Winnebago Industries Inc (WGO) 2003 Q4 法說會逐字稿

Good day and welcome everyone to the Winnebago Industries fourth quarter 2003 earnings results conference call. This call is being recorded. At this time, for opening remarks, I would like to turn the call over to Ms. Sheila Davis, please go ahead.

Thank you Jennifer, and welcome to the Winnebago Industries Incorporated conference call to review the company's results for the fourth quarter in fiscal 2003 ended August 30, 2003. Conducting the call today are Bruce Hertzke, Winnebago Industries' Chairman, CEO and President, and Ed Barker, Senior Vice President and CFO.

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 twelve months, copies of which are available from the SEC or from the company upon request. I'll now turn the call over the 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 financials with you.

Each of you should have received a copy of the company's earnings release this morning. I'm very happy to report that we saw a positive turnaround in our business during the fourth quarter. Our new, 2004 Motor Homes were very well received by our dealers, and they began stocking their shelves with these new products.

It appears that our 2004 products were also very well received by the retail customers. Another indication of the turnaround is that our business backlog is 85% increase over our sales backlog since the end of the third quarter.

The sales backlog reported at the end of the fiscal 2003, was 2,632, up from 1,419 at the end of the third quarter. As a result of the increase in the sales backlog, and the positive sales activity that we saw during the fourth quarter, we have increased our production level in our factories and have scheduled overtime to meet this demand.

We also continue to increase production in our Charles City facility, which is now producing over 50 class C units a week there. And we will continue to increase production within that facility throughout the coming months which will allow us to increase the capacity of both class A's and C Motor Homes, within all our facilities as the market demands our new products.

We closed our fiscal 2003 with record revenue of $225.7 million, a 2.5 increase over last year. I'm very proud of the fact that Winnebago Industries had record revenues and operating income that were near record historical levels for the year, in spite, the increased competitiveness from incentives from the marketplace and start up expenses of our new Charles City Motor Home manufacturing facilities. We believe, that both wholesale and retail sales have now normalized. The wholesale market is more closely following the full demand of the retail market. Retail results for the industry indicate that Motor Home sales are 8.7% ahead of last year through the first eight months of calendar 2003.

Winnebago industries remains the top selling Motor Home manufacturer in the industry with 19.2% of the class A and class C market for the first eight months of calendar 2003.

What we're seeing in the industry is that the retail sales have accelerated after the war in Iraq. The fall retail shows in Harrisburg, Pennsylvania and Pomona, California have been very well attended and have many active buyers. As we pointed out in our last three annual reports and conference calls, Winnebago Industries goal is to remain the most profitable in the RV industry.

While we enjoy being the top selling Motor Home manufacturer, our priority is to remain the industry leader in profitability for our shareholders. We continue to believe that there's a great future for Winnebago Industries and the entire RV industry. Motor Homes are growing in popularity, and we are also seeing the baby boomer generation that is entering the prime target market at a rate of approximately four million people per year.

We are also seeing the ages of Motor Home buyers broadening. Our buyers are staying more active and healthy later in life so that the age continues to extend upward through the purchasing of Motor Homes. And also, a growing number of younger buyers who are also continuing to enter the market. We believe that the timing for the completion of our new Charles City facility was just right to be able to meet this growing demand for our future products.

Because of our confidence in our business and in the future, we have doubled our dividends. Winnebago Industries is now paying a quarterly dividend of 10 cents a share for a total of 40 cents per year. We believe that the increased dividends is an effective way of also rewarding our shareholders for our success.

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

Good morning. Revenues for the fourth quarter of fiscal 2003 were $225.7 million, compared to revenues of $220.1 million for the fourth quarter last year. Net income for the fourth quarter of fiscal 2003 was $12 million versus $16.4 million for the fourth quarter of fiscal 2002.

On a diluted per share basis, the company earned 65 cents a share for the fourth quarter of fiscal 2003, versus 86 cents per share for the fourth quarter last year.

Included in net income for the fourth quarter of fiscal 2002, was $455,000 at three cents a share from the company's discontinued operations. Revenues for fiscal 2003 were a record $845.2 million versus $825.3 million for the previous fiscal year. Net income for fiscal 2003 was $49.9 million versus $54.7 million in fiscal 2002. On a diluted per share basis, the company earned $2.65 a share, versus $2.68 cents a share in fiscal 2002.

Included in that income was $1.2 million from discontinued operations or six cents a share in fiscal 2003, versus $1.8 or nine cents a share in fiscal 2002.

During the fourth quarter the company's cash balance increased $6.6 million, to $99 million. Capital expenditures were $2 million, and dividend payments were $1.9 million.

In closing, I'd like to recognize and thank all of the Winnebago employees for their tremendous efforts in making fiscal 2003 a financial success for our shareholders.

I'll turn the conference call back to Bruce.

Thank you Ed. I'll now turn the conference call over to the operator for question and answer portion of this call.

Thank you, sir. Today's question and answer session will be conducted electronically. If you would like to signal for a question, you may do so by pressing the star key, followed by the digit one, on your touch-tone phone.

A reminder, if you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again that is star one for questions.

We'll go first to Craig Kennison of Robert W. Baird.

Good morning.

Good morning, Craig.

Good morning, Craig.

Congratulations on the very strong performance. First question has to do with backlog. It appears to be rich in diesel. Is this the incremental strength from the Horizon and Vector product line or what are we seeing there?

That's definitely a major part of it. We also came out with a new product on our task aligned to Meridian, so we actually have kind of three new products in that diesel category, and all three of them are being very well received by the dealers and the retail market.

How might that impact the average selling price of your class A models?

I think it's fair to say that it will continue to edge it up, I don't have an exact percent, but it will definitely move the average selling price over this next year a little bit.

Thanks, second topic would be capacity, what will the production capacity be in Charles City once that facility is running on all cylinders?

The capacity, we're around 50 units a week now, the capacity has been set up for 75 units, kind of more in an eight hour work schedule, but we will be able to get a little bit more like, with overtime. Depending on market demand.

Was it a consideration that you could, instead of doing overtime you could have ramped production faster in that facility or is that not a possibility.

Well, we think it's more that we want to make sure that we control our quality and that we get all our people trained. And so we're actually a little ahead of actually our production capacity of what we originally laid out. Because I think earlier we had told you and the market that it would take us about a full year to get up to production capacity and we're actually a little ahead of schedule right now.

And then, with respect to capacity at fourth (ph) City, when will that convert to purely class A and what will your production capacity be on a weekly basis there?

It's going to be a while before we're strictly class A here, in fact we may not, for flexibility reasons, we may not totally ever take all over the C's from four (ph) City. It depends upon, again, the market demand and our percent of market share for C bodies and A bodies. This will actually give us a little more flexibility that we can build them in both facilities. What was the other part of your question? The capacity?

What would be the ultimate capacity per week of that facility?

Well, it has the capacity, we built over 240 units a week in four (ph) City before, but again, it's going to depend upon the demand and the market share that we get of each of the different classes, class C or class A.

OK, thanks. And then with respect to production, how much overtime was worked in Q4 and how many days off of the 13 weeks of the quarter did you take?

In the fourth quarter we did not take any days off. But we should be aware that Winnebago Industries has the fourth of July week shut down every year for normal vacation purposes for our employees. So --

Right, that's what I mean, so you worked 12, which was the maximum you could have worked.

Yes, that is correct.

OK, and with respect to Q1, it's a 13 week quarter as well, are there any plans days off, whether it's a holiday or otherwise?

Well, you have Labor Day in there and then you have Thursday and Friday of Thanksgiving. So you have those three days that are not production days.

And has the overtime been, since when have you started the overtime?

Overtime started the very first day of the quarter.

OK, thanks, I'll get back in the queue.

And our next question comes from Scott Stember, Sidoti & Company LLC.

Morning guys.

Good morning Scott.

You touched on Far (ph) City that you had the capacity to do 240 units per week, what are you doing as we speak right now?

We're not giving their current numbers of exactly what we're doing in ((Four)) City.

OK.

Again, if we think that if we give all the exact numbers, we've been recommended by guidance counselors not to give the exact numbers.

OK, fair enough, and do you have the breakout of the A's and the C's revenues, or an average selling price on a year over year basis so we can compare?

I do. Do you want the quarter or the fiscal year?

The quarters, last quarter year and this year.

OK, during the fourth quarter the average sales price was 73,124, in a breakdown of A versus class C. Average sales price during the first quarter Class C was 51,011. Class A's been 87,342.

OK, and do you have last year?

I don't have right off the back. Not for the quarter. I have for the year, but not for the quarter.

That's good enough. And could you may be just characterize for the quarter a little bit, if in how much any discounting happened earlier in the quarter I gather on clearing out 03' models, and where you staying with that right now and also such an efforts please?

Yes, there were discounts, probably in early June, you know, we have some '03 products. We're just like every other company, wanted to make sure that we got them out to the market place, and got them to the dealers, so they could get cleaned up. I think there is a lot of discount incentives, probably even more in the May time period, we still had some that lingered into June.

So at this point, the '04s are moving without any discounting?

That's a fair statement with exception naturally there are some show special and few role things that are normal things that we do last year.

OK, and these two shows that you mentioned, the Harrisburg and Pomona show, could you may be give some metrics of just in general feeling how your products perform there?

They perform very well. In Pomona show, which is going on right now, we just received very good results. Sales were up, traffic was up, and the Harrisburg show that was earlier, I think everybody reported pretty much that traffic was up there, and sales were up dramatically for us. We're very pleased with that. The best Harrisburg show ever.

And the last question is, on the backlog, we take the C orders are down pretty significantly. Is there anything to that, or just -

I think it's more seasonally. You'll see that backlog of C body business will actually increase probably around the Louisville show time period, because a lot of them will order some rental, and also more of a spring market unit, than a fall or winter unit, so I think the overall trend is kind of that way every year.

OK, that's all I have for now. Thank a lot.

And we'll now go to John Diffendal of BB&T Capital Markets.

Good morning. Congratulations. I was wondering -- in the last quarter, you gave us some sort of guidance on start-up costs in Charles City, and what the impact of that was. Was there much, if any, in the current quarter you felt that held you back a little bit?

There was not a lot, John. This is Ed Barker. We incurred about $107,000 worth of training start-up costs during the fourth quarter, so it's substantially doubt from where it was in the third quarter, for the year that number was $482,000. Obviously, during the second, third quarter, we bore the brun of our startup costs in our Tufley (ph) operation, but, certainly, reduced in the fourth quarter, pretty well we think worth (inaudible) through that-

Was that 842, was that second and third quarter costs?

That's for the year?

for the year.

It did include the 107 in the fourth quarter.

So the overall start-up cost is a little less than $1 million at Charles City?

Correct.

OK, and could we get an average selling price for the new diesel lines?

Yes, I have that. I think it's about $168,000 during the fourth quarter of the units we sold, so --

OK, and you mentioned overtime, it does hit any specific line? I mean, for example, the diesels, were you running over time, or the any other particular product that you're incurring the over time costs on?

Our overtime is across the board now on all our products. Charles City, our new facility over there, building C bodies is also on overtime, and we are -- all three of our production lines are on overtime, in four cities.

OK, and just you didn't give any guidance in the release, and I guess you don't typically do that, but thinking broadly, if we could, in terms of margins, with your gross margins a little less than 13% in the quarter, and in good times between 14, I guess, and 15%, how do you see, looking forward, how do you see your margins over the next few quarters?

Well, obviously the market is starting to recover, John. This is Ed, and we expect with the increase in volumes in our factory, we see our gross profits to get more back to the normalized level. Probably expectations somewhere in the 14 probably a fair estimate going forward here.

Including in the quarter we're in now?

Yes, sir.

OK, thanks very much.

Thank you.

Our next question comes from Bill Lerner of Prudential Securities, Inc.

Thanks, guys. How are you doing?

Good.

Good.

A few quick ones. Actually two. Let's see. On the backlog question one more time, it appears to be a bit apples and oranges, between the quarter over quarter backlog increase due to the new capacity you have in Charles City, and I guess if you were able to break it out, what would backlog be without that capacity, and I guess what percentage of it would you see is attribute to be the new diesel product, and I have one follow up.

I'm not sure I understand your question. First of all, we're hoping to keep our backlog down lower because of Charles City. The objective was to build that facility, so hopefully we can continue to do a better job to keep that number considerably lower, and I think without a doubt, Charles City has definitely helped us this year over last year. We can have it.

Gotcha. First of all this what I'm saying. So, even with incremental capacity, you still backlog grew 85%, so if you stripped it out, would it be over a 100% increase in backlog, that's what I'm getting there.

Oh, yes, If we get (inaudible) Charles City, just a think of considerably higher than now.

So pretty out on apples to apples basis it's even more impressive, if I call that and then the last question is as it relates to the new class A diesel product, what sort of market share type numbers should we be thinking about? Should we be thinking about the class C type share? I mean this is a relatively new (inaudible) for you, or should we be thinking something between that and where you are in Class A right now?

I think it's somewhere between where we're at now and the class Cs, because it's going to take a while. We just getting few products, we came out, we showed it to our dealers. At the end of July and in August, they're filling their shelves and it's just giving out the market place, so it's going to take a while to pick up some of that market share, and to get the product throughout our entire dealer product line.

OK, thanks, guys.

We'll now go to Barry Vogel of Barry Vogel and Associates.

Good morning.

Good morning. I've got a couple of quick questions. One is for Ed. This is going to be easy, Ed. What are your capital expenditure expectations for fiscal '04, as well as your depreciation and amortization?

'04, we're looking at right about $11 million for capital expenditures and about $9.6 million per depreciation, amortization.

OK, now, someone asked a question that they said your diesel backlogs were higher. I didn't. see that in your press release, so I don't know where he got that from. You had -

You have the table on the very end of the news release.

On the very end. I didn't catch that. OK, there may be another page. I got it. I got it. I didn't see it is last page. Now, I have a question about the mix issue of diesel versus gas. If we look at your Class A shipments over the last few years, again, diesel versus gas, in fiscal '03, diesel was 23.1% of the year's mix versus 24.8% the year before, 24.1% the year before and 21.6% the year before. You really haven't broken out of that sort of range you've been in versus the gas.

That's correct.

and so if you had to make some kind of an estimate, based on what you feel your new diesel lines are going to do, do you thing you will break out in terms of the percentage of your mix being diesel from that narrow range this fiscal year?

Well, I can tell you Barry, that we have targeted for Winnebago Industries that we definitely want to be at least 30% of our product line into the diesel category, and that's why we came out with the new vector, Horizon and Meridian, those three products in the diesel category. We found that we kind of in the 20% area, like you said, with our journey, and product line, and that was the most popular selling diesel, and we just figured out that we had to get into more diesel lines if we wanted to continue to grow in that diesel, and that's why we came out with these new three lines of diesel, so we that we could continue to increase that percentage. Again, our goal, we need to get, for even just Winnebago's market share, we need to get our products in the 30% range.

So I was thinking you would be disappointed with all of these introductions if you didn't go into a new high in terms of diesel as a percentage of your class A mix this fiscal year?

Very fair statement, Barry.

Good. Congratulations, keep up the good work.

Thank you.

Thank you.

We'll now go to Jeff Tryka of Delafield Hambrecht Inc.

Good morning guys, good quarter.

Thank you.

Thank you.

I wanted if you could comment a little bit about your dealer inventory levels. I know they're down a little bit from last year, but if you could sort of characterize how much of it is related to the new product line, and how much of it is sort of the core dealer inventories?

The dealer inventory was down slightly from last year, and what we feel is that with the new product lines, that we're definitely feeling that we can, not only get above our dealer inventory, but hopefully a little other shelf space with some of our new product lines, and I think that's part of the reasons why (inaudible) our backlog has grown, because they are ordering that product and put that in their dealer's lots, and hopefully we will see our dealer inventory grow before the heavy spring market.

So basically at 3945, you're saying that's kind of a low level of inventory you think that should be higher?

That's a fair statement, especially with our new product lines.

OK, and in looking at the new product lines, in particular the new diesel products, have you seen much in any competitive response relating to that?

I don't know if I seen that many other new products come up with out, but there's definitely competitive response. That's a pretty competitive part of the market and I'm sure everybody just going to - I think let us walk through and pick up a lot of market share. We're going to have to continue to earn it, but we were able to do it with our journey product lines, and we are hoping that we'll see the same success with the Vector, Horizon and Meridian.

Great, thanks guys.

Thank you.

Operator and once again, ladies and gentlemen, that is "star, one," if you would like to signal us a question. We'll go next to Michael Millman of Millman Research.

Thank you. I also want to talk about the mix in the diesel, and some questions. First of all, what typically, is the seasonal change in backlog between third and fourth quarters? In other words, how does this 85% compare with previous years?

I think its fair to say that the diesel and the larger class A Motor Home, they pick up in the fall and winter, as far as a percent, and in the spring, we see a little more sea body, and what we call rental business, that's available there, so that's kind of how the backlog shift a little bit. We'll see a little higher concentration in the -- and then it also kindly depends upon what new products the company brings out each year. Naturally this year we brought out, you know, three new products in the diesel category, so you would expect our backlog to pick up more into that area, with our new product introductions also.

So the 85% is probably larger it's been typical, but if you -- and maybe putting words in your mouth.

No, that's -- what you said is accurate.

OK.

This is probably a little larger and more A body product for backlog than what we normally had the experience in the past.

Also, speaking with the dealer -- with the diesel, how much of that dealer inventory is diesel compared with previous year?

I think at the end of the year, where we have our dealer inventory at 3945, that was more of a typical inventory, because we just introduced -- our year-end is in August, and we just introduced that product to our dealers right at July, and they basically got to order it the first week in August, so I think it was a typical inventory at that time.

Thanks. And so it hasn't built up as of yet?

That's a fair statement.

Is your strategy with the new diesel to add new dealers, you've talked about getting more shelf space with existing dealers --

Yes, I think our existing dealers; we were not in that product category, and they did not have a product to sell for Winnebago before. They now have the opportunity to sell in that price range and product category, which was one of the main price ranges that the diesel product was in. We just didn't have anything. I mean, our dealers did not have anything to sell. They had to sell a competitor's product in that price range before, where now we do have a product in that range.

And does this typically sell at two to two and a quarter.

The retail price range is right in that two to two and a quarter, yes.

And are you now moving up in price, basically?

Well, no, we actually had a higher line product, our ultimate series was 260 to 325 and then we had a lower product below this probably in the 120 to $180,000. You know, we had those two areas covered, but we didn't have anything between basically the 175 to 225 categories, we didn't have a product in that category before.

include whose product do you think, generally, you're moving out?

Probably the most successful company in that category was Monaco

So, Monaco was standing to be the biggest loser?

I'm not making that statement. I'm just saying that's the price range they were in.

But I see you smiling. To change the subject slightly, can you talk -- maybe this is too fill (inaudible) conference call, can you talk about price elasticity, particularly in the A's, or would you prefer to do this later?

I think that's kind of a long conversation. I think we better do that later.

OK, great, thank you very much.

Thank you.

And our next question is a follow up from John Diffendal.

Couple of things. First, you still have a less than $100 million in cash. You may be just give us your thoughts on that, and how you expect to -- are you comfortable with that? Is it something you want to take down? How do you want to just sort of (inaudible) the whole cash position going forward?

I think the cash position, first of all, we're very proud of the fact that we have this cash, and we have a very strong balance sheet with everything paid for. We'll continue to look at ways that we can just continue to enhance shareholder value. We doubled the dividends. We think that was a positive move. We received a lot of positive comments from that. We continue to have stock buyback (inaudible) and that we will continue to look at and we will look at ways, that we can -- the number one priority if we needs for growth, we will use it for growth. Number 2, we will definitely figure out ways that we can return it for shareholder value.

I am just thinking forward a little bit, just finish this quarter, $225 million, much greater ability to process backlog, and backlog is higher. Is there anything you can tell us just in terms of how much sort of incremental revenue, just looking out into the current quarter, you think you can pick up from the backlog increase and the momentum you have going into this quarter, also the 225?

I think we have to pass on that statement. That would be too much forward guidance.

OK, and can you give us some sense -- I mean, certainly in the past year, we've seen a lot of pick up in share by fleet wood, and discounting there. Do you have any sense in terms of whether they may have backed off their discounting, and maybe just give us a sense of that competitive environment, vis-a-vis Fleetwood?

I think Fleetwood's objective has got to be to go back and start being profitable. And we just got August shop surveys, and we gained a half a percent. We were reported we were at 19.2. Picked up another half a percent at 19.7, because I think the climate is getting back to more of a normalized basis of fighting for market share, that product wins out, and I think that -- I'm sure Fleetwood's objective is they've got to get back to become more profitable, and I think on a level playing field, we'll do quite well.

Right. Thank you.

Thank you.

Operator Our next question is a follow up from Craig Kennison from Robert W. Baird & Company, Inc.

Couple of quick questions for you, Ed. Do you have finished inventories balance, and the contingent floor prime liability balance?

I don't have the contingent liability down with me, finished goods that's end of the year was $36.1 million?

And that's down from 50.1 last quarter?

On a fibel (ph) basis, yes.

And the tax rate was a bit lower than high model? What should we expect going-forward?

We're continuing to see probably (inaudible) year-to-date number there. Our tax rate is going to run in that mid-38 range going forward.

OK, and sales and distribution expense was just a tick higher than we anticipated. What influenced that number?

We pulled ahead some of our model introductions this year because of softness in the spring market caused by the war in Iraq, and that created a little bit more earlier demands to get our literature and brochure expenses out. That came more in the fourth quarter than normally would have.

OK, great and finally Bruce, if you could just comment on current retail trends on other been strong throughout the summer, but what are you seeing from your internal retail registration cards in September and October?

I think we can see that we've experienced as good a not little be even better than what the retail stats were showing. We're very pleased with what we're seeing for business. Wee think it's being a very strong fall, and -

Is that a fair statement for September and October, as well?

Also I can state is that we're very, very pleased with our business activity. It's definitely positive.

Terrific. Thanks again.

Yes.

And once again, that is "star, one" for questions. We'll now go back to Jeff Tryka.

Quick question on the share buyback. Have you bought any shares back in the quarter, are you comfortable buying back shares at current levels?

We have not bought any shares during the fourth quarter. I don't make the comment as to when we are comfortable buying shares. That's a strategy that we develop here, and we don't really disclose it. You know, we like to buy shares, and we think it's fairly valued, and that's all I'll comment on that, Jeff.

And how much is left on the (inaudible)?

$10 million.

Great, thanks.

Operator It appears we have no further questions at this time. I would like to turn the call back over to now you, Mr. Hertzke. Any additional closing remarks?

Thank you. Once I again I would like to thank you for joining Winnebago Industries fourth quarter and fiscal 2003 conference call.

In closing, we are very optimistic about the future. We see the retail market from Motor Homes improving. Our 2004 products were very well accepted in the market place, and Winnebago Industries has a strong balance sheet with no debt, and almost $100 million in cash for future growth and opportunities. Demographic trends are continuing to be favorable with a broadening of the age group for purchasing Motor Homes, and increasing the number of potential owners.

The increased popularity of Motor Homes are continuing to add to our business. We have expanded our production capacity in order to meet the increased demand for our products future.

Winnebago Industries strong name and quality reputation, and our leadership in profitability in the RV industry, we believe we will continue to be a very strong company. We will also continue to repurchase the company stock and pay dividends in order to enhance our shareholders' value. With all this, we feel that Winnebago Industries is positioned for a very strong future. Thank you.

Operator and once again, ladies and gentlemen, it does conclude today's conference. You may disconnect at this time.