see the changes as fast as we wanted to. But we do see the opportunity going forward.

And we think that being patient is definitely worthwhile.

Speaker 5

Got it. Okay. So could you give us also an update as to where you are with your direct to consumer efforts at this point?

Speaker 2

Well, we're all up and running. We've got every site that's up and running with direct to consumer. I think we are it's working the way we want it to work, which is it's not just driving online sales, but it's also driving our consumers into bricks and mortar. We have a you know, it's always a process, and it's heavy lifting. And I feel very good our team got this up and running in such a short period of time.

And we're, you know, but there's a lot of things that still have to be done in optimizing certainly our website and how we present our e commerce site. But we are also learning as we go about the other big e tailers out there and how to leverage what they offer as well. So it's a process, but we are definitely on the road and look for it to just get stronger as we go forward.

Speaker 5

Got it. Okay. And lastly, any updated thoughts on your acquisition activity? What are your thoughts there? I assume you're still looking for potential deals?

Speaker 2

We are always looking. And I you know, we the good thing is we have a very, very solid focus, and we're looking for those strategic acquisitions. And there's a lot of mature businesses out there that are going for a lot You know, it's a tough time for not really a buyer's market, but we are looking. And when something strategic presents itself, you know, we always dive into it and consider it.

So we're not sitting by the sidelines. But I would say that the worst thing we can do is go out there and buy something that is for sales growth alone and not strategically enhancing our position in the market. We're there. We're looking.

Speaker 5

Understood. Okay. Well, you and best of luck.

Speaker 0

Thanks, Andy. Thank you. And our next question comes from George Kelly of Imperial Capital. I

Speaker 4

guess I do have a couple other questions about your Fishing business. So first part is, correct me if I'm wrong, but I believe Ultera and Ultrex are now three years old and two years old. And just wondering if those two lines are still growing. And then the second part of the question is, Helen, I from your prepared remarks, it sounds like the integration between Minn Kota and Humminbird is is really cool, and a lot of your new stuff is focused around integrating those two products, and they they fit so well together. So wondering if your product pipeline is sort of early stages, if there's a lot more coming over the next few years as you look at that sort of integrated bundled packages if you're going in that direction?

Thank you.

Speaker 3

So I'll take the first part of the question. We are seeing growth across the product line. And Ultera and Ultrex are no exception. So they're to be stalwarts. They're still Star Wars of our product line.

So it's still good.

Speaker 2

And just to comment on your connectivity, you know, we have I think the connectivity piece is truly new to world and great because it's connectivity that gives you more functionality, which is not available for the most part out there. But we also put heavy emphasis on innovating on the individual brands themselves. So we're not doing the all or none approach, but it's having both. Because Hummingbird has had a lot of innovation on its specific technology, as has Minn Kota. But the connectivity is another piece of that.

So it's really we're trying to keep all aspects moving forward. And the pipeline, you know, they've got a very good range of product in their pipeline.

Speaker 0

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Helen Johnson Leopold for any further remarks.

Speaker 2

Thanks again for joining us. I hope everybody has a great day.

Speaker 0

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.