Johnson Outdoors Inc.

Hello everyone, and welcome to the Johnson Outdoors 4th Quarter 2020 Earnings Conference Call. Today's call will be held by Helen Johnson-Leopold, 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 placed in listen-only mode. After the prepared remarks, the question and answer session will begin. If you'd like to ask a question during this time, please press star followed by the number one on your telephone keypad. 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.

Thank you. Good morning, everyone. Thank you for joining us for our discussion of Johnson Outdoors results for the 2020 fiscal fourth 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-Leopold.

Thanks, Pat. Good morning, and thank you for joining us. I'll start off with comments on the quarter and full year results, discuss key performance drivers in each business, and outline priorities going forward. Dave will review financial highlights, and then we'll take your questions. In fiscal 2020, total company revenue grew 6% to $594.2 million, profits were $71.1 million, and net income was $55.2 million, or $5.47 per diluted share, a 7% improvement from the prior fiscal year. The 2020 fiscal year was like no other year in our history. We started the year with a very strong first quarter, but the onset of the pandemic and the initial stay-at-home mandates cut short our momentum and significantly impacted our second and third quarters, which is the heart of our primary selling season. As those mandates eased, we saw demand wrap up and participation grow in fishing, camping, and watercraft recreations. Strong, positive momentum continued in our fiscal fourth quarter, the period when the warm weather outdoor recreation industry is historically gearing down for the year. Total company net sales increased to $164.7 million in the fourth quarter, a 58% increase over the prior year's fourth quarter, and profits were up significantly as well. Overall, this year's performance was fueled by demand created through Through people's eagerness to get outdoors, the hard work and dedication of our employees enabled us to meet as much of that demand as possible, while operating under strict health and safety procedures and protocols to reduce the spread of COVID-19. Many people who got outdoors during the warm weather months of the pandemic continued their participation post-Labor Day, and we were able to take advantage of the extended season, leveraging our market-leading brands and innovations. Participation in fishing has always been high, but it has been even higher this year as it has an activity that is accessible and lends itself to social distancing. And both seasoned anglers and new anglers look to Johnson Outdoors for great fishing experiences. In fishing, our largest business, we are continuing to build on a powerful legacy of innovation that transformed Minn Kota and Hummingbird into the market-leading brands they are today. The latest innovation from our Hummingbird brand is the award-winning Mega360 imaging. It began shipping this year, and consumer response has been very favorable. Mega360 imaging is the only sonar option that provides a high-resolution, 360-degree view with unmatched detail and coverage. Before Mega360, anglers were limited to a sonar view either below or to the side of their boat while moving. Now with Mega360, anglers can make accurate casts in any direction, even if the boat is anchored. When Mega360 imaging is used together with Minn Kota SpotLock technology, this provides anglers with an effortless command of their boat and an uncompromised view of fish and the world below. And this year, Minn Kota debuted our award-winning Raptor shallow water anchor with 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. It's still early, but consumer response to the Minn Kota Raptor has also been favorable. Looking ahead, sustaining our innovation and technology leadership position in fishing market is a top priority, and we have an exciting pipeline of new products on the horizon. Moving on to watercraft, the fishing kayak segment is the fastest-growing segment, and our Old Town Sportsman line of power, pedal, and paddle fishing kayaks has generated a lot of enthusiasm since its launch earlier this year. The flagship model of this innovative new line, the award-winning Sportsman Autopilot 120, utilizes a GPS-enabled Minn Kota trolling motor to propel, steer, and anchor the kayak with its unique SpotLock technology. providing kayak anglers with hands-free fishing. The Sportsman Line had a great start in its first year on the market, and we hope to continue that momentum going into year two. As more people desired to get out on the water, we saw strong demand across our entire watercraft recreation portfolio. Additionally, the increase in use of e-commerce as a bond channel allowed us to leverage the investment we've made in growing our digital and e-commerce capabilities. Going forward, our digital presence and e-commerce are a key priority, and we will continue to optimize our online consumer experience. Camping is an important gateway into the outdoor recreation and one of the most accessible outdoor activities that people have been able to do safely. Once state and national parks began to open, both our Jetboil and our Eureka brands benefited from the surge of interest and participation in the activities. Camp cooking is an integral part of the experience, and Jeff Boyle, the technology leader in portable outdoor cooking systems, continues to be the top choice among tech-savvy outdoor enthusiasts. Consumer-driven innovation is key to providing the best camping experience as possible, and we'll keep investing in that. ScubaPro is the most trusted dive brand in the world, and while the diving market has experienced pandemic-related headwinds due to travel restrictions, Our team has been working hard to continue their focus on sustained innovation, enhancing our digital presence globally, and promoting local diving. These efforts will ensure Scuba Pro is in a strong position for the future. Looking ahead, at Johnson Outdoors, we are always investing in understanding our consumers like no one else and turning these deep consumer insights into pioneering innovation. We take a long view, working to position our brands and businesses for growth, well beyond the next quarter or the next year to continue being a thriving enterprise that is built to last and deliver long-term value creation. Our company purpose, which is to inspire people to get out there, to experience and value the great outdoors for generations to come, has never been more important. Now I'll turn the call over to Dave for a review of the financial highlights.

Thank you, Helen. Good morning, everyone. As Helen mentioned, we came into our historically slow fiscal fourth quarter with strong momentum, driven by high demand in our fishing, camping, and watercraft recreation businesses. We've been working hard to produce as much as we can, including adding more ships and managing our supply chain to increase capacity where possible. A few other things to highlight from the year. Gross margin for fiscal 2020 was 44.6% of 20 basis points from the prior year. Improved cost absorption through higher volumes and a stronger product mix help offset a $1 million increase in tariff costs. Operating expenses were $7.9 million higher than last year, but down 50 basis points as a percentage of sales. Volume-related expenses, along with increases in headcount, compensation costs, and R&D expenses, were partially offset by lower discretionary spending. That income for the year was $55.2 million, up 7% from prior fiscal year. The effective tax rate is 25.1% compared to last year's 22.7%. Higher state and local taxes were the primary drivers behind that rate increase. Next year, we expect the tax rate to be in the mid-20s. We ended the fiscal year with net working capital up about $19 million versus the prior year. Trade receivables are up about $23 million and inventory up $3 million. Looking ahead, while demand remains high, and this gives us a good start to the season, we'll continue to monitor marketplace dynamics and related supply chain pressures caused by increased demand and COVID-related capacity constraints. Our balance sheet's strong. Our healthy cash position will continue to provide a competitive advantage as we make smart investments to strengthen the business and drive value for our shareholders. Now I'll turn the call back over to the operator for the Q&A session. Operator?

Ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number one key on your touch-tone telephone. We have a question from the line of Anthony Lubizynski with Sedodian Company. Your line is now open.

Thank you, and good morning, everyone. So looking back at your stronger quarter, can you give us a sense as to the progression of the revenue trends throughout the quarter? Sure.

Are you talking about month by month?

Yeah, I mean, if you could start with that, that would be great.

You know, let me – this is Helen. You know, during that quarter, we were – you know, in the beginning of it, we were making up for some of the pent-up demand that got kind of pushed from the third quarter. And so it was a pretty steady – increase, I would say it just, the momentum just continued going into the fourth quarter. And I think it was, you know, people were trying to stay outdoors as long as they could and make sure they got the product when it was available because, you know, it was tough product availability across the board in our industry. So I would say it was, it started ramping up as soon as, you know, the everything, the people could go out and recreate, and the demand just kept going. I think also there's a little anticipation of being prepared and not missing out on buying a product. I think it's a mixture of being prepared and wanting to continue to recreate. So it was, you know, the best quarter we've had.

Right, of course. Okay, so... Can you give us a sense as to what the state of inventories is at the retail level? And I know, Dave, you said that it sounds like you're off to a good start here, but if you could just maybe expand on that. There was also a comment in the press release that you'll continue to scale operations consistent with demand. So I'm just wondering if you could just talk about the inventory levels and your commentary in the press release about scaling your operations.

Yeah, I mean, you know, right now –

Demand's strong still, and from what we can tell, retail inventory is pretty lean. So we're continuing to, you know, ship product, and I think a lot of retailers are also, you know, they're looking to buy product in anticipation of the season. So it seems to still be a pretty lean retail environment out there.

And, you know, our comment about scaling, we have done what we can to add shifts to make sure we can, you know, do what we can in the production area, but the COVID and the safety protocols, you know, automatically put us at like 80% capacity. So as that demand continued, even our plans to pull forward and do more build before to be prepared for the season, you know, it kind of kept us always, you know, producing as much as we can you know, 100% of the time.

Got it. Okay. And then, you know, as far as availability of component parts or just the overall supply chain, are you in good shape with that or is there any issues perhaps or how should we think about that?

You know, it's a challenge in some of these areas. I mean, we're shipping electric components from Asia and we're competing for product with, you know, all LCD components. consumers, you know, so that's a challenge. We're doing everything we can to keep our pipeline going with the supply chain, but, you know, frankly, it's difficult right now.

Okay, got it. Okay, and then a couple of more questions, if I can just squeeze those in. So, as far as, you know, what's happened here with COVID, I mean, do you guys have a sense as to what the magnitude is of the increase in outdoor participation levels for this past season and kind of what your expectation is for next year?

You know, we know that we, our current consumer base is certainly purchasing more, but we know that there's some new consumers, you know, jumping in these activities. I think, so we're benefiting from that for sure, and it's a shot in the arm for the whole industry to have new consumers trying out our activities. I think the question is how – you know, I think there will be increased participation because of COVID, but how – what level that is or, you know, when the world gets back to kind of normal and normal activities become available – You know, that's the big question is what will be the long-term positive impact? You know, we don't know. And yet to be, you know, we'll have to see how things pan out.

Got it. Okay. And then, you know, last question for me is, you know, looking at your very strong balance sheet, you do have a lot of cash. What's the priorities for usage of that cash position?

Well, again, Let me just say that, you know, we are just constantly looking at what's available out there. You know, with our industries being – the demand in our industries obviously make this not a buyer's market, and there's a lot of companies that are doing very well. There's also a lot of cash sitting in – You know, in private equity companies, there's a lot of cash and not a lot of opportunities to buy. So I would say it's a very difficult market. But we are always looking and we're very strategic. And I think one of the reasons we, you know, continue to have the resiliency is because we are very strategic about the decisions we make, especially with the acquisitions. And we will not do an acquisition to bump our sales. or because we have the cash to do so, we have to make sure that there is an acquisition out there that is gonna be beneficial to us and to accelerate our ability to build value over time. So we are looking and we are being strategic about it.

Got it, okay. I guess if I could just follow up on that. Is there any possibility that you guys would consider doing a special cash dividend if you continue to build up this cash?

You know, Andy, we look at all options, and I think it's paramount that we are strategic and prudent with this cash. So I think, you know, as Helen said, acquisitions are kind of at the top of the list, but we look at everything in terms of driving shareholder value. So, yeah, that would be an option in the future potentially.

Got it. Okay, well, thank you, and best of luck. Thanks.

As a reminder, ladies and gentlemen, if you'd like to ask a question at this time, that's star, then one. I'm not showing any further questions at this time. I'd like to turn the call back to Helen Johnson-Levold for closing remarks.

Thank you, everyone, for joining us today, and I hope you enjoy the holidays and try to stay safe and stay healthy. Thank you.

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

Thank you.

Hello, everyone, and welcome to the Johnson Outdoors Fourth Quarter 2020 Earnings Conference Call. Today's call will be held by Helen Johnson-Leopold, 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 placed in listen-only mode. After the prepared remarks, the question and answer session will begin. If you'd like to ask a question during this time, please press star followed by the number one on your telephone keypad. 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.

Thank you. Good morning, everyone. Thank you for joining us for our discussion of Johnson Outdoors results for the 2020 fiscal fourth 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-Leopold.

Thanks, Pat. Good morning, and thank you for joining us. I'll start off with comments on the quarter and full year results, discuss key performance drivers in each business, and outline priorities going forward. Dave will review financial highlights, and then we'll take your questions. In fiscal 2020, total company revenue grew 6% to $594.2 million, profits were $71.1 million, and net income was $55.2 million, or $5.47 per diluted share, a 7% improvement from the prior fiscal year. The 2020 fiscal year was like no other year in our history. We started the year with a very strong first quarter, but the onset of the pandemic and the initial stay-at-home mandates cut short our momentum and significantly impacted our second and third quarters, which is the heart of our primary selling season. As those mandates eased, we saw demand wrap up and participation grow in fishing, camping, and watercraft recreations. Strong positive momentum continued in our fiscal fourth quarter, the period when the warm weather outdoor recreation industry is historically gearing down for the year. Total company net sales increased to $164.7 million in the fourth quarter, a 58% increase over the prior year's fourth quarter, and profits were up significantly as well. Overall, this year's performance was fueled by demand created through Through people's eagerness to get outdoors, the hard work and dedication of our employees enabled us to meet as much of that demand as possible, while operating under strict health and safety procedures and protocols to reduce the spread of COVID-19. Many people who got outdoors during the warm weather months of the pandemic continued their participation post-Labor Day, and we were able to take advantage of the extended season, leveraging our market-leading brands and innovations. Participation in fishing has always been high, but it has been even higher this year as it has an activity that is accessible and lends itself to social distancing. And both seasoned anglers and new anglers look to Johnson Outdoors for great fishing experiences. In fishing, our largest business, we are continuing to build on a powerful legacy of innovation that transformed Minn Kota and Hummingbird into the market-leading brands they are today. The latest innovation from our Hummingbird brand is the award-winning Mega360 imaging. It began shipping this year, and consumer response has been very favorable. Mega360 imaging is the only sonar option that provides a high-resolution, 360-degree view with unmatched detail and coverage. Before Mega360, anglers were limited to a sonar view either below or to the side of their boat while moving. Now with Mega360, anglers can make accurate casts in any direction, even if the boat is anchored. When Mega360 imaging is used together with Minn Kota SpotLock technology, this provides anglers with an effortless command of their boat and an uncompromised view of fish and the world below. And this year, Minn Kota debuted our award-winning Raptor shallow water anchor with 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. It's still early, but consumer response to the Minn Kota Raptor has also been favorable. Looking ahead, sustaining our innovation and technology leadership position in fishing market is a top priority, and we have an exciting pipeline of new products on the horizon. Moving on to watercraft, the fishing kayak segment is the fastest-growing segment, and our Old Town Sportsman line of power, pedal, and paddle fishing kayaks has generated a lot of enthusiasm since its launch earlier this year. The flagship model of this innovative new line, the award-winning Sportsman Autopilot 120, utilizes a GPS-enabled Minn Kota trolling motor to propel steer, and anchor the kayak with its unique SpotLock technology, providing kayak anglers with hands-free fishing. The Sportsman Line had a great start in its first year on the market, and we hope to continue that momentum going into year two. As more people desired to get out on the water, we saw strong demand across our entire watercraft recreation portfolio. Additionally, the increase in use of e-commerce as a bond channel allowed us to leverage the investment we've made in growing our digital and e-commerce capabilities. Going forward, our digital presence and e-commerce are a key priority, and we will continue to optimize our online consumer experience. Camping is an important gateway into the outdoor recreation and one of the most accessible outdoor activities that people have been able to do safely. Once state and national parks began to open, both our Jetboil and our Eureka brands benefited from the surge of interest and participation in the activity. Camp cooking is an integral part of the experience, and Jetboil, the technology leader in portable outdoor cooking systems, continues to be the top choice among tech-savvy outdoor enthusiasts. Consumer-driven innovation is key to providing the best camping experience as possible, and we'll keep investing in that. Scuba Pro is the most trusted dive brand in the world, and while the diving market has experienced pandemic-related headwinds due to travel restrictions, our team has been working hard to continue their focus on sustained innovation, enhancing our digital presence globally, and promoting local diving. These efforts will ensure Scuba Pro is in a strong position for the future. Looking ahead, at Johnson Outdoors, we are always investing in understanding our consumer's like no one else, and turning these deep consumer insights into pioneering innovation. We take a long view, working to position our brands and businesses for growth well beyond the next quarter or the next year to continue being a thriving enterprise that is built to last and deliver long-term value creation. Our company purpose, which is to inspire people to get out there, to experience and value the great outdoors for generations to come, has never been more important. Now I'll turn the call over to Dave for a review of the financial highlights.

Thank you, Helen. Good morning, everyone. As Helen mentioned, we came into our historically slow fiscal fourth quarter with strong momentum, driven by high demand in our fishing, camping, and watercraft recreation businesses. We've been working hard to produce as much as we can, including adding more ships and managing our supply chain to increase capacity where possible. A few other things to highlight from the year. Gross margin for fiscal 2020 was 44.6% of 20 basis points from the prior year. Improved cost absorption through higher volumes and a stronger product mix helped offset a $1 million increase in tariff costs. Operating expenses were $7.9 million higher than last year, but down 50 basis points as a percentage of sales. Volume-related expenses, along with increases in headcount, compensation costs, and R&D expenses were partially offset by lower discretionary spending. That income for the year was $55.2 million, up 7% from prior fiscal year. The effective tax rate is 25.1% compared to last year's 22.7%. Higher state and local taxes were the primary drivers behind the rate increase. Next year, we expect the tax rate to be in the mid-20s. We ended the fiscal year with networking capital up about $19 million versus the prior year. Trade receivables are up about $23 million and inventory up $3 million. Looking ahead, while demand remains high, and this gives us a good start to the season, we'll continue to monitor marketplace dynamics and related supply chain pressures caused by increased demand and COVID-related capacity constraints. Our balance sheet's strong. Our healthy cash position will continue to provide a competitive advantage as we make smart investments to strengthen the business and drive value for our shareholders. Now I'll turn the call back over to the operator for the Q&A session. Operator?

Ladies and gentlemen, if you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. We have a question from the line of Anthony Lubizinski with Sedodian Company. Your line is now open.

Thank you, and good morning, everyone. So looking back at your strong quarter, can you give us a sense as to the progression of the revenue trends throughout the quarter?

Are you talking about month by month?

Yeah, I mean, if you could start with that, that would be great.

You know, let me – this is Helen. You know, during that quarter, we were – You know, in the beginning of it, we were making up for some of the pent-up demand that got kind of pushed from the third quarter. And so it was a pretty steady increase. I would say it just – the momentum just continued going into the fourth quarter, and I think it was, you know, people were trying to stay outdoors as long as they could and make sure they got the product when it was available because, you know, it was tough – product availability across the board in our industry. So I would say it started ramping up as soon as, you know, the people could go out and recreate and the demand just kept going. I think also there's a little anticipation of being prepared and not missing out on buying a product if I think it's a mixture of being prepared and wanting to continue to recreate. So it was, you know, the best quarter we've had.

Right. Of course. Okay. So can you give us a sense as to what the state of inventories is at the retail level? And I know, Dave, you said that it sounds like you're off to a good start here, but if you could just maybe expand on that. There was also a comment in the press release that you'll, continue to scale operations consistent with demand. So just wondering if you could just talk about the inventory levels and your commentary and the press release about scaling your operations.

Yeah, I mean, you know, right now demand is strong still.

And from what we can tell, retail inventory is pretty lean. So we're continuing to, you know, ship product. And I think a lot of retailers are also – you know, they're looking to buy product in anticipation of the season. So, it seems to still be a pretty lean retail environment out there.

And, you know, our comment about scaling, we have done what we can to add shifts to make sure we can, you know, do what we can in the production area, but the COVID and the safety protocols, you know, automatically put us at like 80% capacity. So, As that demand continued, even our plans to pull forward and do more build before to be prepared for the season, you know, it kind of kept us always, you know, producing as much as we can, you know, 100% of the time.

Got it. Okay. And then, you know, as far as availability of component parts or just the overall supply chain, you know, Are you in good shape with that, or is there any issues perhaps, or how should we think about that?

You know, it's a challenge in some of these areas. I mean, we're shipping electric components from Asia, and we're competing for product with, you know, all LCD consumers. You know, so that's a challenge. We're doing everything we can to keep our pipeline going with the supply chain. But, you know, frankly, it's difficult right now.

Okay, got it. Okay. And then a couple more questions, if I can just squeeze those in. So as far as, you know, what's happened here with COVID, I mean, do you guys have a sense as to, what the magnitude is of the increase in outdoor participation levels for this past season and kind of what your expectation is for next year?

You know, we know that we, our current consumer base is certainly purchasing more, but we know that there's some new consumers, you know, jumping in these activities. I think, so we're benefiting from that for sure. And it's a, shot in the arm for the whole industry to have new consumers trying out our activities. I think the question is how, you know, I think there will be increased participation because of COVID, but what level that is or, you know, when the world gets back to kind of normal and normal activities become available, you know, that's the big question is what will be the long-term impact positive impact, you know, we don't know. And yet to be, you know, we'll have to see how things pan out.

Got it. Okay. And then, you know, last question for me is, you know, looking at your very strong balance sheet, you do have a lot of cash. What's the priorities for usage of that cash position?

Well, let me just say that, you know, we are – just constantly looking at what's available out there. You know, with our industries being – the demand in our industries obviously make this not a buyer's market, and there's a lot of companies that are doing very well. There's also a lot of cash sitting in – You know, in private equity companies, there's a lot of cash and not a lot of opportunities to buy. So I would say it's a very difficult market. But we are always looking, and we're very strategic. And I think one of the reasons we, you know, continue to have the resiliency is because we are very strategic about the decisions we make, especially with acquisitions. And we will not do an acquisition to bump our sales. or because we have the cash to do so, we have to make sure that there is an acquisition out there that is going to be beneficial to us and to accelerate our ability to build value over time. So we are looking and we are being strategic about it.

Got it. Okay. I guess if I could just follow up on that. Is there any possibility that you guys would consider doing a special cash dividend if you continue to build up this cash?

You know, Anthony, we look at all options, and I think it's paramount that we are strategic and prudent with this cash. So I think, you know, as Helen said, acquisitions are kind of at the top of the list, but we look at everything in terms of driving shareholder value. So, yeah, that would be an option in the future potentially.

Got it. Okay, well, thank you, and best of luck. Thanks.

As a reminder, ladies and gentlemen, if you'd like to ask a question at this time, that's star, then one. I'm not showing any further questions at this time. I'd like to turn the call back to Helen Johnson-Levold for closing remarks.

Thank you, everyone, for joining us today, and I hope you enjoy the holidays and try to stay safe and stay healthy. Thank you.

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