Johnson Outdoors Inc.

Hello, everyone, and welcome to the Johnson Outdoors third quarter 2023 earnings conference call. Today's call will be led by Helen Johnson Leopold, Johnson's Outdoors chairman and chief executive officer. Also on the call is David Johnson, vice president, 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 the 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 agree to these terms, simply drop off the call. 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 2023 fiscal third 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, Matt. Good morning, everyone, and thank you for joining us. Just want to excuse my voice. I've got a little bit of a hoarse voice today, but I'll do my best. I'll begin with an overview on the quarter and the year, and then I'll share perspective on performance and outlook for our businesses. They will review financial highlights, and then we'll take your questions. Sales in our third fiscal quarter ending June 30, 2023, declined 8%. to $187 million compared to $203.8 million in the prior year third quarter. Total company year-to-date sales were up 4% over last year's fiscal nine-month period. Profits before income taxes for the third quarter slightly increased to $19.8 million versus $19.2 million in the prior year quarter. For the year-to-date period, profit before income taxes was $47.9 million versus $47 million in the prior year-to-date period. We're seeing consumer demand continue to moderate from the strong pandemic field levels of the past few years. At the same time, the marketplace continues to be competitive, reinforcing the critical importance of innovation for the continued growth and success of our brand. In fishing, we remain committed to being innovation leaders. We recently announced a broad line of exciting new products at this year's ICAST, the largest sporting trade show in the world. Minn Kota announced the Quest series, the all-new brushless trolling motor technology giving anglers ultimate control in tough fishing environments. Minn Kota also launched a restage of all of its bow-mount trolling motors with an updated technology suite, family enhancements, and more seamless integration with Hummingbird products. We're always looking for ways to unify our products to enhance the fishing experience. Also launched at ICAST, was the OneBoat network app bringing together both Humber and encoded devices into one dashboard to give anglers unprecedented command of their fishing boat. Sustaining our innovation leadership position in a competitive fishing market remains a top priority. We are excited about the breadth of new innovation we just announced, and we will continue to work on a pipeline of new products to give anglers the best fishing experiences possible. In our diving business, sales were flat this quarter. However, year-to-date period shows positive growth, especially from our European and Asian markets. We will continue to leverage our innovation and brand-building efforts to ensure ScubaPro remains the world's most trusted dive brand. Our camping and watercraft recreation businesses continue to face softening markets due to the post-pandemic slowdown. Retailers still have product on shelf to work through, and at the same time, consumer spending has slowed. We're committed to the long-term opportunity in these two businesses, and our consumer-focused innovation plays a critical role in that. I'm excited to announce that Old Town received the Best of Boats and Watercraft Honor at this year's ICAST for its revolutionary Old Town E-Pedal Plus Drive. This is cutting edge technology and it's powered assisted pedal drive that combines pedal and power to propel the fishing experience to the next level. This technology is new to the world and we look forward to shipping Old Town ePedal Plus early next year. While the near-term continues to be challenged across all of our brands, we're working hard to position them for continued in the evolving marketplace. Ongoing investment to understand our consumers, sustain innovation leadership, and identify new sources and paths of growth in our markets. Our key to ensuring progress toward our goal is delivering sustained, profitable long-term growth. Now I'll turn the call over to Dave for more details on the financials.

Thank you, Helen. Good morning, everyone. I want to highlight a few items from the quarter and the year. The quarter's gross margin of 41.5% improved from 36.1% in last year's third quarter due primarily to price increases and lower freight and materials costs. We're pleased that our gross margins have started to recover and will continue to look for ways to improve efficiencies to maintain strong gross margins going forward. Operating expenses in the third quarter increased $10.4 million versus the prior year third quarter, due primarily to a $5.1 million increase in deferred compensation expense related to marking plan assets to market, which is entirely offset in other income. Additionally, higher warranty expense and advertising and promotion costs also contributed to the increase between quarters. Resulting operating profit for the quarter decreased to $17.4 million versus $23.8 million in the prior fiscal year third quarter. Earnings before taxes up slightly versus the prior quarter. Net income for the third quarter was $14.8 million versus the prior fiscal year third quarter of $14.1 million. The quarter's effective tax rate was 25.3% and was 25.9% for the nine-month period. While we have generated strong cash flow from operations through June, we're still working through high inventory levels as we wind down the season. We'll continue to proactively manage our inventory position and working capital levels appropriately. Looking ahead, we remain focused on continuing to improve operational efficiency and strengthen our operating margins. Our balance sheet continues to have no debt, and our cash position enables us to invest in opportunities to strengthen the business. We've remained competent 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. Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone and then wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Anthony Levizinski with Sedoti. Your line is open.

Yes. Good morning, everyone. So first, thanks for taking the question. So first, I guess, a housekeeping type of question here. I know you guys talked about the pricing, especially, I think, in your fishing segment. But just overall, as you look at the quarter, can you just broadly speak to pricing versus unit volumes?

Yeah. I think for the quarter, I would say, in general, unit volumes are flat-ish. And so the

increases we're seeing in revenue and gross gross profit is is pricing related got it okay thanks dave okay and then um you know your gross margin was up nicely ahead of our expectations you know uh so um do you think you can sequentially build from here um now that you know ocean freight costs have normalized i think you've seen decreases in your raw material costs so Just wondering as to how we should think about the gross margin trajectory from here.

Yeah, it's a good question. I mean, there are a lot of factors at play going forward. I think cost easing is good for us going forward. I do expect probably promotional activity to be robust going forward, too. So being above 40% is definitely our intention going forward. But again, there's lots of factors at play.

Right, I understand there's lots of puts and takes there. Okay, but certainly good to see that moving in the right direction. Now, as far as your operating expenses, I know you called out higher advertising, promotion, and warranty expenses. Can you talk about how much that was as far as an increase and whether you expect that going forward, those types of increases? Or do you think that some of those maybe costs will moderate going forward?

Yeah, I mean, you know, if you exclude the deferred comp expense, you know, there's about a $5 million increase in operating expense for the quarter. That's, you know, about half that's warranted, about half is advertising promotion, the increase. You know, I think advertising promotion will continue to be robust for us going forward. Again, as we compete in the marketplace and make sure our products are front and center for everybody. I would think warranty would start to moderate some going forward, but again, there's, I guess, no crystal ball on that, but I would expect that to moderate.

Got it. Okay. And as far as just the inventory levels at retail, I assume that they're probably the fullest in the camping and watercraft, but just overall, if you could talk about what you're seeing from retailers and as far as you know, replenishments. How do you see that? I mean, you know, camping and watercraft has been certainly the most, the hardest hit here as of late. So I guess as a follow-up to that, when do you think that will kind of bottom out?

Well, even watercraft, you're right, watercraft and camping are the ones that have been been dealing with the most inventory of retail. I think we are seeing some light at the end of the tunnel for the champion business. And hopefully, Watercraft will get better as we go forward. But we do have some exciting new products coming into the market. So we'll keep an eye on that. BUT AS WE SAID, THE DEMAND IS SOFTENING, BUT WE FEEL GOOD THAT WE'LL MOVE SOME PRODUCTS AND BE IN BETTER SHAPE BY THE END OF THE YEAR. FISHING, I THINK, IS HEALTHY. THE RETAIL IS HEALTHY AND CERTAINLY HEALTHIER THAN IT HAS BEEN, BUT THERE'S BEEN MORE ACTIVITY IN THE FISHING CATEGORY VERSUS OTHERS. softening, but we think the inventory is in a good place and is there to fuel the market. You know, diving is a different story altogether, but is in good shape. So it is different by category, but again, you know, our job is to put activity out there to pull it through and bring in new innovation to get the retailers excited about what's next. So it depends on which market you're talking about, but hopefully by the end of the season, we'll be in good shape.

All right. Sounds good. My last question, the press release, you guys talked about investing in strategic opportunities to strengthen the business. So I was wondering if you could expand on that as far as the what you're seeing as far as maybe possible M&A? I know you guys have talked about that for a while, but just wondering if you could expand on some of the opportunities that you see in the future.

Well, I think there's two things. I mean, strengthening the business and looking for opportunities. We are focused on, you know, improving our supply chain situation so that we can benefit from it efficiently. So I think, you know, strengthening the business in that respect. We are always looking externally for opportunities in the marketplace. And again, they have to be very strategic and fit with our strategy long-term. And again, there's less activity going on out there, but again, we're not letting up on our research and our visibility to opportunities.

Got you. Okay. And I guess as a quick follow-up to that, I guess as far as your R&D expenses, I mean, typically they've been around 4% of revenue. I mean, do you think that will continue or do you think you need to step up that spending? How should we think about that?

You know, again, as we said, I think innovation even becomes more important during times of, you know, when there's a lot of competition and challenging markets. So I think we would expect that to be most likely growing from that point.

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

Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Anna Glazden with B. Rowley. Your line is open.

Hi, good morning. Thanks for taking my question. First, I'd like if you could provide some perspective on sell-in versus sell-through or any color on POS as we're trying to understand and market demand in light of how distorted retailer inventories are to get a real sense of what's going on in the field.

Well, it reflects our comments on the softening of demand that we are seeing across the board. And again, I think the watercraft business is the one that the consumer demand piece has been challenged. But we are seeing, you know, pull through on fishing, again, at a level that is lower than it has been during, you know, the pandemic. And actually, the fishing business has been pretty resilient from a demand standpoint, more so than the other industries. So, you know, it's starting to normalize now, which is a little later than the most. But I do think you're seeing that the consumer demand is normalizing from the swing of the pandemic. And, you know, our watercraft business, we're going to work on pulling that through, helping that through, because that's a little bit tighter than the rest of them.

Got it. And more of a clarification, did you come into the quarter with a backlog? Was there any benefit from that?

We had a bit of backlog coming into the quarter, but we're down to like normal levels now of orders. So, yeah, I think we're in kind of a normal level of order activity at this point.

Got it. So basically, you know, as we move forward, you know, thinking about the coming quarter, it should be a relatively balanced sell-in, sell-through. Yeah. Barring like watercraft or places where there's excess inventory or still normalizing inventory.

Right, yeah. Yeah, that's, yes.

Got it. Super helpful. That's all for me. Thank you.

Thank you. As a reminder, ladies and gentlemen, that's star 11 to ask the question. I am showing no further questions in the queue. I would now like to turn the call back to Hella for closing remarks.

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

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