Winnebago Industries Inc (WGO) 2004 Q1 法說會逐字稿

Welcome, everyone, to the Winnebago Industries first-quarter 2004 earnings results conference call. Today's call is being recorded. At this time I would like to turn the call over to Ms. Sheila Davis. Please go ahead ma'am.

Thank you. Welcome to the Winnebago Industries Inc. conference call to review the Company's results for the first-quarter of fiscal 2004 ended November 29, 2003. Conducting the call today are Bruce Hertzke, Winnebago Industries' Chairman, CEO and President, and Ed Barker, Senior Vice President 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 12 months, copies of which are available from the SEC or from the Company upon request. I will now turn the call over to Bruce Hertzke. Bruce?

Thank you Sheila. Good morning. I would like to welcome everybody to the Company conference call this morning. I will briefly review a few highlights at Winnebago Industries, and then Ed Barker, the Senior Vice President and Chief Financial Officer, will review our financial highlights with you.

Each of you should've received a copy of the Company's earnings release this morning. We were extremely pleased with the growth in our revenue and earnings during the first quarter of fiscal 2004. We made a concentrated effort to increase our presence in the diesel market in 2004, and the new and redesigned diesel models -- the Winnebago Journey and Vectra, and the Itasca Meridian and Horizon motorhomes -- have been extremely well received.

An indication of strong growth going forward is the increase in our sales backlog order. The sales order backlog reported at the end of the first quarter of fiscal 2004 was 2768 motorhomes, up 42 percent from the backlog of 1950 at the end of the first-quarter fiscal 2003. As we mentioned in our last conference call, we have increased production levels in the first quarter of fiscal 2004, working overtime in all our factories. As a result, we are continuing to strengthen our sales -- even with that we have continued to strengthen our sales order backlog. We will continue to work 45 hour weeks in the near-term to continue to bring this sales order backlog down.

We also continued to increase production in our Charles City facility, now producing over 60 Class C units there per week. We will continue to increase production within this facility throughout the coming months, which will allow us to increase the manufacturing capability of both Class A and C motorhomes within all of our facilities as our market demands.

We believe the U.S. economy is improving. Interest rates have remained a relatively low historic level, while it appears that consumer confidence has begun to rise. These economic factors show a positive trend for our business. Retail sales for the industry indicate motorhomes sales are 7.8 percent ahead of last year through the first nine months of calendar 2003.

Our dealers appear to be extremely optimistic about the retail sales environment for the remainder of 2003 and the upcoming calendar 2004. The recent RV industry trade show in Louisville, Kentucky was a great success for Winnebago Industries. We were extremely pleased with the positive response the Company's new products that we introduced during the show, especially with our new Class A diesel models as well as our triple slide Winnebago Adventure and Itasca Sun Cruiser Class A gas models. While in Louisville, we were also very pleased to receive the Quality Circle Award from the Recreational Vehicle Dealer Association for the eighth consecutive year. It was an honor and a privilege to receive this recognition from our dealers on their ranking of the Company's sales, products, management, and service warranty support processes. Winnebago Industries remains the top-selling motorhome manufacturer in the industry with 19 percent of the Class A and C motorhome market share for the first ten months of calendar 2003.

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

Good morning. I'm pleased to review with you the excellent revenue and earnings performance for the first quarter of fiscal 2004. Revenues for the first quarter of fiscal 2004 were a record 254.9 million, a 9.3 percent increase compared to revenues of 233.3 million for the first quarter of fiscal 2003. Net income for the first-quarter was 18.1 million, an 11 percent increase compared to net income of 16.3 million for the first quarter last year. On a diluted per-share basis, the Company earned a record $1.01 a share for the first quarter of fiscal 2004, an 18.8 percent increase compared to net income per diluted share of 85 cents a share for the first quarter of fiscal 2003.

Included in net income for the first quarter of fiscal 2003 was $400,000, or 2 cents a share, from the Company's discontinued operations. We continue to believe the best use of our excess cash is to return to our shareholders through the repurchase of the Company's stock and through the increase in our cash dividends. To that end, during the first quarter of fiscal 2004, we purchased 1,450,000 shares for $44.12 a share from the Hanson Capital Partners, the family of the late Company founder John K. Hanson and his wife Louise. Also in fiscal 2004 we doubled our dividend, now paying a quarterly dividend of 10 cents a share for the total of 40 cents a share annually. The first-quarter dividend was paid on October 6 of 2003, and the next payment is scheduled for January 5th of 2004 to shareholders of record as of December 5, 2003.

That wraps up our financial review. I would like to wish all of our Winnebago Industries shareholders, and also our employees, a very happy holiday. I'll turn the call back to Bruce.

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

(OPERATOR INSTRUCTIONS). Scott Stember, Sidoti and Company.

Could you maybe give the average selling price for last year and this year, so we can formulate what the revenues were for A and C?

I can. For the first-quarter of 2004, our Class C average sales price is 52,212. Class A gas is 80,724 and Class A diesel is 148,497. I don't have those for the last first quarter of last year but I do have them for last year's fiscal year, if you would like them.

That would be fine.

For the fiscal year of 2003, Class C average sales price was 49,832. Class A gas was 75,859 and Class A diesel was 135,151.

As far as the backlog number that you guys put out, that obviously did not include anything from Louisville, correct?

That is correct. Our Louisville -- we ended that the first week in December, and this is as of the close of our first-quarter at the end of November.

So would it be safe to assume that, obviously, given the success of the show that everybody is reporting and the enthusiasm that you guys have, that the backlog going through December -- is that a similar clip that it was at the end of the month?

I think that is a fair statement, and assuming that we have again announced that we're continuing to work overtime to catch up this backlog -- even with our increased production, we have not been able to get our backlog where we would like it.

And in total, could you just talk about where your capacity utilization is right now?

It's around 80 percent. We're continuing to ramp up our Charles City facility, and as we ramp that up, it gives us a little more capacity (indiscernible) city for some extra Class As also. So we're approximately 80 percent.

One last question. One of your competitors yesterday indicated that they were having some issues with certain suppliers of ovens and ranges and microwaves and stuff like that. Could you talk about how that is affecting you guys, or if you're perfectly stocked up for that kind of an event?

Winnebago has not been significantly impacted by the parts shortages. We understand that ranges and cooktop inventories have been tight, but we have continued to work closely with our vendors and have utilized other alternative solutions to help alleviate the problem. Winnebago has not missed any production yet of any stoves or ranges, and we have no reason to issue any warning statement that we feel is necessary to announce. In fact, Winnebago has enough ranges to run through the Christmas period of time, and then we have been assured by our suppliers that they are working through this period, and hopefully we will not see any fault in our production at all.

One last question. As far as discount environment, obviously, it seems that there's probably not much if anything going on. Can you talk maybe specifically about the diesels, how they are placing? Obviously you have a lot of orders for them, but are you seeing any pricing pressure on that level?

We know that there are some competitors out there doing a pricing deal. I think our earnings kind of speak for themselves. We really do not want to get into that game or program. Again, we think we need to have the most integrated product and the highest quality. And with the backlogs that we have we do not foresee Winnebago participating heavily in that. Other than -- you know, there's always a few little show specials or a few things like that, but we think that the market should be strong enough that we do not have to compete in there.

Kathryn Thompson, BB&T Capital Markets.

First question is, in your previous call, you said (indiscernible) increase your Class A diesel mix to around 30 percent of Class A sales. Is this still the case? And also, could you comment about -- a little bit more about your long-term plans in your diesel products?

I think what we said is that's what we would like to get our mix to. We are still way short of that 30 percent. We continue to hope that our new diesel lines will allow us to get to that. Currently, we're closer to the 10 percent of our production mix is the diesel. So as we've told people before, this is a big opportunity area that we have. Our gas market share is around 24 percent. Of the industry, our diesel market share is around 10. We need to continue to work to grow that segment, and we're hoping -- and, according to the orders that we are receiving, we feel pretty optimistic that our new diesel products will show us some increased opportunities in the diesel area over the next six months.

Also, could you give an update on where dealer inventories stand and where you're finished goods currently stand?

We put our sheet in there that gives the numbers for the dealer inventory. The dealer inventory at the end of November was 4429, which is actually down from last year which was 4602. And with our new product lines in the diesel area, we definitely should actually be higher in dealer inventories than where we are at. Right now we are lower, and I think that's part of the reflection that we have on the backlog that we need to get some more product out to our dealers.

Jeff Tryka, Delafield Hambrecht.

Congratulations on the great quarter. I wonder if you can talk about two things. One is, given that you are working overtime now and you're putting in 45 hour weeks, could you talk about the impact that that has had on gross margins in the quarter?

It really hasn't got a significant impact on gross margins. One of the options we have when we schedule our factory is to either hire more people to increase their run rate or to work overtime. And one of the things we do to kind of hedge our bet a little bit on the market is to -- we do a combination of (indiscernible) city as we continue to ramp that facility up. We also opt when we have a strong dealer demand, in particular like in the first-quarter, when we're really trying to increase our production level on our new Vectra Horizon -- we have a lot of pipeline to fill in that new price point category, and we opt to do that with overtime as opposed to add staffing just for that pipeline fill. But in terms of does it have a significant impact on gross profit? It really doesn't. So whether we use regular time and hire people or overtime, it's pretty insignificant to the gross profit numbers.

Second, given your backlog -- and that's been, I guess, getting even larger -- could you talk about the effect that's had on leadtimes? What kind of leadtimes you are having for deliveries to dealers, and whether or not that is having an impact on sales?

We do not feel that -- well first of all, we need to get more product out to the dealers so that we can continue to grow. We feel that some of our products, dealers have been shorted and we need to make sure that we can get it to them, especially for the spring market. And that's part of the reason that we continue to ramp up our production, and we continue to stay on overtime, both. So, our objective is, naturally, we're shipping out a lot more than retail during this time of the year, and that we should be able to see a pretty significant increase in dealer inventory by spring, so that we're ready for the prime selling season.

Related to the backlog, could you break down the backlog between Class A and Class C in diesel and gas?

That's on the back of the news release, if you've got that. We broke it out in the news release if you look on the back page behind the financials. There's a table of that information (multiple speakers)

You got it?

I do have it. Specifically to the gas backlog, or sorry, to the diesel, backlog -- could you characterize how much of the new models have been shipped versus orders, and where you stand there?

Of the new models, the new Vectra and Horizon -- diesel products? Ed's got the numbers.

We shipped 263 models during the quarter.

Okay. And then --

Dealer inventory is about 250 of those models out there in that 4429.

Okay. And then that 260, that follows -- you only shipped very few of those in the fourth quarter, is that correct?

Something like 55, I think, if I remember correctly.

We're just getting the product out there and getting it with its exposure, so hopefully we'll see some positive results.

Barry Vogel, Barry Vogel Associates.

I know you didn't give us too much details on the Revenue show itself, in terms orders, so I was wondering if you can share with us, in the new diesel area first of all, how much orders you actually got at the show in Louisville? And then, on the new triple slides and gas, what kind of orders you got in that product area?

We decided the only time we really put out the individual numbers are during our conference call and at the end of our news release. I guess I'm not willing to break down and pass out all the individual numbers, but all I can say is we had kind of like what I think a lot of companies did. We had an extremely good show. The products did extremely well and our new diesel products and our triple (indiscernible) gas did receive a lot of orders.

Seasonally, usually, your shipments go down from the November quarter to the February quarter.

That is a correct statement.

You have -- we know the backlog at the end of October, which is very large and perhaps might have grown larger. Is it possible this year, because of the way the timing was of the RV show and the improvement in the market conditions, is it possible that we won't see a drop in shipments November to February like we always see?

That possibility does exist, but I do need to say we are taking the week off for Christmas. Please understand that just like we have done for many years at Winnebago Industries, we shut down between Christmas and New Years.

So the fact you lose a week, it's hard to do that.

Yes. So we will lose that, but other than that the assumptions are good.

As far as the Charles City production, which I think you said earlier in the call was 60 C's per week now and going higher?

That is correct.

Given the reception by your dealer body on your C product, what do you think realistically is where you can get to production on C's at a peak this year? And what is the capacity on a single shift at Charles City?

We set Charles City up, the capacity if you remember was around 3500 to 4000 units a year. And if we get to 80 a week, just roughly 50 weeks of production minus maybe only 48 weeks of production, but you're getting close to 4000 units at that point in time. One of the things that we can look at in Charles City though, is there may be even the opportunity that we can double shift that facility in Charles City, because they still have a very ample labor pool in their area, where we would not be able to double shift the production in Forest City because we don't have the ability available workforce.

What would make you go double shift? I mean you (indiscernible) --

Volume, if we just have a need for that much. But then we also can utilize overtime like we are doing now for the future in Charles City also, so these are different things. We are at -- as we said earlier, we're about at 80 percent of our capacity, and we're going to continue to do both -- hire people to ramp up our production capacity and also utilize overtime.

Timothy Jones, Wasserman (ph) Associates.

First of all, I can understand you don't want to break out by lines of the Jacksonville show that (indiscernible). Were your orders up (indiscernible) the dollar value in the line would be 68 and 75 percent number of recorded by (indiscernible)?

I guess we are just saying that we had a very good show. We don't give any guidance and we try not to pass this on, other than general comments like it was a very good show for, I think, the entire industry. I think the whole RV market is going to do very well this next year.

You (indiscernible) on this problem with the valve that coachman is having, that $8 part that they're having with the ovens. Obviously, with your size you got to the front of the line. But you said you use alternative solutions? I know of no alternative solutions.

There were some alternative solutions. First of all, we were able to buy all the CSA stoves, the Canadian stoves that were available. We utilized a bunch of those, (technical difficulty) able to get a bunch of inventory. We were also able to utilize some stainless steel stoves. We have (indiscernible) front stoves, but we were able to get some stainless steel. So there were some things that --

(multiple speakers)

That's not from (indiscernible)? The stainless steel, (indiscernible) different manufacturer?

Yes, we were able to find some other alternatives to use.

Excellent job; very good. The decline in the non-diesels, is that just because you're concentrating on the diesels for the quarter?

Yes. In fact, our gas shipments were down a little bit because we were trying to get so many diesels off the market. Again, we're number one in gas Class A's, but you we're number three or four in diesels. And that is our (inaudible). We need it. And now that we have a product, we need to continue filling it to the marketplace and see how we can perform. We're number one in Class C's, Number one in Class A's. We would like to be better than three or four in diesel.

I've got a question. Diesels have been (indiscernible) on this industry for over 35 years, but diesels have been strong for the last 10 or 15 years. Why have you not been more aggressive over, let's say the last decade, on diesels? (indiscernible). I think you did exactly the right move last year, but why haven't you been doing it for the last 10 years?

I think that's a fair question. Winnebago has concentrated a lot more in the Class C's and Class A gas, and I would even compliment companies such as Monaco and others who got into the diesel market and read it earlier. I don't think it's been strong for 10 years but I think you can say it has been fairly strong for 5 years, and they identified the market and they got into it before Winnebago did. And that was an area that we needed to catch up in.

Finally -- your inventories, I think, last year were down. And they were up, down 8 million up 13 million this year. Was it just the tight situations last year or -- that it was extremely tight, or what is the situation?

We had a little higher finished goods inventory at the end of the quarter primarily because -- this is Ed -- we showed a lot of diesel product at the Louisville show. (inaudible) that's our inventory, we take that; that will be sold out in the second quarter.

Finally, your dealer inventories are down 4 percent. It looks like -- is that just these delays maybe on the parts and everything. It looks to me like they should be up for -- given your backlog and so forth, and certainly since you're introducing these two new models (indiscernible) 253, that they should be up maybe 300 units instead of being down 200. Can you address that?

I think that's, again, a function of our order backlog. We're working overtime, we did have a very strong retail market environment during September and October, and I think the dealer inventories got reduced and the Company is working as hard as we can to get inventory out to our dealer channel.

I can't get to the 80 percent. Is that because you're taking up -- you're accounting the Christmas (indiscernible) week of is something. You're talking about a 52 week because you're running more than full capacity at Torch City. Are you just taking that on a theoretical inventory for 52 weeks or something? (indiscernible) give you that 80 percent, the capacity rate?

Last year we announced when we built Charles City that we thought we could get our capacity up to between probably 14 5 and 16,000 units, depending upon the mix of gas versus diesel, as well as the mix of Class A's versus CLASS C's. And we continue to try to strive to bring our Charles City operation up to that level. We believe that our current run rate puts us at about 80 percent of what we believe to be capacity when Charles City is up and running at full strength.

Craig Kennison, Robert W. Baird.

Congratulations. First, could you characterize the margin profile of the new diesel models that you're selling?

I think, obviously, I would have to characterize that obviously it's going to be better than what we -- our average has been in the past. We recognize the diesel market is a very good market. It has, obviously, higher ASPs, and the margins are good there, too, Craig.

So the follow-up would be, your margins were particularly strong in this quarter on the gross margin side, relative to our model. Wondering what is a sustainable number? It was well above 15 percent this quarter. Is that a sustainable number, given the current demand trends?

Probably not Craig. As Bruce indicated, we did concentrate very heavily on getting our new Vectra and Horizon products into the marketplace. As you could see by the shipments profile, about 28 percent of our Class A business was diesel, which is a little stronger than it has been. And that definitely helped our gross profits. Going forward, once we get the channel filled with that product, we will see a return more to what I would say -- more typical gross profit profile.

Could you discuss (indiscernible) survey recently reported fairly weak retail demand trends in October. It looks like an anomaly, but I wonder what your opinion was. And what does November and December look like from a retail perspective?

You know, we continue to see all the numbers also. First of all, I think November was fairly -- we feel November was fairly strong. And again, part of the reason our dealer inventory is down is because the retail rates went higher than what was probably normal in the past for a lot of Novembers. So again, I think you're going to see the numbers in the future, November and December, actually be stronger than where they were last year.

Could you comment on your share repurchase activity, and what remains as an opportunity for you relative to the Hanson Family Foundation?

The Hanson family has approximately 3 million shares available. When they finished, they filed to sell 700,000 shares through a 10 B-1 program. And they are about 60 percent through that, selling those shares. At the end of that time they will have approximately 2.7, 2.8 million shares left, of which the family continues to talk to us. And we know about -- before they did this other filing they came to us and they talked to us, but it was in a blackout period. We could not do anything. We will just see. I think the family has been very fair to us and the shareholders, and continue to let us know their direction. And if we get an opportunity for the future and they want to do something, I am sure Winnebago -- as you have seen we have $57 million in cash again, even after we paid for the last 64 million in October. So we're in a very good position, that if we get an opportunity we can take advantage of it again.

Finally, Ed, if you could comment on the rise in average selling prices across the board? What is driving that, and again, is that sustainable?

I think it probably is sustainable. We continue to see increasing popularity for people to trade their vehicles up to double and triple slide features on our coaches. Obviously, we are going to, in fiscal 2004, see an upward lift in diesel ASP's simply because of our new product offering. I think what you see in the first quarter is for the most (indiscernible) reasonably expected to sustain itself.

(OPERATOR INSTRUCTIONS). Michael Novak, Frontier (ph) Capital.

Can I get CapEx estimates, please, for this year? And if you have any preliminary guess on what it would be in the out year, as well?

Our remaining CapEx is going to be about 7.8 million, which will get us pretty close to 10 million for this fiscal year. And in terms of '05, we're really looking at -- assuming our forecast for the industry is correct -- probably about 10 million in CapEx in '05.

And when do you foresee building another plant or doing a plant extension?

That would probably depend upon the strength of the industry. We built this last Charles City facility and we thought it would be good for at least two or three years, but if business (indiscernible) up, we will be happy to start planning a new facility earlier.

Great. And if I just annualize the D&A in the current quarter, is that a good estimate for the year?

Yes.

Your inventory turns historically have been sort of mid sevens to eight turns. You are in the low 6's over the last couple of quarters. Would you expect it to re-accelerate?

I think what we have seen in the last quarter or two is probably going to be what to expect here going forward in the near-term. It certainly might possibly return to that. But with the addition of Charles City, one of the things that we have experienced is, with the additional diesel business, we have a longer production cycle with painted products. And that has a tendency to raise our work in process inventory level and it's going to slow turn down, simply because we don't process those through the factory as fast as the unpainted products.

And then you had mentioned that the Company is committed to its share repurchase program and to its dividend program as a way of returning the cash flows to the shareholders. I guess I am asking, are you looking at any acquisitions, or is that going to be a strategy that you stick to going forward?

Number one, the money we earn -- the number one priority is for growth of the actual company, whether it be acquisitions or expansions of new facilities. Number two and three will then be if we can't figure out how to grow through the acquisitions or expansions, then it will be to look at continued stock buyback programs or increased dividends, and how we can return it to the shareholders. One of the things that -- this last year our return on assets actually dropped a little bit, because we had carried too much cash at times and it just didn't get a good enough return. And we like to keep our ROE and ROA the highest in the industry.

Earlier a gentleman asked a question about the sequential revenues. I just want to make sure that I heard correctly. Typically, sequential revenues in the second quarter are down from the first. But it sounds like they could be flattish this year given the strong demand in the industry?

That is correct.

Michael Millman with Millman research.

You may have answered this, but in regarding the diesel and your entry, have you had to fight your way into that market, be aggressive on pricing? Or has the Winnebago name sort of carried the day, and your Winnebago customers are pleased as punch to be able to buy a Winnebago Pusher, and so that you're getting full price?

I can tell you that so far the introduction of our product has been with little or no discounting. There may have been a show special that we put on or something like that, but the bottom line is there hasn't been any discounting. Our dealers are actually extremely pleased that we're giving them a product line that we did not offer before. This was a void in the diesel category in the price range of 170,000 to 240,000. We have six different floor plans in both the Itasca, Horizon, and six floor plans in the Winnebago Vectra. So we've given a pretty substantial line of products in each of them, and I think our dealers are just happy that they have the products that they can compete with in the marketplace. And so, the bottom line is we have given little or no discounts at all with the new product, the introduction.

Are the dealers selling them at a faster rate than they're selling, for example, the gas motorhomes, because they're relatively new?

I can tell you that we just got the product out. We introduced it to the dealers the first week in August. We went back, we started production and started shipping the product to the dealers in September and October. And we're just starting to see the retail turns, and so far we're pleased. And we will just have to see where it can continue to go. When you introduce a new product like this, usually you've got to complete the first full year and into the second year before you really see its real success on how well it's going to do. Then you've got a good review of the backlog and the retail turns that have happened with this new product.

So you're still primarily in the selling stage?

That's correct.

Mr. Hertzke, there appears to be no further questions. At this time I would like to turn the call back over to you, sir.

Thank you. Once again I would like to thank everyone for joining the Winnebago first quarter 2004 conference call. In closing, I would like to again point out that we remain very optimistic about the future. We see retail markets for the motorhomes improving. Our 2004 products were very well accepted for the marketplace. Winnebago Industries has a strong balance sheet with no debt and approximately 57 million in cash for future growth opportunities.

Motorhomes are growing in popularity, and our owners who use them enjoy the leisure activities such as tailgating, motorsports, and many other activities other than just camping, today. The baby boomer generation is entering their prime target market and the age of the typical motorhome buyer continues to broaden. Production of our new Charles City facility continues to expand to allow us to increase demands of our products for the future. Winnebago Industries has a strong brand name and a quality reputation. And as a leader in profitability in the RV industry, we will continue to repurchase the Company's stock, pay dividends and try to enhance our shareholder's value.

With all this in our favor, Winnebago Industries feels it is well-positioned for a very strong future. I'd like to wish a happy holiday to everyone and thank you for joining us today. We look forward to talking to you again in March for our second quarter results on our conference call. Thank you.

This does conclude today's conference call. At this time, you may disconnect.