Johnson Outdoors Inc.

Hello, everyone, and welcome to the Johnson Outdoors second quarter 2023 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 prepared remarks, The question and answer session will begin. If you would like to ask a question during that time, please press star 11 on your telephone. 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 Pat Tenman from Johnson's Outdoors. Please go ahead, Miss Tenman.

Thank you. Good morning, everyone. Thank you for joining us for our discussion of Johnson Outdoors results for the 2023 fiscal second 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 controls. 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, everyone. I'll begin with an overview on the quarter and the year, and then I'll share perspective on the performance and outlook for our businesses. Dave will review financial highlights, and then we'll take your questions. Sales in our second fiscal quarter ending March 31, 2023, rose 7%. to $202.1 million compared to $189.6 million in the prior year's second quarter. At the halfway mark of the fiscal year, total company year-to-date sales increased 11% over last year's first fiscal six-month period. Profit before income taxes for the quarter increased to $19.9 million versus $13.2 million in the prior year quarter. For the year-to-date period, profit before income taxes was $28.1 million versus $27.8 million in prior year-to-date periods. Gabe will give some more insight into the profit drivers. Over the past few years, we've seen higher participation in outdoor activities and have benefited from the pandemic fuel demand. Now coming out of the pandemic, we're facing more challenging markets and uncertainties affecting our customers and our consumers. I'll delve into markets further in my discussion of each business. In phishing, supply and component availability significantly improved, allowing us to fill more customer orders. Near-term customer demand continues to be solid, and we're continuing to monitor consumer takeaway. During the quarter, the team showcased our fishing brands at the annual Bassmaster Classic Tournament and Consumer Show in Tennessee. This year, Bassmaster had a record attendance with consumers passionate about fishing, and I'm pleased to share that Minn Kota and Hummingbird Sponsors Angler Jeff Gustafson won the tournament. In our diving business, momentum continues as the market rebounds from depressed pandemic levels and increased global travel we continue to benefit from our scuba pro equity as the most trusted dive brands in the world in camping and watercraft recreation both markets are impacted by a post-pandemic slowdown retailers have built up inventory and now have a lot of products on shelf to work through meanwhile consumer spending has slowed Consumer-focused innovation is critical for both the new and existing participants in these activities, and the hire and votes of our innovative Old Town Sportsmen line continue to do well. In all of our businesses, sustaining innovation leadership is critically important to our growth and the success of our brands. We remain focused on investing in understanding both new and existing consumers' evolving needs, and translating that into new product success. We continue to work on an exciting pipeline of new products across all of our brands. Looking ahead, we continue to stay on top of marketplace conditions and monitoring consumer buying behavior. And as always, I'll take the long-term view at Johnson Outdoors, positioning our brands and businesses for long-term growth. Now I'll turn the call over to Thanks for the review of the financial highlights.

Thank you, Helen. Good morning, everyone. I want to highlight a few items from the quarter and the year. As Helen mentioned, supply availability has markedly improved, allowing us to fill more customer orders, especially in fishing. Raw material inventory is down 25% as we continue to convert those components to finished goods available to ship as we enter our primary selling season. With the right market conditions, we plan to see a measurable reduction in total inventory by the end of the fiscal year. The quarter's gross margin of 37.3% slightly improved from 36.2% in last year's second quarter, due primarily to price increases and efficiencies from increased sales volumes. We expect margins to continue to be challenged in the coming months as we work through higher cost inventory. Inflation remains a concern, and we continue to evaluate our expense structure. Operating expenses in the second quarter increased $10.8 million versus the prior year second quarter. The primary drivers of the increase between the quarters were higher sales volume driven expenses as well as higher warranty costs, compensation costs, deferred compensation expense, and increased professional services. This fiscal year, we've made an investment in reviewing and assessing our operation model in order to maximize operating efficiencies. Resulting operating profit for the quarter decreased 26% to $11.4 million versus $15.4 million in the prior fiscal year second quarter. A $10.1 million improvement in other income for the quarter more than offset the operating profit decline, however. That increase was due to a $6.6 million gain on the sale of the military and commercial temp product lines that we announced in March. Additionally, a $3.3 million $3.3 million of higher earnings on the assets and deferred compensation plan in the current year further contributed to the increase and entirely offset the increased deferred compensation expense I noted earlier. Net income for the second quarter was $14.9 million, up 50.1% from the prior fiscal year second quarter. The quarter's effective tax rate was 25.5% and was 26.2% for the six-month period. Looking ahead, we foresee the consumer markets to continue to be challenging. We remain focused on evaluating the expense structure and delivering product on time. Our balance sheet continues to have no debt, and our cash position enables us to invest in opportunities to strengthen our business. We remain confident in our ability to navigate challenging market conditions and deliver long-term value to 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, if you would like to ask a question, please press star 1-1 on your telephone. One moment while we get ready for the Q&A session. As well, please wait for your names to be announced before you proceed with your call, with your question. First question is coming from Anthony Libitski of Sidoti and Company. Your line is open.

Yes, good morning, and thank you for taking the questions. So, you know, fishing had a great quarter as you were able to fulfill more orders as supply surely improved. So, I guess first I have a two-part question. So, you know, first, you know, how much remaining backlog is there left to fulfill given the previous supply chain constraints? And then secondly, more recently, are you seeing incoming orders during the last few weeks? Just curious to hear your thoughts on that.

We continue to fill our phishing orders, so it is a little difficult to tell what is backlogged versus new. it's still a very solid flow of product um you know we we want to make sure that for the season that we've got good inventory at store level and you know it's just that transitional time right now and hopefully um you know it's too early to really look at the consumer demand piece, but your terms of demand of our customers is really good. I don't know, Dave, do you have anything you want to add? Right, yeah.

Okay, gotcha. And thanks for that, Helen. And then, you know, specifically to the fishing segment, as far as inventory levels at the retail level, you know, how would you describe that now? Yeah, I mean, I...

From what we can tell, they look to be in pretty good shape right now. So, you know, it's still kind of preseason, but we feel like we've got the shelves in pretty good shape, and, you know, it's kind of up to the consumer now as we head into the season.

Got it. Yeah, thanks, Dave. And then as far as, you know, just revenue for the quarter, can you just comment broadly as far as, you know, pricing versus unit volumes as far as that overall sales increase?

Yeah, I mean, in general, we've got really healthy unit volume. Probably a third of the increase that we're seeing in our revenue is due to pricing, and the rest would be due to unit volume and mix.

Got it. Okay, thanks. And then as far as the operating expenses, those came in higher than what we had expected. I know you called out the higher warranty, compensation, professional services, and some other costs as well. So, I'm just wondering how meaningful of an increase was that, and do you expect those components of costs to continue near term, or how should we think about that?

I mean, it's kind of a – there's a lot of different buckets there. I mean, certainly we've got our warranty expense. I mean, I think we were artificially low over the last – 18 months or so, so I would expect that rate to kind of be where it is now. So, you know, if you're looking at it versus last year, there could still be some increases there. You know, the deferred comp expense has offset another income, as you know, so that is what it is. And then, you know, we do have higher, you know, some headcount and some merits that are in there that will continue. The pro-serve stuff is more of a one-time thing. So, again, that's not a huge number, but it's just part of the story.

Got it. Okay, thanks. And then, you know, in terms of the smaller segments, watercraft, recreation, and camping, when do you think that weakness bottoms out?

You know, well, you know, that's very hard to tell. We've seen... You know, we miss across a number of categories in the outdoor space given, you know, the pandemic was such a great and significant season for those kind of businesses. You know, we hope that when the season kicks in that we'll start seeing the movement and then we'll get some of the reorders. But at this point, it's hard to tell.

Got it. I understand. Okay. And then, Dave, as far as your comment about the gross margins, I mean, just wondering, you know, I mean, just looking at how you guys did in this quarter, I mean, this was the first actually year-over-year increase of the gross margin since late fiscal 21. So it looks like we're kind of off the bottom. So, you know, do you think you'll be kind of still in that, you know, kind of high 30% range here in your term as far as gross margins, or do you think it's reasonable to at some point you can get back to, you know, 40% plus?

Well, I think, you know, if all else being equal, we'll start to have, you know, get the high-cost inventory off our books, and so we'll start to see expansion of the gross margin. I can't tell you when that's going to happen to get, you know, where we want it to be, but, you know, certainly we should expect to see more improvement through the year. Again, all else being equal. There's no other issues that we see.

Got it. Okay. Thanks. You know, last question for me. You know, what is your appetite for acquisitions? And overall, are you seeing any sort of moderation in terms of valuation multiples?

You know, As we said, we are always looking at what the markets, and I think we are seeing some moderation in the multiples. But again, I think it's about being on target and having strategic acquisitions. And we're actively looking, I think, You know, our hope is that we will get the right companies that come to the surface. And when they do, you know, we'll go after them.

Okay, sounds good. Thank you and best of luck.

Thank you. Thank you. Again, if you would like to ask a question, please press star 11 on your telephone. At this time, I'm not showing any more questions in the queue. I'd like to turn the call back over to Johnson Leopold for closing remarks.

Okay. Well, thank you, everybody, for joining us today, and I hope you have a great day. Thank you.

Thank you all for joining today's conference calls. This concludes today's event. You all may disconnect, and everyone, have a great day.