Johnson Outdoors Inc.

Everyone and welcome to the Johnson Outdoors fourth 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 the 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 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 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 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 filing 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.

Thanks, Pat. Good morning, everyone, and thank you for joining us. I'll begin with an overview of the fiscal year and fourth quarter results, 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. During fiscal year 2023, we saw the end of the elevated pandemic-driven demand of the past few years. That, combined with higher inventory levels at retail, led to challenging results for the year. Total company sales declined 11%. $663.8 million compared to $743.4 million in the prior fiscal year. Net income for the year was $19.5 million or $1.90 per diluted share, a 56% decline from the prior fiscal year. Operating profit decreased 82% to $11.7 million versus $66.3 million in the prior fiscal year, with the decrease in sales volumes and the 13% increase in operating expenses significantly impacting profitability. Our fourth quarter was particularly impacted by a significant slowdown in demand. Sales in the fourth quarter ending September 2023 were $96.3 million compared to $196.4 million in the prior year fourth quarter. The fourth quarter results also reflect a challenging comparison between quarters. The last quarter of fiscal 2022 was when supply chain restrictions eased and when we filled a significant number of backlogged customer orders. So it was a tough quarter and a tough year as demand in the outdoor recreation marketplace moderated, and we also began to see a return to the pre-pandemic traditional seasonality of order patterns. In a challenging marketplace, competitive dynamics continue to be aggressive, affecting pricing. Looking forward, we anticipate these dynamics will continue and we are committed to innovation to help our brands grow and succeed. In phishing, innovation is key to sustaining our leadership position. We are excited by the broad line of new products we announced during the third quarter of the fiscal year. Minn Kota announced the Quest series, the all-new brushless trolling motor technology, giving anglers ultimate control in a tough fishing environment. Minn Kota also launched a restage of all its bow-mount trolling motors with a brand new look, an updated technology suite full of angler-friendly enhancements, and a more seamless integration with hummingbird technology. We are fishing industry leaders, we have great brands, and we're committed to returning retaining that position in this marketplace. We are excited about the momentum for the breadth of new innovation we announced, and we will continue to work hard to give anglers the best fishing experience possible. In our diving business, we saw positive growth as global dive markets, especially European markets, continued to recover. We will leverage our innovation and brand-building efforts to ensure Scuba Pro remains the world's most trusted dive brand. Our camping and watercraft recreation businesses faced a significant decline from strong pandemic-fueled demand of the past few years. Retailers still have high inventory on their shelves, and consumer spending has slowed in camping. We recently announced that we made the tough decision to exit our Eureka product line to increase our focus on the Jeff Boyle franchise. Jetboil has experienced tremendous growth over the past five years, and we're working on leveraging the brand equity into expansive growth opportunities. In watercraft recreation, we're excited about Old Town's award-winning revolutionary e-pedal plus drive. This cutting-edge technology is a power-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're looking forward to shipping Old Town ePedal Plus soon. While we're disappointed in our fiscal year results, we're laser-focused on working hard to outperform the challenging marketplace and to improve our profitability. Despite current economic headwinds and marketplace softness, we will continue to invest in our key strategic drivers, understanding our consumers, sustaining innovation leadership, identifying new sources and paths of growth in our markets, and continually optimizing our digital consumer experience. Our ongoing hard work on these priorities ensures that our portfolio of market-leading brands is well-positioned for success and that we will continue to deliver long-term growth for Johnson Outdoors. 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. As Helen mentioned, fourth quarter results were significantly impacted by the slower demand as well as high inventory at retail and customers managing inventory more tightly with fishing's new bow-mount motor transition. For fiscal 2023, operating profit margin was 1.8% compared to 8.9% in the previous fiscal year. Gross margin for the year was 36.8%, slightly improved from last fiscal year. While we experienced improved materials and freight costs versus last year, those gains were nearly offset by increases in inventory reserves and unfavorable absorption due to reduced sales volumes. Operating expenses increased 13% or $27.3 million versus the prior year. Deferred compensation expense increased $9.3 million as a result of marking plan assets to market and was entirely offset in other income. We also recognized $2.4 million in expense related to the exit of the Eureka brand. Additionally, we experienced higher warranty expense of approximately $7 million. Research and development costs increased $3.7 million, and higher marketing and professional services costs further drove the operating expense increase versus fiscal 2022. Net income for the year was $19.5 million versus the prior fiscal year of $44.5 million. The effective tax rate was flat prior year at 24.4%. Inventory remains elevated and is higher than last year by about $12.8 million. We're focused on carefully managing inventory levels as we navigate a challenging marketplace, and I expect we'll see inventory levels decline by the end of the fiscal year. Looking ahead, we remain focused on strengthening our operating margins with an active cost savings program and prudent expense management. Our balance sheet continues to have no debt, 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 to the operator for the Q&A session.

Thank you. At this time, we'll conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. One moment for our first question. First, just in terms of the... Sorry, our first question comes from Anthony with Sidoti. Anthony, your line is open.

Oh, thank you. Okay. Okay. So, so again, yeah, thank you for taking, taking the questions. So first, I guess, you know, just in terms of how the, I guess, first, just in terms of the inventory comment at retail, are you seeing this across all your brands or is it more isolated to phishing? Just wanted to get a better understanding of what's going on in the marketplace.

You know, we do see it varies by business, but there is inventory at retail that, you know, is slowing down demand, making our buyers a little bit, you know, questionable about the orders they place. So I think it really is in the outdoor industry pretty much across the board.

Okay, gotcha. Okay, and then can you comment on the monthly progression of sales throughout the quarter? And, you know, given that you're more than two months into your current first fiscal quarter, what can you share with us in regards to demand so far? Is it similar to the fourth quarter or better or worse? Just ballpark kind of estimate, if you could share that, that'd be great.

Yeah, I mean, you know, the quarter kind of progressed. It declined kind of as the season wound down. So we've really seen it go back to traditional seasonal marketplace, if you will. But it is depressed versus, you know, where it probably should be. So, you know, as we kind of look into the next quarter, you know, we're still seeing a challenging marketplace. So, you know, we're hopeful for a good season, but right now it looks pretty challenging.

Gotcha.

Okay. It truly is. It's a swing. It's really a swing in the post pandemic. You know, we had such great performance and now it is, it's, it's getting back to more of a stable market, which I think, you know, everybody thought was coming. It's always hard to predict the level of it, but you know, it's, it's, we've got to work through that period, but hopefully the season does, uh, you know, have the energy we need.

So should we kind of go back and look at our models and like basically see the, so now that, you know, we're past the pandemic, like you said, you know, the demand has dropped off. I mean, are we getting back to the seasonality that you had, let's say in fiscal 18 or fiscal 19, where you saw really, you know, March and June quarters with big revenue numbers and then the I guess the shoulder season, like the December and September quarters. Is that what you're seeing now? Is that a fair assessment of how things will look like in fiscal 24 and beyond?

Yeah, I believe we'll get back to traditional seasonality of the business. Yeah. And, you know, as we pointed out last year's fourth quarter was really high due to just refilling the shelves. So, you know, we'll get back to, you know, more of a traditional season. portionment of the season.

Okay, thanks, Dave. So, you mentioned the new product lines from Minn Kota and from Old Town. Have you guys already seen purchase orders come in for those, or how should we think about that?

Yeah, I mean, we traditionally get, you know, the orders preseason. But as we said, you know, we do have the, our customers have inventory on shelf. And that's a key. We've got, you know, they've got to move through that. So I would say, you know, that the uncertainty is due to the inventory they've got. And we're hoping that it moves through and we will see those orders come in. But we are seeing them. they're coming in now.

Okay, that's good to hear. And then, you know, in terms of the fourth quarter, so the inventory reserve impact on gross margin, can you comment on that?

Yeah, I, you know, part of it was due to the exit of the Eureka business, but also just across the board, we were looking at our inventories and decided to take some reserves to the levels. So, I mean, I feel good about the inventory level that we have now and that it's saleable, but we took some increased reserves kind of across the board.

Gotcha. Okay. So overall, you don't think there is much in terms of inventory obsolescence risk?

You know, as long as the marketplace and the consumer behaves as we expect, I think we're in okay shape. We obviously have to get those inventory levels down, but if we have a season that we expect, we'll be able to do that.

Gotcha. Okay. Thanks for that, Dave. So I look back, when you announced the Eureka exit, you talked about a $4 million charge, and it looks like it was $2.4 million instead. Is that correct?

No, it was... $2.4 million hit the operating expense line.

Yeah, that was just the operating expense effect.