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Johnson Outdoors Inc  (NASDAQ:JOUT)
Q2 2019 Earnings Call
May. 03, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, everyone and welcome to the Johnson Outdoors Second Quarter 2019 Earnings Conference Call. Helen Johnson-Leipold, Johnson Outdoors' Chairman and Chief Executive Officer will lead today's call. 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. (Operator Instructions) 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 Patricia Penman from Johnson Outdoors. Please go ahead, Ms. Penman.

Patricia Penman -- Vice President of Marketing Services & Global Communication

Thank you. Good morning and welcome to our discussion of Johnson Outdoors fiscal 2019 second quarter results. 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 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 releases and filings with the Securities and Exchange Commission. If you have additional questions following the call, please contact either Dave Johnson or me.

It is now my pleasure to turn the call over to Helen Johnson-Leipold.

Helen Johnson-Leipold -- Chairman and Chief Executive Officer

Thanks, Pat. Good morning. Thank you for joining us. I'll be giving an overview on the quarter and year-to-date results and then, I'll share perspectives on the performance and outlook for the businesses, and Dave will review key financials and then we'll take your questions. Last fiscal year, we experienced unprecedented growth. We expected growth would eventually moderate and it has. During the first six months of the fiscal year, we are in free season ramp-up and selling period for the primary retail selling season. In this second quarter ending March of fiscal 2019, new products drove higher sales in Fishing bringing year-to-date revenue slightly ahead of the prior year's first six months.

Sales were $177.7 million during the quarter and 7% ahead of last year's record second quarter. At the halfway mark of this fiscal year's total Company year-to-date sales, they stand at $282.1 million, which is on par with last year. Total operating profit for the quarter was $27.8 million, up 7.1% versus the previous quarter and total Company operating profit increased 2.4% to $33.8 million compared with the prior fiscal year to date period.

Current quarter's net income was $21.9 million or $2.18 per diluted share and was slightly higher than second quarter last year. Dave will discuss the key financial drivers later in the call. Performance this quarter as well as year-to-date results reinforce the importance of innovation. New products consistently drive a third or more of our annual sales, and they are key to strengthening brand equity, building customer loyalty-enhancing margins.

We want to give consumers the absolute best outdoor experience possible, and this means we have to dedicate the time to really understand who they are, where they are, how they use our products and what they want. We are continually fine-tuning our innovation process to better help us understand the needs of our target and maximize the opportunity for us to uncover new insights, which are key drivers behind successful innovation.

Throughout the process, even after we are in product development stage, we look back to the consumer for input on design and relevant messaging. For the past two years, new product success has driven unprecedented growth in Fishing. And so far this year, pre-season selling across our Fishing brands continues to be strong. Connectivity between Minn Kota and Humminbird is one of the drivers to this success, our One-Boat Network platform enhances the ease and fun for anglers by enabling Minn Kota and Humminbird products to work together in unison.

Our new Minn Kota Down Imaging motor is this year's launch of another connected product that integrates Humminbird Down Imaging transducer into select Minn Kota bow-mount motors. This easily allows anglers to see what's directly below the bow of the boat. Johnson Outdoors is the first and only company to offer this pioneering innovation in fishing. We constantly look for ways that our products can seamlessly integrate and communicate unlocking more features, capabilities and potential for anglers everywhere.

We are also seeing success with our SOLIX and HELIX Series of fish finders. The ultra big screen, SOLIX series with our state-of-the-art mega sonar imaging provides an extended depth range, while enhancing the clarity of the image. The small and midsize Helix series offers our patented size imaging to even a larger group of fishing consumers. The award-winning Minn Kota all tracks the first electric steer motor for the pedal controls enthusiasts with GPS and wireless capability what's being called as most successful motor launch, and sales continued to impress in its third year on the market.

In Diving, our most global business, sales are up in the second quarter due to significantly improved performance in our North American market. New products continue to drive about a third of Scubapro sales with particularly strong sales in our dive computer category. Our G2 dive watch computer with wireless transmission and a heart rate monitor is doing well, helping to sustain Scubapro's position in the most trusted dive equipment brand in the world. We're seeing more sell-through in the diving market, which we believe is the truest measure of new product success.

In Diving, we're also excited to see the beginning of a positive trend in terms of our digital efforts in e-commerce and direct-to-consumer sales, which are driving sales both online and in retail. Our investment in e-commerce and digital sophistication is important to the future of all our brands and businesses, and we're working toward this being a meaningful contributor to overall sales and profitability.

Challenging market conditions in both Watercraft and Camping emphasize the critical importance of continuing investment in enhanced digital marketing and e-commerce effectiveness. Work is under way to tailor innovation to our consumers' target specific needs and wants and to align go-to-market strategies, consistent with their expectations. We're trying new things and applying what we learned. Our investments in these areas will give consumers the ability to see the full range of equipment we make for each of our brands during the season. They can use it as a purchasing tool in the off-season, and they can use it as research and planning tool. We're committed to the long-term opportunity of these two businesses, and we anticipate that we will see benefits from these investments in the future.

Across all of our brands, we are working hard to position them for continued success in the evolving marketplace. Ongoing investment into understanding our consumers, sustaining innovation leadership and identifying new sources and paths of growth in our markets as well as investing in accelerated digital sophistication e-commerce and marketing excellence are key to ensuring progress toward our goal of delivering sustained profitable growth. We feel good about where we are heading into -- as we are heading into the season and focus -- our focus now is on the strong execution to finish the year.

Now, I'll turn the call over to Dave for more details on the financials.

David Johnson -- Vice President and Chief Financial Officer

Thank you, Helen. Good morning, everyone. I want to highlight a few items from the quarter. As Helen mentioned, sales for the quarter improved 7% over the prior year, and we're fairly flat on a year-to-date basis. On a constant currency basis, sales for the first six months would have increased approximately 0.6% versus the prior year. We're pleased that we were granted an exclusion for our components subject to Section 301 tariffs that's used in products assembled in the United States. Now, we previously projected that tariffs on Chinese goods will have a potential $6 million to $9 million impact on fiscal 2019 profits.

Now, we anticipate a lower potential impact of $5 million to $7 million on profits this fiscal year. We're also continuing various tariff mitigation efforts with respect to other affected product components. Operating expense declined during the first half of the fiscal year due primarily to lower warranty expense. Operating expense during the quarter increased 6.4% year-over-year, due primarily to a higher deferred compensation expense resulting from a $2 million upward adjustment in the valuation of the plan's assets.

However, an offsetting gain was reflected in the other expense. The year-to-date effective tax rate of 25.9% was significantly lower than last year's six month's rate of 42.1%, which reflected charges associated with initial implementation of the new US Tax Reform Act. For the full year, we're expecting the tax rate to be consistent with the year-to-date tax rate. Looking ahead to the rest of the year, we continue to expect moderate sales growth, and we expect profitability to be affected by Section 301 tariffs on components. Nonetheless, we continue to benefit from our ongoing efforts to improve operational efficiency, enabling us to protect margins and effectively manage working capital. The balance sheet remains strong and our cash position is healthy, providing us with financial flex -- capacity and flexibility to strategically invest in growing the businesses, while continuing to pay out the cash dividend to our shareholders.

Now, I'll turn things back over to the operator for the Q&A session. Operator?

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from George Kelly of Imperial Capital. You may proceed with your question.

George Kelly -- Imperial Capital -- Analyst

Hi, guys. Thanks for taking my questions. First, Dave, just a question about the guidance that you're -- the kind of general guidance that you provided. I didn't hear you say that you expect operating income to be down as I thought you said in prior calls, am I hearing that correctly?

David Johnson -- Vice President and Chief Financial Officer

Yeah, with the sales growth, that will help us with profitability, but the tariffs will be a negative. So I -- we don't expect necessarily growth in that number, the profit number.

George Kelly -- Imperial Capital -- Analyst

So just to clarify, I thought you said in prior quarters that you expect that operating income to be negative. Your view is that -- is that still the case to the full year?

David Johnson -- Vice President and Chief Financial Officer

Yeah, I think it's fair to say that there could be some decline in profit this year. Yeah.

George Kelly -- Imperial Capital -- Analyst

Okay. Okay. Thanks. And then really strong Fishing segment quarter and even year-to-date, it's just like -- it continues to happen in that business. Can you give any kind of quantification -- any detail about what you're seeing this year as far as the Humminbird, Minn Kota and then everything else in the mix of that business changed at all versus a couple of years ago, and I guess what I'm trying to get at is that as Humminbird has the profitability there continue to improve?

David Johnson -- Vice President and Chief Financial Officer

Sorry, George. The last part of the question has the profitability continue improve? Was that your question?

George Kelly -- Imperial Capital -- Analyst

With Humminbird, specifically, it's becoming more of an even mix.

David Johnson -- Vice President and Chief Financial Officer

Well, we're seeing strength of both brands, so I think overall just both brands have -- are in really good positions. And yeah, I mean good mix, good pricing with the innovation. And so, we're pleased with the performance of both brands.

George Kelly -- Imperial Capital -- Analyst

Okay. And then last question for me still on the Fishing segment, what do you think so far with point-of-sales data? And how is the inventory -- how is the retail dynamic -- is inventory at retail a reasonable level, etcetera? Thank you.

Helen Johnson-Leipold -- Chairman and Chief Executive Officer

Hi, this is Helen. We're just -- we're seeing good solid pull-through at retail. Again, it's still preseason, but it looks good.

George Kelly -- Imperial Capital -- Analyst

Okay. Thanks.

Operator

Thank you. (Operator Instructions) Our next question comes from Anthony Lebiedzinski of Sidoti & company. You may proceed with your question.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Yes, good morning. Again, thank you for taking the questions. So I know you provided some data for Diving as far as percentage. It looks like about a third of that coming from new products. Can you give us a sense as to what percentage of your Fishing sales for the quarter and year-to-date have come from new product introductions?

David Johnson -- Vice President and Chief Financial Officer

Well, we counted the last 24 months basically. So it's still pretty strong. We're fishing, and we've had good innovation this year. Last year, we had really extraordinary innovation. So it's still strong really due to the last couple of years of intros.

Helen Johnson-Leipold -- Chairman and Chief Executive Officer

And just to add to that, we consider that there is -- it's more than a one-year launch cycle that -- in the fishing industry, you wouldn't -- you've put two years as considered the launch period, just because of the purchase cycle given the nature of those businesses.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay. Thank you for that. Now as far as the Diving segment, I know you have done some streamlining of operations. Are you done with that initiative or is there still more to come on that side?

Helen Johnson-Leipold -- Chairman and Chief Executive Officer

We have more to come, and this is what you're seeing is just preliminary expenses to lead up to some initiatives that we've got going. Dave, you can answer that if you want to.

David Johnson -- Vice President and Chief Financial Officer

Yeah, I mean we continue to look to simplify that business, and there's a lot of initiatives in that area to do that both from a product line segmentation to operationally those kinds of things. So yeah, there's more that's on the horizon.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay. Thanks for that. So, as far as the other two smaller segments, Watercraft Recreation and Camping, it sounds like from your prepared remarks that you are willing to be patient with those. Just wanted to make sure that I heard that correctly?

Helen Johnson-Leipold -- Chairman and Chief Executive Officer

Yes, you are correct. I think there -- both businesses, certainly camping is a growth segment in terms of participation and a lot of changes have happened there not only in channels, but also with consumer behavior and how they camp. We do think that it is an opportunity for growth long term; maybe we're a little bit. It took us a little longer than we thought to identify how things are actually changing with the consumer, but our plan going forward is to really be right on top of it with our product and take advantage of the fact that, we do see millennials are camping and are driving the participation levels in that segment. And camping is one of the biggest segments up there with Fishing. So that's the key. I think in Watercraft, again if you ever thought about change what happened to that market and certainly, channels have changed and as well competition has changed and the consumer behavior has changed. But people will never stop recreating in the water, and we know that business. So yes, we will be patient. Maybe we didn't see the changes as fast as we wanted to, but we do see the opportunity going forward, and we think that being patient is definitely worthwhile.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay, so can you give us also an update as to where you are with your direct-to-consumer efforts at this point?

Helen Johnson-Leipold -- Chairman and Chief Executive Officer

Well, we're all up and running. We've got every site that's up and running with direct-to-consumer. I think we are -- it's working the way we wanted to work, which is it's not just driving online sales, but it's also driving our consumers into bricks and mortar. We have a -- it's always a process and it's heavy lifting. And I feel very good, our team got this up and running in such a short period of time and -- but there's a lot of things that still have to be done in optimizing certainly our website and how we present our e-commerce site. But we are also learning as we go about the other big e-tailers out there and how to leverage what they offer as well. So it's a process, but we are definitely on the road and look for it to just get stronger as we go forward.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay. And lastly, any updated thoughts on your acquisition activity? What are your thoughts there? I assume you're still looking for potential deals.

Helen Johnson-Leipold -- Chairman and Chief Executive Officer

We are always looking, and we -- the good thing is we have a very solid focus and we're looking for those strategic acquisitions and they are -- there's a lot of mature businesses out there that are going for a lot of dollars. It's a tough time for -- it's not really a buyer's market, but we are looking and when something strategic presents itself, we always dive into it and consider it. So we're not sitting by the sidelines, but I would say that the worst thing we can do is go out there and buy something that is for sales growth alone and not strategically enhancing our position in the market. So we're there. We're looking.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

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

David Johnson -- Vice President and Chief Financial Officer

Thanks, Andy.

Operator

Thank you. And our next question comes from George Kelly of Imperial Capital. You may proceed with your question.

George Kelly -- Imperial Capital -- Analyst

Hi. Thanks for -- I guess, I do have a couple of other questions regarding your Fishing business. So first part is correct me, if I'm wrong, but I believe Ulterra and Ultrex are now three years old and two years old. I'm just wondering if those two lines are still growing and then, the second part of the question is Helen, from your prepared remarks, it sounds like the integration between Minn Kota and Humminbird is really cool and a lot of your new stuff is focused around integrating those two products, and they've been so well together. So wondering in your product pipeline is sort of early stages, if there's a lot more coming over the next few years as you look at that sort of integrated bundled packages, if you're going in that direction? Thank you.

David Johnson -- Vice President and Chief Financial Officer

So I'll take that first part of the question. We are seeing growth across the product lines. And Ulterra/Ultrex are no exception, so that they're still to be stalwarts. They are still stalwarts of our product line. So it's still good.

Helen Johnson-Leipold -- Chairman and Chief Executive Officer

And just to comment on your connectivity, we have -- I think the connectivity piece is truly new to world and great because it's connectivity that gives you more functionality, which is not available for the most part out there, but we also put heavy emphasis on innovating on the individual brands themselves. So we've got -- we don't -- we're not doing the all or none approach. But it's having both because Humminbird has had a lot of innovation on its specific technology as Minn Kota, but the connectivity is another piece of that. So it's really -- we're trying to keep all aspects moving forward. And the pipeline, they've got a very good range of product in their pipeline.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Helen Johnson-Leipold for any further remarks.

Helen Johnson-Leipold -- Chairman and Chief Executive Officer

Thanks again for joining us. I hope everybody has a great day.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a wonderful day.

Duration: 23 minutes

Call participants:

Patricia Penman -- Vice President of Marketing Services & Global Communication

Helen Johnson-Leipold -- Chairman and Chief Executive Officer

David Johnson -- Vice President and Chief Financial Officer

George Kelly -- Imperial Capital -- Analyst

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

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