Earnings Call Transcript - JOUT Q3 2021

Operator, Operator

Hello everyone and welcome to the Johnson Outdoors Third Quarter 2021 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. Prior to the question-and-answer session all participants will be in a listen-only mode. After the prepared remarks the question-and-answer session will begin. 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.

Patricia Penman, Investor Relations

Thank you. Good morning everyone. Thank you for joining us for our discussion of Johnson Outdoors Results for the 2021 fiscal third quarter. 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' 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 Dave Johnson or me. It is now my pleasure to turn the call over to Helen Johnson-Leipold.

Helen P. Johnson-Leipold, CEO

Thanks Pat. Good morning and thank you for joining us. I will begin with an overview on the quarter and year-to-date results and then I will share perspective on the performance and outlook for our businesses. Dave will review key financials and then we will take your questions. During the fiscal third quarter, the warm weather outdoor recreation season is in high gear, and continued strong demand and increased interest in outdoor activities delivered another quarter of unprecedented results. Sales surged to $213.6 million during the third quarter, 54% ahead of last year’s third quarter; continued strong operational efforts allowed the company to deliver these results. Year-to-date total company sales stand at $585.4 million, a 36% increase over last year’s fiscal nine-month period. Of note compared to fiscal 2019, we are up 28% for the year-to-date period. Total company operating profit of $97.7 million was 16.7% of net sales, an increase of 4.7 points over the prior year-to-date period. Margin improvement was driven primarily by operational efficiencies as a result of increased sales volumes. For the third fiscal quarter, total operating profit was $38.1 million versus $12.9 million in the previous quarter. Net income in the quarter more than doubled to $28.8 million or $2.83 per diluted share. Dave will discuss the key financial drivers later in the call. In fishing, high demand for Minn Kota and Humminbird technologies continued through the third quarter in both new and seasoned segments, and we continued to look at Johnson Outdoors for the best fishing experience possible. Our most recent innovation in Humminbird, the new MEGA Live Imaging, captured Best in Electronics honors at this year’s ICAST, the world’s most prestigious fishing show, marking our 10th award in this category in the past 11 years. MEGA Live Imaging delivers the clarity and detail of MEGA Imaging in live action, allowing anglers to see fish and structure in real-time, even watching fish on-screen as they move in to bite an angler’s lure. With the release of this technology, anglers have access to the most complete package of industry-leading technologies and products offered by a single brand. Minn Kota’s award-winning rafter shallow water anchors continue to do well in its first full year in the market. The rafter features two industry-first technologies: auto bottom mode, which detects bottom density to determine the right anchoring force, and active anchoring which continuously monitors anchoring force and adjusts automatically for stable bottom pinning. Across all product lines, sales continue to impress with anchors, with Minn Kota as a trusted brand to help them catch more fish. Looking ahead, we will continue to focus on understanding anchors, evolving these expectations, and translating those unique insights into bigger, better product successes to maintain our pipeline of exciting new products and to sustain Minn Kota and Humminbird’s leadership position in the fishing market. In watercraft recreation, people continue to be eager to get out on the water and our industry-leading propulsion technologies offer options for anglers of all abilities and interests. The fishing kayak segment continues to grow, driven by ongoing enthusiasm for the innovative line of sports in kayaks that was launched last year, from the versatile paddle-powered Sportsman Salty kayak to the award-winning AutoPilot 120 Motorized Fishing Kayak. This Sportsman line offers a watercraft for everyone looking to enjoy a great day outdoors. In camping, demand for both Eureka and Jetboil gear remains strong as people continue to be interested in all sorts of camping experiences, from backyard to backcountry. Demand for our Eureka brand of tents and camp cooking technology is beating expectations, and in Jetboil, consumers continue to be excited about the super lightweight Stash Stove that we launched earlier this year. Reducing weight on the trail is critical for backpackers, and the Stash is the lightest all-in-one backpacking stove system that Jetboil, the technology leader in portable outdoor cooking systems, has ever made. Finally, in diving, as pandemic-related travel restrictions and lockdowns are being eased and people are traveling again, we have seen the diving market begin to recover. Diving had a strong fiscal third quarter versus 2020 and is also up versus the third quarter of 2019. Our work to promote and support local diving, simplify our value business, and enhance our digital presence globally with new European websites and e-commerce has been paying off. As the diving market recovers, our continued focus on these efforts, along with sustained innovation, will ensure SCUBAPRO’s position as the most trusted dive brand in the world. In summary, we are pleased with our results and people's continued interest in spending time outdoors. While ongoing supply chain issues and logistics disruptions may affect our ability to fill all increased demand across our segments in the future, our near-term focus is to continue to work hard to manage supply issues and meet demand for a strong finish to the fiscal year. We remain committed to investing in our key strategic drivers, understanding our consumers, sustaining innovation leadership, identifying new sources of growth in our markets, and continually optimizing our digital consumer experience. Our ongoing hard work on these priorities ensures that our portfolio of market-leading brands is well positioned for success and that we continue to deliver sustained profitable long-term growth for Johnson Outdoors. Now I'll turn the call over to Dave for a review of the financial highlights.

David W. Johnson, CFO

Thank you, Helen. Good morning everyone. I wanted to highlight a few items from the quarter. As Helen mentioned, sales for the third quarter rose 54% over the prior year quarter and increased 36% on a year-to-date basis, driven by continued high demand across fishing, watercraft, rafting, and camping, as well as some recovery in diving. Our excellent sales performance was the key driver to increasing profits both during the quarter and the year-to-date period. Gross margin of 45.7% rose slightly versus the prior year quarter as increased costs due to tariffs and inbound airfreight were more than offset by sales volume-driven operating efficiencies. Total company operating profit was $38.1 million for the third quarter compared with $12.9 million during the prior year's third quarter. Operating expenses for the quarter increased $9.38 million driven primarily by higher sales volume-driven expenses and higher health insurance claims, but decreased as a percent of sales. Net income for the quarter more than doubled to $28.8 million compared to $12.9 million in the prior fiscal year third quarter. On a fiscal year-to-date basis, the effective tax rate is 25.3% compared to last year's rate of 24.4%. We expect the full year tax rate to be in the mid-20s. Looking ahead, our factories are still running and supply chain issues remain an ongoing challenge that we are continually managing. The balance sheet and cash position remain strong, providing us with the capacity and flexibility to strategically invest to drive future growth and to continue to pay out a cash dividend to shareholders. Now, I'll turn the call back over to the operator for the Q&A session.

Operator, Operator

Our first question comes from the line of Anthony with Sidoti & Company. Your line is now open.

Anthony Lebiedzinski, Analyst

Thank you and good morning, everyone. So certainly you've seen a strong demand as you've noted here. Just wondering what are the inventory levels at your key retailers like now that you're winding down the season, so just wanted to get a better sense of that?

Helen P. Johnson-Leipold, CEO

Well, our inventory levels have been very stressed this whole season just because the demand is high. So, I would say that they are below normal and we continue to make as much product as possible.

Anthony Lebiedzinski, Analyst

Got it, okay. And at the retail level, would you say they're also below normal as well?

Helen P. Johnson-Leipold, CEO

Yes, I think across the board that’s true.

Anthony Lebiedzinski, Analyst

Got it. Thanks for that. I was just wondering, given that the Delta variant has caused some disruptions recently, have you noticed any significant changes in end user demand or buying patterns?

Helen P. Johnson-Leipold, CEO

You know, so far we have not seen a reaction to that at all, but it's still early. So we would be monitoring that.

Anthony Lebiedzinski, Analyst

Got it, okay. Thanks. And then regarding the supply chain, I'll certainly understand all the issues there. As far as airfreight, you did call that out in the press release. So just wondering if you could just comment on how much of that was an impact in the quarter and how do you see a usage of airfreight versus ocean freight to here going forward?

David W. Johnson, CFO

We have implemented air freight as one of our strategies to address the container shortage and the lead time challenges we are experiencing with components from Asia. While we historically utilized air freight to some extent, its use has become significantly more pronounced this year. This has likely had a modest impact on our margins relative to the cost of goods sold. We plan to continue employing this strategy in the future as we navigate these ongoing challenges.

Anthony Lebiedzinski, Analyst

Got it. Okay. And then in terms of labor costs or any other cost issues, I know you called out higher healthcare costs, I don't know if that was a one off quarter here, but if you could just comment on any cost issues that you expect that would be different than what you've seen near-term kind of what you're thinking here versus maybe what you were thinking at the beginning of the fiscal year?

David W. Johnson, CFO

Yeah. I'm hoping the healthcare is a one-off thing just because there's no activity in the prior year's quarter. In terms of the labor inputs, if there's pressure there, I think we're doing okay so far with that. But I think as we look into next year, that will be another factor that we will consider in our strategies, the wage rate and what happens there.

Anthony Lebiedzinski, Analyst

Got it, okay. And again, two more questions for me. So, you mentioned Helen about the fishing segment that you've been able to certainly increase your sales nicely about existing anglers and new anglers. So just wondering if you could give us maybe some more data or maybe some more insight as to what you've seen as far as participation way that as far as in your new participants in the segments?

Helen P. Johnson-Leipold, CEO

There's a delay in obtaining the participation data, but we know it has increased. To fully understand the situation, we'll need to wait for the data, though some trends are short-term while others may be long-term. We'll see how it all unfolds. There were many existing fishermen in the market purchasing equipment due to the pandemic, so it was a mix of both new and existing customers.

Anthony Lebiedzinski, Analyst

Got it, okay. And then as far as your cash flow priorities, can you talk about like what you're looking to do as far as with all the cash that you've been accumulating on the balance sheet?

David W. Johnson, CFO

Yes. The first priority is to grow the business, and so that's what we're looking to do with the cash. A piece of that is M&A, a piece of that is investing in organic growth. So those are both key for us. We'll continue to do that. We've talked about the fact that we're very active out there, and we are. We continue to look at a lot of different things. But with our strategy, it's pretty discerning and so that tends to put a filter on what we're actually excited about. So that's kind of the key thing for us. And then beyond that, we'll continue to look to grow the dividend, hopefully the regular dividend, and we look at alternative uses of cash continually, so those are always options that we could look at.

Anthony Lebiedzinski, Analyst

Right. Okay, and then just a follow-up about that regarding a special dividend. Is that something you all have considered, or would you like to share your thoughts on it?

David W. Johnson, CFO

Yes, I mean, that's part of the alternate use of cash strategy that we look at. We have looked at buybacks and specials, and we'll continue to look at that as potential uses of cash. No doubt about it.

Anthony Lebiedzinski, Analyst

Got it. Okay. Well, thank you very much and best of luck.

Helen P. Johnson-Leipold, CEO

Thank you.

Operator, Operator

Thank you. There are no further questions. I will now turn the call over to Helen Johnson-Leipold for closing remarks.

Helen P. Johnson-Leipold, CEO

Thanks everyone for joining us. I hope you have a great day. Thank you.

Operator, Operator

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