Johnson Outdoors Inc.

Hello, everyone, and welcome to the Johnson Outdoors fourth 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 today is David Johnson, vice president and chief financial officer. Prior to the question and answer session, all participants will be placed in the listen-only mode. After the prepared remarks, the question and answer session will begin. If you'd like to ask a question during that time, please press star 11 on your telephone keypad. This call is being recorded. Your participation implies consent to our recording this call. If you do not disagree with these terms, simply drop off the line. I would now like to turn the call over to Pat Tenman from Johnson Outdoors. Please go ahead, Ms. Tenman.

Thank you. Good morning, everyone. Thank you for joining us for our discussion of Johnson Outdoors results for the 2022 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 myself. It is now my pleasure to turn the call over to Helen Johnson-Leopold.

Thanks, Pat. Good morning. I'll begin with an overview on the fiscal year results and then I'll share perspective on the performance and outlook for our business. Today we'll review financial highlights and then we'll take your questions. In fiscal 2022, total company sales declined 1%. to $743.4 million compared to the prior record setting fiscal year. Net income for the year was $44.5 million or $4.37 per diluted share, a 47% decline from the prior fiscal year. Operating profit decreased 40% to $66.3 million versus $111.3 million in prior fiscal year, with the challenging supply chain situation primarily in our fishing business significantly impacting our profitability. Managing the challenging supply chain environment remains a key priority, and we will continue to evaluate all avenues to mitigate cost pressures into the next fiscal year. In fishing, while supply chain challenges persisted throughout the first part of the fiscal year, we saw supply availability start to improve during the fiscal fourth quarter. Sustaining innovation leadership in fishing is also our focus, and we are always looking for new ways that Hummingbird and Minn Kota products can connect and work together to deliver new benefits to anglers. Our recent innovation in Hummingbird, the award-winning Mega Live Imaging Target Lock, used in conjunction with our Minn Kota Ultrex trolling motor, makes it easier for anglers to stay on point and catch more fish. During fiscal 2022, Mega Live Imaging Target Lock received the Best in Category for Electronics Honors at this year's ICAST, marking our 11th award in this category in the past 12 years. Moving on to our watercraft recreation business, the success of our Old Town Sportsman line gave us momentum in a moderating market. Part of this innovative line of boats is the award-winning, wildly versatile, lightweight Sportsman Discovery Solo 119, a solo canoe that paddles like a kayak and is great for fishing, waterfowl hunting, and enjoying lakes and rivers. The Sportsman line offers a watercraft for everyone looking to enjoy a great day on the water. Our camping business saw double-digit growth even as the market started to moderate compared to the unprecedented high demand of last fiscal year. Participation in the activity remains high, and demand for our Eureka Consumer Tension Stove is strong. And in jet oil, consumers remain excited about the innovative Super Light Stash Stove that continues to grow since launch. Finally, our diving business continues on a growth trajectory as dive markets continue to experience recovery as several regions around the world reopened and tourism resumed. Sustaining innovation is critical to our growth, and divers are loving the award-winning, powerful Seawing Supernova fins that ScubaPro recently launched. The Supernova is the go-to fin for avid recreational and professional divers, seeking maximum speed, power, and kicking control in all diving conditions. Our continued innovation efforts will ensure ScubaPro's position as the most trusted dive brand in the world. In summary, it's good news that we are seeing some relief with supply chain issues, and we continue to look at all options to mitigate challenges in our overall profitability. Orders for our products remain strong, and we continue to work hard to replenish inventory levels with our loyal customers. While it's unclear the extent to which economic conditions and inflation may affect consumer buying behavior in the future, as always, our team takes the long-term view, working hard to position our brands and businesses for growth well beyond the next quarter or next year. Now, I'll turn the call over to Dave for review of the financial highlights.

Thank you, Helen. Good morning, everyone. I want to highlight a few items from the fourth quarter and the year. As Helen mentioned, supply availability started to improve in the fiscal fourth quarter. As a result, total company fourth quarter sales were up 18% compared to the prior year's fourth quarter. While fishing and diving saw strong revenue growth in the fourth quarter, camping and watercraft recreation declined versus the previous fourth quarter. For fiscal 22, Gross margin of 36.5% is down eight points from last fiscal year due to significant increases in material costs. We saw some relative improvement in our costs in the fourth quarter, but we expect margins to continue to be impacted by inflationary pricing conditions. Operating expenses for fiscal 22 decreased $17.8 million versus the prior year. The decrease was primarily due to lower variable and deferred compensation expense incurred in fiscal 22. Warranty and bad debt expense were also down versus last year. Profit before income taxes was $58.9 million versus $112.9 million from the prior year. Net income for fiscal year was $44.5 million, down 47% from the prior fiscal year. The effective tax rate is 24.4% compared to last year's rate of 26.2%. As a reminder, we built significantly higher inventory levels for several quarters to help mitigate supply chain disruptions and meet increased demand for our products. Heading into fiscal 23, we remain focused on monitoring demand and proactively managing higher than normal inventory. 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 out cash dividends to our shareholders. Now I'll turn the call over to the operator for the Q&A session. Operator?

Thank you. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone. Please wait for your name to be announced. Please stand by while we compile the Q&A roster. One moment for our first question. And our first question comes from Anthony Liebkamp. Lee Bozinski with Sudoti. Your line is now open.

Good morning and thank you for taking the questions and certainly a very nice finish to your fiscal year. So first, I just wanted to get a better sense as far as the commentary about the strong orders. Is that primarily phishing? And also, if you could just touch on the backlog of unfulfilled orders, if you could just give us some color on that, that'd be great.

You know, we've got continuing, you know, back orders. We're continuing to work those down in fishing, and, you know, as we get into building inventory for the next season, and we get some pre-orders in, so they're all getting kind of mixed together, but we have solid orders in fishing, and... you know, getting back to the normal kind of order placement that we have seen historically in the other businesses. So we feel good about the position. We haven't seen cancellations, so it's a positive sign.

Got it. Okay. So thanks for that. And then can you give us a sense as to what you're hearing from your retail partners as far as current demand levels and, you know, What's your sense as far as the inventory levels at retail?

Well, we are still building inventory at retail. You know, our supply situation eased up a little bit in this past quarter, so that's given us an opportunity to, you know – shift to customers and have them start building we're still not to the levels that we want to be but um you know i think demand you know we the the holiday season has has been better than i think we expected but uh um you know juries out on what happens going forward but obviously we had a very strong fourth quarter so uh that was a very good sign okay gotcha and then

Now, historically, the company's gross margin have been in the mid 40% range. Do you expect to over time, of course, you know, do you expect to get back to those types of gross margins? Or do you think there's been a structural change to the business where those types of margins are not achievable?

Well, those were very, you know, different times. Obviously, we will keep that as a goal to get back there. I think, you know, right now we're dealing with significant cost increases on raw materials, and we're assuming those will come down. We don't know how much they will come down, but we do, you know, we're going to work hard on getting our margin back up. Whether it goes all the way up is, you know, yet to be seen.

Okay. Got you. Okay. And then, so as far as the comment also about the focusing on and evaluating options to address increased costs and the efficiency of your supply chain. So, you know, can you share with us, you know, more details as to what you're doing there? to bring also inventories back in line to more normal levels?

I mean, yeah, the cost structure and the margin question, I mean, we're looking at everything to improve that. So, you know, we've taken price increases in the past. We'll continue to look at our pricing structure and look to see what makes sense versus our demand and our margin profile. We're also trying to find ways to decrease our costs coming in. And part of that is going to be marketplace driven, but part of it's looking at sourcing, design, how we design products, et cetera. So we're looking at everything there. And then, you know, on the inventory question, yeah, our inventory is higher than where we'd like it to be. So we're really working hard on managing that and making sure that we can get that more balanced. It'll probably be into the season when we get that done.

Mm-hmm. Okay. Gotcha. Okay. And then, you know, your balance sheet still remains strong, certainly, even though, to your point, you do have higher than normal inventories. Can you just talk about your cash flow priorities? And also, CapEx looks like it was higher than normal this year. Any sort of ballpark estimate, Dave, as to where you think fiscal 23 CapEx will be?

Yeah. I mean, the CapEx – spending will we expect that to go down and if this looks like three maybe you know 15 20 versus where we had 22 we had some you know facility work that we did in 22 that is not going to be repeatable not repeated in 23. so I would expect a 15 20 decline in capex okay okay and then otherwise your cash flow priorities I know you talked about the you know the dividend and you know

Are you guys still looking at potential acquisitions or maybe looking at buying shares?

Well, we're always, you know, looking for good acquisitions and, you know, they have to fit, they have to be strategic, and it's always on our radar screen. So from that perspective, again, always, always looking.

Yeah, I mean, beyond that, you know, we like to see a good, healthy dividend. And I think we've achieved that. So we'll continue to look at our regular dividend and make sure that's meaningful for the shareholders. And, you know, as we've talked before, I mean, we look at all other options on how to utilize the cash beyond, you know, growth for the company. And that's an ongoing discussion about, you know, other options that we could utilize the cash.

Understood. Okay. Well, thank you and best of luck.

Thank you. Thank you. As a reminder, ladies and gentlemen, that's star 1-1 to ask your question. And I'm currently showing no further questions at this time. I'd like to hand the conference back over to Ms. Helen Johnson-Leopold for closing remarks.

Thank you, everyone, and I hope you have a wonderful holiday season. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.