Hello, everyone, and welcome to Johnson Outdoors Third Quarter 2022 Earning 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. This call is being recorded. Your participation implies consent to our recording the 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 2022 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-Leipold..

Thanks Pat. Good morning, everyone, and thank you for joining us. I'll begin with an overview on the quarter and the year, 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.

Sales in our third fiscal quarter ending July 1, 2022 declined 5% compared to the prior year's record high third quarter. For the year-to-date period, total company sales declined 7% over last year's fiscal nine-month period. Compared to the 2019 preprint pandemic year-to-date period, our net sales are up significantly.

Total company operating profit of $23.8 million for the third quarter was down versus $38.1 million in the prior year's record setting quarter. Year-to-date operating profit also declined compared to the prior fiscal nine-month period.

The decline is due to lower sales volumes and a decrease in gross margin driven by significant cost increases particularly in our Fishing business. We have implemented price increases across our product lines and we are focused on fulfilling demand and reducing our expenses where possible.

We are seeing markets begin to moderate from the pandemic-driven demand of the past two seasons. However, solid demand from our trade partners continues while global supply chain disruptions persist.

We have strategically invested in building inventory so we can complete products as parts come in and our team has been working hard to maximize product build and fulfill orders to customers.

In Fishing, while we have some supply chain challenges, we are not wavering from our focus on innovation to give anglers the best fishing experience as possible. An important part of that focus is looking for new ways that Humminbird and Minn Kota products can connect and work together to deliver new benefits to our consumers.

Our most recent innovation in Humminbird, the exciting new MEGA Live Imaging TargetLock sonar technology, used in conjunction with Minn Kota Ultrex trolling motor enables full trolling motor control while independently steering and locking MEGA Live on a specific target. This makes it easier for anglers to stay on point and catch more fish.

MEGA Live Imaging TargetLock captured Best in Category Award for Electronics at this year’s ICAST, the world’s most prestigious fishing show marking our 11th award in this category in the past 12 years. In Watercraft Recreation, we continue to have momentum in a moderating market driven by the innovation of Old Town Sportsman line.

Part of the Sportsman line is the wildly versatile lightweight Sportsman Discovery Solo 119, a solo canoe use a paddles like a kayak and is great for fishing, waterfowl hunting and enjoying lakes and slower moving rivers. The Discovery Solo 119 was recently awarded Field & Stream's best overall fishing canoe for 2022.

The Sportsman line offers a Watercraft for everyone looking to enjoy a great day on the water. In camping while the market has cooled compared to the high demand of last year's unprecedented season, participation remains high and we continue to see double-digit growth.

Demand for Eureka! consumer tents and stoves is strong as well and in Jetboil, consumers remain excited about the innovative superlight Stash Stove that is in its second year on the market. Finally, in diving, as more consumers resume travel during the quarter, dive markets are experiencing recovery.

The hard work we've put in promoting and supporting local diving enhancing our global digital presence and our sustained innovation has contributed to our growth. Recently, SCUBAPRO launched the brand new powerful Seawing Supernova Fin.

The Supernova is the go-to fin for avid recreational and professional divers seeking maximum speed, power and kicking control in all diving conditions. The Seawing Supernova was also the winner of the prestigious, internationally-recognized Red Dot Award for product design.

Our continued innovation efforts will ensure SCUBAPRO's position as the most trusted dive brand in the world. In summary, while we face supply chain disruptions and long lead times, we remain laser focused on working hard to fulfill orders from our loyal customers who seek out our award-winning products.

Obviously, we are monitoring the uncertain economic conditions and as always, we take the long view at Johnson Outdoors, working hard to position our brands and our businesses for growth well beyond the next quarter or next year. Now I'll turn the call over to Dave for a review of the financial highlights..

Thank you, Helen. Good morning, everyone. I wanted to highlight a few items from the quarter and the year. As Helen mentioned, sales declined for the quarter compared to last year's record high third quarter, but sales are significantly higher than the pre-pandemic June 2019 quarter.

We continue to have a strong order position, but our ability to meet demand is being impacted by ongoing supply chain issues, especially in our Fishing business. Now to help mitigate supply chain disruptions, we’ve been building significantly higher inventory levels for several quarters. Total inventory is up $120 million compared to last year.

The increase is primarily due to increased raw material and other component purchases in many instances at higher cost in an effort to meet increased demands for products. We continue to work closely with all of our vendors and planning for alternate sources of supply for critical components where feasible.

Moving forward, we will continue to manage our inventory position actively, balancing sales demands with maintaining a solid balance sheet. The quarter's gross margin of 36.1% is down 9.6 points from last year's third quarter. We continue to experience significant increases in cost of materials.

While we've implemented price increases across product lines, they were not enough to offset the negative impact of component cost increases.

Operating expenses for the quarter decreased $9.7 million versus the prior year third quarter, primarily due to lower sales volume driven expenses, as well as lower variable and deferred compensation expense between quarters.

Unfavorable market conditions on the company's deferred compensation plan assets resulted in approximately $5.3 million of lower deferred compensation expense in the current year quarter versus last year's quarter. This impact is entirely offset by a loss in other income expense.

The quarter's effective tax rate was 26.8% and was 25.9% for the nine-month period. We expect the full-year tax rate to be in the mid-20s. Net income for the quarter was $14.1 million down from the prior year’s quarter of $28.8 million.

In closing, we continue to have no debt on our balance sheet and our cash position enabled us to invest in opportunities to strengthen the business. We remain confident in our ability to deliver long-term value and consistently payout cash dividends to our shareholders. Now I'll turn the call over to the operator for the Q&A session.

Operator?.

Thank you. And our first question comes from the line of Anthony Lebiedzinski with Sidoti. Your line is open. Please go ahead..

Yes. Good morning, and thank you for taking the questions. So first, I just wanted to get a more color about the strong orders.

Are you seeing that across the board and whether it's – in each of your segments? And then also just wanted to get more color as far as your backlog is concerned and what's your lead times are now compared to the last quarter?.

We are seeing continued strong demand from our customers across the board. We do see some of the markets moderating, but our customer orders are still strong. Have lead times changed from last quarter. I think that's not – I don't think that's a timeframe. Have they increased from the beginning of the pandemic? Absolutely.

And that obviously causes challenges when it comes to forecasting, but the inventory levels. Our orders continue to be solid and we feel we're in a good position..

Okay. Got it. Thanks for that. And then it sounds like you're not really seeing much in terms of order cancellations.

Is that correct?.

Yes. We have not seen order cancels and in fact it's just a pretty solid position as far as orders are concerned..

Got it. Okay.

And then in terms of the price increases, can you review what you did in the quarter and whether you plan to take additional price increases and just overall, how should we think about gross margins?.

Yes. So we took price increases at the beginning of our fiscal year in October. Moderate price increases, I would say in hindsight. We took another slog of increases in April – the beginning of April. But as you see, I mean, it's just not enough to offset the unfavorable variance from our cost of goods sold. So we'll continue to look at that.

I think it's something that remains an arrow in our quiver going forward, and we won't be afraid to continue to price appropriately, but we just have to balance the accessibility of the products with the need to get the gross margin back to where it needs to be..

Got it.

So is it fair to assume that near-term gross margins will remain under pressure?.

Yes. I wouldn't expect us to get back to historic gross margins soon. But we'll continue to look at that and make sure that we've got a better supply chain situation as well as look at the pricing strategies that we have..

Got it. Okay.

And then given everything that's going on, when would it be reasonable to assume a decrease in your inventory, which looks like it's a record high levels now?.

Yes. The supply chain has to get back to some semblance of normality or normalcy, if you will. So we're actively managing that. I think as we go into the next season, we're looking to try to get a little bit more balance in our inventory, but we got to get the industry supply chains to get back to more normal levels..

And we are focused on meeting the orders of our customers. So when components are available, we have invested, so that we are ready and we're waiting for one or two key parts, but hopefully our focus on fulfilling orders is the right priority at this time..

Understood. Okay. And then a couple of other questions, if I may here. So you have increased your CapEx. How should we think about that? I mean, you only have one quarter left in your fiscal year. It's just overall ballpark estimate if you have that for the year.

And then kind of going forward, what would you say would be reasonable to assume for CapEx for next year?.

Yes. We invested in capacity this year. So that's reflected in the year-to-date CapEx number. We'll still have a little bit more investment in the fourth quarter, so we'll see some increase for the year versus last year in CapEx, but I expect that to come back down to 2021 levels for next year. If that makes any sense.

So I think this year was kind of an unusual year..

Yes. That does make sense, yes, absolutely. And then as far as your capital allocation, what are your thoughts as far as dividend increases, which you have done a good job of raising those over time.

And it's been a while since you've done any acquisitions, but would love to hear any updated thoughts you may have on that?.

Yes. I mean, strategy remains the same, which is to utilize our capital for growth, invest in the business both internally as well as looking at acquisitions, we remain still very active in that regard. The dividend is important for us too. I mean, we are paying a good solid regular dividend is important in our capital strategy.

And we'll look to see if we need to increase that going into next year. And we continue to look at other alternatives too, but those are kind of the two main aspects..

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

Thank you..

Thank you. And I'm showing no further questions. And I would like to turn the conference back over to Helen Johnson-Leipold for any further remarks..

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

This concludes today's conference call. Thank you for participating. You may now disconnect..