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Executives

Cynthia Georgeson - Vice President, Worldwide Communications

Helen P. Johnson-Leipold - Chief Executive Officer

David W. Johnson - Chief Financial Officer

Analysts

Scott Hamann - Keybanc Capital Markets

Justin Orlando - Dolphin Management Company

Michael Schecter – Mentor Partners

Johnson Outdoors Inc. (JOUT) F4Q08 Earnings Call December 5, 2008 11:00 AM ET

Operator

Welcome to the Johnson Outdoors’ fourth quarter 2008 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 and Chief Financial Officer. (Operator Instructions) I would now like to turn the call over to Cynthia Georgeson, Vice President, World-Wide Communications for Johnson Outdoors.

Cynthia Georgeson

Good morning and thank you for joining us for our discussion of Johnson Outdoors’ results for the fourth quarter of fiscal year 2008. If you need a copy of the news release we issued this morning it is available on the Johnson Outdoors’ website at www.johnsonoutdoors.com under Investor Relations, Investor Information.

Before I turn the call over to Helen I need to remind you that this conference may contain forward-looking statements intended to qualify for the Safe Harbor for liability established by the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical fact are considered forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond Johnson Outdoors’ control, that could cause actual results to differ materially from those set forth in, or implied by, such forward-looking statements. These risks and uncertainties include those listed in our media release from today and our filing with the Securities and Exchange Commission.

If you have further questions after the call please give either Dave Johnson or me a call at (262) 631-6600.

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

Helen P. Johnson-Leipold

Good morning and thank you for joining us. I hope you have had an opportunity to review our fourth-quarter and year-end earnings announcement. I will start off with comments on 2008, share my perspective on 2009, and provide details on our plans to address future challenges. Dave will cover some key financials, then we will take your questions.

I am not going to rehash the numbers in the press release. Obviously it was a challenging year, however, it didn’t start out that way. In fact, 2008 first quarter projections indicated a year of strong growth ahead. Apart from a weak marine market, orders during the first six months were solid and we built inventory capacity to meet the demand.

Then just as our season began, the economy took a nosedive. Consumer and customer purchases slowed considerably, eroding margins, lowering profits and net income significantly.

Despite the fact that most of our brands were holding or gaining share in key markets and even though we acted immediately to reduce overhead, cut costs, and control spending, results fell short of the prior year.

Overall, outdoor markets declined about 8% but we fared better than the markets and the competition. The marine market was hit the worst by economic downturn with a 25% year-over-year decline, but our marine electronic sales were only down about 12%. The paddle sports market dropped 8% but our canoe and kayak revenues were essentially flat with prior year. Our 2008 new products certainly helped us outperform the market and we have a very strong new product line for 2009.

Strong innovation is key to helping our leading brands gain share in the coming year, which we believe will be at least as challenging as 2008. We also need to protect profitability and enhance our cash position by scaling our cost structure with the current economic environment.

We have comprehensive plans to cut costs and capital by more than $30.0 million across three areas. First, we have specific cost-saving initiatives totaling about $20.0 million. This includes headcount reduction and wage freezes totaling more than $6.0 million. Manufacturing consolidation of die computers along with other raw material and product sourcing initiatives are expected to net almost $9.0 million. The remainder will come from just distribution efficiency programs, reduced discretionary spending in a number of areas, and less use of external consultants.

$20.0 million in cost savings is a very aggressive target for a company of our size. We are committed and are working very hard to capture every penny.

The second area of cost reduction is working capital, where we have set a target of reducing peak working capital by 12%. Restructuring in 2008 has resized operations and functions so that we are leaner and more flexible. To achieve our working capital reduction targets we are being conservative and disciplined in our forecasting models to keep inventories in check, and as of last week our inventories were down 12% compared to the same time last year. The investments we have made in upgrading systems and processes over the past few years have helped us do this.

In addition, we are decreasing safety stock levels and we have an aggressive excess and obsolete movement program. We are also working with our vendors to replace the size and frequency of our orders. Importantly, our bonus program has been revised to align management and operational incentives with our working capital reduction objective.

Our third area of cost savings focuses on capital spending, which we are reducing by 26%. This is the area where we invest in the future. We have and will continue to spend wisely in what I call game-changing innovation.

For instance, side-imaging sonar technology which catapulted the logistic number to Hummingbird fishfinder brand into a neck-and-neck race for the number one market position.

Also the Galileo Sol dive computer which revived the Uwatec brand and set a new higher-bar performance in the category.

And this year Minn-Kota is introducing the next generation fishing motor, the Foretrex. It is revolutionary in styling and performance, the smoothest, quietest trolling motor ever. While anglers may not be in the market for a new boat, the Foretrex can make an old fishing boat feel new again.

These are game changers for the market place and for the company, and that is what we will be focusing resources against.

Importantly, targeted cost savings and spending reductions are highly strategic, intended to scale our cost structure to the current environment while maintaining our competitive position in the coming year and beyond.

In summary, the inherent challenge of doing business amid such economic volatility demands a readiness and commitment to take actions necessary to preserve the long-term sustainability of the enterprise. We believe in the future of Johnson Outdoors and we are doing the right things to ensure we weather the storm, maintain our market leadership, and prepare for growth once the economy and market place rebound.

Now I would like to turn the call over to Dave for the financial highlights.

David W. Johnson

As you say in the press release, the Board voted to suspend quarterly dividends at their meeting yesterday. They felt it was a prudent action at this time. As Helen has just outlined, we are working very hard to ensure the future for Johnson Outdoors and ultimately to enhancing shareholder value for the long term.

I want to talk about the two non-cash items, goodwill impairment charges and deferred tax asset valuation allowance that had such an impact on the quarter and full-year earnings. Let me explain how these occurred.

Consistent with FAS No. 142, we are required to annually test recorded goodwill to determine whether or not there is an impairment. Impairment exists when the carrying amount of goodwill exceeds the fair value. This test is done by a reporting unit. A key element of the fair value calculations is projected future cash flows of each unit, which were impacted by the economic turbulence and declining markets in primarily the fourth quarter.

Projected future cash flows hit their lowest levels concurrent with our annual goodwill assessment, deflating the value of the unit at that point in time, and does not take into consideration the potential for positive future changes in the economic environment. As a result, we were required to write down about $41.0 million of goodwill and other intangible assets in the fourth quarter.

By reporting unit, diving had about $27.0 million in charges, marine electronics roughly $7.0 million, watercraft about $6.0 million, and outdoor gear less than $1.0 million.

Now additionally, there was a $3.5 million inventory write-down across all businesses. Although impairment charges are non-cash items they hit the bottom line and severely impacted earnings, resulting in a significantly higher than normal net loss for the quarter and in turn, the year.

The deferred tax asset valuation allowance was in turn triggered by the net loss, pursuant to FAS 109. This accounting rule deals with whether a valuation allowance should be established against deferred tax assets, based on consideration of all available evidence, positive and negative.

Obviously, the net loss was a big negative and the impact of goodwill impairment was included in the assessment. Ultimately this led to the valuation allowance of $29.5 million in the quarter.

While intangible asset impairment charges and the deferred tax valuation allowance are non-cash accounting charges with no impact on our day-to-day operations, they are reflected on the company’s balance sheet and are used to help calculate various financial performance measures included under our debt agreements. As a result of these non-cash items, the net worth covenant of these agreements has been breached and we are working with our banks to amend those agreements.

In closing, let me reiterate what Helen said. We are working hard and committed to delivering against our plans to protect profits and enhance cash flow during the year. We believe we are doing the right things for today and for the future.

Now I will turn the call back over to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott Hamann - Keybanc Capital Markets.

Scott Hamann - Keybanc Capital Markets

On the cost reduction plan, what is the timing that you have in mind? Is this also a base year, this past year, and what are the costs to achieve on those initiatives?

David W. Johnson

The timing on the cost reductions will be throughout the year. Most of those have been put in place already so I think we can expect to see those cost reductions over the full amount of the year.

I think importantly to realize is we went into the year with our plan of about a $15.0 million cost reduction to offset input costs as we went into our planning season so obviously as input costs change there could be some changes in those savings, but the input costs were contemplated when commodity costs were really high. So I feel pretty good about the fact that we can achieve some level of economics on this.

Scott Hamann - Keybanc Capital Markets

So the $20.0 million is expected for fiscal year 2009?

David W. Johnson

Yes.

Scott Hamann - Keybanc Capital Markets

The currency benefit that you had in 2008, either in sales or operating income?

David W. Johnson

On the sales line it was about a 5% benefit and on the operating profit there was a negligible effect. We got some translation benefit but that was offset by transactional profit loss in U.S. and Asia.

Scott Hamann - Keybanc Capital Markets

In terms of what you are seeing with the retailers and their inventory and what their comfort level is in taking new inventory, what are you seeing right now?

Helen P. Johnson-Leipold

We have been constantly in touch with our guys and our sales force and it is kind of mixed. You have to talk about it by business units, but we are getting pretty good orders in. We do think their inventory level is low because they were very conservative last year so there is an opportunity to get some product in. We are getting the orders but this is only our first quarter and our peak season comes into next fiscal so we will get a much better indication going forward, but so far there is an optimistic outlook.

Scott Hamann - Keybanc Capital Markets

Based on what you are seeing right now, do you think that you can be profitable in 2009?

David W. Johnson

I believe we have a shot to be profitable in 2009. We have got plans in place to react to the market and as you see, we have got a pretty aggressive cost-savings program in place, so from what we are seeing, I think we have got a shot to be profitable.

Helen P. Johnson-Leipold

Just let me add to that. We feel very good about our new products that we are introducing and certainly we are going to have a struggle with the industry in general but what we have seen in the past is that innovative products do drive sales, even in a down market.

So our big push this coming season is share gain, share gain, share gain, and in places where we got hit last year it was somewhat weak new product areas and we are coming back and filling that gap.

So from a business standpoint and a line-up of products, I think we are in good shape. Obviously it is still a huge, challenging market but that part, we have to certainly generate the top line in order to generate the bottom line.

Scott Hamann - Keybanc Capital Markets

Can you run through the covenant situation and what covenants we need to be looking for and what the ramifications are if you don’t get an amendment or renegotiate this thing? What’s it going to look like?

David W. Johnson

The first item is the net worth covenant, which has been breached and was not included in the omnibus agreement that we put in place for the September quarter. So the first level of business is to take care of that with the banks.

We still also need to reach an amendment that puts us beyond the December quarter in our debt agreements. The omnibus agreement that we put in place after the September quarter goes through the December quarter and can be extended at the banks’ option. So we are working through that with the banks right now.

If we just get a waiver that extends us into the next quarter our debt will be classified as short term because the auditing rules are that you have to get a waiver or an agreement in place for the next fiscal year.

So those are some of the dynamics we are working with.

Scott Hamann - Keybanc Capital Markets

If that goes to short term, what amount is that going to be, and obviously it is going to increase your borrowing costs?

David W. Johnson

It won’t necessarily increase our borrowing costs. That will be contemplated in the debt agreements, or in the amendments.

But what is on our books right now is about a $60.0 million debt, as of September, and that would be classified as short term.

Operator

Your next question comes from Justin Orlando - Dolphin Management Company.

Justin Orlando - Dolphin Management Company

Can you help me with what the current book value is, as of September 30?

David W. Johnson

Yes, about $122.0 million.

Justin Orlando - Dolphin Management Company

And what is the intangibles?

David W. Johnson

$18.0 million.

Justin Orlando - Dolphin Management Company

So am I doing the math right that we have over $10.00 of tangible book value on the balance sheet today?

David W. Johnson

Yes, that seems about right.

Justin Orlando - Dolphin Management Company

Thank you for the break down on the $20.0 million costs. How are you working through, specifically on the working capital side, to get these changes and what is the timing that you thing there? We talked about it last quarter as a goal that you all had, that the economy was going to affect. How are you going to do that specifically and what kind of timing are you looking at?

Helen P. Johnson-Leipold

We are already seeing a reduction versus year ago in our working capital, especially our inventory, so we feel good about that. A big piece of this is going to be conservative and disciplines forecasting and production planning and obviously production planning drives the inventory build, so we are watching that very closely and our business heads are very focused on that.

That’s in process and happening as we speak and that is one thing that is going to be contributing to the working capital reductions.

We are working on how we place orders, the frequency of that and the size of that. We have got safety stock levels that are down. These are all happening right now.

The other thing is our bonus program is aligned with reducing working capital, which is kind of icing on the cake there.

We also already have a very aggressive program to reduce our excess and obsolete products. So things are in the works and in place to, as we said, 12% below peak as we get into the season.

Justin Orlando - Dolphin Management Company

Could you refresh my memory as to what the peak was last year, ballpark on the working capital side?

David W. Johnson

It was around $180.0 million.

Justin Orlando - Dolphin Management Company

So the $18.0 million to $20.0 million reduction you are targeting here, ballpark, that would include the $3.5 million in the inventory write-down taken this quarter?

David W. Johnson

Yes.

Justin Orlando - Dolphin Management Company

I want to talk a little bit more about the goodwill impairment, and I understand it is business unit by business unit, which is very helpful in understanding that. So if I have it right, those impairments are done based with a DCF analysis, is that right?

David W. Johnson

It’s done in a variety of ways, DCF is one of the methods that we use to value that.

Justin Orlando - Dolphin Management Company

But you are valuing cash flows on a going-forward basis, is that right?

David W. Johnson

Yes.

Justin Orlando - Dolphin Management Company

And then taking that value of cash flows and measuring it against the goodwill value that you have on the books to decide which is greater and how much you need to write down?

David W. Johnson

Yes, but part of the equation is also the value of the enterprise, in total, and then bumping that up against what the value is of the reporting units, including the goodwill. So there is a reasonability check in terms of what the value of the Johnson Outdoors enterprise is.

Justin Orlando - Dolphin Management Company

The value of the entire enterprise, is that a DCF analysis or are you using multiples based on comps or how are you arriving at that?

David W. Johnson

We are using the market price.

Justin Orlando - Dolphin Management Company

The auditors wanted you to use the market price?

David W. Johnson

Again, we use a variety of methods and the market price is one of the most reasonable checks that we use.

Justin Orlando - Dolphin Management Company

Did I do the math right, that if you take out the one-time charges here and the one-time expenses for the year and add back the non-cash comp costs, that you are roughly $18.5 million of EBITDA for the year?

David W. Johnson

You are pretty close to that, yes.

Justin Orlando - Dolphin Management Company

Maybe it would be a little more if you do all the add-backs.

David W. Johnson

Yes.

Justin Orlando - Dolphin Management Company

What I am trying to understand is if you have $18.5 million of EBITDA on an LTM basis and then you tell me that you are looking at $20.0 million of cost savings that you’re going to capture, and then you tell us that there is a shot of being profitable for the forward year, which would be the most valuable year in any cash flow analysis, so those three things don’t gel with 60% or more reduction in goodwill, so maybe you can help me understand how all those things together work.

David W. Johnson

Admittedly, it is tough to piece it all together to say in the goodwill valuation that we ought to have this huge impairment, but again, it’s a triangulation and DCF does come into play and the economic volatility that we are in right now and our projections that we use in our goodwill valuation, I think that taking that into account and also the valuation of the enterprise, it all pointed to the fact that we should be prudent and take this goodwill valuation allowance.

Justin Orlando - Dolphin Management Company

If you back out of the diving, you have the piece that you have written down, diving was EBIT positive, is that right? For the year?

David W. Johnson

Yes.

Justin Orlando - Dolphin Management Company

So diving was EBIT positive for the year and it was the biggest chunk of your goodwill write-down but it sounds to me like the stock price was the biggest enforcer in this analysis, in getting these write-downs.

David W. Johnson

I wouldn’t characterize it as the biggest enforcer. It was just another piece of data that we needed to take into consideration.

Justin Orlando - Dolphin Management Company

Maybe I can chat with you offline about it, but the bottom line here is still more than $10.00 of tangible book value, even after the write down on the business and $20.0 million of cost savings coming in 2009 and a potential for being profitable, even off of what I assume are down sales projections, going forward from 2009 to 2008.

David W. Johnson

I think that is a fair characterization.

Operator

Your next question comes from Michael Schecter – Mentor Partners.

Michael Schecter – Mentor Partners

Not to beat a dead horse, but the DCF analysis on the goodwill write-off, is it done line by line, meaning the goodwill associated with a brand or a particular acquisition and it is not a consolidated basis?

David W. Johnson

It is done by reporting unit, by diving, marine electronics, etc.

Michael Schecter – Mentor Partners

But if the cash flow, or EBITDA, from one part of diving isn’t reflected in the goodwill that was created from an acquisition, meaning if there was a dud acquisition that is creating no EBITDA, don’t you have to write all that off anyway? Or is it really consolidated and it doesn’t matter where the EBITDA was generated within the unit.

David W. Johnson

It is by reporting unit so we looked at the diving reporting unit and the cash flows and the other inputs and determined the value in the goodwill valuation allowance.

Operator

There are no further questions in queue.

Helen P. Johnson-Leipold

Thank you for joining us and we wish you a happy holiday season and look forward to speaking with you again early next year.

Operator

This concludes today’s conference call.

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Source: Johnson Outdoors Inc. F4Q08 (Qtr End 10/03/08) Earnings Call Transcript
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