Winnebago Industries Inc (WGO) 2003 Q3 法說會逐字稿

Good day and welcome, everyone to the Winnebago Industries third quarter 2003 earnings results conference call. This call is being recorded.

With us today is the Chairman, President and Chief Executive Officer, Mr. Bruce Hertzke and Senior Vice President and Chief Financial Officer, Mr. Ed Barker. At this time, for opening remarks and introductions, I'd to turn the call over to the Public Relations and Investor Relations Manager, Miss Sheila Davis. Please go ahead, ma'am.

Thank you, Lisa.

I'd like to welcome you once again to the Winnebago Industries and to review the results for the third quarter and first nine months of fiscal 2003 ended May 31st. Before we start, let me offer the following cautionary note.

This presentation contains 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 contained in the company's filings with the Securities and Exchange Commission over the last 12 months, copies of which are available from the S.E.C. or from the company upon request.

I'll now turn the call over to Bruce Hertzke. Bruce?

Thank you, Sheila. Good morning. I'd like to welcome everybody to our company's conference call this morning.

I will briefly review a few highlights at Winnebago Industries and then Ed Barker, our Senior Vice President and Chief Financial Officer will review our financial information with you. Each of you should have received a copy of our company's earnings release this morning.

I'm proud of the fact that Winnebago Industries remains solidly profitable during the quarter in spite of decreased volume, increased competitive pressures from incentives in the marketplace and start-up expenses from our new Charles City motor home manufacturing facility. And in spite of lower results it was still a record for the company's first nine months in terms of revenue.

Shipments for the company, motor homes, were slower because of dealers trimming their inventory levels due to low consumer confidence and the uncertainty of the war in Iraq.

In the coming changeover of our new 2004 models, Winnebago Industries remains the top selling motor home manufacturer in the industry with 18.4% of the class-A and class-C market share calendar year-to-date through April. However, sales of our products within the third quarter were impacted by current competitive nature of our business.

As we have pointed out in the last three annual reports, Winnebago Industries goal is to remain the most profitable in the RV industry. While we certainly enjoy being the top selling motor home manufacturer, our priority is to remain the industry leader in profitability for our shareholders.

We are also very bullish on the future growth in Winnebago Industries and the entire RV industry. Motor homes are growing in popularity. The baby boomer generation is entering the prime market at a rate of over 4 million people per year. We are seeing the age of our consumers purchasing motor homes broadening. Our buyers are staying more active and healthy later in life so that the age of the purchasing power has their purchasing a motor home has extended later in life. In addition, to a new growing number of younger buyers coming into our market.

As a result of this anticipated increase in demand of our products, we have completed our largest expansion to date in Charles City, Iowa. We began producing class-C motor homes in our new Charles City facility in March and had their grand opening on May 9th. We are currently building approximately 30 units per week in the new facility and will ramp up as the market dictates.

At this time, I'll turn it over to Ed Barker for the financial review. Ed?

Thank you, Bruce.

Winnebago Industries today reported net income from continuing operations of 9 million through the third quarter ended May 31, 2003 versus 17.7 million for the third quarter of fiscal 2002. On a diluted per share basis, the company earned 48 cents from continuing operations for the third quarter of fiscal 2003 versus 88 cents for the third quarter last year.

Net income from Winnebago Acceptance Corporation operations which were discontinued during the quarter were .3 million or 2 cents per share ended May 31, 2003, versus .4 million or 2 cents per diluted share for the third quarter of fiscal 2002. Revenues from continued operations for the third quarter fiscal 2003 were 200.2 million versus 245.9 million for the same quarter last year.

Net income from continuing operations for the first 39 weeks of fiscal 2003 was 36.8 million versus 36.9 million for the first 40 weeks of fiscal 2002. On a diluted per share basis, the company earned $1.94 from continuing operations for the first 39 weeks of fiscal 2003 versus $1.78 for the first 40 weeks of fiscal 2002.

Net income from discontinued operations for the first 39 weeks of fiscal 2003 was 1.2 million or 6 cents per share versus 1.3 million or 6 cents per diluted share for the first 40 weeks of fiscal 2002. Revenues from continuing operations for the first 39 weeks of fiscal 2003 were a record 619.5 million versus 605.1 million for the first 40 weeks of fiscal 2002.

Turning to the balance sheet, the company's cash balance during the quarter did increase $53 million. This was primarily due from the sale and collection of 42.3 million in Winnebago Acceptance Corporation receivables, a decrease in our inventory balance of 12 million offset by 4 million in capital expenditures and 9.7 million from stock repurchases under the company's stock repurchase program.

We did this quarter increase our coverage in terms of financial disclosure by including, and we will continue that in subsequent quarters, a statement of cash flow so you can more timely take a look at the company's financial statements. With that I'll turn the call back to Bruce.

At this time, I'll turn the call over to the operator for question and answer portion of the call.

Thank you. Today's question and answer session will be conducted electronically. In order to ask a question, please press the star key followed by the digit one on your touch-tone telephone.

If you are on a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that's star one to ask a question. We'll go first to Scott Stember with Sidoti.

Last quarter you indicated you would have six less workdays in the quarter. Could you talk to the fact whether there was more than that, whether there were any additional Fridays taken off?

Yes. Where we were, we announced at the end of our second quarter that we were going to have those six days off this quarter.

Right.

That is exactly what we did do. There were no extended time periods. We took those six Fridays off and right after that we went back and currently we're back to our normal 40-hour workweek.

Okay. And can you maybe talk about with the new facility up and running maybe talk about the capacity utilization is and if you can break it out with the main facility versus the new facility or just in total?

Okay. Last year at this time, if you remember, Winnebago Industries during the third quarter, we were on overtime for the entire quarter. All 13 weeks. We were either 45 or 50-hour workweeks. We were probably at 100 -- probably you would classify it at 105% capacity at that point in time.

Currently with our new facility and the added capacity, we're probably at about 75 to 80% capacity.

Okay. And just a couple of follow-up questions. Can you maybe talk about what you're seeing in June so far as far as the order picture and maybe just talk about retail trends maybe for the quarter and in June?

Yeah. I can give you some general comments.

Our 2004 product we started in late May and in June and so we have cleaned out our 2003 products and we are, you know, we're in process of now taking orders and selling 2004. I think the only comment that I can make just general comment, everything seems to be being accepted very well.

And naturally, we're seeing the order input increase because of our new products offering and dealers during the last quarter as we stated in our news release had taken their inventories down.

Okay. And just maybe some general flavor on the general retail? I know you guys track your retail internally, also. Any general flavor on what's going on right now?

Well, the latest stat surveys just came out of April just this week. And I think you'll see that our industry overall is down like a half of 1%. And I believe that everybody -- I also just came back from an RVIA meeting.

I believe everybody really feels that our industry weathered the whole spring quite well considering we were in a war. We were in a low consumer confidence period. We had gas prices jumping all over and that our market held up this good, I think everybody felt very good that our industry is remaining very strong and I think we at Winnebago Industries definitely feel that.

All right. And just one last question. Ed, maybe can you just quantify maybe some of the start up costs you had for the new facility?

Yes, Scott. Our start-up costs for the Charles City facilities for the quarter ran about $262,000. That was on top of the fixed overhead of our new Charles City facility, which ran slightly under a half a million dollars. So for the quarter, about three-quarters of a million dollars was cost impact by Charles City facility.

Okay. That's all have I for now. Thanks.

Thank you.

We'll go next to Jeff Tryka with Delafield Hambrecht.

Good morning, guys.

Good morning.

A couple questions for you. One, if you could kind of characterize the gross margin impact on -- from the Charles City plant? We had a pretty big drop in gross margins and just wanted to see how much of that is due to Charles City versus just other, you know, the six days that you took off during the quarter?

Well, thank you. As I mentioned to Scott. The cost impact at the gross profit level of Charles City was about $250 million.

The rest of that--a substantial part of the reduction in gross profit really comes from the fact that we operated our factory at a lot less than we did last year in terms of capacity utilization and efficiencies associated with working almost half the quarter on a four-day workweek was the primary drivers there.

Okay. And looking kind of broader at the industry, are there any particular areas of concern either by product line, I know we've heard some issues in the industry where there's been some pressure on pricing and discounting for the high-end gas class A's. I just wanted to know where you see things in the industry?

As far as on the product lines, we really don't. I can tell you that we're very pleased at the reception of our product. The only thing that's created some pressure in the inventory is the pricing. I think everybody was anxious to displace their 2003 models and get onto 2004. So we went through a period where it would definitely increased incentives out there.

Last question. If you could comment on the inventory levels. Both the internal inventory and in terms of finished goods as well as where you see dealer inventories? Are they still too high or are they coming back into where they should be or what?

Dealer inventories have come down substantially in this last quarter. They were, you know, at the end of the of February, they ramped up for the spring market.

Then we hit the war and the consumer confidence and GAAP prices and a few things like that, that really we were very pleased that retails continued to happen, but we definitely see some hesitation in the dealer not to want to take any more 2003 because he also knew that it was just a matter of a couple months and he would be going into 2004 product. So, they definitely held off buying new products. And I'm sure they did that with ours and a lot of the people in the industry.

And then the competitive pressures just who wanted to get rid of their products the most at what cost and I think we all had to participate some.

In terms of your own inventory levels at the corporate level?

As Ed said, you'll see we actually brought our inventories down around $12 million. You know, we were gearing up for the spring , also.

Mm-hmm.

And we ended up reducing our inventory by over $12 million, too.

Is that mostly on the finished goods line?

Yes.

And now, based on the previous comments, I just wanted to verify that you don't have any remaining 2003 inventory left?

At the end of 2003, we had a -- or at the end of our third quarter, we had--Ed is digging out the numbers. We had approximately about 237 at that point in time.

Okay.

And I'm happy to say that basically, we've got just a handful left.

Okay, great.

There's always two, three, four, you know, that continue to work on that or showing off, but they are pretty much cleaned up now.

Great. Thanks very much, guys.

Thank you.

We'll go next to Barry Vogel with Barry Vogel and Associates.

Good morning, ladies and gentlemen.

Good morning, Barry.

Going back to that discounting, were you forced during the quarter to discount more aggressively than you might have been doing a couple of months ago?

Oh, without a doubt. The bottom line is the 2003 product, everybody in our industry wanted to clean up their product and get on to 2004. And we had to participate somewhat into that, also.

Now, I know you've done a better job than some of your competitors in terms of you can't have to discount as early as they did for different reasons. But are some of your competitors still discounting going into the fourth quarter?

I think that's a fair analysis. Yes, we know of a few programs that our competitors still have. Naturally, we really don't want to play in that arena. We think our 2004 product will -- we're hoping that we can just stay away from that.

But are you now being forced as the '04 models begin to be --

Certainly, we do not have the programs -- any programs in '04.

So you have no discounting right now?

On '04s.

On '04s.

We have a few '03s that we are cleaning up, but we are not in that in '04.

Okay. And I have a couple of little questions for Ed. Your tax rate for the year, what is your best guesstimate right now?

38.6%.

And capital expenditures, what are you looking at this year?

We are looking at an additional 5 million for the fourth quarter, Barry, bringing it to 26.5 million.

And your D&A for the year?

8.8 million.

And if you needed to guess about what your capital requirements would be for next year, what would be the best guess today?

Right around 10 million.

10 million? And as far as your stock buyback program, how much do you have left on the current authorization?

Approximately 10 million.

Thank you very much. You guys have done a great job.

Thank you, Barry.

Once again that's star one to ask a question. We'll go next to Craig Kennison with Robert W. Baird.

Good morning, everyone.

Good morning, Craig.

Thanks for that cash flow statement. The gross margin looking at it a different way, gross margin is 250 basis points below where it was a year ago. Charles City is clearly an impact, no overtime is an impact but also the pricing.

Could you quantify the pricing impact on gross margin? I think you mentioned the other two, but how does pricing impact gross margin?

Actually, pricing, we have higher asp's, Craig so it was really positive by a small amount. Again, the prime drivers of gross profit are volume, which is really the big -- the biggest of all by a long ways.

We did lose some efficiency in our manufacturing operation when we compare this quarter to a year ago, so plan efficiency was probably the next biggest factor. As we indicated, we did have more discounts, obviously, this year than a year ago because of the market environment. And those are kind of the main drivers of our gross profit decline.

And then going to market share, despite some of the discounting that's taking place here, Winnebago has been losing share. At least this year, you are down two percentage points relative to a year ago.

You talk about some of the dynamics there and whether that's changed since we've seen some of the new '04 models coming out?

We just got the April stat surveys. I don't know if you've seen those yet.

Sure.

But you know, I think what we're seeing is that there's even a few new, if you look at the top companies. Fleetwood's gaining a little bit of market share back but the top five companies basically we're seeing a little more pressure from some of the others in the industry. And I think it's a few little niche products that are coming out in the marketplace and that we're just reviewing it and seeing if there's any other areas that we need to get into.

But I can tell you that we're very pleased we are not hearing any comments about our 2003 product, which is mainly in the dealer's lots yet. And so far, all of the introductory of our 2004 products we've had some very positive comments.

Is the primary driver of the market share lost is it product or is it price? Is it a full plan that you have or the price at which they are going out?

I think there is some price competitive that, you know, a lot of people are even doing retail rebates to customers, salesmanship. There's a lot of different types of incentives. And I think as 2004 comes out, hopefully everybody gets back and it's more of a normal playing field and whatever products did the best will win the battle.

And I know you don't provide guidance, but gross margin fluctuates quite a bit. Could you give us a sense whether we should be thinking closer to 15% or closer to the 12% you reported recently?

Well, Craig, a lot of that will obviously be dictated by the volume of the market.

Right.

Will provide us. And I'm not necessarily sure your question is related to the fourth quarter or certainly to '04.You know, I guess the only thing I could say to help you there is the fact that if we see a strong RV market over the next 12 months and we start to see our volumes rise, there's no reason if we get improved market conditions we can't be towards the higher end of that range. I think in the near term probably, you're maybe talking more in the lower part of that range.

Again, I think maybe it's demonstrated certainly to our investors during the third quarter when you compare back to last year when we run our factory at 70, 75% versus 100 to 105%, the tremendous amount of leverage gives us a great lift in our gross profit numbers. So it's going to be predicated upon what kind of a market we're in.

And your capacity in terms of units is probably 325-ish?

Between 300 and 325 is a good number.

Okay. And finally respect to your cash position, 93 million is a strong number and more than really you need. Talk about your priorities with respect to dividends whether that's changed or with respect to share repurchases and acquisitions, thanks.

I can tell you that I have a Board of Directors meeting next week, and even at our last planning meeting, we have talked more about dividends. We have no comment.

The only thing is, I think it's fair to say that dividends are starting to receive some more favorable treatments and taxation. It would have been an easier decision if there wouldn't have even been the 15% tax rate on it but other than that, I think you'll continue to see us repurchase our shares.

And, you know, as you can see, we authorized in March a repurchase program and we spent about half that money just since March. And we have completed seven other complete stock buyback programs, so you know, we'll definitely continue to utilize some of our cash that way.

Great, thank you.

Thank you.

Next, we'll go to Ruthanne Williams with Red Chip Companies.

Good morning. I joined the call a few minutes late so I apologize if we are going over old ground.

I would appreciate it if you could break out anything possible into months as far as trends that you may have seen in demand during and after the period of the conflict in Iraq? And second of all, if you can share any information that you may have gathered from your retail registrations, I would be interested to hear that?

I'm going to start with retail registration first. We have the exact data on that. Again, as I stated earlier, we've been actually very satisfied with retail registration for the industry. Again, it's only down a half of 1% for the industry and we think we went through some pretty tough times. So we're still very positive.

Again, we lost a little bit of market share because we probably weren't as aggressive as some people may have been, but we think that, you know, business remains very strong, especially in these conditions.

As far as the first part of your question was on by a month to month basis?

Yes. Is there anything you can see looking at a month to month basis whether the falloff and demand during the quarter may have changed during and after the period of the conflict in Iraq?

I think it was -- we didn't really see much difference. You know, again, the dealers were kind of at a unique point in their ordering because in April and May, it's hard to order much product when you know 2004 products are coming out in June. So, I think it was fairly even throughout the quarter.

Okay. Thank you very much.

Today's final question comes from John Diffendal with BB&T Capital Markets.

Yes, good morning.

Good morning.

Can you give us. I think in the last call, you gave us average selling prices of both the A's and the C's?

Yes, I have that, John. For the quarter, average sales price for class C's was $48,111 and for the A's, it was $92,302.

Okay. And obviously we're all trying to pull a little bit at getting sort of a clear sense of how the market sort of stands today and moving forward and obviously a lot hangs on the '04 introductions, but can you maybe just give us some sort of anecdotal sense? You were talking with dealers and whatever particularly related to traffic that they may be seeing at their dealerships, you know, sort of post war with the war sort of over maybe just give us a little more color on what you are seeing?

Well, I think I can tell you again, I just had the opportunity to be with several of the industry people this week. And, you know, everybody is still very positive about the RV industry and they continue to say everybody's been very pleased with business considering the economic environment.

And, you know, it's just a matter that, I believe, dealers are now going to be a little more optimistic to go to the 2004 product. I think that we're going to see consumers as the market continues to gain a little bit back and consumer confidence goes back up.

You know, all of the trends that we have continue to indicate that we should be heading in the right direction.

And you mentioned that, you know, with the '04s that order input rates are up. Is there any sort of hard number you can give us relative to that?

No, I don't think -- I can -- you know, just like our order backlog that we give you, we hope to -- we hope to keep that down because of we now have two plants, and we hope that we can actually be more efficient for our dealers and get them out faster. But we definitely, you know, the dealers went through a period where they reduced their inventory to what I feel is pretty significantly for the last quarter and I believe they are in a good position to get set up to are 2004 now.

I mean, has that inventory problem that everybody's been dealing with, you and others as well, completely gone at this point of the '03s going into the '04s or is there still some overhang? Sounds like you are saying your '03's are largely gone.

Yeah, we feel we are good position. I guess I have talked to a lot of the rest of the industry people, but I guess I don't have a clear picture to say whether I feel that they have all of their inventories under control or not.

Right. Thank you very much.

Thank you.

At this time, I'd lake to turn the call back over to Mr. Hertzke for any additional or closing remarks.

Thank you. Once again, I'd like to thank you for joining the Winnebago Industries third quarter conference call.

In closing, I'd like to highlight our continued optimism for the future. Winnebago Industries has a strong balance sheet with no debt and a large cash balance. The demographic trends are happening and we are seeing a broadening of age groups purchasing motor homes and an increased number of potential customers for the future.

Winnebago Industries strong name and quality reputation will help our future and leadership and profitability in the RV industry. With all this in our favor, Winnebago Industries is well positioned for a strong future.

I'd like to thank you for joining us today. Good-bye.

This concludes today's Winnebago Industries conference call. At this time, you may disconnect.