Johnson Outdoors' (JOUT) CEO Helen Johnson-Leipold on Q1 2016 Results - Earnings Call Transcript

| About: Johnson Outdoors (JOUT)

Johnson Outdoors Incorporated (NASDAQ:JOUT)

Q1 2016 Earnings Conference Call

February 05, 2016 11:00 AM ET

Executives

Helen Johnson-Leipold - Chairman and CEO

David Johnson - VP and CFO

Pat Penman - VP, Global Marketing Services & Communication

Analysts

Kristine Koerber - Barrington Research Associates

Brian Rafn - Morgan Dempsey Capital Management

Operator

Hello, everyone. And welcome to the Johnson Outdoors First Quarter 2016 Earnings Conference Call. Today’s call will be held by Helen Johnson-Leipold, Johnson Outdoors’ Chairman and Chief Executive Officer. 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. [Operator Instructions] This call is being recorded. Your participation implies consent to our recording of 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 Pat Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Pat Penman

Thank you, Andrew. Good afternoon, everyone and thank you for joining us for our discussion of Johnson Outdoors’ results for the 2016’s fiscal first quarter. If you need a copy of our news release issued this morning, it is available on the Johnson Outdoors Web site at www.johnsonoutdoors.com under Investor Relations.

Before I turn the call over to Helen, I need to remind you that this conference call may contain forward-looking statements. These statements are made on the basis of our views and assumptions at this time and are not guarantees of future performance.

Actual events may differ materially from those statements due to a number of factors, many of which are beyond Johnson Outdoors’ control. These risks and uncertainties include those listed in today’s press release and our 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.

Helen Johnson-Leipold

Good morning. I’ll begin with comments on performance this quarter and share perspective on market conditions 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 for the recreational industry is in ramp up mode getting ready for a primary selling season during the second and third quarters. Our first quarter’s sales are usually are the lowest of the year and we historically post an operating loss. This year's first quarter sales grew to $85 million, a 20% increase versus last year. So, the quarter's operating loss comes under 1 million, a fiscal decrease versus the prior year period. And net loss dropped to $0.05 compared to a net loss of $0.42 in last year's quarter. It was a great start to the fiscal year. We got a nice lift from warmer and normal fall temperatures that led to extended retail demand until late in the calendar year. In addition, this year's new products have generated a lot of excitement in pre-season orders across our flagship Fishing, Camping and Watercraft recreation brands.

Marine electronics remains a primary driver of top-line growth with sales 35% above last year's first quarter. Keep in mind that first quarter last year was unusually slow for marine electronics, but even so year-over-year increases are significant. We did benefit from higher boat sales and lower gasoline prices but most importantly terrific innovation. Demand for Minn Kota's Ulterra and this year's new Riptide Ulterra helped propel increased pre-season sales and i-Pilot and i-Pilot Link continued to exceed expectations.

Humminbird is also off to a great start with sales of double-digit over prior year. This is due impart with strong favorable market response to the HELIX series of fish finders particularly the 7 inch and the 9 inch model. Importantly, we are seeing growth in all key channels consistent with the reported resurgence in the boat market overall. Growth in Old Town led to a 17% surge in watercraft revenue this quarter, new products like Old Town’s Predator series of Fishing boats and NEXT canoe/kayak hybrids are helping us keep pace with an overall upward trend in the pedal boat market.

Our canteen business continues to benefit from Jeff Boyle the world's number one personal cooking system we acquired three years ago. Award winning new products fueled double-digit growth in the brand this quarter, leading to growth in our Camping business overall. While our consumer business was up declines in military weighed down results in our outdoor equipment unit.

A diving business has been significantly impacted by ongoing geopolitical tensions across the Middle-East. At this time it remains unclear how long travel restrictions to the Red Sea, one of the most popular dive destinations for Europeans in the Middle-East will last. Unfavorable currency translations had an even greater effect this quarter which Dave will discuss further in his remarks. While we are addressing these near term challenges our primary focus remains on ensuring the long term growth and strength our scuba program. That’s why we are working hard to invigorate innovation in underwater electronics and computers, a key growth industry segment.

We are very excited by the opportunities we see in our acquisition of Seabear Dive Technology, specialists in the development of underwater instrumentations with a unique application of new and emerging technologies. Seabear’s technical expertise together with our deep knowledge of the dive consumer and iconic scuba programs is a great combination. Diving has historically been a key contributor to growth and we believe that our efforts will result in steadily improved performance in this business overtime.

As a reminder that first quarter results are not indicative of full year performance. However, the fact that we are off to such a strong start is certainly a positive sign. Our core brand across fishing, camping and hiking and watercraft recreation businesses are heading into the season with strong momentum and our continued investments in comprehensive consumer research, enhanced innovation and digital sophistication are essential to consistently deliver accelerated growth and enhance profitability for Johnson Outdoors long term. We are very excited by the future.

Now I'll turn the call over to Dave for financial highlights.

David Johnson

Thank you, Helen and good morning everyone. The strong top line growth was obviously a key driver in our improved operating profit performance. We also benefited from a significant decrease in legal spending of approximately $2.5 million due to the pacing of Humminbird patent litigation. Foreign currency translation which had a negative impact of $1.5 million or 2.2% on total company net sales during the quarter primarily affected Diving our most global business. The effect of unfavorable currency translation on total company operating profit was minimal. As we told you previously wherever possible we've adjusted pricing to minimize the impact of the strong U.S. dollar on overseas revenues.

The effective tax rate was negative 2.9% this quarter and is primarily a function of losses occurring in jurisdictions with valuation allowances for which no tax benefit is recognized. We expect the tax rate to return to a normal level throughout the year. Working capital is higher compared to last year due impart to higher inventory levels year-over-year both in finished goods and raw materials. In addition to ramping up production for the season, pre season demand has been strong, and inventory levels reflect the positive momentum behind this year's new product line up, particularly in Minn Kota and Humminbird our largely from most profitable brands.

Accounts receivables are also at $9 million in the quarter in line with this early demand. We will be monitoring inventory closely as we move into primary selling season for our products in the second and third quarters to keep levels consistent with market demand. Finally, operating cash flow usage reflects our cash purchase of Seabear technology which is being integrated into our revenue. We are heading into the warm weather outdoor recreation season with the balance sheet in great shape, providing us the capacity to invest in growing our business while also consistently paying a dividend to our shareholders.

Now, I will turn things back over to the operator for the Q&A session, operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Kristine Koerber from Barrington. Your line is open.

Kristine Koerber

A few questions, first, Dave, where there any unusual expenses in the quarter?

David Johnson

No.

Kristine Koerber

So the litigation expenses are now behind you, for the most part?

David Johnson

Well we expect them to be significantly less this fiscal there is always a chance that things could heat up again, but we are happy with where we are with the litigation.

Kristine Koerber

So it's ongoing but just not significant.

David Johnson

Yes.

Kristine Koerber

And then with regards to the marine electronics business, who is this sector taking share from? I mean where -- I know the growth; you're doing well with several products. But where do you think the share is coming from?

Helen Johnson-Leipold

Well, in our motors business we I think are growing the market and we lead that front, we don’t have major competitor there. But I would say in the fish finder business we have got two major competitors Lowrance and Garmin. And I think Lowrance has more share than Garmin so obviously we are taking from both of them.

Kristine Koerber

And then as far as diving, obviously working on and improving the trends in that segment, how long do you think it will take before we start to see a payoff with some of your initiatives you're working on?

Helen Johnson-Leipold

Well, the fact is some of the factors are external that piece of it makes it a little hard to project. We are working on initiatives that should generate energy and growth in that. We don't rely on those external factors kind of turning positive. So, we have a lot to do, a lot of opportunities and I think we're positive I hate to tell you when but we should see some positive performance as we move forward.

Kristine Koerber

This Seabear those products when will they hit the market?

Helen Johnson-Leipold

Well, that's dive computers, and we did buy some great technology from them. And we are in process of incorporating this technology into our computer line. But we would probably see products coming out under the SCUBAPRO name in our next we will try and launch them at the next dive show which is November.

Kristine Koerber

And then the recent price increases in the dive segment have any impact in the quarter, helped at all?

David Johnson

Yes it helped a little bit it did but it is just that versus prior year we still had a weaker dollar. So I’m hoping on a go forward basis that stabilizes a bit, we’ll have increased pricing in a more normalize kind of value of dollar to euro.

Kristine Koerber

And then just lastly, as you look at some of your -- the retail accounts, your customers, what are their inventory levels looking like? And what was the promotional environment like in the quarter?

Helen Johnson-Leipold

Well our largest sales came out of our marine electronics group and we feel pretty good that there is also some positive consumer pull from that. So there is increase in consumer takeaway, they do have inventories, but not significant we feel that’s going to move forward. I think there is in the other businesses I think it’s pretty much -- there is not a significant amount of inventory, we have an extended season, so that us helpful too. So I think we’re in pretty good shape.

Operator

Thank you. Our next question comes from the line of Brian Rafn from Morgan Dempsey Capital. Your line is open.

Brian Rafn

I apologize I got stuck with your operator for about 17 minutes. So I missed all the opening lines, so I hope my questions aren't redundant. Give me a sense, if you look at this season, getting into your strong seasons, what was your sense of sales momentum, inventory pattern, or order patterns, inventory building from some of your retailers? I'm judging, based by sales, probably some pretty good stocking forward. Or give me a flavor for what you guys have seen.

Helen Johnson-Leipold

Well I think in the pre-season orders from the marine electronics was significant. And I think there is a lot of elements in there but I think the retailers are pretty good about that over stocking these days. We do see and we do get point of sale data in marine electronics and there is a good pull through on that product. So it is they are responding to innovation in the product and the strong boat season. So I think we’re in pretty good shape in the other businesses it is pretty much as history has gone and not unusual patterns.

Brian Rafn

Yes. In the marine electronics, if you look at some of your big-box, your category super -- the Bass Pro Shops, the Cabela's -- are they ordering? You're obviously saying you're getting POS. Are you -- you got an electronic data interchange? Or is that -- you're constantly refurbishing? Or how many sequential orders will they put in? Do they order by the month or --?

David Johnson

Yes, I mean it various Brian. I mean we do have EDI system with our major retailers. And so we’ve got almost real time visibility it’s what their inventory is and the buying patterns. But it’s really constant the activity.

Brian Rafn

So it’s constant, so their replenishment is virtually continuous, basically?

David Johnson

Yes, I mean, I don’t want to say continuous, but it’s, we’ve got a pretty good handling what’s happening out there with those retailers.

Brian Rafn

On the scuba diving side, obviously, you've got geopolitical issues in the Mediterranean and that. Give me a sense: what is it, SUBGEAR versus SCUBAPRO? I don't want to say the low end, because obviously scuba diving is mission-critical. You're not selling things that are going to kill people. But how has your initiative been on the SUBGEAR side? And in a difficult market, is SCUBAPRO performing better than the lower price point? Or how is that lower price point value area, in the diving area, performing?

Helen Johnson-Leipold

I would say that’s a segment of our business that we get very -- we got minimal data from the market. But we have to deal with it, mostly our own internal data, so we make assumptions. But our philosophy has been that our premium brand is really the focus and the power brand and during tough times I think our consumer is not as price sensitive as the lower end consumer. So our assumption is we don’t get hit as hard during those times. But so the -- we do have entry level price points, but our emphasis has always been on the higher end product and we feel that that’s really a better place to be when there is things going on in the external environment.

Brian Rafn

You guys pride yourself in trailing sales, a fairly substantial portion being generated from new product design. With the acquisition on the diving side, and coming out with some new dive computers, would you say fairly in -- for the November 2016 show -- would you say that you should have more product sales in the diving area, given the fact of this -- the new dive computer? Because obviously in marine electronics, you are always bringing stuff out, so that seems to be a fairly strong generator. For this year, would you say that you're going to get more incremental sales, now that you're launching this dive computer stuff in the -- or updating it, upgrading it?

Helen Johnson-Leipold

As I mentioned earlier that we will be incorporating the technology that we purchased into the SCUBAPRO computer line and we will launch the first of our entry there with a new technology in November. So, that is fiscal year but the dive computer segment is a significant and very important segment in diving and we do feel that with this technology and with -- we've got some pretty steadfast core product offering from our own historic product launches. That this is a key -- we feel is a key growth for us. It's an area that should go along, you are number one in regulators, you should have the same with the computer line. So, we feel very good about it, but you will see the new acquisition the technology being integrated to next year's launches.

Brian Rafn

Dave, you don't have a number on what new product sales were in the quarter, do you?

David Johnson

It was over 3%.

Brian Rafn

Anything on the military side, from the camping, Eureka!, the tent side?

David Johnson

Yes. Military was, it was a week quarter for us. We are hoping that we've said it will stabilize around a $7 million to $8 million level for the year but we have got some work to do to get there.

Brian Rafn

As you look out the balance of the year, CapEx plans, Dave, for…?

David Johnson

I think we will probably be up a bit this year versus last year I think we are at a $10 million level something like that. It looks like maybe more in 12.

Brian Rafn

And can you highlight maybe where you're allocating that?

David Johnson

Yes, our fishing business is going to be up again it is really all new products driven some growth driven in fishing and then there is other investments at a company level in digital marketing that will be capitalized.

Brian Rafn

And then I missed the tail end -- I caught the tail end of your tax discussion. Did you talk about the rate you anticipate for this year?

David Johnson

Yes it should normalize we expect it to normalize by the end of the year. This first quarter is so wacky with the mix of income, but I think between 36% to 38%, something like that could be our target.

Brian Rafn

And any headcount initiatives, hirings or reductions across the four different product areas, staffing et cetera?

David Johnson

Nothing significant, we are investing in pockets and then we are simplifying in other pockets but there is nothing significant on price.

Brian Rafn

And then anything, Dave, that you see on the cost side, materials, raw materials, freight costs -- anything that you see as a cost escalator?

David Johnson

No. I think our cost structure right now I mean things could change but right now I think that is looking pretty good.

Operator

Thank you. [Operator Instructions] I am seeing no other questioners in the queue at this time. Sp I'd like to turn the call back over to management for closing remarks.

Helen Johnson-Leipold

Thank you all for joining us and we'll talk to you seen. Thank you.

Operator

Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program. And you may all disconnect your telephones lines at this time. Everyone have a great day.

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