Q2 2022 Johnson Outdoors Inc Earnings Call

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Okay.

Hello, and welcome to the Johnson outdoors second quarter 2022 earnings Conference call.

Today's call will be led by Helen Johnson, Leipold, 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 <unk>.

10 minutes.

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 Dot Johnson outdoors Dot 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.

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 Leipold.

Thanks, Pat Good morning, and thank you for joining us I'll begin with an overview on the quarter and the year and then ask your 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 April one 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 fiscal.

Six month period.

Total company operating profit.

Two $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 months 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 in 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 English continue to look to Johnson outdoors for the best fishing experience as possible and demand across all product lines remained strong.

Ongoing supply issues in component delays are slowing our ability to complete and ship finished products. We have invested in available components. So we're positioned to finished products as we receive remaining parts.

It's a very difficult.

<unk> 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 the 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 sportswear line that has shown continued strength in the market.

Demand for <unk> continues to be strong and then Jeff Boyle consumers remain excited about the Super light cash so that is in its second year on the market finally in diving, our most global business diagnostics are showing signs of recovery our work to promote and support.

<unk> local value and to enhance our global digital presence, including ecommerce and helped US positive growth. We remain focused on these efforts along with sustained innovation to ensure scuba <unk> position as the most trusted that brand in the world.

In summary, the great news is that more people wanted 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.

<unk> been working hard to maximize product built in shipments to customers now I will turn the call over to Dave for a review of the financial highlights.

Thank you Hal and 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 the 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 in cost inputs.

We expect margins to be pressured through the balance of the fiscal year as we prioritize meeting the strong demand.

Additionally, we have been strategically building higher than normal inventory levels, primarily in raw materials.

We continue to work closely with all of our vendors and planning for alternate 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% is down nine points from last years 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.

As well as lower variable and deferred compensation expense.

Yeah.

Quarter's effective tax rate year to date is 25, 1% comparable to last year's quarter and.

And we expect the full year tax rate to be in the mid twenties.

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 remained 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 Q&A session operator.

Certainly ladies and gentlemen, if you do have a question at this time. Please press Star then one on your Touchtone telephone again, if you do have a question at this time. Please press Star then one.

And our first question comes from Anthony <unk> of Sidoti <unk> Company. Your line is open.

Thank you and good morning.

Do you have a few questions. So thanks for the opportunity here.

So I guess first in terms of the patient segment sales decline.

Was this entirely due to supply chain issues or do you think perhaps or any competitive issues in the quarter.

This.

Quarter is the whole story is about supply chain.

Demand is high.

And we've got backwards. So it was it's all about supply.

Okay great.

Great. Thank you for that and then.

So I mean.

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 onto these orders or.

Just wanted to get a better sense, whether these could be.

Lost sales or do you think it'll be just a matter of time before you can fulfill these orders.

<unk>.

Convert them into revenue.

Well.

All we can say is we we'd seen orders actually come in incrementally. So the demand is still high because the customers are still the leading product.

And.

So at this point it's about.

Getting supply.

Hopefully, we'll hang on to these orders.

Get to supply them.

Okay. So it sounds like you haven't seen any order cancellations because of the supply chain issues that youre having.

Yeah, Okay. Okay. Thanks for that Okay, and then in terms of the price increases.

You took.

How much were the price increases on average and can you just remind us what the timing of that was.

What are your plans for further increases.

Yes.

We took pricing at the beginning of our fiscal year and 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.

It's Ben.

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 that would you say are they generally in line with competition and how.

How would you describe the elasticity of demand.

Yes.

Yes, I mean thats.

We've seen competitive price increases kind of across the board and we've got many competitors. So it's.

Mixed bag in terms of how we compare to what Theyre doing.

So I would say in general it looks like that.

We've seen incremental price increases in the industry.

Yes, the elasticity of demand I mean, that's the great question, it's just about what the consumers willing to pay and those dynamics are definitely what we've taken into consideration.

Mhm Gotcha, Okay and then.

So so far this quarter are you still seeing.

Solid demand.

I guess.

Also are you seeing as far as inventory levels of retail how would you describe that.

Hi, Anthony sorry, we broke up there for a second could you repeat your question.

Sure I didn't hear you for a couple of seconds. So.

Yes, so as far as how would you describe the overall demand that youre 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 wanted to give you.

To reiterate whether that's continuing into this quarter and then as far as your sense about inventory levels at retail now.

That demand.

And use.

It's a pretty steady and this is were getting right into the heart of the season.

What goes on the shelf.

Doesn't stay long it just moves us so.

I would say also the inventory levels that we see at store level or.

Our very light so.

And as they're moving.

Okay.

That's good to hear and then.

In terms of the gross margin precious obviously it was.

Rather sizable decrease.

Can you help us deconstruct the different buckets of the gross margin decline materials versus air freight versus lack of absorption.

Yes.

Given the fixed cost I mean, if you could just give us maybe a little bit more details as to the magnitude of how much maybe that exact.

Numbers, but a little bit better understanding because.

Gross margin was down.

More than most in the past.

Yes, sure both for the quarter and year to date most of the variance versus last year is due to higher material cost.

A $60 to 70% of the variance was due to that.

Sure.

The biggest chunk of that after that is just the volume decrease and 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 in them.

<unk> overhead.

Okay got it Okay, and then I know in the past you have used more air freight was that the case this quarter as well.

I would say it's been comparable to last year. When we were to do a lot of that so it's been it's been wherever we can find the ability to get the product in.

So it hasnt 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.

Obviously.

And a second wave of Lockdowns and that.

Certainly impacts supply ICU.

Yes, we have that.

In a wait and see what this latest one has in terms of impact, but I think.

Is <unk> is going to be difficult until.

We have things kind of even out.

That's a tough situations.

Mhm.

Got you okay.

Okay. So as far as the inventory I think you mentioned that it's mostly raw materials flows that increased because the overall 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.

Yes, that's totally fair to say at this point.

Because demand is so strong we feel good about the inventory we have right now.

Mhm.

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

Well, that's difficult to say Anthony just because 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 is a couple of dynamics there that we just need to work through so it'd be hard for me to predict.

Six months.

Could happen with that inventory.

Okay understood.

I know, it's still a fluid and dynamic environment for sure and then I.

I guess lastly, if you could just comment on the 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 1234.

And that kind of order that would be very helpful.

Yes.

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 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.

A big vehicle that is the dividend that we pay we want to make sure that's robust.

But yes.

And we will 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, Alright, 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.

Okay.

And I am showing no further questions I would now like to hand, the call back to Helen Johnson Leipold for closing remarks.

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

Ladies and gentlemen. This concludes today's conference you may now disconnect.

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For the year.

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Thank you.

Good.

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