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Johnson Outdoors Inc (NASDAQ:JOUT)
Q3 2020 Earnings Call
Jul 31, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, everyone, and welcome to the Johnson Outdoors' Third Quarter 2020 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.

[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, Marketing Services & Global Communications

Thank you. Good morning, and welcome to our discussion of Johnson Outdoors' fiscal 2020 third 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 any 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 P. Johnson-Leipold -- Chairman and Chief Executive Officer

Good morning, everyone. Thank you for joining us. I'll begin by reviewing financial results for the quarter and year-to-date, and discuss the current market dynamics and their effect on our brand's performance. I will then outline key priorities going forward. Then turn things over to Dave to share key financials, and then we'll take your questions.

Total company sales during the third quarter were $138.4 million with operating profit of $12.9 million and net income of $12.9 million or $1.27 per diluted share. On a year-to-date basis, net sales totaled $429.5 million with operating profit of $51.5 million and net income of $39.7 million or $3.93 per diluted share for the fiscal nine-month period. Results for the quarter and nine-month period all compared unfavorably to the prior year, reflecting the impact of the pandemic on our markets and businesses.

Typically the fiscal third quarter is the primary selling season for our warm weather outdoor recreation products. However, this is anything but a typical year. Government ordered stay-at-home mandates and a temporary suspension of operations at some locations stifled [Phonetic] sales and shipments in April in every business. In May and June, orders increased significantly in Fishing, Watercraft Recreation and Camping. At this time, we are working overtime to keep pace with continuing demand in all three of these businesses.

On the flip side, travel restrictions continue to limit accessibility to Diving, causing a sharp decline in that market overall. As mandates ease and waterways in camp grounds open up again, the great outdoors is providing people exactly the kind of experience they are eager for recreational activities that are rejuvenating to the mind, body and spirit and safe to enjoy. Our purpose to inspire more and more people to get out there and experience the awe of the great outdoors is more important than ever. And our employees' dedication to our mission to provide products that deliver a great outdoor experience has never been stronger.

Participation in Fishing has always been high. It's even higher now because on the water recreation sports, people [Indecipherable] right now. Innovation is our lifeblood and continue to play a key role in trying both seasoned anglers and new anglers to Johnson Outdoors for a great fishing experience. A great example is the new Old Town Sportsman line of fishing kayaks in watercraft recreation. The fishing kayak segment is one fastest growing in the paddle market, and we've taken innovation to a whole new level in this segment with this pioneering line of power, pedal and paddle fishing kayaks tailored to meet unique wants and needs of every kind of anglers.

The Sportsman AutoPilot, which utilizes a GPS-enabled Minn Kota trolling motor to propel, steer and anchor the kayak that you need Spot-Lock technology, grab the coveted Best in Show award at the 2020 ICAST, the world's most prestigious fishing show. This marks Johnson Outdoors' third ICAST Best in Show honor in the past five years. While the Sportsman line is generating a lot of excitement in the market and off to a great start, the overall appeal of on-the-water recreation this year is also giving a big lift to sales across our entire watercraft recreation portfolio. And we're leveraging our growing capabilities in digital marketing and data analytics to maximize this opportunity. As a result, Watercraft posted higher sales and profit during the third quarter despite COVID-19 business interruption.

In Fishing, we are continuing to build on a powerful legacy of innovation that transformed Minn Kota and Hummingbird into the market-leading brands they are today. The new MEGA 360 Imaging from Humminbird is the first and only sonar technology that sweeps 125 feet around the boat, providing a full 360-degree view with unmatched detail and coverage. While other sonars function only when the boat is moving, our patented 360 technology suites continuously even when the boat is at a standstill. MEGA 360 is also enabled with our unique One-Boat Network capability, which enhances the performance of both the Minn Kota trolling motor and Humminbird fish finder to give anglers effortless command of their boat. Shipments of MEGA 360 began early this year and are on track to be year one expectations established prior to the pandemic.

Johnson Outdoors' fishing innovation captured two more awards at the 2020 ICAST event. First, the new Humminbird CoastMaster charting technology, which now [Phonetic] best electronics for our ninth win in this category in the past 10 years. CoastMaster provides more information, more detail, greater clarity in customizable chart views to enable saltwater anglers to identify and navigate the most productive fishing spots. And second, the new Minn Kota Raptor Shallow Water Anchor, which took best boating accessory honors to industry-first technologies. Auto-Bottom Mode, which detects bottom density to determine the right anchoring force and active anchoring, which continuously monitors anchoring force and adjust automatically for stable bottom pinning. Fishing got off to a very strong start this year. And since April, sales have continued to surge in virtually every category and channel. We're working hard to end the year as strong as we started.

Camping markets have begun to rebound as more and more campgrounds and parks reopen. Both Eureka and Jetboil are benefiting from the heightened interest in Camping of all sorts from backyard to backcountry. Cooking is an essential element of great camping experience in Jetboil, the world's number one brand of cooking systems, is poised for continued growth when camping markets fully recover.

In Diving, our near-term focus is on growing share in a down market and to better position SCUBAPRO for growth in the post-pandemic global market recovery. SCUBAPRO is the world's most trusted dive brand, and we will be there for divers once the market recovers. Near-term, the biggest challenge we face is keeping pace with strong demand in Watercraft, Fishing and Camping as we continue to operate under strict procedures and protocol to keep our employees safe and to mitigate the spread of COVID-19.

Going forward, our goal is to maintain the positive momentum of our Fishing, Watercraft Recreation and Camping brands through the end of the year by leveraging the increased interest in our outdoor activities to the fullest. Longer-term, we remain committed to creating value by building vibrant thriving businesses with the capability and capacity to deliver sustained profitable growth.

Now, I'll turn the call over to Dave Johnson, our CFO, to review key financial highlights. Dave?

David W. Johnson -- Vice President and Chief Financial Officer

Thank you, Helen. As Helen said, this is a typical year. We came out of the gate strong with record high first quarter results poised for growth in every business. And then, one by one every business begin to feel the impact from COVID-19. Now, at this time in prior years, sales and production would be slowing down in anticipation of the season coming to an end. But this year, demand and free businesses remain high, production is in full swing and if the weather cooperates customers are preparing for the season to have a longer tail. While we're pulling out all those dots in the year strong, right now there are too many unknowns to give us a clear picture on how the full year will shake out.

For the quarter, gross margins remained strong at 45.2%, equal to last year, due to favorable product mix and lower tariff costs offsetting lower absorption resulting from the lower volume. Operating expense was down about $2 million in the quarter, driven by a $5 million reduction in volume-related expenses and a $2 million decline in advertising and promotion spending. Bad debt expense was up about $800,000 due to a customer bankruptcy. Deferred compensation expenses were up $2.1 million due to valuation adjustments, and were 100% offset in other income. R&D costs were also up $1.6 million due primarily to an acceleration of amortization of intangibles in the Diving business.

On a fiscal year-to-date basis, our effective tax rate of 24.4% was comparable to last year. We're keeping a very close eye on working capital in this challenging business environment. On a year-to-date basis, working capital was up $4.2 million as decline in accounts payable more than offset a decrease in inventory. And despite the business interruptions this quarter, we generated about $50 million in cash flow.

The fundamentals of our business are strong, market-leading brands with outstanding innovation along with a debt-free balance sheet and healthy cash position. All are critical to enabling us to work through the challenges ahead and emerge a stronger company better positioned for future success and continuing to drive value for our shareholders.

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Anthony Lebiedzinski with Sidoti & Company.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Yes, good morning, and thank you for taking the questions. So, I just wanted to see if you guys can give me -- give us a better sense as to the magnitude of the timing shift for shipments, especially Fishing and Camping, if we could just start with that, that will be great.

Helen P. Johnson-Leipold -- Chairman and Chief Executive Officer

Well, given the pandemic and the fact that we shut down, and a lot of the retailers shut down for some time frame, it certainly has shifted because our key month is usually April. And so, we can see that everything is shifted, but predicting whether it's going to continue or how long that's going to go is really hard to say. So, all we can say is that right now demand is very strong, and we're working hard to keep up with it. And obviously it would be great if they continued the season, kept going longer than normal, but hard to predict at this time.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Sure, yeah. I understand that. Certainly there is a lot of unknowns with COVID. So, as you're seeing the strong demand beginning in May, just curious about the relationship between volume and pricing that you have seen. Obviously there is a great interest in people getting outdoors, but with the economy with high unemployment, just curious whether the people are willing to trade up to more expensive products or are they trading down? I'm just curious to get some color on that.

Helen P. Johnson-Leipold -- Chairman and Chief Executive Officer

I think what we're seeing is, interest is so high in outdoors that across the board, our consumers are buying our products and we haven't seen the impact of that as of now, and the innovation we have seems to be driving interest. So, right now, things are going as we would hope.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Okay. And then, as far as any way for you guys to distinguish as far as the benefit from the stimulus checks that the government obviously has been very active, and it's trying to stimulate the economy. And do you think that's been much of a benefit or do you think your customer -- the end consumer is really not affected by that?

Helen P. Johnson-Leipold -- Chairman and Chief Executive Officer

Well, that's hard to say. But certainly our demand is still there, and there is still -- I think, the desire to get outdoors has put a significant value on outdoor activity, and they are willing to spend. And certainly a stimulus check contributes to that. But knowing how much it has is really, that's something we don't know.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Okay, understood. And then -- and as far as with COVID, how should we think about the costs related to PPE or sanitation products whether -- as far as your productivity. I know you guys are working over time to keep up with the demand. But as far as your ability to maintain proper social distancing and so on, is that an issue that we should think about?

Helen P. Johnson-Leipold -- Chairman and Chief Executive Officer

Yeah. We've -- I mean, we've had some incremental costs due to COVID. It hasn't been material. But to your point two, we're dealing with capacity basically with social distancing and protocols we're putting in place with our factories. So that's a bit of a challenge. I think we are overcoming that each month and figuring it out. So, yeah, we'll have to see how that plays out going into next season. But right now, as we said, we're just -- we're hoping to keep up with demand right now.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. All right. And then, two more questions from me. And then, so as far as the bad debt expense, I think it was $800,000 exactly [Phonetic] right?

David W. Johnson -- Vice President and Chief Financial Officer

Yes.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Okay. Do you foresee anything else or is that you accrue already kind of ahead of what you think -- was this an actual one or is it more of a project kind of accrual?

David W. Johnson -- Vice President and Chief Financial Officer

Yeah. It's an actual bankruptcy with a retailer. We accrue to what we think is reasonable. Having said that, I think we'll have to see how this plays out with our retailer base. It just kind of depends on how the economy goes. I think everyone is kind of hanging in there right now. We're in pretty good shape really with our retailers, but a lot to see how it plays out over kind of the medium to long-term.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it, OK. And then, last question from me. So, the tax rate was a little bit light versus prior quarters. Just wondering what that was and how should we think about the tax rate?

David W. Johnson -- Vice President and Chief Financial Officer

Yeah. I mean, it varies in the quarter pretty significantly. But I think the year-to-date one is more of a fair comparison, which is comparable to last year. We took some benefit from some tax positions we had reserves. So, as we filed our paperwork this year, we were able to take some tax positions off the table. So -- but I think, year-to-date is probably a more fair comparison.

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Got it. Okay. All right. Well, thank you, and best of luck.

Helen P. Johnson-Leipold -- Chairman and Chief Executive Officer

Thank you.

David W. Johnson -- Vice President and Chief Financial Officer

Thanks, Anthony.

Operator

[Operator Instructions] Your next question is from Will Hamilton with Manatuck Hill.

Will Hamilton -- Manatuck Hill -- Analyst

Hey, good morning. Thanks for taking my question. I was just wondering, drill down on the end market demand you're seeing. Could you give us any color as to the retail sales or sell-through that you're seeing, particularly in Fishing, Camping and Watercraft?

Helen P. Johnson-Leipold -- Chairman and Chief Executive Officer

Well, what we can say is that we have significant demand. And so, our feeling is that the retailers are light on inventory, because they got orders in that we are trying to keep up with. So, I think the sell-through is pretty good. And I think it's more that there is more demand than there is supply at this point.

Will Hamilton -- Manatuck Hill -- Analyst

Okay. But you can't provide any specifics of you're talking like up 20% or maybe can you give us a sense of what kind of order growth that you experienced maybe in June or here in July?

Helen P. Johnson-Leipold -- Chairman and Chief Executive Officer

Well, all I can say is that the demand is continuing in that. So, at this point, it's a good thing. But it was -- through the quarter, it was very good, and obviously our projection starting the quarter were not good, given what was going on. So we're very -- feeling very good about the growth in demand. But we just got to keep up with it now.

Will Hamilton -- Manatuck Hill -- Analyst

Okay. It would seem like based on that demand and inventories being as low, it's what we are hearing from retailers that you could experience. If the productivity is at the plant, what you would like double-digit growth in the fourth quarter, which might bring the year flat year-over-year on a revenue standpoint. Is that unreasonable to think about it or is that reasonable?

David W. Johnson -- Vice President and Chief Financial Officer

I mean, right now, demand is strong. So, I mean, that's as far as we're going to go well on that. I mean, I think, we just kind of have to read the tea leaves.

Will Hamilton -- Manatuck Hill -- Analyst

Right. Okay. I understand. I mean, just trying to get us a little bit more color as it relates to the current interest. Just one last one then is, the Watercraft business obviously was up 18%, which you had some new products there. But it seemed a little bit less disrupted by the COVID relative to Fishing and Camping and Hiking. So, could you just talk a little bit about that difference in the performance?

Helen P. Johnson-Leipold -- Chairman and Chief Executive Officer

Well, we pretty -- we feel that there is good demand across the board. I think the difference with Fishing and the Watercraft is that Camping was a little delayed because the parks were not open right away. And so that waterways were more open and accessible. And I do think in our [Indecipherable] product launch at both was, certainly it's Watercraft and Fishing, which was our Sportsman line and -- but also our base business was up as well. So, I think it's just reflecting that people want to get outside fresh air, what's accessible, what's easy, Fishing, Watercraft, they're safe. We've got automatic social distancing. So, all those things we have going for us. And I think Camping was just a function of when the camp crowd start opening up and people can start getting out there. So, I think the demand is good across the board. There is a little bit of differences, but I think fishing, water, camping, backyard, all those things are activities people are looking to do. So, It's all good, all healthy. Good stuff.

Will Hamilton -- Manatuck Hill -- Analyst

Thank you.

Operator

And there are no further questions at this time, I would like to turn the call back over to Ms. Helen Johnson-Leipold for closing comments.

Helen P. Johnson-Leipold -- Chairman and Chief Executive Officer

Well, thanks everybody for joining us and stay safe and stay healthy. Take care.

Operator

[Operator Closing Remarks]

Duration: 23 minutes

Call participants:

Patricia Penman -- Vice President, Marketing Services & Global Communications

Helen P. Johnson-Leipold -- Chairman and Chief Executive Officer

David W. Johnson -- Vice President and Chief Financial Officer

Anthony Lebiedzinski -- Sidoti & Company -- Analyst

Will Hamilton -- Manatuck Hill -- Analyst

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