Johnson Outdoors Inc.

Hello and welcome to the Johnson Outdoors second quarter 2022 earnings conference call. Today's call will be led 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 a listen-only mode. After the prepared remarks, the question and answer session will begin. If you would like to Ask a question during that time. Please press the number one on your telephone keypad. The 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 Pat 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 2022 fiscal second quarter. If you need a copy of today's news release, it is available on our website at www.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 David Johnson or myself. 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 begin with an overview on the quarter and the year, and then I'll share perspectives on the performance and outlook for our businesses Dave will review financial highlights and then we'll take questions. Sales in our second fiscal quarter ending April 1st, 2022 declined 8% compared to the prior year's unprecedented second quarter. At the halfway mark of the fiscal year, total company year-to-date sales declined 8% over last year's fiscal six-month period. Total company operating profits of $15.4 million for the second quarter was down versus $36 million in prior year quarter. And year to date, operating profit also declined compared to the prior fiscal six-month period. The great news is that people continue to want to recreate outdoors, and we're seeing continued robust demand for our products across the businesses. At the same time, global supply chain disruptions continue to persist. and the inflationary environment and geopolitical issues create many uncertainties. We're prioritizing product build, and we expect our margins to be challenged this fiscal year with the current supply chain dynamics. In the midst of these challenges, we remain focused on working hard to manage the supply chain issues and continue to fill orders. In fishing, anglers continue to look to Johnson Outdoors for the best fishing experience as possible and demand across all product lines remain strong. Ongoing supply issues and component delays are slowing our ability to complete and ship finished products. We have invested in available components, so we're positioned to finish products as we receive remaining parts. This is a very difficult and challenging environment. I'm very proud of the hard work the team is doing to help us get our products to market. In watercraft recreation and camping, We're building on momentum as both businesses continue to benefit from surge in participation in the activities. Both businesses continue to see double-digit sales growth and are outperforming the market. In watercraft recreation, growth in our fishing kayak segment continues with high demand for the innovative sportsman line that has shown continued strength in the market. And in camping, demand for Eureka tents and stoves continues to be strong, and in jet boil, consumers remain excited about the super light stash stove that is in its second year on the market. Finally, in diving, our most global business, dive markets are showing signs of recovery. Our work to promote and support local diving and to enhance our global digital presence, including e-commerce, have helped this positive growth. We remain focused on these efforts, along with sustained innovation, to ensure ScubaPro's position as the most trusted dye brand in the world. In summary, the great news is that more people want to get outdoors and we're seeing continued strong demand for our products. At Johnson Outdoors, we take the long-term view, working to position our brands and businesses for the future growth. In the meantime, navigating the challenging conditions and uncertainties is our priority, and the team remains focused on working hard to maximize product build and shipments to customers. Now I'll turn the call over to Dave for a review of the financial highlights.

Thank you, Helen. Good morning, everyone. I wanted to highlight a few items from the quarter and the year. As Helen mentioned, demand remains strong across the business, and we're continuing to face disruptions in our supply chain. As a result, our ability to meet demand for our products has been impacted, especially in the fishing business. As a result of these supply shortages, we're experiencing increases in costs, which are impacting our gross margins. While we've taken pricing increases across all of our businesses, these actions have not entirely offset the increases of cost inputs. We expect margins to be pressured through the balance of the fiscal year as we prioritize meeting the strong demand. Additionally, we've been strategically building higher than normal inventory levels, primarily in raw materials. We continue to work closely with all of our vendors in planning for alternative sources of supply for critical components where feasible. For the quarter, operating profit was down versus the prior year's record-setting quarter due to lower sales volumes and a decrease in gross margin. The quarter's gross margin of 36.2 percent is down nine points from last year's second quarter due primarily to increased material costs, higher inbound freight, and lower absorption from decreased volume. Operating expenses in the quarter decreased $4 million versus the prior year second quarter, primarily due to lower sales volume-driven expenses, as well as lower variable and deferred compensation expense. Quarter's effective tax rate year-to-date is 25.1% comparable to last year's quarter, and we expect the full-year tax rate to be in the mid-20s. Net income for the quarter was $9.9 million, down from the prior year's quarter of $27.8 million. We continue to have no debt on the balance sheet, and our cash position enables us to invest in opportunities to strengthen the business. We remain confident in our ability to deliver long-term value and consistently pay dividends to shareholders. Now I'll turn the call over to the operator for the Q&A session. Operator?

Certainly. Ladies and gentlemen, if you do have a question at this time, please press star, then 1 on your touchtone telephone. Again, if you do have a question at this time, please press star, then 1. And our first question comes from Anthony Libodinsky of Sidoti & Company. Your line is open.

Thank you, and good morning. I do have a few questions, so thanks for the opportunity here. So I guess, you know, first, you know, in terms of the fishing segment sales decline, was this entirely due to supply chain issues, or do you think perhaps there were any competitive issues in the quarter?

You know, this quarter, the whole story is about supply chain. You know, demand is high, and, you know, we've got back orders. So it's all about supply.

Okay. Okay. Thank you for that. And then, so, I mean, so obviously you were unable to fulfill a lot of the orders here. So do you think, what's your degree of confidence as far as being able to hold on to these orders or just want to get a better sense whether these could be any lost sales, or do you think it'll be just a matter of time before you can fulfill these orders and produce them and convert them into revenue?

Well, all we can say is we've seen orders actually come in incrementally, so the demand is still high. The customers are still needing product, and so at this point, it's about getting supply, and hopefully we'll hang on to these orders while we get the supply in.

Okay. So it sounds like you haven't seen any order cancellations because of the supply chain issues that you're having. Is that fair to say? No, we haven't. Okay. Thanks for that. Okay. And then in terms of the price increases that you took, You know, how much were the price increases on average, and can you just remind us what the timing of that was, and what are your plans for further increases?

Yeah, I mean, we took pricing at the beginning of our fiscal year in some of our businesses and some of our brands, and then we took some incremental pricing at the beginning of April. I'd rather not get into the percentage that we got into, but, you know, it's been – incremental, I would say, in terms of the pricing, and obviously not enough to offset the cost increases that we've seen. Okay, got it.

Thanks, Dave. And then, so as far as the price increases, would you say, are they generally in line with competition? And how would you describe elasticity of demand?

Yeah, I mean, we've seen competitive price increases kind of across the board, and, you know, we've got many competitors. So it's a mixed bag in terms of how we compare to what they're doing. So I would say in general it looks like that we've seen incremental price increases in the industry. Yeah, and the elasticity of demand, I mean, that's the great question. It's just about what the consumer is willing to pay, and those dynamics are definitely what we take into consideration as we move forward.

Mm-hmm. Gotcha. Okay. And then, you know, so far this quarter, are you still seeing, you know, solid demand? And I guess also, are you seeing as far as inventory levels or retail? How would you describe that?

Hey, Anthony, sorry, we broke up there for a second. Could you repeat your question?

Yeah, sure. Yeah, I didn't hear you for a couple of seconds either. So yeah, so as far as you know, so how would you describe the overall demand that you're seeing so far this quarter? Obviously, this is a big seasonal quarter for you guys. So while on that topic, I know you said demand is strong. So just want to just reiterate whether that's continuing into this quarter. And then as far as your sense about inventory levels at retail now?

You know, the demand continues. It's pretty steady, and this is, you know, we're getting right into the heart of the season. What goes on the shelf, you know, doesn't stay long. It just moves off. So I would say also the inventory levels that we see at store level are very light.

So things are moving. Okay. That's good to hear. And then, you know, In terms of the gross margin pressures, obviously it was a rather sizable decrease. Can you help us deconstruct the different buckets of the gross margin decline materials versus air freight versus lack of absorption given the fixed costs? I mean, if you could just give us, Dave, maybe a little bit more details as to the magnitude of how much, maybe the exact numbers, but you know, a little bit better understanding, you know, because, you know, the gross margin was down, you know, certainly more than what we've seen in the past.

Yeah, sure. Both for the quarter and year-to-date, most of the variance versus last year is due to higher material cost. You know, I'd say 60 to 70 percent of the variance is due to that. The biggest chunk of that after that is just the volume decrease in unabsorbed overhead. We have seen inbound freight impacted. It's not as big of an impact on the quarter versus year to date. So really the two big buckets are materials and then unabsorbed overhead.

Okay. Got it. Okay. And then I know in the past you have used more air freight. Was that the case also this quarter as well?

I would say it's been comparable to last year when we had to do a lot of that. So it's been wherever we can find the ability to get the product in. So it hasn't been a big delta versus what we've done in the past.

Okay. Gotcha. Okay. And then can you comment on your exposure to China and impact of the lockdowns in China?

You know, obviously they've had a second wave of lockdowns and, you know, that, you know, certainly impacts supply. I think, you know, You know, we have to, you know, wait and see what this latest one has in terms of impact. But I think, you know, this lodging is going to be difficult until, you know, things kind of even out. So it's a tough situation.

Mm-hmm. Gotcha. Okay. And, okay, so as far as the inventory, I think you mentioned, Dave, that it's mostly raw material as far as that increase because, you know, raw materials, inventory is up almost double from a year ago. I assume that there are no issues there with any obsolescence or anything like that. I mean, is that kind of fair to say?

Yeah, that's totally fair to say at this point. Because demand is so strong, we feel good about the inventory we have right now.

Okay. So given what you know today, I mean, where would you say inventories could be by the end of the fiscal year?

Well, you know, that's difficult to say, Anthony, just because of the demand profile that we're seeing right now. I mean, I think if the season is strong, we can start to work that down, and we'll see what the pipeline fill is at the retail level kind of as we end the season. So there's a couple of dynamics there that we just need to work through. So it would be hard for me to predict, you know, six months, what could happen with that inventory.

Okay, understood. Okay. I know it's still a fluid and dynamic environment for sure. And then I guess lastly, if you could just comment on capital allocation priorities, if you could just rank where do you see dividends versus M&A versus share buybacks, if you could just kind of rank them one, two, three, four, in that kind of order, that would be very helpful. Sure.

Yeah, I mean, it's the same for us where we do have capital that we have available to us, and we want to grow the company with that capital. So that's the primary focus is to grow the company with the capital that we have. Beyond that, we want to make sure that the shareholder has a good return. And, you know, a big vehicle of that is the dividend that we pay. We want to make sure that's robust. Yeah. But yeah, I mean, and we'll look at other things as we need to with buybacks or other things that could be alternative uses of the cash. But that kind of remains the same strategy. Okay.

All right. Well, thank you and best of luck. Thank you.

As a reminder, if you do have a question, please press star, then one on your touchtone telephone. And I'm showing no further questions. I would now like to hand the call back to Helen Johnson Leopold for closing remarks.

Just want to thank everybody for joining us and have a great day.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.