Johnson Outdoors Inc. (JOUT) Q1 2013 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the Johnson Outdoors' First Quarter 2013 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] 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 conference over to Cynthia Georgeson from Johnson Outdoors. Please go ahead, Ms. Georgeson.

Thank you, operator. Good morning, everyone, and thanks for joining us for our discussion of Johnson Outdoors' results for the 2013 fiscal first quarter. If you need a copy of our news release issued this morning, it is available on the Johnson Outdoors' website 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's now my pleasure to turn the call over to Helen Johnson-Leipold.

Good morning. I hope you've had an opportunity to review our first quarter earnings announcement. I'll start off with comments on the results, provide perspective on the marketplace and outline top priorities for the year. Dave will cover some key financials, then we'll take your questions. We're very pleased with the first quarter performance. Fishing, Camping, Diving, and Paddling equipment markets are seasonal, and the first quarter is when we ramp up for the primary selling period for our products during the second and third quarter. As a result, sales are usually the lowest of the year and we historically post an operating loss. We bucked both trends this quarter, sales increased 9% to over $87 million; operating profit was $1.5 million, a $5.2 million improvement over last year. And despite a higher-than-normal tax rate, earnings per diluted share were $0.02 in the quarter compared to a loss of $0.30 per share in the prior year quarter. Marine Electronics posted record first quarter sales, primarily due to strong growth in Minn Kota, in Cannon and a double-digit increase in sales to U.S. and European distributors during the quarter. We have a great lineup of new products for Marine Electronics this year, for example, Humminbird's 360 Imaging, our new patent pending sonar technology, which won best in show at this year's ICAST. 360 allow anglers for the first time to have a full 360-degree underwater view and to see up to 150 feet in front of their boat. By giving them a look at what lies ahead, anglers can cast to productive areas without spooking the fish. But even more innovative is that unlike other sonar technologies, 360 works whether the boat is moving or not, pretty incredible. And then there's the Minn Kota i-Pilot Link. First, we gave anglers the CoPilot for the remote control trolling, then we give them i-Pilot for wireless hearing and positioning. Now we've given them the technology that links their motor with their fishfinder and digital GPS maps so they can track a course, set waypoints, lock in anchor spots and even follow a specific depth contour. With i-Pilot Link's cruise control and advanced autopilot, the boat and the motor do the work, bringing the angler to focus on what's important, catching more fish. Shipments started in January and with just a month under our belt, new products are meeting expectations. In Diving, currency had a negative impact. However, on a currency-neutral basis, Diving sales were up 1% from last year's first quarter. SUBGEAR continues to grow and we adjusted pricing to better reflect the value across both SCUBAPRO and SUBGEAR brands, which improved margins and increased unit profitability. The acquisition of Jetboil gave a nice lift to outdoor gear sales and commercial party and military tent sales were also ahead of last year's first quarter. While Watercraft sales fell short compared to last year, operating loss decreased significantly due to the new operating model we put in place in Europe and the U.S. last year. Overall, we're off to a great start, well-positioned to gain market share and continue to deliver behind our commitment to sustained profitable growth. Recent data points provide 3 positive indicators for outdoor rec markets and Johnson Outdoors this year. First, growth in participation rates in our core activity segments, fishing, camping, hiking, diving and paddling. Higher participation rates equate to higher overall market demand. More importantly, there is a strong core base of enthusiasts who participate regularly and frequently in these activities and they represent a steady, ongoing demand for the best price value equipment. A recent poll showed that while on average, U.S. consumers expected to spend over $300 on outdoor products over the holidays, core enthusiasts plan to spend more than double that amount. Enthusiast spending has a disproportionately high impact on industry profitability. The enthusiast is our target consumer and we must continue to successfully compete and win the race for their discretionary dollars. Second, growth in outdoor equipment segments. Now we divide the outdoor rec industry into 2 major segments. One is equipment and the other is apparel and footwear. Each segment requires a very different kind of market knowledge and expertise. In 2012, growth in outdoor hard goods led the industry with a 5.8% increase across all channels. Equipment sales during the holiday retail season between Thanksgiving and Christmas were very strong with December sales alone 10% above prior year, confirming the consumer purchase intent data. And there was growth in every equipment category except snow sports. This is good news for us because our expertise and know-how is in designing, making and marketing equipment, which is essential to our core outdoor activities. Third, growth in our outdoor specialty channels. Local and regional specialty dealers are the #1 choice for camping, hiking, and paddling enthusiasts. Specialty represents about 40% of the market for these products, about the same size as sporting-goods and chains. Specialty camping and paddling stores catered to enthusiasts who continue to spend through the recent recession, that's why camping and paddling specialty channels recovered faster and stronger than our distribution channels for these products -- than other distribution channels for these products. Last year alone, specialty retail sales were up between 4% to 14%, depending on the outdoor activity served. Building momentum and recapturing leadership in specialty channels is a key strategy for our camping and paddling brands over the next 3 years. Last year, we relocated Watercraft R&D and marketing to our Old Town main operations to increase the velocity of innovation, primarily for specialty only paddling products. First step was to put together a strong, experienced and respected team to drive progress, we've done that. Both R&D and marketing teams are being led by well-known industry veterans who've been responsible for some of the best-selling paddle boats and brands in the specialty channel over the past 10 years. Progress will happen over time, not overnight and we are pleased to have the right team, the right talent to make it happen. So in summary, outdoor recreation market dynamics are positive and we believe there is significant opportunities to expand and grow in our current outdoor recreation activity markets. As we look to the future, it is critical that our plans reflect a full understanding of our 4 important implications brought on by the post-recession reality and technology-rich age namely, one, consumers are demanding -- consumers are more demanding, they're more connected, they're more informed than ever, they want the best value, they want the best quality, the best service and the best price. Transparency and trust are essential. Number two, customers are demanding more. This means knowing as much, if not more, about your customers' business as they do. It's about providing data and insights to ensure they have the right product, at the right price, at the right time, for the right consumer to grow their business. Number three, competitors are tougher and market leaders have to be prepared to aggressively defend leadership positions. And number four, the race for technology and innovation is accelerating. Meaningful innovation and proprietary technology can give you a competitive edge for a while, but the timeframe has shrunk from years to months in electronics. So priority one is for us at Johnson Outdoors is to continue to deliver against our unique value proposition, which is understanding our markets, consumers and recreational activities best and then leveraging our deep insights, product expertise and know-how to deliver winning innovation to enhance and enrich the outdoor experience for our outdoor enthusiasts. This is how and why we've been successful for over 40 years. It's what we've invested in, and future growth demands discipline and focus on what we know best, what we do best and doing it even better to create sustained Value Plus for our consumers, customers, employees and our shareholders. To do so over the next 3 years, our focus will be on gaining even deeper access to enthusiast consumers and enhancing data analytics to gain richer market insights and on maintaining a strong, deep R&D bench with the capacity and know-how to advance and apply new technologies better and faster. I'm confident we can and will deliver. I will provide the specifics and financial targets of our 2015 Value Plus plan at our annual shareholder meeting on February 28, which will be webcast at www.johnsonoutdoors.com for those who cannot attend in person. In closing, while it is too early to predict how the year will go, we are pleased by such a strong start as we ramp up for the primary selling period for our products over the next 2 quarters. The competition for consumer discretionary dollars is always tough and we feel good about our position and ability to grow share across every segment. Now I'd like to turn things over to Dave to discuss key financial highlights.

Thank you, Helen. Good morning, everyone. As Helen said, a great start to the year. Now I'm going to start with taxes. The effective tax rate this quarter is high, 59%. The rate as a function of where we make money and where we lose money and whether there's a tax benefit in those countries where losses occur. We expect the rate will go down over the course of the year as we drive more profits during the season. We're also considering a number of other options to benefit and stabilize our tax position on an ongoing basis. One thing I also want to point out is that last quarter, Helen told you we were working to better balance the profit contribution across our portfolio. And this quarter, all businesses have increased profits versus last year, so we're making progress. Now a second big question, what are we doing with our cash? As you know, this quarter, we utilized some of our cash to acquire Jetboil, which is a great complement to our camping portfolio. We know that the success of an acquisition is determined by how well we execute our integration plan, which kicked into high gear immediately after announcement. The key here was a seamless integration with no disruption to either business. The first step was to bring Jetboil employees, who call themselves jet heads, into our Johnson Outdoors family. Help them understand who we are, where we're going and bring them into our comp and benefit program. Now at the same time, a joint Jetboil and Johnson Outdoors team hit the ground running to align systems and processes and start leveraging each brand's distribution and channel strengths to benefit the collective whole. For example, Johnson Outdoors has a distribution center in Canada, which services dealers there. Jetboil had to ship to dealers from the U.S., which is complex and costly and held back growth. As of last month, Jetboil began shipping to Canadian dealers from our Ontario operation, which, by the way, has been growing steadily over the past 5 years. We're also building on our strength in what we call the hook and bullet channel to expand Jetboil distribution there. Likewise, we're leveraging Jetboil's strong presence in specialty to grow Eureka! and Silva brands in that channel. Integration is moving ahead, on time and on budget. And as projected, the acquisition of Jetboil is accretive to earnings. While we're always looking for the right acquisition at the right time, our criteria remain the same, a leading brand or technology in a growing category where we can leverage our combined strengths and knowledge to deliver sustained profitable growth. And we refined our M&A radar screen to focus in on targets and technology consistent with our vision/mission and 2015 strategic plan. So like Helen said, it's too early to call the year but we feel good about where we are and our ability to gain share and continue to grow profits faster than sales this year. I'm going to turn the call back over to the operator for the Q&A session. Operator?

[Operator Instructions] And our first question is from James Fronda of Sidoti & Company.

Were there any significant, I guess, cost synergies that were realized during the quarter with the Jetboil acquisition? Were you able to do that during the quarter?

Not during the quarter, no.

Okay. So next quarter, you might see some?

We should start to see some. But like I said, James, I think the main value driver here is really the distribution strategies of both companies coming together.

Okay, right, okay. All right. And the growth you're seeing in Marine Electronics, is that majority from all new products?

We usually get the majority of our growth from new products and it is spread over quite a few, but we're also getting growth from our base business as well. So it's been pretty good overall.

Okay. And I guess, just any sense of military sales coming back anytime soon?

No. We have not seen a lot of activity in that arena. And actually, I think we -- it may even be down from where we have projected. So it's a pretty tough area right now.

And with that, I'm showing no further questions. I'd like to turn it back to Helen Johnson-Leipold.

Okay. Well, thanks, everyone, for joining us and I hope we'll see you at our annual shareholder meeting on February 28 in Racine. Thanks for joining us, have a great day.

Thank you, again, ladies and gentlemen, for your participation in today's conference. You may now disconnect. Have a great day.