Winnebago Industries Inc WGO
Q2 2013 Earnings Call Transcript
Transcript Call Date 03/28/2013

Operator: Good day ladies and gentlemen, and welcome to the Second Quarter 2013 Winnebago Earnings Conference Call. My name is Gavril, and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session.

I would now like to turn the conference over to your host for today, Ms. Sheila Davis, PR and IR Manager, for Winnebago Industries. Please proceed.

Sheila Davis - IR: Thank you. Good morning, and welcome to Winnebago Industries' conference call to review the Company's results for the second quarter of fiscal 2013, ended March 2, 2013. Conducting the call today are Randy Potts, Chairman of the Board, Chief Executive Officer, and President; and Sarah Nielsen, Vice President, Chief Financial Officer.

I trust each of you have received a copy of the news release with our earnings results this morning. This call is being broadcast live on our website at winnebagoind.com. A replay of the call will be available on our website at approximately 11 o'clock Central Time today. If you have any questions about accessing any of this information, please call our Investor Relations department at 641-585-6803 following the conference call.

Before we start, it's my duty to inform you this presentation may contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are inherently uncertain. A number of factors could cause actual results to differ materially from these statements. These factors are identified in our filings with the Securities and Exchange Commission over the last 12 months, copies of which are available from the SEC or from the Company upon request.

I'll now turn the call over to Randy Potts. Randy?

Randy J. Potts - Chairman, CEO and President: Thank you Sheila. And good morning to everybody joining our conference call today. Sarah will provide the financial details in a moment, but first I'll make a few comments about our second quarter of fiscal 2013.

Simply put we had a great quarter. We had positive comparisons against our performance a year ago in nearly every aspect of our business. Our motorhome products are in demand. When compared to last year, wholesale motorhome shipments to dealers grew 42% during the quarter and 45% for the first six months. We have reason for even more optimism going forward. Our motorized sales order backlog has grown in the last five consecutive quarters. At the end of the second quarter, it had grown in every motorized category and was up a 174% year-over-year and 30% sequentially from the first quarter.

Our motorhome products are also in demand at the retail level, not only are industry retail volumes increasing, but Winnebago Industries is outpacing the industry. Retail sales for Winnebago Industries motorhomes increased 17% in the U.S. and Canada during calendar 2012 compared to the industry's increase of 7% for the same period in North America. Good traffic and retail sales have been reported during the RV show season held since the beginning of the year.

In addition, our dealer partners are reporting good traffic and sales in their lots. The demand is driven by multiple factors. First and foremost is our continued emphasis on the development of great new products. Additionally, we're encouraged by an improving economy with rising housing start, growing stock market, lower unemployment levels and attractive interest rate.

Operationally, though we do have a few opportunities in need of our attention. First is our inventory, which is higher than we've liked. Some of this is a result of the increased pace of business, but frankly, there are some execution issues as well. We're implementing several changes aimed at reducing inventories going forward and will continue doing so until we're satisfied with the level.

The second opportunity is our towables business unit, which has not been performing to our expectation. A year ago we were pleased with the direction that operation was heading, but the success wasn't sustained. We have made many changes there and we are as committed as ever to the success of this market, which holds a great deal of potential for us. The travel trailer and fifth wheel segment are significantly larger than the motorized market segment and we intend to be a larger presence in that market. Sarah will speak to that in more detail shortly.

We'll hold our Dealer Days event in Las Vegas in late April and plan to introduce a host of sensational new products to our dealer partners at that event. We've diligently been developing new products that we believe will excite the marketplace. We've historically been a leader in new product development and we're continuing to blaze the trail as we move into the next generation of products in both motorized and towable. Now, I'll turn it over to Sarah.

Sarah N. Nielsen - VP and CFO: Thank you, Randy. Before I cover the consolidated results, I wanted to specifically address the disappointing financial performance of our towables division. The subsidiary generated an operating loss of $850,000 in the second quarter. Thus we have lost $2.2 million for the first half of 2013. These results are obviously not acceptable, so I wanted to briefly cover the significant reasons for the losses and more importantly what we are doing to address them.

The most noteworthy issue that have negatively impacted towables' operating performance in the past few quarters were increased warranty expense due to escalating claim experience and unfavorable overhead variances due to lower production. In light of the increased warranty, wholesale demand was negatively impacted as well resulting in lower revenues. We also incurred one-time employee separation cost in the second quarter.

To address the continued underperformance of this business, we made several management changes including naming a new Towables President in January to lead the turnaround efforts of the operations. He has begun to take corrective actions in his new roles notably in February, he temporarily idled one of the two assembly plants or production issues had been pervasive to have better aligned with current demand levels to prevent further warranty issues. Our intention is to reopen the plant once the appropriate employee training has occurred and the capacity is needed.

Another change that was made that I want to highlight relates to warranty and service. We have now centralized the leadership responsibility of towables, warranty and service to the company's headquarters in Iowa to better leverage our industry-leading capabilities, processes and expertise of long time motorized resources.

Our goal in regards to towables based on all the efforts underway is to achieve breakeven results in the fourth fiscal quarter as Randy noted we are as committed as ever to the successive towables and this market posed a great deal of future growth potential for us.

Moving on to the consolidated results net revenue for the second quarter were $177.2 million approximately a 35% increase from the second quarter of fiscal 2012. The primary growth in revenue was a result of increased motorhome deliveries coupled with a 2.1% increase in selling price.

Not only did we achieve a significant growth on the topline we were able to convert the revenue expansion into $0.25 EPS improvement on a year-over-year basis.

The impressive growth in earnings is primarily attributable to our innovative products. The new motorized models that were introduced approximately one year ago, have been well received by our dealers and more importantly, the retail customer. The innovative products that we launched last spring helped generate the improved market share that we achieved in calendar 2012.

The improved volume was not a result of increased sales incentives, in fact on a quarter-over-quarter basis our sales incentive dropped meaningfully, when measured as a percentage of revenue. Increased volumes also allowed us to continue to leverage the cost structure within our business model on multiple lines. Our gross margins increased from 5.2% in the second quarter a year ago to 9.7% in the second quarter of fiscal 2013.

In addition, our SG&A expense has dropped from 6.1% to 4.7%. The demand for our motorized products has not subsided as we continue to see strong growth in our backlog for this segment of our business. During the quarter, we continued to raise our production rate to accommodate this increased order position. Our daily production rate was up 24%, as compared to the rate in our first fiscal quarter.

The added production was achieved in part due to an increase in headcount, but also a result continued over time in most areas of the Company. The balance sheet remains healthy and in the position to support the recovering RV industry. During the quarter, our cash decreased by approximately $18 million, which is directly a result of our increased inventories. The majority of the inventory build was related to our in transit, finished good category, which was converted into receivables shortly after the quarter end. We will continue to manage our balance sheet in a prudent manner as we balanced the capital needs of the business with the opportunities to return cash to the shareholders.

I will now turn the call over to the operator for the question-and-answer portion of the call.

Transcript Call Date 03/28/2013

Operator: (Mark), Robert W. Baird.

Mark - Robert W. Baird: First question is on capacity. Sarah, what was capacity utilization in the quarter and what would you the biggest capacity constraints today and how much ability is there to continue to add capacity both in terms of people and production space?

Sarah N. Nielsen - VP and CFO: Well, from the standpoint of our physical capacity, the lines are completely still than running. And as I mentioned, we've been hiring. Unemployment is around 5% in the state of Iowa, so it is lower than the national level that we have on a consistent basis on Monday's, weather permitting, and starting 20 plus people a week. We have attrition to consider as well as that incremental increase to plan for. So, our headcount at this juncture is a little bit under where we need to, but we've been keeping up for the most part. When we look at capacity and maybe they are more traditional sense that we've talked about it on a historical what our physical plant can do, measured in our Forest City campus, that measurement will be in 63% range. We have an opportunity to run our tow lines on the assembly areas faster, but all that takes a lot of planning and the people that support it to be trained as a balancing act that we manage day-to-day. So, we're working through expanding the run rate and that, to Randy's point, did result in an increased inventory levels inside over the last few quarters but a lot of efforts are underway to address the issues that have come up on running at a faster rate.

Mark - Robert W. Baird: I know chassis supply has been an issue so far this year where do things stand on that today?

Randy J. Potts - Chairman, CEO and President: The Ford gas frame chassis continue to be a constraint for the entire industry. And I think will be a constraint for the foreseeable future just based on what we anticipate the demand to be going forward versus what Ford says they'll be able to supply.

Mark - Robert W. Baird: Then a bigger picture question on margin, I think if you look at the prior cycle EBIT margins they average nearly 10% I think peaking close to 11%, I know mix is a little bit different today and you've entered towables, but is there anything else structurally different today that would curb the ability to achieve that 8% to 10% EBIT margin as the motorized market continues to grow towards the prerecession levels?

Sarah N. Nielsen - VP and CFO: I think the biggest factor is going to be the margin profile of new products introduced. We are more competitive in entering statements that we haven't been as notable a factor in the recession timeframe. So the added volume that brings provides leverage to our cost structure, but the margin profile is at the low end for both fees and Class A gas and Class A diesel, more competitive. So that I think introduces a new dynamic, but offsetting that would be new product introductions, if you have something that the retail consumer wants. You have the opportunity to set the pricing there for that, which we've had great experience on some product categories in that range, but probably most notably I would say is the evolution of new product categories or lower price point categories can put pressure on that potential.

Mark - Robert W. Baird: Just one last housekeeping. Sarah, could you give us ASP by category motorized and towable?

Sarah N. Nielsen - VP and CFO: Certainly, I'll go through the second quarter as compared to last year from Class A gas our average selling price was $91,987 as compared to $95,478 so that was actually down almost 4% that mix weighted as we are gaining market share in that lower price point Class A gas space. From a Class A diesel perspectives our average selling price is $209,634 as compared to $191,178 for that was up almost 10%. So, Class A in total the average was $137,818 versus $133,726 up 3%. On the Class C front though very similar to a year ago, we were at $74,411 versus $74,077 so it was up just 0.5%. A and C combined was a $113,873 as compared to $110,919 that's almost 3% up on the Class B segment $77,800 versus $75,338 that was up a little over 3% all in combined ASP for the quarter was $111,458 versus $109,177 up 2.1%. On the towable side, our travel trailer ASP down based on mix to $19,684 versus $22,051. The smaller price points, great example would be the Minnie Winnie's, or the Minnie's on that side of the fence, the very, very small travel trailers has created new opportunities for us, but are lowering that price point. On the fifth wheels side it was $30,490 versus $29,942, so that was up a little under 2%. In total we were at $21,853 versus $25,673, down almost 15% notably influenced by more travel trailers sold as opposed to fifth wheels compared to last year.

Operator: Kathryn Thompson, Thompson Research Group.

Kathryn Thompson - Thompson Research Group: On the gross margin improvements, we know that last year's Q2 had greater motorized discounting, so that would be a tailwind for you guys. How much of the margin was impacted by volume versus lower discounting versus any other factor?

Sarah N. Nielsen - VP and CFO: In relation to a year ago, and it had a dynamic of maybe, let's say, 20% of our margin on expansion was due to fewer discounts incentives, it's about 90 basis points. The remaining upside was a function of the leverage in our model. A good piece of that was on the fixed side, but we also saw improvement on the variable cost side. So, it's kind of an 80-20 dynamic with 80% really flying though due to the – on expanded volumes and better efficiencies and 20% on the pricing side.

Kathryn Thompson - Thompson Research Group: Given that we've had another quarter where fairly sizable lead times, is it safe to say I think when we last spoke that lead times could be bumping up against 8 weeks are we still at that standpoint and how should we think about managing lead times as we go into the seasonal peak?

Randy J. Potts - Chairman, CEO and President: Well, not a lot has changed since we talked about this last time. Some products for instance are backlog of gas A, starts to get into that supply constraint issue. So naturally lead times are going to be dictated by our ability to get those chassis, those are some of our longest lead times. There is just so many variables capturing, it's really hard to probably put it in a context that spreads it across the whole business, because there is a lot of different factors there. Some products will go through our system, very quickly they are simpler, it just depends on a lot of things, but I guess it's probably fair to say that the discussion we held about it at the close of the first quarter is still appropriate.

Kathryn Thompson - Thompson Research Group: You gave some commentary on dealer inventories in the release which is always appreciated but, in your conversations with dealers balancing traffic and retail sales versus where their inventories now. Do they feel, if you can maybe give a little bit more color on do they feel that there is one to one ratio in terms of replacement or has that ratio even lower or even potentially higher? Can you talk just a little bit about that, that ratio of retail sale to wholesale order?

Randy J. Potts - Chairman, CEO and President: Well, we are confident that the dealer inventory levels are very appropriate to the market. I mean they've grown slightly. The market is growing. We're growing faster. So, most dealers well all dealers have turn rate that they are trying to achieve and that will vary depending on dealer to dealer and their lender and what kind of products they carry. But the turn rates are improving based on our calculations. So, we don't really look at it so much as a one-to-one, because there is some seasonality to it inventories build probably slightly over winter and then pickup in the spring. So, there is dynamics there that it's kind of hard to look at it as a one-to-one relationship, we tend to just look at as are the turns appropriate, and I think they're absolutely the turn rates are – I think everybody's comfortable with them.

Operator: Morris Ajzenman, Griffin Securities.

Morris Ajzenman - Griffin Securities: In the press release you stated that at the end of the verbiage there that we believe the motorized RV markets will continue to grow toward prerecession levels. Can you give us little more color 2006-2007 revenues were $864 million, $870 million via 2004, 2005 it was north of $1.1 billion and just under $1 billion. Where exactly are you looking towards pre-recession levels as far as returning the RV industry returning to, which of those years?

Randy J. Potts - Chairman, CEO and President: Well, we tend to look at pre-recession levels more as an average of years leading up to the recession. They did absolutely spiked just prior to the recession, but the industry average for over a quarter of a century prior to the recession was around 60,000 units a year in all of North America. So that's what we tend to look at as an average. I mean, when we talk about things getting to normal, I guess that's the best I could describe it. Internally when we talk about, when things are normal we are looking at a market that somewhere in that 55,000 to 60,000 unit a year market.

Morris Ajzenman - Griffin Securities: That's helpful. But let me take another stab at this, pre-recession levels. I think capacity utilization, the answer was 63%. I am not exactly sure, but if you are able to run optimal, and throughput was whatever that level is to be optimal, what sort of revenue run rate can the company generate with current capacity, current productivity et cetera, et cetera. What could you optimally get to?

Sarah N. Nielsen - VP and CFO: Well, we did speak about the motorized side and we look at – there's a lot of variables I guess on caveat. If we had the labor, unlimited access to the labor and could run the facility with the physical ability that we believe we do have here, we probably have an upside of let's say in that 10,000 to 11,000 unit range and if I diffuse the ASP that we reported on here on the motorized revenue alone that’s over $1.1 billion of revenues before we consider any of the other revenue streams, but the labor elements at that level, that’s a lot of people that we would need to be hiring and that’s something that we are navigating successfully and something that we continue to plan for on a perspective basis. I'll turn we could be looking at production in other locations to tap into other labor markets which we have done that in the past as well. But if that provides you a little bit of insight to your question, I'll leave it there.

Morris Ajzenman - Griffin Securities: Let me just ask one last unrelated question inventories exiting this past quarter, $124 million you basically stated it was hiding, like to, there will be some execution issues you have to get your hands around, assuming that had been under control, where you'd like it, where should have inventories been exiting the quarter?

Randy J. Potts - Chairman, CEO and President: We'd like to say it's about 10% higher than it should have been.

Operator: David Whiston, Morningstar.

David Whiston - Morningstar: I guess first question for Sarah on capacity, is normal straight time, is that two shifts and then over time is three shifts or over time mean two shifts?

Sarah N. Nielsen - VP and CFO: It depends on what part of the business we're looking at, because we have both dynamics on the assembly areas we want to run a one shift with over time, but some of the support facilities we have second and the third shift areas. So, we have a combination of both.

David Whiston - Morningstar: On the cash trends, it sounds like you are expecting a normal second half reversal from a working capital benefit. So, do you think you are going to have to draw on your credit line this year, given where cash is today?

Sarah N. Nielsen - VP and CFO: From the standpoint of looking at the back half of the year and what we are planning for from an inventory perspective and we definitely touched upon that. We don't anticipate having to utilize a credit facility, but the whole purpose of having that in place is if there is opportunities or if things play out in different manner then we are modeling, we have that flexibility.

David Whiston - Morningstar: And the share buyback pace slowed this quarter with the stock running. Is there – I mean can you comment at all on what you think you want to do with that in the second half of the fiscal year and is there a target price you would resume or stop them?

Sarah N. Nielsen - VP and CFO: We continually reevaluate in regards to laying out a grid to repurchase from and that's going to be our process on a prospective basis. So, we are going to continue to balance the use of our cash for internal purposes be it capital or investing in our facilities, needs of the business today versus using the cash to buy back stock. But it's all based on looking in a longer-term and making some judgments in regards to that, and executing accordingly.

David Whiston - Morningstar: Finally, any update on the M&A pipeline?

Randy J. Potts - Chairman, CEO and President: No, no new news. We're still very busy working the opportunities we have at hand. Sarah talked about towables. We have mentioned our transit bus project a time or two and we're still working that very hard. We think we're sure we'll have more to talk about there in the coming weeks as far as our distribution plans and what not.

David Whiston - Morningstar: Do you think towables would be helped by another deal?

Randy J. Potts - Chairman, CEO and President: Pardon me?

David Whiston - Morningstar: Do you think the towable business results could get helped out by another deal or would that be a distraction right now?

Randy J. Potts - Chairman, CEO and President: Well, it depends on what the deal was. So, yeah, that would be hard to answer.

Operator: Barry Vogel, Barry Vogel & Associates.

Barry Vogel - Barry Vogel & Associates: First question for you Randy. How would you – first of all, as far as your retails in the second quarter for A's and C's do you have an idea of what the change was in the second quarter versus last year?

Sarah N. Nielsen - VP and CFO: Yes, our retail growth inside of our second quarter was 23.5%.

Barry Vogel - Barry Vogel & Associates: Is that for both A's and C's combined?

Sarah N. Nielsen - VP and CFO: That was actually A, B and C, all of our motorized product combined.

Barry Vogel - Barry Vogel & Associates: Randy, how would you characterize current business condition – characterize business conditions in the towables business as well as motorized?

Randy J. Potts - Chairman, CEO and President: Well, yeah I'll start with towables. Barry, we are very small there, we are around 1% of the market. I do see and I'll editorialize, I do see the really big players there talking a lot about margin pressures competing against each other and that tells me that to be profitable in that business, you need to have a product that isn’t just selling on price. And that's always been our goal to bring that Winnebago brand name into the towable business with a product offering that's unique with the name that, that brings to the market things that people would expect to come with the Winnebago brand name. So it's kind of a two-staged answer there. I think in the big picture where people are selling more of a commodity based product and they are selling in price. They are having a hard time maintaining margins. You need to be, you need to differentiate yourself from that businesses model and that’s probably not if we are going to get you 30% of the market but that’s okay. In that towable market that is so big, I think maybe a bigger opportunity is to be, and this has always been the strategy, you know we started with a very small operation and you probably have better margin opportunity to be on the smaller side and have a distinct product that’s in demand, on the motorized side we are as I said in the opening statements and you see in the stats. We are outperforming the market. The market is lifting some. The market was up 7%, roughly 7% in calendar 2012 and we're up over double that. And that really speaks to the work we've been doing here and the way we are changing the business. Naturally, we are going to take what the market gives us, but we are not going to stop there. We have to do more than that. So, again, where you see any competitor talking about margin pressures in the motorized part, it's because they're not differentiating themselves. They're not giving the market something other than price to go to their product, and that's what we need to stay focused on and is building our brand, building the differences between us and the market and growing.

Barry Vogel - Barry Vogel & Associates: Have you started to produce Winnebago brand in towables?

Randy J. Potts - Chairman, CEO and President: Absolutely. That's actually been very successful. The Winnebago brand out of Middlebury is probably 80% of what's being produced is that fair Sarah, currently. So, many parts of that strategy have worked very well. As I said a quarter ago, the parts that didn't work are the details that we need to get shorted up and get the thing back on track. And we're working on that. We'll get there.

Barry Vogel - Barry Vogel & Associates: Can you tell us who the new president is and what his background is?

Randy J. Potts - Chairman, CEO and President: Absolutely, his name is Johnny Hernandez, and Johnny has a long background in the RV industry. He is worked for many of our competitor's very seasoned individual in the industry. He ran his own business, his own towable operation for a while. Johnny's got – Johnny is a team player. He understands the big picture and he is working very closely with us on all the things that Sarah talked about.

Barry Vogel - Barry Vogel & Associates: I have a couple of questions for Sarah. What's the situation with the ARS is?

Sarah N. Nielsen - VP and CFO: There hasn't been much activity. I mean, we see every six months small redemptions and all those redemptions have been at par. So, so far not a lot of movements this fiscal year, so we're patiently waiting because we don't have the need to access that cash immediately. There is a secondary market if we would choose to sell it in that matter and there's always interest and that's coughed up a bit, but not much to say on that topic at this point.

Barry Vogel - Barry Vogel & Associates: Could you tell us what the effective tax rate will be for the full year and what are your going to be your capital expenditures and depreciation and amortization this year?

Sarah N. Nielsen - VP and CFO: Yeah, from a tax rate standpoint we're modeling about 30% for the year in that range. When you look at the CapEx, we're planning in the $6 million range on a year-to-date basis for capital expenditures and slightly underneath that a little under $5 million from a depreciation perspective.

Barry Vogel - Barry Vogel & Associates: That's great. It's good to see you recover (indiscernible) and obviously the dealer inventories really have not gone up that much in terms of the motorized dealer inventories?

Randy J. Potts - Chairman, CEO and President: That's spot on. Barry.

Barry Vogel - Barry Vogel & Associates: So, I was surprised with only $2,392 units when they had been averaging for 13 straight quarters about $2,000 a quarter?

Randy J. Potts - Chairman, CEO and President: Yeah.

Barry Vogel - Barry Vogel & Associates: But really that’s not big lift and yet, things are really progressing nicely, so keep up the good work?

Randy J. Potts - Chairman, CEO and President: Thank you very much.

Operator: There are no further questions at this time I would now like to turn the call over to Mr. Randy Potts.

Randy J. Potts - Chairman, CEO and President: The motorhome market is growing, but still far below pre-recession levels. The opportunity for growth of the motorhome market coupled with our plans for growth within that market give us two reasons for optimism. We made great progress in the last year and everybody at Winnebago Industries is focused on continuing down that path of success. Thank you for joining our call this morning. Please note that the next conference call will also be two weeks later than normal, due to the 53-week year calendar we have this year. We look forward to talking to you again on Thursday June 28 when we report our results for the third quarter of fiscal 2013.

Operator: Ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect, have a great day.