Johnson Outdoors - Q3 2023

Transcript

Helen Johnson-Leipold (CEO)

Johnson Outdoors Q3 2023 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, 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. If you would like to ask the question during that time, please press star 11 on your telephone keypad. 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 call. I would now like to turn the call over to Pat Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Pat Penman (President)

Thank you.

Good morning, everyone.

Thank you for joining us for our discussion of Johnson Outdoors results for the 2023 fiscal Q3.

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's 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 David Johnson or myself. It is now my pleasure to turn the call over to Helen Johnson-Leipold.

Helen Johnson-Leipold (CEO)

Thanks, Pat. Good morning, everyone, and thank you for joining us. Just wanna excuse my voice.

I've got a little bit of a hoarse voice today, but I'll do my best. I'll begin with an overview on the quarter and the year, and then I'll share perspective on the performance and outlook for our businesses. Dave will review financial highlights, and then we'll take your questions. Sales in our third fiscal quarter, ending June 30, 2023, declined 8% to $187 million, compared to $203.8 million in the prior year Q3.

Total company year-to-date sales were up 4% over last year's fiscal 9-month period. Profits before income taxes for the Q3 slightly increased to $19.8 million versus $19.2 million in the prior year quarter.

For the year-to-date period, profit before income taxes was $47.9 million versus $47 million in the prior year-to-date period. We're seeing consumer demand continue to moderate from the strong pandemic-fueled levels of the past few years.

At the same time, the marketplace continues to be competitive, reinforcing the critical importance of innovation to the continued growth and success of our brands. In fishing, remain committed to being innovation leaders. We recently announced a broad line of exciting products at this year's ICAST, the largest sporting trade show in the world. Minn Kota announced the QUEST Series, the all-new brushless trolling motor technology, giving anglers ultimate control in tough fishing environments.

Minn Kota also launched a restage of all of its bow-mount trolling motors with an updated technology suite and enhancements and more seamless integration with Humminbird products.

We're always looking for ways to unify our products to enhance the fishing experience. Also launched at ICAST was the One-Boat Network app, bringing together both Humminbird and Minn Kota devices into one dashboard to give anglers unprecedented command of their fishing boat.

Sustaining our innovation leadership position in a competitive fishing market remains a top priority. We are excited about the breadth of new innovation we just announced, and we will continue to work on a pipeline of new products to give anglers the best fishing experiences possible. In our diving business, sales were flat this quarter. However, year-to-date period shows positive growth, especially from our European and Asian markets. We will continue to leverage our innovation and brand-building efforts to ensure SCUBAPRO remains the world's most trusted dive brand, dive brand. Our camping and watercraft recreation businesses continue to face softening markets due to the post-pandemic slowdown.

Retailers still have product on shelf to work through, and at the same time, consumer spending has slowed. We're committed to the long-term opportunity in these two businesses. Our consumer-focused innovation plays a critical role in that. I'm excited to announce that Old Town received the Best Boat or Watercraft honor at this year's ICAST for its revolutionary Old Town ePDL+ drive. This is cutting-edge technology and it's a powered assisted pedal drive that combines pedal and power to propel the fishing experience to the next level. This technology is new to the world. We forward to shipping Old Town ePDL+ early next year.

While the near term continues to be challenged across all of our brands, we're working hard to position them for continued success in the evolving marketplace.

ongoing investment to understand our consumers, sustain innovation, leadership, and identify new sources and paths of growth in our markets are key to ensuring progress toward our goal of delivering sustained, profitable long-term growth. I'll turn the call over to David for more details on the financials.

David W. Johnson (CFO)

Thank you, Helen. Good morning, everyone.

I wanna highlight a few items from the quarter and the year. The quarter's gross margin of 41.5% improved from 36.1% in last year's Q3, due primarily to price increases and lower freight and materials costs. We're pleased that our gross margins have started to recover, and we'll continue to look for ways to improve efficiencies to maintain strong gross margins going forward.

Operating expenses in the Q3 increased $10.4 million versus the prior year Q3, due primarily to a $5.1 million increase in deferred compensation expense related to marking plan assets to market, which is entirely offset in other income. Additionally, higher warranty expense and advertising and promotion costs also contributed to the increase between quarters.

Resulting operating profit for the quarter decreased to $17.4 million versus $23.8 million in the prior fiscal year Q3. Earnings before tax is up slightly versus the prior quarter. Net income for the Q3 was $14.8 million versus the prior fiscal year Q3 of $14.1 million. The quarter's effective tax rate was 25.3% and was 25.9% for the nine-month period. While we have generated strong cash flow from operations through June, we're still working through high inventory levels as we wind down the season.

We'll continue to proactively manage our inventory position and working capital levels appropriately. Looking ahead, we remain focused on continuing to improve operational efficiency and strengthen our operating margins.

Our balance sheet continues to have no debt. Our cash position enables us to invest in opportunities to strengthen the business. We've remained confident in our ability to deliver long-term value and consistently pay out cash dividends to our shareholders.

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

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder, to ask the question, please press star one, one on your star one, one on your telephone, and then wait for your name to be announced.

To withdraw your question, please press star one, one again. Please stand by while we compile the Q&A roster.

Our first question comes from the line of Anthony Lebiedzinski with Sidoti. Your line is open.

Anthony Lebiedzinski (Senior Equity Research Analyst)

Yes, good morning, everyone. First, and thanks for taking the question. First, I guess, a, a housekeeping type of question here. I know you guys talked about the pricing, especially, I think, in your fishing segment, but just overall, as you look at the quarter, can you just broadly speak to pricing versus unit volumes?

David W. Johnson (CFO)

For the quarter it's, I would say in general, unit volumes are flat-ish. The, the increases we're seeing in revenue and gross profit is, is pricing related.

Anthony Lebiedzinski (Senior Equity Research Analyst)

Got it. Okay, thanks, David. Okay. Then, you know, your, your gross margin was up nicely ahead of our expectations, you know, so, you know, do you think you can, sequentially build from, from here, now that, you know, ocean freight costs have normalized? I think you've seen decreases in your raw material costs. Just, just wondering as to how we should think about the, the gross margin trajectory from here.

David W. Johnson (CFO)

Yeah, it's a good question. I mean, there are a lot of factors at play going forward. I think, you know, cost easing is, is good for us going forward. I do expect, probably promotional activity to be robust going forward, too. Being above 40% is definitely our intention going forward, but again, there's a lots of factors at play.

Anthony Lebiedzinski (Senior Equity Research Analyst)

Right. I understand. Yeah, there's lots of puts and takes there. Okay, but, you know, certainly good to see that, you know, moving in the right direction. As far as your operating expenses, I know you called out higher advertising, promotion, and warranty expenses. Can you talk about, you know, how much that was as far as an increase and whether you expect that going forward, those types of increases, or do you think some of those maybe costs will moderate going forward?

David W. Johnson (CFO)

If you exclude the deferred comp expense, you know, there's about a $5 million increase in operating expense for the quarter. That's, you know, about half that's warranty, about a half is advertising promotion, the increase. I, you know, I think advertising promotion will continue to be robust for us going forward. Again, as we, you know, we compete in the marketplace and make sure our, our products are front and center for everybody. I would think warranty would start to moderate some going forward, but again, you know, there's, I guess, no crystal ball on that, but I would expect that to moderate.

Anthony Lebiedzinski (Senior Equity Research Analyst)

Got it. Okay. Then as far as just, just the, you know, inventory levels at retail, I assume that they're probably the fullest in the camping and watercraft, but just overall, if you could talk about what you're seeing from retailers and as far as, you know, replenishments, how do you see that? I mean, you know, camping and watercraft has been certainly the most, the hardest hit here as of late. I, I guess as a follow-up to that, when do you think that will kind of bottom out?

Helen Johnson-Leipold (CEO)

Well, even Watercraft, you're right, Watercraft and Cannon are the ones that have been dealing with the most inventory of retail. I think we are seeing some light at the end of the tunnel for the Cannon business. Hopefully, Watercraft will get better as we go forward. You know, we do have some exciting new products coming into the market, so we'll keep an eye on that. As, you know, we said, demand is softening, but we feel good that we'll move some product and be in a better, better shape by the end of the year. Fishing, I think, is healthy.

The retail is healthy, you know, certainly healthier than it has been, there's been more activity in fishing category versus others. It's still softening, but we think the inventory is in a good place and is there to fuel the market. diving is a different story altogether, but is in good shape. It is different by category, but again, you know, our job is to put activity out there to pull it through and, and bring in new innovation to get the retailers excited about what's next. It depends on which market you're talking about, but hopefully by the end of the season, we'll be in good shape.

Anthony Lebiedzinski (Senior Equity Research Analyst)

Mm-hmm.

All right, sounds good. My, my last question, in the press release, you guys talked about investing in strategic opportunities to strengthen the business. I was wondering if you could expand on that as far as what you're seeing as far as maybe possible M&A. I know you guys have talked about that for a while, just wondering if you could expand on some of the opportunities that you see in the future.

Helen Johnson-Leipold (CEO)

Well, I think there's two things. I mean, strengthening the business and looking for opportunities, we are focused on, you know, improving our supply chain situation so that we can benefit from its efficiency. I think the, you know, strengthening the business in that respect, we are always looking externally for opportunities in the marketplace. Again, they have to be very strategic and fit with our strategy long term. Again, it's, there's less activity going on out there. Again, we're, we're not letting up on our research and our, our visibility to opportunities.

Anthony Lebiedzinski (Senior Equity Research Analyst)

Got you. Okay, and, I guess as a quick follow-up to that, I guess as far as your R&D expenses, typically they've been around 4% of revenue. I mean, do you think that will continue, or do you think you need to step up that spending? How should we think about that?

Helen Johnson-Leipold (CEO)

You know, I, again, as we said, I think innovation even becomes more important during times of, you know, when there's a lot of competition and challenging markets. I think, we would expect that to be, most likely growing from that point.

Anthony Lebiedzinski (Senior Equity Research Analyst)

Understood. Okay, well, thank you very much, and best of luck.

Helen Johnson-Leipold (CEO)

Thank you.

Operator (participant)

Thank you. Please stand by for our next question.

Our next question comes from the line of Anna Glaessgen with B. Riley. Your line is open.

Anna Glaessgen (Senior Research Analyst)

Hi, good morning. Thanks for taking my question.

First, if you could provide some perspective on sell-in versus sell-through or any color on POS, as we're trying to understand, end market demand in light of, you know, how distorted retailer inventories are to get a real sense of, what's going on in the field.

Helen Johnson-Leipold (CEO)

Well it reflects our comments on the softening of demand that we are seeing, you know, across the board. You know, and again, I think the Watercraft business is the one that, that, the consumer demand piece has, has been challenged. We are seeing, you know, pull-through on fishing, again, at a level that is, is, lower than it has been during, you the pandemic. Actually, the fishing business has been pretty resilient from a demand standpoint, more so than the other categories. It's a, you know, it's starting to normalize, and now, which is a little later than the most. I do think we're seeing that the consumer demand piece is, is normalizing from the swing of the pandemic.

That, you know, our Watercraft business, we're going to work on pulling that through, helping that through, because that's a little bit tighter than the rest of them.

Anna Glaessgen (Senior Research Analyst)

Got it. More of a clarification, did you come into the quarter with a backlog? Was there any benefit from that?

Anthony Lebiedzinski (Senior Equity Research Analyst)

We had a bit of backlog coming into the quarter. We're, we're down to, like, normal levels now of orders. Yeah, I, I think we're, we're in kind of a normal level of order activity at this point.

Anna Glaessgen (Senior Research Analyst)

Got it. So basically, you know, as we move forward, you know, thinking about the coming quarter, it should be a relatively balanced sell-in, sell-through?

Anthony Lebiedzinski (Senior Equity Research Analyst)

Yeah.

Anna Glaessgen (Senior Research Analyst)

Excluding, like, Watercraft or places where there's excess inventory or it's still normalizing inventory.

Anthony Lebiedzinski (Senior Equity Research Analyst)

Right, that's, yes.

Anna Glaessgen (Senior Research Analyst)

Got it. Super helpful. That's all for me. Thank you.

Operator (participant)

Thank you. As a reminder, ladies and gentlemen, that's star one one to ask the question. I'm showing no further questions in the queue. I would now like to turn the call back to Helen for closing remarks.

Helen Johnson-Leipold (CEO)

Okay. Well, thank you, everybody, for joining us, and I hope you have a great day.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.