Earnings Call Transcript - JOUT Q2 2020

Operator, Operator

Hello to everyone and welcome to the Johnson Outdoors Second Quarter 2020 Earnings Conference Call. Helen Johnson-Leipold, Johnson Outdoors Chairman and Chief Executive Officer, will lead today's call. Also on the call is David Johnson, Vice President and Chief Financial Officer. Before we begin the question-and-answer session, all participants will be in a listen-only mode. After the prepared remarks, we will move on to the question-and-answer session. This call is being recorded. Your participation implies consent to the recording. If you do not agree to these terms, please disconnect. I would now like to turn the call over to Patricia Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Patricia Penman, Director of Investor Relations

Thank you. Good morning and welcome to our discussion of Johnson Outdoors fiscal 2020 second quarter results. 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 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 releases and 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, Chairman and CEO

Good morning, everyone. Thank you for joining us. I'll begin with a brief overview of financial results for the quarter and first six months, review the initial impact of COVID-19 on our businesses and outline our priorities, as we work to help mitigate its ongoing effect. I'll turn things over to Dave to review the key financials and then we'll take your questions. Total company sales declined 8% to $163.1 million during the second quarter. Each business was impacted differently by the pandemic this quarter, some more, some less, some earlier, some later. Improved margins and cost-cutting efforts helped offset the impact of lower sales. Operating profit for the quarter improved to $31.8 million and Dave will discuss the factors behind this increase in his section. Net income was $20.4 million or $2.02 per diluted share. On a year-to-date basis, sales, profit before taxes and net income all compared favorably to the prior year six-month period, due to this year's very strong first quarter performance. Government ordered stay-at-home mandates led to temporary suspensions at many of our operations. Diving, our most global business, was affected first due to the rolling spread of COVID-19 around the world. As a result, guide markets across the globe have been negatively impacted by government ordered stay-at-home mandates. Watercraft and Camping production was temporarily suspended in mid- to late March, followed by Fishing in early April. Due to the timing of all this, at the heart of our primary selling season, it has dramatically disrupted and we expect the third quarter to be significantly impacted as a result of COVID-19. During these unsettling times, employee health and safety has been our primary focus, with employees working from home, and while production and shipments were on temporary hiatus, every location was deep cleaned and sanitized. Strict operating processes and procedures put into place, consistent with CDC guidelines for COVID-19 and good personal hygiene directive advanced. As a result of these measures, we are able to ramp up operations at levels consistent with demand in each business and with applicable government requirements, which vary by state and location. Despite the physical distance between us, my management team has worked closely together, monitoring all aspects of this rapidly changing situation to bring clarity to near-term priorities and longer-term needs. Government mandates have restricted activities enjoyed by our outdoor consumers thus far. And while these are just beginning to ease, this year's warm weather outdoor recreation season will be constricted. Our focus now and for the remainder of the year is implementing strategies and plans designed to optimize sales. Key to this will be leveraging our digital marketing capability and capacity to maximize e-commerce and in-market opportunities. When our consumers are once again able to get out there and experience the great outdoors, Johnson Outdoors will be there for them. Once stay-at-home mandates and restrictions on travel are eased, we hope to have a clear view on the fuller impact of COVID-19 on the outdoor recreation industry and our markets and thus greater clarity on the full year outlook. Importantly, our unwavering commitment to building a thriving enterprise long-term remains stronger than ever. Now, as always, consumer-driven innovation will play a critical role in helping us overcome challenging times and emerge stronger and better positioned for the future. Now, I'll turn things over to Dave.

David Johnson, CFO

Thank you, Helen. Good morning. As Helen said, COVID-19 impacted much of our operations this quarter. The widespread disruption and cost to the global dive markets drove declines in diving. Travel to key dive destinations has come to a virtual halt and government mandates have temporarily suspended production and forced closures of specialty dive shops, which are the primary retail channel for core life support dive equipment. As of now, it's unclear just how long it will take for dive markets to recover, but we anticipate it will be gradual, versus immediate. Fishing production and shipments were minimally affected by stay-at-home orders during the quarter. The pacing of new product introductions last year led to unfavorable year-over-year quarterly comparison. Camping sales declined 7% and Watercraft sales fell 38% from the prior year quarter, due largely to COVID-19 impacts on production and demand. We moved quickly to protect the bottom line by cutting nonessential spending, deferring capital expenditures and reducing incentive compensation. Operating expense declined $7.9 million in the quarter, due primarily to a $5.5 million favorable impact from valuation adjustments to the company's deferred compensation plan assets, which are totally offset in other income. And incentive compensation costs declined $3.4 million. In addition, executives and the Board have voluntarily taken reductions in pay. Going forward, we're scaling operations to demand in each quarter with a key focus on keeping working capital in check. At the end of the quarter, working capital was more than $20 million favorable to prior year. Looking forward, our debt-free balance sheet remains strong and our healthy cash position will be beneficial as we work through challenges ahead, while continuing to make smart investments in strengthening the business and drive value for our shareholders. Now I'm going to turn things over to the operator for the Q&A session. Operator?

Operator, Operator

And your first audio question comes from the line of Anthony Lebiedzinski from Sidoti.

Anthony Lebiedzinski, Analyst

Yes. Good morning, and thank you for the opportunity to ask questions. I hope you're both well and healthy. I joined the call a few minutes late; I had some technical difficulties getting on the call. So you may have addressed this already, but can you give us a sense of how your business performed through early March and then after the COVID-19 outbreak?

Helen Johnson-Leipold, Chairman and CEO

Yes. This is Helen. I think we had quite a bit of momentum going into our normal selling season. So we felt pretty good about our position. I would say that we had a strong first quarter. So year-to-date numbers were really good. And obviously, when COVID hit that was quite a different story. So it overlapped exactly with our important selling season, which is key. So we felt good about coming into the season, and then we got impacted. So we've got a restricted season on the other end. So we'll have to wait and see how that goes. But I'm sure we're all seeing a little bit of pent-up demand, which is good, but we don't have a good view to the future or the remainder of the year at this point in time. But we can always be optimistic.

Anthony Lebiedzinski, Analyst

Sure. Okay. So as far as the gross margin improvement in the second quarter here, can you just touch base a little bit more about that? What drove that? I know you talked about the product mix and the pricing. But is there anything else to think about that? And how should we think about gross margins going forward?

David Johnson, CFO

Yes. I would expect gross margins to kind of tame a little bit going forward. It's mostly due to promotion activity, pricing activity, and like I said, stronger mix across the businesses. Costs have been pretty tame as well. But I don't necessarily expect a huge improvement going forward in gross margin versus last year.

Anthony Lebiedzinski, Analyst

Okay. Got it. Thanks for that. So just wondering, with the economy now in a recession, can you talk about the expected impact on each of your different segments? Obviously, I'm particularly interested in the fishing segment, which is your crown jewel. So just wanted to get a sense of the willingness of your customers to be spending $2,000 or $3,000 for an Ultrex or an Ulterra; could there possibly be some people trading down to lower-priced models? So just wanted to get a sense of how we should think about your business in a recession?

Helen Johnson-Leipold, Chairman and CEO

We have a very dedicated group of fishermen who are quite passionate about their hobby. They remain committed to the fishing season. Looking back at the previous recession, I see some differences compared to today. Even if some consumers don't purchase a new boat, they will often invest in a better motor by trading in their old one. This means we can either be an accessory for their boating needs or get involved in new boat purchases. We've got various options for consumers to buy our products. However, the main concern is that we had a limited selling season and missed out on significant sales opportunities. The key question is whether those customers will return or if we've lost those sales for good. Our consumer base is quite loyal and eager to fish, especially following a period of restrictions, but the recession adds another layer of uncertainty. Predicting future trends is challenging, given all these factors.

Anthony Lebiedzinski, Analyst

Sure. Yes. Thanks for that. And if you could just briefly maybe touch on the other segments as well, I know they're far smaller compared to fishing, but as far as, how would you expect those to perform?

Helen Johnson-Leipold, Chairman and CEO

I believe that all our businesses were affected by the timing of COVID, particularly since it coincided with our peak season and we operate seasonal companies. This was likely the most significant impact. While there was some pent-up demand, the effects varied by business. As Dave mentioned, the diving business faced many challenges and was hit early worldwide. It also involves travel, so it may have been more adversely affected. Meanwhile, our camping and watercraft sectors are solid, but with restrictions keeping people at home, they’ve also suffered. We expect there to be some pent-up demand; however, the impact differs by industry. Fortunately, we have a loyal customer base, and we’re prepared to serve them when they’re ready to get outside and enjoy recreation.

Anthony Lebiedzinski, Analyst

Got it, okay. And then a couple of more questions if I may, so as far as competition in the fishing segment, have you seen anything notable to call out at this point?

Helen Johnson-Leipold, Chairman and CEO

If you're referring to the motors business, we haven't seen a lot of new activity. Obviously, new motors are out there and have gotten placement. So I think COVID has really put a big variable in the mix of everything and it's hard to really determine how things are going. I'm sure as everybody gets back to the stores are opened and the consumers can get out, then we'll see more about what's going on out there.

Anthony Lebiedzinski, Analyst

Got it. And lastly, as far as can you touch base on your capital allocation priorities at this point?

David Johnson, CFO

Sure. Yeah. I mean, I think they remain pretty much the same as they were before. I mean, we're more into saving money, saving costs where we can, but we continue to look at ways to allocate that capital appropriately. Paying the dividend is still an important tool in our toolbox; M&A continues to be top of mind in terms of what we want to do with that money. So it will be interesting to see how this all plays out in the marketplace, but we'll be ready. And as you know, we've got $132 million of cash on our balance sheet so we're in really good shape.

Anthony Lebiedzinski, Analyst

Right. Yeah, absolutely. So in terms of M&A activity, have you noticed a decrease in multiples, or are they still high?

Helen Johnson-Leipold, Chairman and CEO

I think it's a little too soon to see the impact of COVID on that, but certainly during the time a lot of issues happening out there. You're hoping that things do. There are opportunities that come about. We've got our eyes out and looking. But I think it's really early right now to look at multiples.

Anthony Lebiedzinski, Analyst

Got it. And actually one last question if I may. So obviously, COVID-19 has impacted all the four segments of the business, no question about it, but that being said, the Watercraft recreation segment has been the most challenged in the last couple of years from a profitability standpoint. At some point, would you perhaps consider divesting that segment, or are you still willing to be patient and trying to turn that around?

Helen Johnson-Leipold, Chairman and CEO

Well, no at this point, we're certainly not looking at selling. I think our whole focus on innovation is the key. And we've got plans that we are doing to reenergize that business and we've got a little bit like interrupted with the COVID, but we still feel good about the plans and look forward to the future with that business.

Anthony Lebiedzinski, Analyst

Got it. All right. Well, thank you and best of luck.

David Johnson, CFO

Thanks, Anthony.

Operator, Operator

Okay. Operator, thank you. I'd like to thank everybody for joining us and stay safe and stay healthy. Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now all disconnect.