Earnings Call Transcript - JOUT Q3 2020

Operator, Operator

Hello, everyone, and welcome to the Johnson Outdoors Third 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. This call is being recorded. Your participation implies consent to our recording this call. If you do not agree to today's 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, and welcome to our discussion of Johnson Outdoors fiscal 2020 third 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 any 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 by reviewing financial results for the quarter and year-to-date and discuss the current market dynamics and their effect on our brands' performance. I will then outline key priorities going forward, then turn things over to Dave to share key financials. Total company sales during the third quarter were $138.4 million with operating profit of $12.9 million and net income of $12.9 million or $1.27 per diluted share. On a year-to-date basis, net sales totaled $429.5 million with operating profit of $51.5 million and net income of $39.7 million or $3.93 per diluted share for the fiscal 9-month period. Results for the quarter and 9-month period all compared unfavorably to the prior year, reflecting the impact of the pandemic on our markets and businesses. Typically, the fiscal third quarter is the primary selling season for our warm-weather outdoor recreation products. However, this is anything but a typical year. Government-ordered stay-at-home mandates and the temporary suspension of operations at some locations stifled sales and shipments in April in every business. In May and June, orders increased significantly in Fishing, Watercraft Recreation, and Camping. At this time, we are working overtime to keep pace with continuing demand in all three of these businesses. On the flip side, travel restrictions continue to limit accessibility to Diving, causing a sharp decline in that market overall. As mandates ease and waterways and campgrounds open up again, the great outdoors is providing people exactly the kind of experience they are eager for: recreational activities that are rejuvenating to the mind, body, and spirit and safe to enjoy. Our purpose, to inspire more and more people to get out there and experience the awe of the great outdoors, is more important than ever. And our employees' dedication to our mission to provide products that deliver a great outdoor experience has never been stronger. Participation in fishing has always been high. It's even higher now because on-the-water recreation affords people the space and tranquility they want right now. Innovation is our lifeblood and continues to play a key role in drawing both seasoned anglers and new anglers to Johnson Outdoors for a great fishing experience. A great example is the new Old Town Sportsman line of fishing kayaks in watercraft recreation. The fishing kayak segment is one of the fastest-growing in the paddle market, and we've taken innovation to a whole new level in this segment with this pioneering line of power, pedal, and paddle fishing kayaks tailored to meet the unique wants and needs of every kind of angler. The Sportsman Autopilot, which utilizes a GPS-enabled Minn Kota trolling motor to propel, steer, and anchor the kayak with its unique Spot-Lock technology, grabbed the coveted Best in Show award at the 2020 ICAST, the world's most prestigious fishing show. This marks Johnson Outdoors' third ICAST Best in Show honor in the past five years. While the Sportsman line is generating a lot of excitement in the market and off to a great start, the overall appeal of on-the-water recreation this year is also giving a big lift to sales across our entire watercraft recreation portfolio. And we're leveraging our growing capabilities in digital marketing and data analytics to maximize this opportunity. As a result, Watercraft posted higher sales and profit during the third quarter despite COVID-19 business interruption. In Fishing, we are continuing to build on a powerful legacy of innovation that transformed Minn Kota and Humminbird into the market-leading brands they are today. The new MEGA 360 Imaging from Humminbird is the first and only sonar technology that sweeps 125 feet around the boat, providing a full 360-degree view with unmatched detail and coverage. While other sonars function only when the boat is moving, our patented 360 technology sweeps continuously even when the boat is at a standstill. MEGA 360 is also enabled with our unique One-Boat Network capability, which enhances the performance of both the Minn Kota trolling motor and Humminbird fishfinder to give anglers effortless command of their boat. Shipments of MEGA 360 began early this year and are on track to beat Year 1 expectations established prior to the pandemic. Johnson Outdoors fishing innovation captured two more awards at the 2020 ICAST event. First, the new Humminbird CoastMaster charging technology, which nabbed Best Electronics for a ninth win in this category in the past 10 years. CoastMaster provides more information, more detail, and greater clarity in customizable chart views to enable saltwater anglers to identify and navigate the most productive fishing spots. And second, the new Minn Kota Raptor Shallow Water Anchor, which took Best Boating Accessory honors with 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. Picking that off to a very strong start this year, and since April, sales have continued to surge in virtually every category and channel. We're working hard to end the year as strong as we started. Camping markets have begun to rebound as more and more campgrounds and parks reopen. Both Eureka! and Jetboil are benefiting from the heightened interest in camping of all sorts, from backyard to backcountry. Cooking is an essential element of a great camping experience, and Jetboil, the world's #1 brand of cooking systems, is poised for continued growth when camping markets fully recover. In Diving, our near-term focus is on growing share in a down market and to better position SCUBAPRO for growth in the post-pandemic global market recovery. SCUBAPRO is the world's most trusted dive brand, and we will be there for divers once the market recovers. Near term, the biggest challenge we face is keeping pace with strong demand in Watercraft, Fishing, and Camping as we continue to operate under strict procedures and protocols to keep our employees safe and to mitigate the spread of COVID-19. Going forward, our goal is to maintain the positive momentum of our Fishing, Watercraft Recreation, and Camping brands through the end of the year by leveraging the increased interest in our outdoor activities to the fullest. Longer term, we remain committed to creating value by building vibrant, thriving businesses with the capability and capacity to deliver sustained profitable growth. Now I'll turn the call over to Dave Johnson, our CFO, to review key financial highlights. Dave?

David Johnson, CFO

Thank you, Helen. As Helen said, this isn't a typical year. We came out of the gate strong with record-high first quarter results, poised for growth in every business. And then one by one, every business began to feel the impact from COVID-19. Now at this time in prior years, sales and production would be slowing down in anticipation of the season coming to an end. But this year, demand in three businesses remains high. Production is in full swing, and if the weather cooperates, customers are preparing for this season to have a longer tail. While we're pulling out all the stops to end the year strong, right now, there are too many unknowns to give us a clear picture on how the full year will shake out. For the quarter, gross margins remained strong at 45.2%, equal to last year, due to favorable product mix and lower tariff costs offsetting lower absorption resulting from the lower volume. Operating expense was down about $2 million in the quarter, driven by a $5 million reduction in volume-related expenses and a $2 million decline in advertising and promotion spending. Bad debt expense was up about $800,000 due to a customer bankruptcy. Deferred compensation expenses were up $2.1 million due to valuation adjustments and were 100% offset in other income. R&D costs were also up $1.6 million due primarily to an acceleration of amortization of intangibles in the Diving business. On a fiscal year-to-date basis, our effective tax rate of 24.4% was comparable to last year. We're keeping a very close eye on working capital in this challenging business environment. On a year-to-date basis, working capital was up $4.2 million as the decline in accounts payable more than offset a decrease in inventory. And despite the business interruptions this quarter, we generated about $50 million in cash flow. The fundamentals of our business are strong, market-leading brands with outstanding innovation, along with a debt-free balance sheet and healthy cash position. All are critical to enabling us to work through the challenges ahead and emerge a stronger company, better positioned for future success and continuing to drive value for our shareholders. Now I'm going to turn things over to the operator for the Q&A session. Operator?

Operator, Operator

Your first question comes from Anthony Lebiedzinski with Sidoti & Company.

Anthony Lebiedzinski, Analyst

So I just wanted to see if you guys can give us a better sense as to the magnitude of the timing shifts for shipments, especially fishing and camping. If you could just start with that, that will be great.

Helen Johnson-Leipold, Chairman and CEO

Well, given the pandemic and the fact that we shut down and a lot of the retailers shut down for some timeframe, it certainly has shifted because our key month is usually April. And so we can see that everything has shifted, but predicting whether it's going to continue or how long that's going to go, it's really hard to say. So all we can say is that right now, demand is very strong, and we're working hard to keep up with it. And obviously, it would be great if it continued, and the season kept going longer than normal. But it's hard to predict at this time.

Anthony Lebiedzinski, Analyst

Sure. Yes, I understand. Certainly, there's a lot of unknowns with COVID. So as you're seeing the strong demand beginning in May, just curious about the relationship between volume and pricing that you have seen. Obviously, there's a great interest in people getting outdoors. But with the economy, with high unemployment, just curious whether people are willing to trade up to more expensive products. Or are they trading down? I'm just curious to get some color on that.

Helen Johnson-Leipold, Chairman and CEO

I think what we're seeing is that interest is so high in the outdoors that across the board, our consumers are buying our products, and we haven't seen the impact of that as of now. And the innovation we have seems to be driving interest. So right now, things are going as we would hope.

Anthony Lebiedzinski, Analyst

Okay. Can you distinguish whether the stimulus checks from the government have provided any benefits? Do you think this has been advantageous, or do you believe the end consumer remains largely unaffected?

Helen Johnson-Leipold, Chairman and CEO

It's difficult to quantify. However, our demand remains strong, and the desire to engage in outdoor activities has increased its value, leading customers to spend more. While stimulus checks certainly play a role in that spending, we can't determine the exact impact they have.

Anthony Lebiedzinski, Analyst

Good. Understood. As far as COVID is concerned, how should we consider the costs associated with PPE or sanitation products in relation to productivity? I know you are working overtime to meet demand, but are there any challenges with maintaining proper social distancing that we should consider?

David Johnson, CFO

Yes. We've had some incremental costs due to COVID that haven't been material. But to your point, too, we're dealing with capacity basically with social distancing and protocols we're putting in place with our factories. So that's a bit of a challenge. I think we are overcoming that each month and figuring it out. So yes, we'll have to see how that plays out going into next season. But right now, as we said, we're just helping to keep up with demand right now.

Anthony Lebiedzinski, Analyst

Got it. All right. I have two more questions. Regarding the bad debt expense, I believe it was $800,000, if I remember correctly?

David Johnson, CFO

Yes.

Anthony Lebiedzinski, Analyst

Okay. And do you foresee anything else? Or did you already accrue ahead of what you think? Was this an actual accrual or more of a projected one?

David Johnson, CFO

Yes, it's an actual bankruptcy with a retailer. We accrue to what we think is reasonable. Having said that, I think we'll have to see how this plays out with our retailer base. It just kind of depends on how the economy goes. I think everyone's kind of hanging in there right now. We're in pretty good shape really with our retailers, but we'll have to see how it plays out over the kind of the medium to long term.

Anthony Lebiedzinski, Analyst

Got it. Okay. And then last question for me. So the tax rate was a little bit light versus prior quarters. Just wondering what that was, and how should we think about the tax rate.

David Johnson, CFO

Yes, it varies significantly from quarter to quarter, but I believe the year-to-date figure is a more accurate comparison, similar to last year. We benefited from some tax positions we had reserved. As we submitted our paperwork this year, we were able to remove some tax positions. So, I think year-to-date provides a fairer comparison.

Operator, Operator

Your next question is from Will Hamilton with Manatuck Hill.

William Hamilton, Analyst

I was just wondering, to drill down on the end market demand you're seeing. Could you give us any color as to the retail sales or sell-through that you're seeing, particularly in Fishing, Camping, and Watercraft?

Helen Johnson-Leipold, Chairman and CEO

Well, what we can say is that we have significant demand. And so our feeling is that the retailers are light on inventory because they've got orders in that we are trying to keep up with. So I think the sell-through is pretty good. And I think it's more that there's more demand than there is supply at this point.

William Hamilton, Analyst

Okay. But you can't provide any specifics if we're talking, like up 20%? Or maybe could you give us a sense of what kind of order growth that you experienced maybe in June or here in July?

Helen Johnson-Leipold, Chairman and CEO

Well, I can say that the demand is ongoing, and that's a positive development. Throughout June, it was very strong, even though our initial projections for the quarter were not encouraging due to the circumstances. We're feeling optimistic about the growth in demand, but we need to ensure we can keep up with it.

William Hamilton, Analyst

Okay. But it would seem like, based on that demand and inventories being as low, that's what we're hearing from retailers, that you could experience if the productivity is at the plants what you would like, double-digit growth in the fourth quarter, which might bring the year flat year-over-year on a revenue standpoint. Is that unreasonable to think about? Or is that reasonable?

David Johnson, CFO

I mean, right now, demand is strong. So I mean that's as far as we're going to go, Will, on that. I mean I think we just kind of have to read the tea leaves.

William Hamilton, Analyst

Right. Okay. I understand. I mean just trying to get us a little bit more color as it relates to the current interest. But just one last one then is, the Watercraft business obviously was up 18%. Which I know you've had some new products there, but seemed a little bit less disrupted by the COVID relative to fishing and camping and hiking. So could you just talk a little bit about that difference in the performance? Is there an issue?

Helen Johnson-Leipold, Chairman and CEO

We believe there is strong demand overall. The difference with fishing and watercraft is that camping was slightly delayed due to park closures, while waterways remained open and accessible. In our Old Town product launch, we saw growth not only in watercraft and fishing, particularly our Sportsman line, but also in our core business. This indicates that people are eager to enjoy the outdoors, seeking fresh air and activities that are easily accessible. Fishing and watercraft offer safety and natural social distancing. Camping was simply contingent on the timing of campground openings. Overall, demand is positive across all categories. While there are some differences, activities like fishing, watercraft, camping, and backyard leisure are what people are looking to engage in, and it's all very encouraging.

Operator, Operator

Since there are no further questions at this time, I'd like to turn the call back over to Ms. Helen Johnson-Leipold for closing comments.

Helen Johnson-Leipold, Chairman and CEO

Well, thanks, everybody, for joining us, and stay safe and stay healthy. Take care.

Operator, Operator

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