Johnson Outdoors - Earnings Call - Q2 2020

Transcript

Speaker 0

Hello, everyone, and welcome to the Johnson Outdoors Second Quarter twenty twenty 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. 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.

Speaker 1

Thank you. Good morning and welcome to our discussion of Johnson Outdoors fiscal twenty twenty 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

Good morning, everyone. Thank you for joining us. I'll begin with a brief overview of financial results for the quarter and first six months, review the initial impact of COVID-nineteen on our businesses and outline our priorities as we work to help mitigate its ongoing effect. I'll turn things over to Dave to review the key financials and then we'll take your questions. Total company sales declined 8% to $163,100,000 during the second quarter.

Each business was impacted differently by the pandemic this quarter, some more, some less, some earlier, some later. Improved margins and cost cutting efforts helped offset the impact of lower sales. Operating profit for the quarter improved to $31,800,000 and Dave will discuss the factors behind this increase in his section. Net income was $20,400,000 or $2.02 per diluted share. On a year to date basis, sales, profit before taxes and net income all compared favorably to prior year's six month period due to this year's very strong first quarter performance.

Government ordered stay at home mandates led to temporary suspensions at many of our operations. Diving, our most global business, was affected first due to the rolling spread of COVID-nineteen around the world. As a result, dive markets across the globe have been negatively impacted by government ordered stay at home mandates. Watercraft and camping production was temporarily suspended in mid to late March, followed by fishing in early April. Due to the timing of all this, the heart of our primary selling season has dramatically disrupted, and we expect the third quarter to be significantly impacted as a result of COVID-nineteen.

During these unsettling times, employee health and safety has been our primary focus with employees working from home and while production and shipments were on temporary hiatus, every location was deep cleaned and sanitized, strict operating processes and procedures put into place consistent with CDC guidelines for COVID-nineteen and good personal hygiene directives advanced. As a result of these measures, we are able to ramp up operations at levels consistent with demand in each business and with applicable government requirements, which vary by state and location. Despite the physical distance between us, my management team has worked closely together, monitoring all aspects of this rapidly changing situation to bring clarity to near term priorities and longer term needs. Government mandates have restricted activities enjoyed by our outdoor consumers thus far. And while these are just beginning to ease, this year's warm weather outdoor recreation season will be constricted.

Our focus now and for the remainder of the year is implementing strategies and plans designed to optimize sales. Key to this will be leveraging our digital marketing capability and capacity to maximize e commerce and in market opportunities. When our consumers are once again able to get out there and to experience the great outdoors, Johnson Outdoors will be there for them. Once stay at home mandates and restrictions on travel are eased, we hope to have a clearer view on the fuller impact of COVID-nineteen on the outdoor recreation industry and our markets and thus greater clarity on the full year outlook. Importantly, our unwavering commitment to building a thriving enterprise long term remains stronger than ever.

Now, as always, driven innovation will play a critical role in helping us overcome challenging times and emerge stronger and better positioned for the future. Now I'll turn things over to Dave.

Speaker 3

Thank you, Helen. Good morning. As Helen said, COVID-nineteen impacted much of our operations this quarter. The widespread disruption it caused to the global dive markets drove declines in diving. Travel to key dive destinations has come to a virtual halt, and government mandates have temporarily suspended production and forced closures of specialty dive shops, which are the primary retail channel for core life support dive equipment.

As of now, it's unclear just how long it will take for dive markets to recover, but we anticipate it will be gradual versus immediate. Fishing production and shipments were minimally affected by stay at home orders during the quarter. The pacing of new product introductions last year led to unfavorable year over year quarterly comparison. Camping sales declined 7% and watercraft sales fell 38% from the prior year quarter due largely to COVID-nineteen impacts on production and demand. We moved quickly to protect the bottom line by cutting nonessential spending, deferring capital expenditures and reducing incentive compensation.

Operating expense declined $7,900,000 in the quarter due primarily to a $5,500,000 favorable impact from valuation adjustments to the company's deferred compensation plan asset, which are totally offset in other income. And incentive compensation costs declined $3,400,000 In addition, executives and the Board have voluntarily taken reductions in pay. Going forward, we're scaling operations to demand in each quarter with a key focus on keeping working capital in check. At the end of the quarter, working capital was more than $20,000,000 favorable to prior year. Looking forward, our debt free balance sheet remains strong, and our healthy cash position will be beneficial as we work through challenges ahead, while continuing to make smart investments in strengthening the business and drive value for our shareholders.

Now I'm going to turn things over to the operator for the Q and A session. Operator?

Speaker 0

And your first audio question comes from the line of Anthony Lebiedzinski from Zydeco.

Speaker 4

Yes, good morning and thank you for the question for the opportunity to ask questions and hope you're both well and healthy. I joined the call a few minutes late. I had some technical difficulties getting on the call, so you may have addressed this already. Can you give us a sense of how your business performed through early March and then after the COVID-nineteen outbreak?

Speaker 2

Yes. This is Helen. I think we have quite a bit of momentum going into our normal selling season. So we felt pretty good about our position. I would say that we had a strong first quarter, so year to date numbers were really good.

And obviously, when COVID hit, that was quite a different story. You know, it overlapped exactly with our important selling season, which is key. So, you know, we felt good about coming into the season, and then we got impacted. So, you know, we've got a restricted season on the other end. So we'll have to wait and see how that goes.

But I'm sure that, you know, we're all seeing a little bit of pent up demand, which is good, but we don't have a good view to the future, or the remainder of the year at this point in time. But we can always be optimistic.

Speaker 4

Sure. Okay. So as far as the gross margin improvement in second quarter here, can you just touch base a little bit more about that? What drove that? I know you talked about the product mix and the pricing, but is there anything else to think about that?

And how should we think about gross margins going forward?

Speaker 3

Yes. I would expect gross margins to kind of tame a little bit going forward. It's mostly due to promotion activity, pricing activity, and like I said, stronger mix across the businesses. Costs have been pretty tame as well. But I don't necessarily expect a huge improvement going forward in gross margin versus last year.

Speaker 4

Okay. Got it. Yes. Thanks, Dave, for that. So just wondering, so with the economy now in a recession, can you talk about the expected impact on each of your different segments?

Obviously, I'm particularly interested in the fishing segment, which is your crown jewel. Just wanted to get a sense as to the willingness of your customers to be spending 2,000 or $3,000 for an Ultrexa or an Ultera? Could there possibly be some people trading down to lower priced models? So just wanted to get a sense of that, how should we think about your business in a recession? Well,

Speaker 2

we have a very avid core group of fishermen, and they're a little bit on the obsessive compulsive side of things. And so they are very dedicated to the season. I think, you know, if we look back at the recession that we had prior, which is really actually very different than today, but, you know, we have people who may or may not, you know, buy into boats, but they always if they don't buy a boat, they will trade in their motor and get a better motor. So we could be either an accessory item or we get involved in a new boat purchase. So we've got a lot of different ways that consumers can purchase our products.

So I think given our loyal consumer base, I think the bigger issue is we've got a very constricted season. And so we missed a big chunk of our selling season. The question is, you know, will they come back in? Did we lose those purchases? Will they make them up?

That's the big question and that's unknown. But I can we've got a pretty loyal base that they want to get out there. I think being pent up also is a reason why people want to get out fishing. But you've got the recession on the other side as well. So obviously a lot of variables, a lot of things impacting.

But I would say of all of our core consumers, they're pretty avid. But again, you know, a lot of things have impacted. So there's looking forward, it's pretty hard to predict as you can tell by my answer.

Speaker 4

Sure, yes. Thanks for that. If you could just briefly maybe touch on the other segments as well. I know they're far smaller compared to fishing, but as far as how would you expect those to perform?

Speaker 2

Well, I think every one of our businesses was impacted because of the timing of COVID. And it was right in our core season, and we have a pretty seasonal set of companies. So that was probably the biggest impact. There's all we were shut down in some of the businesses during March, so there's some pent up demand. But, you know, across the board, this impact is very different by business.

And as Dave said, diving has a lot of variables in there. They got hit early across the globe. So they also have travel involved. So they probably would say they've gotten hit a little harder. And then you've got camping and watercraft, which are good businesses.

But, you know, you can't go out. You know, we've been kind of restricted to our houses these days. So hopefully, there's some pent up demand. But the impact is different by business depending on, you know, the industry. But we've got some pretty loyal consumers.

I think, you know, all we can say is that we'll be ready for them when they can get outdoors and recreate. Got

Speaker 4

it. K. And then a couple more questions, if I may. So, you know, as far as, you know, competition in the fishing segment, have you seen anything notable to to call out

Speaker 2

If you're referring to the motors business, you know, we haven't seen a lot of new activity. Obviously, the new motors are out there. And I've gotten placement. You know, but we I think COVID has really put a big variable in the mix of everything. And it's hard to really determine how things are going.

I'm sure as everybody gets back to the stores are open and the consumers can get out, then we'll see more what's going on out there.

Speaker 4

Got it. And lastly, far as can you touch base on your capital allocation priorities at this point?

Speaker 3

Sure. Yes. I mean, think they remain pretty much the same as they were before. I mean, we're more into you know, save money, save costs where we can. But, you know, we continue to look at ways to allocate that capital appropriately.

Know, paying the dividend is still an important tool in our toolbox. M and A continues to be top of mind in terms of what we want to do with that money. So it'll be interesting to see how this all plays out in the marketplace, but we'll be ready. And as you know, we've got $132,000,000 of cash on our balance sheet, so we're in really good shape.

Speaker 4

Right. Yes. Absolutely. So as far as the M and A activity, I mean, you seen multiples come down? Or those are they still high?

Speaker 2

I think it's a little too soon to see the impact of COVID on that. But certainly during time of a lot of issues happening out there. You're hoping that things do there are opportunities that come about. We've got our eyes out and looking, but I think it's really early right now to look at the multiples.

Speaker 4

Got it. And actually, one last question, I may. So obviously COVID-nineteen has impacted all the four segments of the business, no question about it. But that being said, the watercraft recreation segment has been the most challenged in the last couple of years from a profitability standpoint. At some point, would you perhaps consider divesting that segment?

Or are you willing be in trying to turn that around?

Speaker 2

Well, I'll answer it. No, at this point, we're certainly not looking at selling. I think our whole focus on innovation is the key. And, you know, we've got plans that we are doing to reenergize that business. And, you know, we've got a little bit, like, interrupted with the COVID, but we still feel good about the plans and look forward to the future with that business.

Speaker 4

Got it. Alright. Well, thank you, and best of luck. Thanks, Anthony.

Speaker 2

Okay. Operator, thank you. I'd like to thank everybody for joining us. And stay safe and stay healthy. Thank you.

Speaker 0

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now all disconnect.