Winnebago Industries Inc (WGO) 2004 Q2 法說會逐字稿

Good day and welcome everyone to the Winnebago Industries' second-quarter 2004 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Sheila Davis. Please go ahead ma'am.

Thank you Philip and welcome to Winnebago Industries' conference call to review the company's record results for the second quarter and the first six months of fiscal 2004 ended February 28, 2004. Conducting the call today are Bruce Hertzke, Winnebago Industries' Chairman, Chief Executive Officer and President, and Ed Barker, Senior Vice President and Chief Financial Officer. 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 turn the call over now to Bruce Hertzke. Bruce.

Thank you, Sheila. Good morning. I would like to welcome everybody to our company's conference call this morning. I will briefly review a few highlights of the second quarter and the first six months of fiscal 2004 for Winnebago Industries, and then Ed Barker, our Senior Vice President and Chief Financial Officer, will review our financials with you. By this time, each of you should have received a copy of the news release this morning with the results of the company's second quarter and our first six months. We are extremely pleased with the growth in our revenue and earnings during the second quarter and our first six months of fiscal 2004. We set new records for both revenue and earnings for the second quarter and the first six months.

The quarter and the first six months benefited from strong motor home sales especially in the Class A diesel market. We made a determined effort to increase our presence in the Class A diesel market in 2004. Winnebago ended 2001, 2002 and 2003 calendar year in the number one overall position in motor homes sales. We were number one in Class C's. We were number one in Class A gas, but we were number four in the diesel position. Our new and redesigned diesel models, the Winnebago Journey and Vectra and the Itasca, Meridian and Horizon motor homes continue to be very well received. Sales of our 2004 Class A diesel products have been particularly strong since the introduction last fall.

This has resulted in an increase in our Class A diesel unit volume of 96 percent in the second quarter of fiscal 2004 compared to the volume of the same period of fiscal 2003. Our retail market share in Class A diesel market is also growing, reaching 12.9 percent for the month of January 2004, which compares very favorably to 9.4 percent market share which we had in the Class A diesel market in calendar 2003. Another indication of what we feel will be strong growth going forward is the increase in our sales order backlog. Winnebago Industries' sales order backlog at the end of the second quarter of fiscal 2004 was 2,933.

This was an increase of 55 percent from the backlog of 1,890 reported at the end of the second quarter of 2003. Based on our sales order backlog, we are looking forward to the spring and summer selling season and we also continue to believe the long-term prospects remain extremely positive for our industry. Economic factors have improved since last year at this time. Interest rates have remained relatively low at relatively low historic levels while it appears that consumer confidence has begun to rise.

These economic factors show a positive trend in our business. Our dealers appear to be extremely optimistic about the retail sales environment in calendar 2004. Retail RV shows across the country have been very well attended with improved retail buying activity. Retail sales in January 2004 for the industry indicate motor home sales are 12.8 percent ahead of retail sales reported just one year ago. At this time, I will turn the call over to Ed Barker for a financial review.

Good morning. I am pleased to review with you the excellent revenue and earnings performance for the second quarter and first six months of fiscal 2004. Before I begin, it's important to mention that on January 14 of 2004 the company's Board of Directors declared a two-for-one stock split effective in the form of a 100 percent stock dividend distributed on March 5, 2004, to shareholders of record as of February 20, 2004. All share and per-share amounts reported today have been restated to reflect the retroactive effect of the stock split. Revenues for the second quarter of fiscal 2004 were a record 266 million, a 43 percent increase compared to 186 million for the second quarter of fiscal 2003.

Net income for the second quarter was 15.9 million, a 29 percent increase compared to net income of 12.3 million for the second quarter last year. On a diluted per-share basis, the company earned a record 46 cents a share for the second quarter of fiscal 2004, a 44 percent increase compared to the net income per diluted share of 32 cents a share for the second quarter last year. For the first six months of fiscal 2004, the company reported record revenues up 521 million, a 24 percent increase compared to 419.3 million for the first six months of fiscal 2003.

Net income for the first six months of fiscal 2004 was a record 33.9 million, a 19 percent increase when compared to net income of 28.6 million for the first six months of fiscal 2003. On a per-share basis, the company earned a record 96 cents per diluted share for the first six months of fiscal 2004, a 28 percent increase compared to 75 cents per diluted share for the first six months of fiscal 2003. I will now turn the call back to Bruce.

In closing, I would like to again point out that we remain very optimistic about our future. We see the retail market of motor homes improving. Our 2004 products have been very well received in the marketplace. The baby boomer generation is entering our prime target market and the age of the typical motor home buyer continues to broaden. Motor homes are growing in popularity and our owners are using them for a lot of other leisure activities other than just camping. Winnebago Industries has a strong brand-name and a quality reputation. With Winnebago's strong balance sheet and no debt, we continue to be in a very strong position for future growth. With all of this in our favor, Winnebago Industries is well-positioned for a strong future. At this time, I'm going to now turn the call back to Philip, our operator, for the question-and-answer portion of this call. Philip.

(OPERATOR INSTRUCTIONS). Craig Kennison with Robert W. Baird.

Congratulations on your performance again. If first question, very impressed with your success in the diesel market. If you could just run through the average selling price in A gas, A diesel and Class C?

Our Class C average sales price for the second quarter was 50,938. Our Class A gas was 79,354, and our Class A diesel was 143,684.

It seemed like diesel ticked down them maybe $5,000 from sequentially? Any story to that or just a different mix?

Different mix of product, Craig. If you remember in our call in December, our newly introduced Vectra and Horizon product was new to the dealer market as Bruce alluded to earlier and we spent a lot in the first quarter putting that product into the marketplace and we emphasized that to get a proper amount of product in the distribution channel. During the second quarter we saw a substantial increase in terms of mix -- diesel mix in our core value priced diesel product lineups. Our Journey and our Meridians did very well there and they are a more value priced product and that is where you see the slowdown or the reduction in the average sales price in diesel.

That's helpful. Can we talk a little bit about the higher manufacturing expenses you have identified? Maybe talk about what they are and to what extent we're seeing commodity inflation as we have seen in other RV manufacturers?

Earnings for the second quarter were not really significantly impacted by higher commodity prices, Craig. This is partly as a result of supplier agreements that fix for a certain period of time, our prices and also -- it is also attributed to a pricing philosophy that is built some inflationary costs into the company's product pricing at the beginning of the year. While we have seen certain commodity prices, most notably steel and aluminum go up, those commodities in terms of the total product content are relatively small in nature. Additionally, we have taken increases in the company's prices for our chassis and have passed them on into the marketplace as they have occurred. So they really haven't affected our margins.

In terms of your question regards to manufacturing costs, first of all the second quarter is a quarter in which we lose eight production days because of holidays and we see our overhead in terms of direct labor a bit high because of holiday pay and benefits. But we continue to increase our production levels both at the Charles City plant as well as our diesel production in Charles -- in (indiscernible) City. This has resulted in higher staffing levels, as well as some overtime costs associated working the entire quarter on a 45 hour week. And additionally, the company continues to see increases in health care costs and also seasonally high costs in utilities, primarily natural gas impacted that quarter also.

So, it sounds as though many of these costs are more than just a onetime pressure for you to face?

Some of them are, that is correct.

Any sort of -- margins were impacted last year by some negative events. But going forward this year we would have expected some significant margin improvement on the gross margin side. Any color with respect to expectations there?

In terms, I think on a going forward basis, we continue to see our value priced diesel products perform very well in the marketplace, as well as going forward we are going to probably in the third quarter, as we seasonally usually do, see a more significant mix of Class C products. So from those two perspectives you probably could see continued -- a little bit of pressure on our margins from that prospective, simply a mix issue.

Should we be thinking in general about 14 percent gross margin or below?

I think between 13 and 14 percent on a going forward basis is probably, given the success of our value priced diesel products as well as the strength of the C body market. Right now, that is kind of what we're looking at.

One more question and I will get out of the queue here. Other manufacturers have been raising prices, any plans there?

We will probably -- we have been passing our chassis prices on as they have occurred. We will price our '05 product in the next 60 days and during the fourth quarter we will probably see price increases to reflect higher commodity prices passed on in our '05 pricing, but no current plans to increase our prices in our '04 products.

What would the percentage increase be in the normal '05 upgrade?

Somewhere in the 1.5 to 2 percent range probably.

Terrific. Congratulations again on the quarter and I appreciate your time.

Scott Stember with Sidoti.

Good morning, gentlemen. Could you maybe talk about the product potential, product recall that you referred to? And on a basis point basis, how much of that of the gross margin contraction was attributed to that?

Our recall, basically it affected this quarter by about 3 cents a share. We're working with the supplier now, we just found this out just before the end of the quarter and we are making arrangements. We actually haven't even announced this to our dealers yet, but we wanted to make sure that our financials reflected it, and we get it behind us right away. So we will be announcing this to our dealers and all of our consumers coming forward. But it did affect our quarter by about -- approximately 3 cents a share.

Okay. We should assume that there will be no additional charges going forward?

No, that is correct. There should be no more charges. We feel that we have more than adequately reserved for this.

Can you talk about where your capacity utilization is now? Maybe talk on the unit basis, where you are at?

Capacity utilization, I will give you the percent. We were at approximately 80 percent capacity utilization in our Charles City facility. I think we have been giving you a number. We are in the approximately 70 units per week range, I think last call. We had moved from the 50's, the '60s and now we're up in the 70 range. So, we continue to ramp that up, and we are at about 80 percent capacity probably in both Charles City and Forest City.

Okay. As far as -- I think that is all I have for now actually. I will get back into queue.

Bill Lerner with Prudential Equity.

Thanks guys. A few questions here, one just housekeeping. What is a good tax rate going forward? It drops sequentially to 36 percent?

Going forward probably about -- the year-to-date number is correct because we corrected it. About 37.5 percent on a going forward basis.

Secondly, could you talk about where actually you're accruing for the product recall? I just wanted to get a sense for what it seems to look like if you strip it out, but where do you accrue for that?

That is in our cost of goods sale.

It is in COGS. So margins are actually 50 basis points better than it suggests here?

Actually if you add that back in it would be about 13.9 percent.

Perfect. Then just generally speaking, at what stage of capacity utilization does it make sense to think about expanding capacity? Whether it is at Charles City or some other facility that we don't even know about?

Definitely when you get to 100 percent you need to -- you can then utilize overtime for a little bit more. We did that in 2002. We actually ran nine months straight overtime of before we were able to -- when we decided to go off and build a new facility. Some of those discussions are ongoing right now. We have -- we don't have anything to announce, but we have a big Board of Directors planning meeting May 4th and 5th that we will be continuing to review some future strategies and growth for the company.

Thanks guys.

Kathryn Thompson with BB&T Capital Markets.

Great quarter. First question is, what is the status of dealer inventory, if you could add a little color to that?

In our release, we went through and we showed dealer inventory is at 5,359 at the end of the quarter. This is up from where it was last year, but on the same hand we have all these new diesel productlines and categories, so basically we feel that our dealer inventory is approximately where it should be because our inventory is up just basically in our new product lines. So, we think we're where we should be for dealer inventory.

So you're comfortable with a little bit higher level right now?

Yes, because of our new product lines. As I said, when you add our new diesel productlines inventory into the field, the rest of our inventory is clearly comparable to where it was even last year, and last year was, I think it's fair to say, a little weaker year with the Gulf War and -- in fact we were on four-day work weeks at this time last year.

Okay. Also, are you seeing any pressure to discount in the market now?

There are always programs and there are always spring show specials and different things. Our philosophy is to continue to -- I won't ever say that we will not compete or will not discount, but our philosophy is that we need to earn the reputation of providing high-quality products and good valued products and innovative products to the marketplace, and our main objective is not to just compete on the price point. So, we continue to see that there are always programs out there. There is always different manufacturers that have some type of program, but our philosophy stays -- continues to remain as it has been the last couple of years.

I guess you talked about capacity utilization numbers in the previous questions. Do you see the same utilization of those going into the second half of the year?

As of right now, I think that we continue on overtime. We are currently on overtime, and we continue to have overtime scheduled and we continue to ramp up our production numbers. So, the market will dictate that for us.

Okay. Great. All of my other questions have been answered. Thank you.

Barry Vogel with Barry Vogel & Associates.

Good morning, ladies and gentlemen. Where are you now in your stock purchase, your stock repurchase program, in terms of authorization that is outstanding and did you buy any shares back in the quarter that just ended?

First of all, we did not buy any back in the last 90 days. Our last big purchase last year, we had two major purchases, 64 million from the family in the fall, and about one year ago we bought $10 million of our stock in the spring when it dipped down a little bit. We still have an authorization of approximately $10 million to repurchase shares of stock. So, that is where we sit right now to date.

Okay. As far as the margins are concerned, is it fair to say Mr. Barker and Mr. Hertzke that the margin of the first quarter, which was 11.4 percent operating margin, probably because of all of these factors you discussed will be the peak operating margin for the year in any quarter?

That is correct.

That is also the comment I made in the December call.

Those were very astute comments, Ed. I have to congratulate you on that.

Thank you.

As far as your share of your mix in diesel, I must congratulate you because you finally leaped well above where you had been. Do you think that 30 percent share will grow or do you think that's about it for the moment? Thirty percent of your diesel, of your Class A gas mix was diesel in the quarter, I believe.

I think the thing is, we are strong in gas. We're hoping to stay strong in gas also. So I think the industry is at 40 percent of the Class A market is in diesel. I am not sure that we will ever be able to get to 40 percent if we remain very strong in gas. Again, we will see where the market grows. If it continues to grow in diesel at least we feel that we're in a position that we can continue to grow with that now. I think right now, it looks like 30 percent of our Class As will probably be a diesel mix. If it continues to grow a little more than that and the diesel market grows, we definitely will want to grow with that.

As far as at a 30 percent diesel mix of Class A which you achieved in this quarter, would you say on balance that that helped your operating margins or was it neutral compared to when you had the lower percentage of diesel in your Class A mix?

I think it would probably almost be neutral, Barry, because what happens is we add -- our profitability comes from what we put for what we call value-added onto the chassis. The chassis itself is a higher priced in a diesel. So actually on a percentage basis, it could actually show that our operating profit was a little lower even though we are making just as much on all the value added that Winnebago puts on the chassis. In fact we are making just lightly a little bit more. Because the chassis for the diesel is so much more that we kind of just pass through at cost, you know it brings down, on a percentage basis, it brings you down slightly. Overall we're going to make a lot more money just because of the increased dollar revenue in the diesel category.

Okay. Thanks very much.

Thank you.

Joe Chumbler with Stephens Inc.

Thanks. Most of my questions have been answered but I just wanted to ask, Bruce on the last conference call, I think you described the dealers as extremely optimistic regarding the retail environment. Could you say that today or has that waned at all?

No, I think they are still very very optimistic. They continue to -- and it was very good to see that the retail for the industry was up that 12.8 percent in January. When you have 20 -- our backlog continues to grow. It is up over 2,933, and I would say that is very optimistic. This is, I need to tell you that this is the very first time -- I've been at Winnebago Industries for 32 years and Ed has been here 34, and we have never seen a period of time in the second quarter that we worked the entire second quarter on overtime. This is a true -- something that is very unique that out of all of our years in the industry, we have never seen this strong of a period of time through the winter months.

And you think that goes beyond the new diesel product you're offering?

There are always several factors. Naturally our diesel product has helped us. Some of our other productlines -- we've got a few new floor plans that have done well for us. There are a lot of different things, but the overall market itself and the dealers just continue to be very optimistic, and the show season continues to give us very good indications that we're going to have a good spring.

Finally, being the veterans that you are, do the higher -- potential for higher fuel prices this summer give you any cause for concern?

Well, I think it will play on consumer confidence overall. The actual gas price on the cost of a motor home, we put this in our review a lot, is very very insignificant to your overall costs. If you can afford a motor home, it is pretty hard to spend $500 extra in the year for gasoline or diesel. So, I always use the example. You can change one airline ticket and spend more than $500. So, these people are going to continue to figure out how to enjoy life and the overall actual cost of gas or diesel I really don't think will have a big impact unless it impacts consumer confidence overall.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Timothy Jones of Wasserman & Associates.

Good morning. A couple of questions. I don't understand why you guys keep saying that you are running at 80 percent capacity at Forest City when you have the people working 45 hours a week? What do you count for 100 percent?

First of all, there are two reasons. We continue to shift different products back to Charles City as we continue to move C body and there is actually a labor shortage here in Forest City also that we cannot get all of the people that we want in a very fast mode. And we want to hire so many so that we can continue to control the quality and just slowly ramp up rather than just put a whole bunch of people into the manufacturing cycle at one time. So, we just continue to ramp up on a gradual basis rather than trying to jump into it all at one period of time.

I would suspect, with the unemployment rate, if you made that know to a wider area you probably could get some people to move to Forest City.

We definitely are putting the word out.

The three cents that you said from the product recall, because you haven't announced it, have you gone into exactly what it is or not?

No, we have not.

Okay. What was the -- but in your release you sort of say also about the materials and stock options, but that wasn't material. The three cents was really the product of a one-time deal, or is it a penny or so from those other two things?

The product recall, Tim, was three cents and obviously is a non-recurring item. We talk about a more competitive mix of products and we have talked a little bit about that this morning on the call. That is primarily our value priced diesel products as well as more Class C products. In terms of manufacturing expense, some that has to do with the additional capacity. In regards to our G&A expense being up, a year ago the company, and this is certainly disclosed in our SEC filings, has a long-term incentive officer plan that is stock based, and we have to from an accounting standpoint mark that to market each quarter. A year ago, in December and January and February of 2003, we saw our stock price, because of the war, drop from $49 to $29 and that resulted in almost $1 million income item because we had to reduce the accrued long-term incentive.

Okay, that is where you put that number. Okay.

This year the stock price went from 55 to 67, so it actually was an expense when you take the two years and compare them together like obviously on our statement of operations, it is a very substantial number.

Is there anything else that made last year's numbers so low? The six months was 8 million but the two months were three? It was basically the stock options?

Basically our incentive compensation plans, yes.

One other question. Let me see what I had here. Did you give the exact dollar amount of that product recall right off or just a percentage?

We expressed in terms of cents per share. Three cents per share is what the after-tax impact was.

I can figure that out. Any chance now that you have reported your earnings, did you reconsider the Hanson shares that are on the market?

Just yesterday we had the Board of Directors meeting and John Hanson who represents the Hanson Capital Partners was in. We definitely -- I definitely stay in communications with them and tell them that when the time (technical difficulty), they continue to want to sell shares that Winnebago is always willing to talk.

That's it a little bit obtuse, but I will take that. But they haven't really sold any material shares yet have they?

They continue to sell some to the open market. They had a filing and they continue to sell some of their shares to the open market through that filing.

Do you remember how many they sold?

They sold over 300,000 shares.

Good. They need to get rid of that and that will be nice. Thank you so much.

Neal Miller with Fidelity Investments.

The reference to struggling or evaluating expansion plans, I guess I'm wondering what factors might enter into that under the obvious ones of demand and backlog and those kinds of things, but it strikes made that Charles City given the exogenous variable of the war and those kinds of things collapsing consumer confidence, it was a bit awkward or at least the timing. So I'm just kind of wondering to what extent you -- factors you consider in evaluating expansion?

First of all, like you said last year at this time just when we were opening the new facility we were on four day work weeks. We had kind of wondered about that, but we definitely believed in the long-term growth in this industry, and I can tell you that we are very fortunate that we were able to complete that expansion during that period of time so that we could -- and again I think we said in our expansion, we were expecting 3,000 to 4,000 units, about a 30 percent increase. They are currently building at a rate of around 3,500 units per week -- or per year, their week annualized production right now.

And we actually believe that there is some upside to that, yet that we can get through some efficiencies and some additions that we can put onto that. We have freed up capacity in Forest City then and we are -- one of the things that we are analyzing now is that we are building a lot higher labor dollar unit, because we're building a lot bigger units, diesel products with three and four slides. So we will continue to analyze how much more capacity we can get here, and we have had talks. At what point in time -- we are putting together a forecast. In fact, in May I have to have a three-year plan for my Board of Directors on industry growth and where the company can grow to and again we will be looking at if there is any additional capacity necessary for growth in the future during this three-year period.

One of the backups in evaluating the last opportunity was entry into diesel or at least getting more involved. So that was kind of a new business segment, so I was just wondering to what extent that would weigh in as opposed to just increasing output or optimizing the facilities?

Every year, we definitely discuss different areas that we can go into. In fact, our Vice President of Product Development and our Sales and Marketing are part of this presentation in which they identify different categories or fields that Winnebago Industries can go into and grow into and pick up some market share. Naturally I think it is just every year we have our discussion on travel trailers also. Whether that is the area that we need to concentrate on or whether there is some other more profitable opportunity area. There are other areas that we can continue to consider.

On the operating leverage sort of side of the world, I'm just kind of wondering with your exceptional period you just came through why there wasn't more evidence of that dropping to the bottom-line? And you mentioned the stock incentives but you also said your costs because of how you procure raw materials, were somewhat not as aggravated as the marketplace OSB and board and those kinds of things? So I was just kind of wondering whether you feel that operating leverage is as much as you would expect given that backdrop of the entire career span and how active things were?

We can still see a very competitive market environment and when we go into the diesel market, our products have to be competitively priced. This quarter had an exceptionally strong demand for our value priced diesel products (indiscernible) which don't carry the margins we have historically seen in terms of gas Class A product, simply because our value added is really of the coach, as Bruce indicated earlier, not of the chassis and while we seem top line growth in terms up when we sell a diesel product, the value added we bring to the marketplace is really the coach. So you're going to see, in terms of that leverage, the more diesel mix we add to the product that the leverage isn't quite as strong as it is when we are selling Class A gas product.

Where do the chassis come from? Is that a Ford product?

Chassis come from primarily Freightliner and Workhorse.

Obviously, steel would be part of that equation going forward I would think. I was kind of surprised that you said a one to two percent price increase would take care of the commodity profile and now you are alluding to a higher component cost that is out of your hands, as they say.

One of the things that we do besides our increases is that 1.5 to 2 percent that Ed was referring to, is that we pass chassis increases on automatically right away. As soon as we get notification of them, we pass those onto our dealers. That is besides our increases that we receive here on what we call our value added portion.

Appreciate that clarification. But, I guess in total, I guess your -- at what point is there any program to not spend or increase capacity in an area where you won't get as good of returns because there is less vertical integration chassis from the outside? I am still a little disturbed over the notion of increasing capacity. I am wondering about it.

We don't have anything to announce right now as far as increasing any capacity. The other thing that we have for an opportunity, in Charles City we have the opportunity to see exactly how much production we can get out of that new facility. One of the things that we have gone to is even discussing if we would double shift that, since they have a larger labor pool and labor base over there, that we could actually continue to grow considerably for the future without adding much more brick and mortar.

Appreciated. Thanks so much.

That concludes today's question-and-answer session. At this time I would like to turn the call back over to senior management for any additional or closing comments.

Thank you. Once again, I would like to thank you for joining Winnebago Industries' second quarter fiscal 2004 conference call. We look forward to talking to you again on June 17th for our third quarter conference call. Thank you and have a good week. Bye.

That concludes today's conference call. Thank you for your participation. You may now disconnect.