Winnebago Industries Inc (WGO) 2004 Q3 法說會逐字稿

Good day and welcome, everyone, to the Winnebago Industries' third-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, Amy, and welcome to Winnebago Industries' conference call to review the Company's record results for the third quarter and first nine months of fiscal 2004 ended May 29, 2004.

Conducting the call today are Bruce Hertzke, Winnebago Industries' Chairman of the Board, 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 cost actual results to differ materially from these statements. These statements 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 everyone to our company's conference call this morning. I will briefly review a few of the highlights of the third quarter and the first nine months of fiscal 2004 and then Ed Barker, our Senior Vice President and Chief Financial Officer, will review the 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 third quarter and the first nine months.

We are extremely pleased with our continued growth in our revenues and earnings during the third quarter of fiscal 2004. Once again, we set new records for the third quarter. We also had record revenues and earnings for the first nine months of fiscal 2004.

The quarter and the first nine months benefited from strong motor homes sales, particularly in our Class A diesel market. Our new and redesigned diesel models, the Winnebago Journey and Vectra and the Itasca Meridian and Horizon motor homes, continued to be our sharp performers.

While total delivery of our motor homes increased 32 percent in the third quarter compared to the same period last year, we experienced a 127 percent increase in diesel motor home delivery during the third quarter this year versus the third quarter last year. Our retail market share in Class A diesel market is also growing, reaching 13 percent for the first four months of calendar 2004, which compares favorably to 8.5 percent market share that we had in Class A diesel market for the same period in calendar 2003.

Our sales order backlogs have also remained strong for Winnebago Industries. Sales order backlog at May 29, 2004 was 2,444 units. This was an increase of 72 percent from the backlog of 1,419 units reported for the same period last year. The Class A diesel portion of this backlog is a 262 percent increase from the same period last years.

Retail sales for the first four months of calendar year 2004 for the industry indicated that motor home sales are 15.4 percent ahead of retail sales posted for the same period last year. Winnebago Industries outperformed the industry with our retail sales of Class A and C motor homes up 16.7 percent for the first four months of calendar 2004 compared to the same period last year.

Winnebago Industries remains the top-selling motor home manufacturer in the industry with 18.5 percent of the Class A and C market for the first four months of calendar year 2004, up from 18.3 percent for the same period last year.

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

Thank you, Bruce. Good morning. I am pleased to review with you the excellent revenue and earnings performance for the third quarter and first nine months of fiscal 2004.

Revenues from continuing operations for the third quarter ended May 29, 2004 were a record 310.2 million, a 55 percent increase when compared to revenues of 200.2 million for the third quarter of fiscal 2003.

Net income for the third quarter was 17.7 million, a 97 percent increase compared to 9 million for the same period last year.

On a diluted per share basis, the Company earned 51 cents from continuing operations for the third quarter of fiscal 2004, a 113 percent increase -- compared -- to 24 cents a share for the third quarter last year.

Excluding the charge from the previously announced lawsuit settlement, net income would have been a record 22.3 million, a 148 percent increase, compared to 9 million for the third quarter last year. On a diluted per share basis, excluding the charge, the Company earned 64 cents per share.

For the first nine months of fiscal 2004, the Company reported record revenues of 831.2 million, a 34 percent increase, compared to 619.5 million for the first nine months of fiscal 2003. Net income for the first nine months of fiscal 2004 was a record 51.7 million, a 40 percent increase when Company to the 36.8 million for the first nine months of fiscal 2003.

On a per-share basis, the Company earned a record $1.48 per diluted share for the first nine months of fiscal 2004, a 53 percent increase compared to 97 cents per diluted share for the same period last year.

We also announced yesterday that we had completed the $20 million stock repurchase plan that had been authorized on March 20, 2003 with the repurchase of 384,533 shares of our common stock during the third quarter for an aggregate price of approximately 10.3 million. These shares were adjusted for the two-for-one stock split on March 5, 2004. On a fiscal year-to-date basis, Winnebago Industries has repurchased 3,284,000 533,000 (ph) shares split adjusted for an aggregate price of approximately 74.3 million.

We also announced yesterday that the Company's Board of Directors has authorized its ninth stock repurchase program with an authorization to repurchase up to an additional $30 million of the Company's common stock.

I will now turn the call back over to Bruce for closing remarks.

Thank you, Ed. We continue to believe the long-term prospects remain extremely positive for Winnebago and our industry. Economic factors have improved since last year at this time. Interest rates continue to remain relatively low at low historic levels and the Fed has indicated that they do not attend to raise interest rates dramatically over the coming year. Still, prices have stabilized and it appears that consumer confidence has begun to rise.

These economic factors traditionally bode very well for our business. Consequently, we remain very optimistic about our future. Our 2004 products were well accepted in the marketplace. The 2005 products that we have just introduced so far this year, including our new Winnebago Aspect and Itasca Cambria, are just reaching the dealers. It appears to be very well received. We continue to lead our industry in profitability. Winnebago Industries has a strong balance sheet with no debt and approximately 95 million, even after our last year's cash stock repurchase program. The demographic trends continue to be very positive for the industry's continued long-term growth. Winnebago feels we're very well positioned for a strong future.

Before we close, I would like to thank the entire Winnebago Industries team for their hard work to make this third quarter the most successful quarter in our 46 year history at Winnebago industries. Everybody did a fantastic job.

At this time, I will now turn the call over to the operator for our question and answer period portion of the call.

Thank you. The question and answer session will be conducted electronically.(Operator Instructions). Craig Kennison with Robert W. Baird.

Good morning, everyone. Congratulations on your just excellent performance. The first question has to do with gross margin; that remains very difficult to pin down. Can you give us a feel for gross margin in each of your three categories, diesel, gas and fees, and then maybe comment on whether 13 to 14 percent still seems like a reasonable range for the next several quarters?

Our performance was certainly very strong during our third quarter, Craig. We ran a fair amount of overtime in our factories and that certainly obviously helps us in terms of our plant efficiencies. The strong mix of Class A products was a little unconventional. Traditionally, in the third quarter, we see seasonality in our product mix traditionally more slanted towards the Class C products. It is fairly common for our company, during our third quarter, to run a product mix that runs about 40 to 42 percent Class C and the balance Class A.

The third quarter was a little uncharacteristic of what we traditionally see and is primarily driven by what we talked about in our comments in the release and also in Bruce's comments -- is that we are a little different company now because we have got such a strong product offering in our diesel products. We saw, during the quarter, our Class A products actually run a mix of about 64 percent, which leaves a smaller percentage mix of Class C products. I think, if you look in the back of our news release, you will look at the real growth here we have experienced is very strong in the Class A diesel market. So I think that is what is kind of making our gross profits trend a little bit up is it was a little bit non-traditional quarter in terms of what we've seen in past years but obviously, the fact that we have strengthened our product line up in our diesel market, we look for the future for that to play a stronger mixed percentage of our product mix.

Not to pin you down and maybe you won't allow me to do that, but I think, in previous calls, you have commented that 13 to 14 percent is a reasonable thought. Perhaps you did not anticipate such strong demand this quarter. But going forward, I would think you would not believe 14.8 percent gross margin should be typical.

We can certainly do it in the 14s. I do not want to rotate that off the table or rule that out. Maybe we can look at a range of 13.5 to possibly as high as 15 but it is going to have to be one of those quarters in which we have a good mix.

I think it is important to understand that our products -- we have probably a 300 basis point range in terms of margins in our products. Dependent upon the mix that flows through it each quarter, based upon market demand, we're going to see fluctuations in our variable margins as well as our gross margins. So, it is just something that we deal with and it is hard to forecast. It is based on how well our products are received in the marketplace and how the dealer positions their inventory in terms of our product mix.

Also Craig, you also have to realize the quarter that we just finished basically had only a Good Friday off, from a production standpoint. We were able to utilize our full facility. In our second quarter, we do have our Christmas shutdown. In our fourth quarter, we do have our plant Fourth of July shutdown. So, each time you have your shutdown periods, you are also going to see a little bit of weakness during that period of time also. So everybody needs to make sure they are aware of actual -- how many workdays are in there because that will affect it slightly also.

That is obviously an excellent point. What is the actual number of days of production in the fourth quarter?

In the fourth quarter, we have a one-week shutdown. The Fourth of July week, our corporation has a -- we have always had a one-week shutdown. We have a -- (technical difficulty) -- shutdown also at during the Christmas and then we also have Memorial Day in the fourth quarter, so the fourth quarter, we will have 59 days of production.

That is very helpful. If we look in your inventories, they are about 600 units. Could you comment on how much of that 600 is actually just the incremental diesel volume SKUs that you really did not have last year? Maybe even better yet, in your press release, you do a very nice job of breaking out backlog in terms of As, Cs and diesel. Would you care to try to do that for the inventory that is in the channel?

I'm happy to tell you that we have a little over 400 units. Ed just totaled it up. It's 406 units in the new diesel F series of Vectra and Horizon. So almost all of that inventory that we are up is pretty much our new product lines (sic) that we have offered. To tell you the truth, we would be disappointed if we were not up that amount. We're very comfortable with our dealer inventory.

That is excellent. Can you comment on the current tone, then, of retail demand?

Again, we allow (indiscernible) surveys. All we can do is we refer back to that the industry is going very well; it's up 15 percent as an industry. We're up over 16 percent from Winnebago. We do not give any day-to-day or current retails.

I think people may be interested in, just post some of the stat (ph) survey data, whether gasoline or higher interest rates has had an influence on demand, if you care to comment on that at all?

We have April stat surveys out and again, we are -- I think the gas prices have gone up since January. I think it is fair to say that our industry is still doing very well. Winnebago Industries is actually doing even better than the industry, so we're very pleased with what we see from the marketplace.

Do you have revenue for each class or the average selling price in each class?

I do, Craig. For the third quarter, our ASP for the Class C products we sold was 49,894. For Class A gas, it was 81,439. For Class A diesel, it was 142,697.

Maybe comment on, going forward, whether you have normal price increases baked into your 2005 lineup?

We do, Craig. Our price increases probably this year are going to range from anywhere from 1.5 percent to 3 percent for economics and product features. That is kind of a range of what most of our products fall in for 2005.

Has there been any push-back on any recent price increases from dealers?

We have not heard of any, no.

Then finally just maybe comment on the state of promotional activity in the industry, whether it has heated up in any of these diesel categories where you are showing strength?

Definitely, when we go to different shows, as you can probably see by our margins and what we did, we are not participating in any big discount programs. That does not mean that we will not go to a show and have a show special or that, but the bottom line is we believe that we have gained this market share and gained this without utilizing discounts. We expect our product to sell itself.

Terrific. Well, congratulations once again. Take care.

Thank you, Craig.

Scott Stember with Sidoti and Company.

Good morning, guys. Nice job. Ed, do you have the ASPs on a comparable basis for last year by any chance?

I do. In 2003, for the third quarter, Class Cs were $48,111. Class A gas was 76,691 and Class A diesel was 134,297. Again, that is for the products sold in the third quarter of 2003.

Okay. As far as capacity utilization, I mean, obviously you guys are working overtime. Can you just talk about the actual numbers and just in general about what kind of leeway you have if demand was to continue like this for an expansion, if you had to?

Yes, the capacity we ran during the third quarter was approximately around 90 percent of our capacity. Again, we're very pleased. We just opened our Charles City facility a little over a year ago and we continue to ramp up the numbers and we are getting close to 90 percent. So, that is kind of the number we ran at for our third quarter.

Once again, I mean, with the demand and with the backlog that you guys have right now, at some point do you have land available on the Charles City facility to expand if you had to for a similar 20 percent expansion if you had to?

Without a doubt. Also, we have told everybody that Charles City -- there's a much larger labor pool. We could even look at taking Charles City to a second shift and see if we couldn't utilize more capacity there. We would -- before we actually went out and built again, we would want to get to actually like a 110 percent capacity for our third quarter and probably 100 percent capacity for the other three quarters during the year to make sure that we continue to fully utilize our facility so that we can -- before we would go out and build a brand-new facility again.

Okay. As far as the stock buyback, you guys have done a great job of utilizing your free cash flow. Could you talk about the situation with the founding family, what kind of opportunities are still there, or with regards to the 30 million programs (indiscernible) open market purchases for that?

The family still owns approximately 2.8 million; that is approximately 8 percent of the Company. They still have their filings. They have a filing that says that they're going down to approximately 2 million shares but we never say that we -- you know, they have come to us a couple of different times and give us a buy opportunity but as you can see, this last quarter, we have actually chosen to go to the open market. So, we will probably look at both strategies. If we get that opportunity, we will take advantage of that. If not, we will probably go to the open market.

Lastly, could you just talk about these two new products, the Aspect and Cambria?

Yes. Again, we were very successful getting into a new product area last year with our diesel area. The new Aspect and Cambria is an area in the motorized area that has been identified as a new market segment that is doing quite well and Winnebago has developed a product for that. Again, we are just building that and introducing it to the dealers. We will highlight that at our dealer days and hopefully we can continue to see some market growth opportunities with those new product lines that we offer to our dealers for this next year.

Are these a sub-segment of an A or an C type of product?

These are a Class C segment product.

That is all I have. Thank you very much.

Thank you.

John Diffendal with BB&T Capital Markets.

Good morning and great quarter. Most of my questions have been asked but can you give us an update? You have given us, in the past, the production rate per week at Charles City. Can you give us an update on what that looks like now?

The production rate that we said in the past that they have gotten up into the 70-some units per week range. They kind of continue in that range. It depends upon the demand, you know, at certain times of the year, you know, in like the spring. As Ed said before, a lot of times the C (indiscernible) a little bit stronger spring market, so this last spring, they ran the entire quarter overtime.

Now, in the fall, it drops off a little bit and so they are building pretty much the same number but they're doing it in eight hours rather than in nine hours. So we're still in that 70 range.

Are the Aspect and Cambria being built there?

No, they are not. We are building those in our facility in Forest City, not in our main motor home production facility but we have another production facility that builds that product along with our Riala product, which is a small Class C body product line also.

I see. I remember the time the last quarter that was a product recall announcement at that time. Can you give us a little more color now that that is I guess behind you? I assume that there was not really any impact in this quarter, since you took that charge last quarter but could you give us a little better sense of that?

The last number I received is that the recall has completed approximately 22 percent of the units that were involved. We continue to anticipate that we will do this. We have reviewed the financial numbers. It looks like there is more than adequately amount reserved (sic) for this recall and so we will just continue to complete it over the next several months and hopefully, we can kind of clean it up by the end of the year.

Thank you very much.

Bill Lerner with Prudential Equity.

Hi, guys. This is Kevin McCarthy. Just a quick question -- most of our questions have been already answered. I wanted to get your level of comfort with the backlog right now and to the extent that it will impact, over time, going forward? Thanks.

The backlog is up over last year but we are actually happy to say it is down from the end of the second quarter. So we continue to -- it is a little higher than what we would like and we would like to continue to work it down. I think we've always told everybody that the ideal backlog is that we can produce products to get to our dealer and have maybe a six to an eight week backlog and keep it at that level so that we're making sure we're comfortable that we're getting product to our dealer in a timely basis. That is still our objective. We would actually -- our expectations are to continue to work that backlog down even lower than where it is today. When we have it, we will continue to utilize overtime, especially for certain product lines, if we're getting too far of a backlog.

Okay, thank you. I appreciate it. Thanks.

Barry Vogel with Barry Vogel and Associates.

Good morning, ladies and gentlemen. You did a fab job, I must admit. In terms of expansion, I know you (indiscernible) you were talking to Scott or answering Scott's questions. If I recall the Charles City expansion was only about a $10 million figure and I think it took about six months or maybe more than that. Don't you think that if you think you're going to need more capacity, let's say in fiscal '06, that you would start a new project anticipating that before you actually get to 110 percent operating rate on one quarter and three-quarters of 100 percent operating rate?

You're right, Barry. The only thing is we've nothing to announce now. I hope you -- even when we built our last facility, we had actually started that planning considerably before we actually came out with the announcement. We definitely have had discussions on our future and what capacity levels we will need, what opportunities we have. In fact, we have plenty of communities around here that have realized that -- that continue to contact us, offering us different opportunities to expand in their communities.

Again, we will continue to look at a lot of different options, whether it is expanding, building another plant. We kind of want to continue to look at second shift to see if there's some opportunity to be more efficient and utilize our current facilities more. We have definitely looked at alternatives of other expansions, so -- but again, we have nothing concrete that we're ready to announce currently today.

Okay. Ed, without the concrete announcement, what would be your capital expenditures for fiscal '05 and your depreciation and amortization for fiscal '05?

We're looking at about 10 to $11 million in capital expenditures and depreciation is going to run right at that $10 million level.

Okay. Now, for your operating rate in the fourth quarter where, you had a 90 percent operating rate in the third quarter, what is your expectation, given your backlog, for your operating rate in the fourth quarter?

I suppose, again, maybe 85 percent because we continue to catch up with some of our backlog. You also have to -- again, Barry, I want to reiterate a lot of times you guys figure ever quarter the same. We do have a week shutdown in this next quarter and so that will take out a week of production.

Now, obviously, you are totally a motor home company and some of your competitors also do towables. I know you've been as this question many times over the last couple of years as to what your perception is in terms of your company's mix, going forward. Can you give us some of your thoughts about the possibility of going into the towables business?

In our planning meeting in May with our Board of Directors we have this discussion every year. We also have a discussion are there other areas that you can grow in that are more profitable. Let's face it, the diesel segment this last year was a very good area for Winnebago Industries to get into. This new Aspect and Cambria -- there are still some segments in the motor home area that we have some very good growth potential into. Again, we believe that, overall, that there is probably a little better opportunity for the profitability level in the motorized than -- the towable industry is a very competitive industry.

All right, so what you're saying is the odds on you going into towables in the next year is probably slim to none?

I guess that's fair. In a year, in the next year is the fair statement.

Thanks very much. Congratulation on doing a superb job.

Thank you, Barry.

Joe Chumbler with Stephens, Inc.

Good morning. Could you just comment on retail show attendance since March maybe up, down, unchanged from a year ago?

The show reports that we've received from the marketing department and our industry -- we just had our committee week at RBIA and everybody was reporting very positive numbers of show attendance. There were mixed views; some were up just 1 or 2 percent and we had some that were up double-digit percentages. So, there's been a lot of shows the spring and I think it is fair to say that the overall show attendance was favorably in the majority of all the shows.

How about on the West Coast, any specifics on the West Coast shows?

I guess I don't have any details for any type of the West Coast shows. I know the first shows we had this spring were the Tamp super shows and some of them on the -- and across the United States but I don't have any specifics on any California show.

Okay. Then on the dealer side, you've had some nice market share gains on the diesels. I'm wondering, have you picked up any new dealers, particularly on the diesel side, this year?

Well, I do not have the exact specifics of the numbers. We continue to have approximately 310 to 300 to 320 dealers. Again, the only thing I can tell you is that we have some dealers who are asking for our product lines and sometimes we just don't have open points for them. The good news is what dealers are asking for your product lines -- that means that they see that they are doing quite well out in the industry.

To answer your point, I don't have any details in front me that would say that we added five or six or ten new diesel dealers.

So it sounds like the market share gain is mostly coming from retail sales not necessarily driven by new dealer relationships?

That is correct.

Finally on Class Cs, were you guys -- did Class C shipments meet your expectations in the quarter?

Actually, I think Class C shipments exceeded -- you're talking the industry or just Winnebago's?

Just Winnebago.

Well, ours met our expectation. The only thing that is kind of surprising, I think that there was an awful lot of product that was moved to the rental market this year. I think that if you take a look at Class Cs from a wholesale shipment level so far this year is up pretty dramatically and we have identified that a lot of that has gone to the rental market.

Does that affect the way you view the marketplace for Class Cs?

No, we think the market is pretty stable in the Class Cs. We just know that, certain years, the rental fleets will take more units than other years. Last ride, I think after the Iraq war, it is fair to say that everybody was conservative and a lot of the rental fleet actually cut back quite a bit of their ordering of new products.

I think, this year, it has been just the opposite. I think that there has actually been more product put into the rental industry this year and I think they are also doing quite well as a business, the rental industry itself. So I think the numbers are a little higher this year in Class Cs in the rental area this year compared to most years.

Thanks, Bruce. Great quarter.

Neal Miller with Fidelity Investments.

Hi. I know you all have a different approach toward price initiatives in relation to production cost increase. I was wondering if you could comment on that backdrop and how you offset -- or higher steel prices. Also in relation to our component shortages, there was chatter a while back on an oven piece (ph). I am just kind of wondering whether that is kind of behind you all.

We do historically try to anticipate inflationary pressures, both from a labor and material economics, into our pricing strategies annually. That worked pretty successful this year up through the second quarter or through the February time period. During the third quarter, the March, April, May time period, we did see some pressure on our margins; it wasn't real significant but it was certainly there and we did not have that covered in our pricing. We have starting to build our '05 products in the late third quarter and we have completed all of our pricing and as I indicated early in the call, we have tried to build into our '05 pricing an appropriate amount of what we anticipate our inflationary pressures are in our product costs, so we think we are going to be in pretty good shape there. So, we're pretty comfortable there but it did impact -- we did start to see it create a little bit of pressure on our bottom-line, certainly in this quarter.

In reference to -- (technical difficulty) -- components, the oven (ph) situations, we obviously as an industry and as a company we are challenged this past six months. That pretty much seems to be behind us now and occasionally, from time to time, we will see those come up but you never know where they're going to come from. Right now, things are looking pretty good and the oven (ph) situation is pretty well an item that is behind us.

In terms of the backlog, you mentioned a new product demarcation for a different pricing structure. Does the backlog contain those margin pressures or did you price up -- have a new pricing schedule for that?

Backlog is all our '05 product and does not have pricing pressures on it. We have new prices and as I indicated, our prices for '05 are going to be somewhere in that range of 1.5 percent to 3 percent. That is what the backlog really consists of.

Thanks. I appreciate it.

Gil Alexander (ph) with (indiscernible) Associates.

Good morning. Congratulations. With reference to Neal's question, does that 1.5 to 3 percent include your truck chassis pass-through costs?

On some of the diesel products, we have incurred price increases and we have passed those on through our diesel products. It does not include, in terms of some of the other chassis suppliers, their '05 chassis price increases. We will probably see those in late summer and pass those on as those come to us. Historically, it has been the Company's position, as we receive increases from our chassis suppliers, we usually pass them through to the market but they are not included in that 1.5 percent to 3 percent but will come later on probably in the summer or early fall.

If we included the chassis costs in your price increase, how much would that price increase be?

It varies. Typically, we expect probably late this summer or early fall I guess just to see price increases for our chassis for '05 to probably be in the 150 to 300 to $400 range. Again, that is just kind of an estimate on our part.

I have two more questions, if I could? One is on the RBIA projection for the rest of this year and next year. Could you comment on those and could they be a bit too conservative?

All I can say is that I am on the RBIA board and we definitely believe that the outlook remains very positive for our industry. They do have an economist that collects some numbers for them. I guess it is fair to say that we are just more optimistic than what they are.

Could you quantify that optimism?

I'm not sure that -- again, we don't try to give any type of guidance. Our growth rate -- you know, we just go through and we continue -- as I said on the conference call, we believe -- continue to be very optimistic about the future of not only Winnebago but this actual industry in that we believe that people, the Baby Boomers, are going to continue to get out, spend money and want to travel, and we think we're in a very good position to continue to capture that part of the market.

As I am so new to your industry, you have an idea on a cyclicality of what the growth rate could be for your Class A and Class C over the next three to five years? Is there a band that you put on that normalized demand, like it could be plus 10 percent, minus 10 percent, around that band?

Well, I think it is kind of -- you know, when people talk about the industry, I think Winnebago -- we have been using a number we believe anywhere from 5 to 8 percent growth just because of the number of additional people that are going in that are becoming Baby Boomers. If we just pick them up, there should be able to be at least 5 to 8 percent growth.

Now, as companies -- you know, with the products getting bigger and more slide-out rooms and full-body paint, that doesn't mean that your revenue can only growth 5 percent; it means that a lot of the industry numbers -- and I don't think it will be smooth. When the economy is good, it will probably grow considerably faster than that and when the economy is getting in a tougher position, they will probably grow slower but overall, again, we are optimistic that, five years from now, the market is going to be bigger because we are just going to have a lot more people. Plus, a lot more people are using our RVs for a lot of other uses other than just camping and retirement; they're using them for tailgating and motorsports and a lot of other hobbies. So, we think that will continue to expand also and overall, the industry should just continue to grow.

I thank you. My last question, if I may ask, you had a very positive article in June 14 Barron's.

Thank you.

In it, you were quoted. I just wonder if this is true -- "Operating profit margin should range from 11 percent in good times to 9 percent in weak times." From the comment, is that an accurate comment? What has caused your perception that your operating profits will be in a new high band?

Let's go back to the last couple of fiscal years. A good example of that, I believe, is 2002 and 2003. On an annual basis, we ran at 9 percent operating margins. In the first quarter of this year, our operating margin ran at about 11.5 I believe. On a quarter-to-quarter basis -- and of course, we have a strong operating margin if you take out the one-time litigation charge this quarter. We believe that is kind of a range we can run in during what we considered reasonable market conditions.

I might point out that, both in '02 and '03, we had weak quarters. The '02 fiscal year had a 9/11 event in it and that was a weak for us. In '03, our third quarter last year, we saw weak operating performance because of obviously the situation that occurred in Iraq that weakened consumer confidence. But when people ask us about what is your opportunity to perform and at what level, we kind of give them that range and that's -- you can see I think we have operated historically at those ranges. If we get a strong economy, we obviously believe that fiscal '04 is certainly coming around as to be hopefully a year that we actually can perform well in all four quarters. Given that situation, you know, again, we think that 9 to 11 percent operating range is kind of where we will fall, at least in the near-term. We certainly have seen that 11 percent when we get into certain quarters, which we had a strong product mix and a strong market condition. That is kind of where we come from with that comment.

I thank you very much and congratulations.

(Operator Instructions). Tim Jones with Wassermann and Associates.

Good morning. A couple of things -- I got on a little bit late, so I may have missed something. First of all, what percentage of your diesels Class As and Cs are full-body paint?

One hundred percent.

One hundred percent of diesels obviously?

Yes.

Right. How about the Class Cs -- I mean Class A gas?

Class Cs, it is 0 percent.

Really? I thought that some people have like 5 percent or something?

What was that question again?

I thought some Class C people were even demanding a full-body paint from at least some of your competitors.

I know of maybe one competitor that has it but I've never even seen one in the marketplace. I don't --.

How about on the gas?

In gas, we are starting to see some full-body paint and Winnebago does offer full-body paint in some of its lines of what we call our higher-line gas; we offer full-body paint on that.

What would you say that would -- 10, 20 percent or something?

No. Of that product line, we have estimated --.

No. I mean of the entire gas?

Oh, the entire gas?

Yes.

I would probably say it is probably only less than 20 percent -- (Multiple Speakers).

Yes. Now, you get -- on -- at least on the diesels, you get around 7 to $8000 I believe extra for the full-body paint or even on the gas ones. Is it -- am I right -- it adds about seven days to the production schedules? If it does, is the return on assets adequate for the additional time?

Yes, because -- first of all, you're correct that it adds about another seven days into the working cycle to get it through the entire full-body paint system.

The second part of your question is if it is, as far as the return on assets -- because that is optional on some of the products. I think it is fair to say that options carry a little bit better margin than some of the standards that we put on the unit. So it is favorable to have full-body paint for the Company to do.

With the turnover and everything, is it not only better on the margins but better on the turnovers then too?

Well, yes. I mean, we would like -- the bottom line is, when you paint multicolors, you just have to wait for the drying time in between the colors.

That is what it is, is it took so long.

Secondly, two things -- first of all, it's what the market requires. We have got to make sure we're providing the market with what they want. Number two, it is a profitable opportunity for the Company to put paint on the image.

Going back to the RVIA, our friends there, I had a long talk not only -- I've had some talk with you guys and of course, you have talked in the paper that interest rates could go up 250 basis points and you expect a good year next year. This projected decline that they have of 8 percent next year, given 4 to 5 percent GNP (ph) growth this year and 2 to 3 next year, it seems ludicrous, especially if you look out there decline projected, it looks just pretty much like the one that happened between '99 and 2000. In talking to Fleetwood, they said what kills the RV industry in 2000 was not a 200 basis point rise in interest rates, but was the demise of the OTC market, the crash in March of that year. Would you tend to agree with that?

Well, I think it has something to do with it. I -- you know --.

Do you think the interest rates are more important than the market crash?

I think the interest rates myself was definitely (sic) -- because our consumer pretty well has their money earned and we have actually believed, in some cases, we've had consumer who have said I'm not getting anything out of the marketplace, I am not getting a very good return or I've lost some money in the marketplace. I am going to take what I have and I'm going to figure out what I can enjoy life with and actually go out and give them a reason to go out and buy a motor home. So I think they all play a part (indiscernible) into it but I still believe that the interest rate height, with consumer confidence and everything, probably hurt the most.

But in Barron's, you say that you could take a 250 basis point rise and still have a good very good year.

No. The statement was is that, right now, if you look at in financing RVs today, sometimes you can find it even below 5; probably the average is around 5.5 for financing some RVs.

Over what period of time?

Well, anywhere from 10 to 12 years is probably the normal financing period for a consumer. If you go back and look over the last 10 year average of where our consumers have been financing RVs at, I think it is fair to say you will definitely hit closer to the 7.5 to 8 percent range rather than the 5.5 percent range.

These numbers are very much like where the mortgage market.

Yes, so you know, when we starting seeing real pressure on our industry in 1999 or in 2000 to 2001, it is when the Feds raised the interest rates and we started getting financing rates to the 9, 9.5 10 percent area. When you start getting into double-digit finance rates, I think that definitely impacts our industry. But I think, as I said before, we have quite a ways to go before we get to that level again like we did in 2000 and 2001.

Lastly, something that has bothered me for 37 years (indiscernible) the Group is -- and I'm still worried about it -- is the availability of sites for the motor home industry. I mean, it just seems that it's more and more difficult to find them. How is that running? What is the situation there -- (Multiple Speakers) -- California.

Not just California, all over the United States, there's over 16,000 different campground areas. That actually continues to grow. I gave a report to my Board of Directors from the Campground Association. They showed they had an 8 percent increase in campground from 2002 to 2004.

Was that annually?

No, that was not an annual increase; that was just during that period of time. I think it is fair to say that a lot of our motor homes continue to be utilized in a lot of different areas. We're seeing a lot of motor homes that are utilized for NASCAR races and not necessarily going to a campground but going to an event, tailgating events or maybe going to the desert, not necessarily a specific campground but they are going to the desert to race dune buggies or dirt bikes or four wheelers. So, they are finding other areas to actually even utilize these rather than just campgrounds.

So it's campgrounds you don't believe is a real big problem in the scarcity or is somewhat of a problem? How would you characterize it?

I do not believe it is a problem. I believe that we continue, as an industry, to work with the difference federal departments and land to get more campgrounds made and KOA continues to expand and grow and different campground associations. But the bottom line is there may be some certain areas once in a while that will have a campground closed down or have a problem but overall, I think it is fair to say that that industry has grown with it.

It is interesting to note that Mr. Creen, the founder of Fleetwood, is now -- has a campground Internet site. Thank you.

Thank you.

Ken Grossman (ph) with SG (ph) Capital Management.

Hi, guys. Great quarter. On more of a general side, I just wanted to understand. You made a couple of comments about seasonality. I think last year was impacted by the Iraq situation. If I look back to the years before that, is that a better indication of kind of sequential trends in terms of revenues? I think in 2001, 2002, it was down like 10 percent in Q4. Is that more indicative of the seasonality with the production shutdown for a week in the fourth quarter?

I think that is fair to say. I think that, again, I think that if you go back and you take a 10, 12, 15 year history of Winnebago, you will always that our third quarter is usually our strongest quarter, followed by the first quarter and then the fourth quarter and the second quarter. Again, in the fourth quarter and the second quarter, again, I would like to reiterate or impact it because we just do not have as many production days. So, you always lose -- you know, I think it's important that you guys continue to look at how many production days that we have to the availability to continue to make money during that quarter (sic).

Okay. Just the demand side, I know you guys do not play in the towables area but some of the work we've done recently has suggested that, over the last month or so, some of the demand trends on the dealer side has slowed a little bit. I know that is a lot lower price point where it might be more sensitive to fuel price impacts, but just on your product line, on the lower end, have you seen any trends or any change in demand trends on the low lower price point product areas which may not have been reflected in the data that is out there from a few months ago? Were there any areas from an inventory standpoint, from a dealer inventory standpoint, that you guys are at all concerned about?

No, there is nothing alarming or nothing that we have and again, we just kind of reiterate that we continue to see a pretty strong market like the rest of the industry and what stat surveys report.

Great, thanks.

Doug McLean (ph) with Sirius Capital.

Hello. I was wondering if you would provide a little bit more information behind the Class C unit sales in the quarter. You know, given your Class A introductions into the diesel market, I expected the mix of Class C to go down but I guess just in the last couple of years, the sequential increase between 2Q and 3Q has been, you know, let's say 40 to 50 percent. Of course, only saw about a 12 percent sequential increase. I'm just wondering if you could talk a little bit more about that, kind of what the dynamic is there and how that played into gross margins, what kind of the benefit was there from the mix shift? Thank you.

Well, first of all, again, as Ed stated, you know, we continue to see that different times, different quarters, we build what the marketplace wants. If there is a little -- and then again, it depends on how aggressive you want to get for the rental business, especially in the third quarter, that you want to go after. Winnebago has seen -- you know, the -- you know, our Class C again may be slow-up a little bit because we're definitely doing a lot better in Class A' than the diesel area. As I said in my report, that has kind of been -- Class As and our diesels have been more of a (indiscernible) performer but again, we don't think that the Class C business has been impacted dramatically other than we think there is a little more rental going into the marketplace this year.

But I guess as far as for the future, we are going to continue to develop product in those categories because we don't think that there is going to be a big product mix that -- you know, I think the industry right now is probably 65 percent Class As and 35 percent Class Cs, maybe a little bit more to 70/30 but we believe that the Class C market is going to continue to hang in that percentage area. We want to just continue to develop products so that we continue to be strong in that area also.

The gross margin impact?

Oh, the gross margin, we have always told everybody that our margins in Class Cs are approximately 20 basis points lower than that are in our Class A product line.

Okay. So just moving forward, I mean, should we -- obviously the sequential -- sorry, the sequentiality is a little bit different than previous years. With the trend kind of -- should that continue, going forward? I'm just trying to look at it on a sequential basis. Should we expect kind of the quarter-over-quarter change in Class C to change markedly or does that just depend on demand?

Well, it kind of depends on demand. You also have to kind of understand Winnebago. Last year, when we introduced new lines of Class As, naturally we -- you should kind of expect, when they introduce a new line of Class As (ph), that you should -- we should do a little bit better in that area.

This year, we are doing some lines of Class As plus we're also doing some lines of Class Cs. Last year, we focused a lot more -- our new product lines were all in Class As. This year, we have some Class Cs and Class As. You know we announced our new Winnebago Aspect and Cambria product lines and so again, we would believe that that should -- that will be -- help strengthen our Class C body market.

Okay, thank you.

That includes our question-and-answer session. At this time, I will turn it back to our speakers for additional or closing remarks.

Thank you and once again, I'd like to thank everyone for joining Winnebago Industries' third-quarter conference call today. We look forward to talking to you again on October 14, where we will then have a fourth-quarter and our fiscal year 2004 results conference call at that time. Thank you and have a great day. Bye.

Thank you that does conclude today's conference. We appreciate your participation. You may now disconnect.