Aug 5, 2014
Executives
Cynthia Georgeson - IR Helen Johnson-Leipold - Chairman and CEO David Johnson - VP and CFO
Analyst
Brian Rafn - Morgan Dempsey Capital Management Michael Schechter - Mentor
Operator
Hello, everyone, and welcome to the Johnson Outdoors Third Quarter 2014 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 of this call. If you do not agree to these terms, simply drop off the line.
I would like to turn the call over to Cynthia Georgeson from Johnson Outdoors. Ms.
Georgeson, please go ahead.
Cynthia Georgeson
Thank you, operator, and good afternoon everyone. Thanks for joining us for our discussion of Johnson Outdoors' results for the 2014 fiscal third quarter.
If you need a copy of our news release that was issued this morning, it's 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.
I would now like to turn the call over to Helen Johnson-Leipold.
Helen Johnson-Leipold
Good afternoon. I'll start off with comments on the quarter and year-to-date results and share our outlook on the future.
Dave will review key financials, and then we'll take your questions. The outdoor recreational is highly seasonal extreme weather can impact performance.
This year’s long harsh winder delayed the warm weather season in outdoor equipment season market resulting in a highly compressed retail season. We expected the weather could turn during the third quarter and net demand for our new products would be high.
We were right on both fronts. Third quarter sales were up 6% over the prior year record high third quarter.
Innovation was the key driver behind the increase with new products generating 40% total company revenue during the quarter. Our Fishing, camping, and paddling businesses reported growth that outpaced the respective markets, a clear indication that we are holding or growing share in these core segments.
Growth in these units more than offset declines in diving, key dive markets across Europe continued to be impacted by weak economic conditions in the region as well as political unrest in the Middle East, which limited access to the Red Sea, a favorite dive destination for Europeans. Operating profit compared on unfavorably to the prior year due to non-cash items, which Dave will explain in his remarks.
Excluding usual items operating profit would have been $100,000 ahead of last year’s record third quarter profit. The positive top line performance in the third quarter could not totally offset the weather related declines during the first two quarters.
Revenues are up 2% versus the same nine month period last year and year-to-date operating profit and net income also compared unfavorably. Marine Electronics continues to be a steady engine of growth and we are beginning to realize the benefit of our investments to strengthen the performance of the Watercraft unit.
We are also working hard to lessen the impact of weak European economies on our diving business. Accounting charges aside, Jetboil is a great strategic fit for our portfolio of brands, providing a unique and exciting platform for long-term growth for our Consumer Camping business.
Looking ahead to the end of the year, our focus is on sustaining marketplace momentum and ensuring the success of next year’s exciting new product line up. At this time, demand is still solid and new products are projected to deliver a third and more of sale, illustrating the value and importance of our continued investment in innovation.
To ensure, we stay a step ahead on the innovation curve. We’re constantly looking for ways to strengthen and improve our new product development processes.
For us innovation goes beyond designing and making a great quality product. At Johnson Outdoors, we’re striving for innovation that enhances the entire experience for outdoor enthusiasts from shopping to purchase to service to the recreational activity itself.
We have to be not only better but the best because we’re a company that competes on price value not price alone. We may not be below cost choice but we must always be the best choice for the price because of the added value we bring to the enthusiasts.
This value plus also is key to our being the partner of choice for our customers. The reality is that innovation is getting harder and it’s important that we have to resources, capability and talent to consistently deliver new product successes year after year.
Utilizing resource to better target and under our consumer is critical, applying sophisticated data analytics is the key to gaining deeper, richer, insight into new and untapped opportunities. Leveraging the knowledge knowhow and technology across every business to benefit the whole portfolio of brand is critical.
Where we do this, we have real success a great example is the Old Town Predator, a fishing kayak launched last year. Fishing kayak is one of the fastest growing paddle segments and for years were designed for paddlers who like to fish, but we dug deeper and discovered that the real consumer for these boats was the angler.
And no one knows more about anglers then the company who makes Minn Kota and Humminbird both iconic brands among fishermen. Anglers were involved in the design of the predator every step along the way, the end result was a game changer in the fishing kayak segment.
Last year the Old Town Predator took best in show in the boat category at ICAST, the world's largest and most prestigious fishing trade show. At this year’s ICAST the new Old Town Predator excel powered by Minn Kota was named best in show among boats, once again and also took the top price best in show overall, in fact that this year ICAST our fishing brands were all big winners.
The new Hummingbird Onyx SI took best of show electronics. Here we combined our patented side imaging sonar with faster, easier to use advanced touch screen technology in our exclusive tri-field cryptography.
And the Elite Minn Kota Altera grabbed best of show boarding accessories. Our revolutionary bow mount trolling motor with fully automated stow and deployed power, trim and i-Pilot or i-Pilot link wireless control compatibility.
Awards are great but real success is measured by marketplace and bottom line performance. Demand for the predator has been strong exceeding expectations from day one and we anticipate that to continue with the new Minn Kota powered Predator XL.
Importantly growth in Predator sales have outpaced the fishing kayak market all year. So we’re clearly gaining share in this key segment.
And Predator commands strong margins, which has put us on track improved profitability of our Watercraft business going forward. Now we have a healthy pipeline of new product ideas and we must be disciplined and diligent in focusing recourses against those ideas with the greatest appeal and meaningful value plus to our enthusiast consumer targets.
And we will be investing an additional resources to help us do that and more with the ultimate goal of delivering the desired consistency and new product success across the portfolio. Fiscal 2014 is a second year of our 2015 value plus plan design to deliver sustain profitable growth, year one fiscal 2013 performance was outstanding and although this year severe weather put a damper on our financial results.
We are putting all efforts against delivering a strong third and final year. We remain very excited by the future and confident in our ability to create long term value for our markets and our stakeholders.
Now I’ll turn things over to Dave.
David Johnson
Thank you, Helen. As Helen noted third quarter and year-to-date operating profit and net income were impacted by non-cash impairment charges for the outdoor gear segment.
Now let me explain, 2014 was our first full year of ownership of Jetboil affording us a clear view on the marketplace and the capability to align sales projections with our learnings and experience. While profitable, thus far Jetboil sales have not met initial projections and this prompted an interim impairment test on the intangible assets of the outdoor gear, consumer camping recording unit, consistent with FASB ASC350 accounting standard.
As a result of this analysis, we recorded non-cash impairment charges on the outdoor gear segment totaling about $8.5 million. The negative effect of the write-down was offset in part by a cash recovery of $1.6 million from the Jetboil indemnity escrow account.
The impairment charges which were not tax deductible also drove a significantly higher effective tax rate in the quarter which negatively impacted net income. For perspective our tax rate this year has been hovering in the low to mid 30%s range and now it’s about 54% this quarter.
Accounting charges aside, as Helen said we’re very bullish on Jetboil which is the number one brand in outdoor cooking systems. It’s a great strategic fit for our camping portfolio and brings meaningful value plus to camping enthusiast.
We saw very good about our ability to drive and deliver value from Jetboil for a long term. As we head into the fourth and final quarter of the year the balance sheet is in good condition despite this year’s weather driven pressure on operations we’ve kept working capital in check, control costs and spending and maintain flexibility to adjust to the ad inflow of demand.
Importantly our strong cash position enables us to invest in the future when the opportunity or need arises. Now I’ll turn the call back over to the operator for the Q&A session.
Operator?
Operator
(Operator Instructions) Our first question comes from Brian Rafn.
Brian Rafn - Morgan Dempsey Capital Management
Give me a sense -- you guys have done a fabulous job relative to new product innovation as a percentage of trailing sales. I mean it's outstanding.
In a market like scuba diving that has been a little weaker obviously with all, I mean everybody is shooting red rockets at everyone over there, so I can understand that. How important is -- when you have an area like scuba diving that's a little softer, how important is innovation in that specific segment?
Helen Johnson-Leipold
This is Helen. Innovation especially in diving is critical.
It is life support product and we historically have been one of the leaders in innovation. I would say that even with us innovation hasn’t been enough to counter what has been going on in Europe in the Red Sea and it’s not just the economic conditions, it’s the fact that one of the best diving places and the most accessible dive place for Europeans is the Red Sea and travel there has been greatly diminished.
So very important to diving but not enough to counteract what’s going on in the market itself.
Brian Rafn - Morgan Dempsey Capital Management
What have you guys seen from the standpoint of North American scuba diving market?
Helen Johnson-Leipold
North America is little less volatile, it’s not growing this year versus last year. The weather also does impact North America, but certainly not haven’t the impact of economic conditions like Europe has.
Brian Rafn - Morgan Dempsey Capital Management
Okay. And then you guys -- you have more of a -- I don't want to use the word cheap because that is unfair, more of a value price point relate its SUBGEAR?
Or it's the one below SCUBAPRO. How is that a little less expensive line going and being developed?
Helen Johnson-Leipold
Well, yes, we did introduce SUBGEAR into the U.S. last year, but really the full line is just coming in.
It is our entry into the mid-price point. I would say that, believe it or not, the mid-price point is a little more reactive to economic conditions than the premium segment itself, but it’s okay it’s not doing as we expected, but I would say the whole business is not the diving market in generally is not performing as we expected either.
Brian Rafn - Morgan Dempsey Capital Management
Okay. What's the -- now that you have to some degree a little bit of the -- we came out of the polar vortex here, anybody north of the Mason Dixon line, it was a rough winter.
What's been kind of your observation for some of your boutique retailers kind of coming out of that and then kind of switching over to that summer mode? How quickly -- are they taking inventory, is it adjustment time?
Because you've certainly had a little bit of a truncated season, certainly here in the upper Midwest we've had very seasonal temperatures, not a lot of big heat waves, no droughts. What's your sense in that kind of recovery?
You talked a little bit in your opening comments, Helen.
Helen Johnson-Leipold
Well, if you’re talking specifically about the smaller retail, I mean, in general, they don’t carry a lot of inventory anyway. But I would say that everybody was hoping for the weather to turn and the reaction has been good.
The question is, do you ever make up that first turn that you lose because the first quarter weather was not, I wouldn’t even say not good, it was terrible and to some degree you lose that turn and it’s hard to make it up.
Brian Rafn - Morgan Dempsey Capital Management
Yes.
Helen Johnson-Leipold
So everybody reacted fairly quickly, they don’t carry a lot of inventory and sales have gone really well, but again we lost a big chunk of sales in that first quarter.
Brian Rafn - Morgan Dempsey Capital Management
Okay. And then just, I'll get back in line, anything on the camping side?
Anything military sales? How is that?
Actually you made some comments on Jetboil, how are -- like the Eureka products, some of those other areas?
David Johnson
Yes, military sales are doing pretty well for us. I mean again it’s not a huge number anymore, but it’s provided some growth for the quarter in year-to-date.
I think it’s about a million dollar year-to-date.
Brian Rafn - Morgan Dempsey Capital Management
Okay. And Dave, any CapEx numbers, what you're going to do for the year and any potential next year?
David Johnson
Yes, CapEx this year will be between 13 million and 14 million. I would guess something like that and I don’t expect that will grow -- we'll grow with inflation let’s say next year.
Operator
(Operator Instructions) We have a follow-up from Brian Rafn of Morgan Dempsey Capital Management. Your line is open.
Brian Rafn - Morgan Dempsey Capital Management
Short line. Your sense -- I'm not a fishing guy, I'm a gun guy, so I can't speak and I'm looking forward to your comment.
When you have a tough winter like we've had, how does that affect -- I was a skiing guy, boat racing, so I understand cold water and that, but how does it affect the fishing guy? Hummingbird, Minn Kota is getting back on the lakes, the ice going down.
Is there less of an impact with your angler than it might be with if you are watersports guy?
Helen Johnson-Leipold
The true angler does plan ahead and does buy ahead of the season, but when you’ve still got ice on the lake, that’s a big deterrence. So even though they’re hardcore fishermen are key to our consumer segment -- you didn’t have the ice melting for a month later than normal.
So it did impact the plan purchases. Hopefully season goes longer but again our feeling is to some degree we missed the turn upfront because of the weather.
Brian Rafn - Morgan Dempsey Capital Management
Yes. No, that's understandable.
With the standpoint of you guys being known for great innovation, great product technology, you really develop, deliver a great price quality value. That innovation, how receptive in getting shelf space at some of your category super stores, your big box guys, your Gander Mountain, Cabelas, Bass ProShops, how important is that to have that innovation and to allow you guys to penetrate shelf space and SKU sales?
Helen Johnson-Leipold
Well, innovation to the retailer is just as important as important as it is to us and it drives a lot of support from them in terms of getting distribution and focused attention. So it’s critical to those guys and we -- they like being partners with us because we tend to bring the existing news and the new products.
Brian Rafn - Morgan Dempsey Capital Management
Okay. And then, Dave, could you give us an update -- the tax rate jump, is that episodic or it can't be a run rate?
David Johnson
No. It’s episodic.
The goodwill write down is not deductible. So we were running around 33%, 34% excluding that.
Brian Rafn - Morgan Dempsey Capital Management
Okay. All right.
And then you guys sound pretty excited about it and obviously with the anglers developing the Predator XL, what -- for a guy that doesn't kayak goes on the MerCruiser side or Mercury Marine side of boating, not in the paddling side. What, kind of, life duration, when you come out with a really top line product, how many years of sales momentum can you get out of that?
Or are they always looking for the next iteration from that the kayak fishing side?
Helen Johnson-Leipold
Well, I think to some degree in untapped market I think historically products have geared themselves towards the paddler who likes to fish not the fishermen. And this product is definitely geared toward the angler.
So in the -- you really have to fish from a boat in order to benefit from the experience. So certainly innovation brings excitement every year, but there is a large segment of consumers that I think will continue to purchase it, it’s the product meets their need.
So especially the Minn Kota powered Predator which is coming out next year is really geared towards the core angler group and that’s a large segment. So hopefully it’s got a long life.
Brian Rafn - Morgan Dempsey Capital Management
Okay. But out of curiosity, Helen, what is the price point of something like that?
Helen Johnson-Leipold
Let me check I don’t want to quote something that is off, but we’ll get back to you on that.
Brian Rafn - Morgan Dempsey Capital Management
But let me -- but for the guy going out and buying the whole rig, if you're buying an aluminum boat, I would think that that would be a little cheaper entry point than say the full rig.
Helen Johnson-Leipold
Yes. It definitely is and from a portability standpoint it also meets a need because with the bigger boat you need a trailer, you have to think about that aspect of it, but it’s electric motor, no gas, gas motors are very expensive and it’s a much lighter weight and portable boat.
So it’s not something one person can put on the roof of their cars but it certainly has benefits. But in comparison it will be cheaper.
Brian Rafn - Morgan Dempsey Capital Management
Yes. No, Helen, the Predator is that something from an angler standpoint, is that across the United States or does it have more traction in the upper Midwest or on rivers?
Or is there a geographic specificity to it?
Helen Johnson-Leipold
It really has national appeal and can appeal to all kinds of fishing and there is different kinds of fishing across the country. So we feel very excited about the breadth of the appeal of the product.
Operator
(Operator Instructions) Our next question comes from Michael Schechter, Mentor. Your line is open.
Michael Schechter - Mentor
Can you just triage the Jetboil write down? So you've written off about half of the purchase price.
What happened over the last, what is it, 18 months or so, from when you purchased it until now in terms of its performance?
David Johnson
Yes. It’s basically the revenue and cash flow projections are lower and it’s not lower by a lot versus the original projections, but that triggered step one impairment.
And the accounting rules then require you to go a step two. I am not going to be real technical here but when you do a step two you have to do a fair value of all assets and then deduct from goodwill.
So we actually had -- we have a fair value of assets that are higher than what’s on our books and so that triggered a full impairment. But basically I mean, it is -- so it’s two different things, one is the cash flow projections and the other is the accounting rules that caused the full impairment.
Michael Schechter – Mentor
Okay, but so if the cash flow projections are down, what happened? Why is it not performing the way we thought it would?
David Johnson
I guess it’s fair to say that just the new product pipeline has been just a little bit slower than what we originally projected. I think there has been -- there was some placement in some accounts that we need to get better placement in.
So there is a variety of reasons, but I think one of the key messages is we’re still very bullish on it and still a great strategic fit.
Operator
Thank you. I am not showing any further question in queue.
I would like to turn the call back over to Helen Johnson-Leipold for any further remarks.
Helen Johnson-Leipold
Thanks for joining us. If you have any other questions, please give Dave or Cynthia a call.
Thank you.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program.
You may now disconnect. Everyone have a great day.