Winnebago Industries Inc (WGO) 2005 Q2 法說會逐字稿

Good day and welcome, everyone, to the Winnebago Industries second-quarter 2005 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.

Good morning and welcome to Winnebago Industries conference call to review the Company's results for the second quarter of fiscal 2005, ended February 26, 2005. 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.

I trust each of you has received a copy of the news release this morning. This call is being broadcast live on shareholder.com and vcall.com, and is accessible from our own website at winnebagoind.com. A replay of the call will be available at each site at approximately 1:00 PM Eastern time today. If you have any questions about accessing any of this information, please call our Investor Relations department at 641-585-6803 following the conference call.

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 filing 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.

Thank you, Sheila. Good morning. I would like to welcome everyone to our conference call this morning. I will briefly review a few of the highlights of the second quarter of fiscal 2005 for Winnebago Industries, and then Ed Barker, our Senior Vice President and Chief Financial Officer, will review our financials with you.

Winnebago Industries results for the second quarter were impacted primarily by lower motor home deliveries. As we related in our last conference call, we believe that the comparison for the first half of fiscal 2004 would be extremely difficult, and that is just what happened. To fully explain the situation, I want to take you back to the summer of 2003. The initial stage of the war in Iraq were over and not only were dealers starting to replenish their inventories that they had let draw down during the war period, but they had a pent-up demand of retail levels. That caused us to work overtime for almost the entire first half of fiscal 2004 to rebuild inventory to meet the demand. This was the first time in our history that I can ever recall Winnebago Industries working overtime through the entire winter months.

We did not have those same dynamics working for us in fiscal 2005. Dealer inventory was already at a more appropriate level as we started the quarter. That meant that we were able to increase dealer inventory by 623 units during the first half of fiscal 2005, as a comparison to an increase of 1414 units during the first half of 2004.

It also appears that while the industry's motor home retail sales during the most recent reported quarter remain fairly flat with retail comparisons of a year ago, motor home production industrywide has exceeded the market demand for motor homes, causing an imbalance of inventories.

As in the past, we will continue to monitor our inventories on hand and the inventories at our dealers' lots very carefully to ensure that we continue to produce what the market demands.

Going forward, we believe our sales will closely follow the retail pull of the market. We are pleased that Winnebago Industries ended calendar 2004 as the top-selling motor home manufacturer in the industry, with 19% combined Class A and C market share.

The new low-profile Winnebago Aspect and the Itasca Cambria motor home are helping Winnebago Industries to regain market share in the Class C category. In addition, we have started production and just started deliveries of the new Winnebago View and the Itasca Navion Class C diesel products in the third quarter. We believe these innovative new products will have a positive impact on our market share, as they will be hitting the retail market in the last quarter of fiscal 2005.

Our sales order backlog was 2108 units on February 26, 2005, compared to a backlog of 2933 units one year ago. The backlog was lower due to weaker demand of motor homes sales, but also due to the increase in our capacity that we were able to achieve by adding our new Charles City manufacturing facility. Now I will to call over to Ed for the financial review.

Good morning. I am pleased to review with you the revenues and earnings performance for the Company's second quarter of fiscal 2005. Revenues for the second quarter ended February 26, 2005 were 239.4 million compared to revenues of 266 million for the second quarter of fiscal 2004. Operating income for the second quarter was 21.7 million, or 9.1% of revenues, compared to 24.5 million, or 9.2% of revenues, for the second quarter last year.

Net income for the second quarter was 14.4 million, compared to 15.9 million for the same period last year. On a diluted per-share basis, the Company earned $0.42 for the second quarter of fiscal 2005, compared to $0.46 a share for the second quarter last year.

The Company finished the quarter with 113.6 million in cash and short-term investments. Cash generated by operating activities during the quarter was $18.3 million. During the second quarter of fiscal 2005, the Company repurchased 52,600 shares of the Company's common stock for an aggregate price of approximately $1.8 million. We currently have approximately 25 million remaining on the current stock repurchase authorization from our Board of Directors. Other uses of cash during the quarter were 2.7 million for capital expenditures and 2.4 million for the payment of cash dividends.

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

We continue to believe the long-term prospects remain positive for our industry. While interest rates have raised moderately by the Federal Reserve, we believe that they are still relatively at low historic levels. We continue to remain optimistic about the future. Our new 2005 products have been well accepted in the marketplace. Demographic trends continue to be very positive for the industry for continued long-term growth. And we continue to lead the RV industry in profitability.

Winnebago Industries has a very strong balance sheet, with no debt and approximately 114 million in cash and short-term investments for future growth. Winnebago Industries is well positioned for a strong future.

At this time, I will turn the call back over to the operator for the question-and-answer portion of the call.

(OPERATOR INSTRUCTIONS) Ed Aaron with RBC Capital Markets.

Good morning, everyone. A few questions for you. First of all -- and I know a lot of what we're seeing here is just a matter of a retail correction -- of inventory correction at the retail level, but it seems like from a retail perspective, business might have softened a bit as well. And I'm just trying to get my arms around what might be causing that. Because if you look at the main drivers being consumer confidence and interest rates, they are still pretty favorable. So I'm just curious to get your thoughts on why you think we might be seeing some retail softness currently.

Actually in the retail market, if you take a look for the November/December/January period, retail in 2003 period was 10,362 and the retail for the same exact period one year later for 2004 -- in January would be 2005 -- it was 10,484. So it was up like 122 units, a very slight increase.

I can tell you Winnebagos on our fourth quarter it basically mirrors that of what we have received into -- for our individual retail. So I don't think we have really seen a drop-off on retail from the market. I think that there definitely is a correction of the wholesale, because I think we as an industry have wholesaled more product than what the retail. But the retail numbers continue to show that it is actually up 1.2%

Okay. And you think from an inventory perspective, you're comfortable with where it is now?

If you're talking Winnebago's inventory, we are comfortable with where our inventories are. In fact, I think we -- different times we have told people that our inventory will actually peak in April, and inventories will go up just slightly and then they will be starting to drop down as dealers start to sell off their '05 products in anticipation of picking up '06 products.

You mentioned that your shipments should approximate retail pull-through. Is that going to be the case for the third quarter? It's just such a tough comparison, I'm wondering if we should take that into consideration at all.

As I said before, you might see actually for a period of time that the wholesale shipments are actually a little bit below retail because they are going to hold off selling 2005 before they start bringing in all their 2006 products, because I'm sure all dealers are going to want to move their 2005 products off the marketplace.

And then one last question and I'll open it up. Just with respect to oil prices, I know gas prices don't tend to be a big factor, but with oil just hitting record levels do you see that as affecting the psychology of your customer?

This is Bruce again. I can definitely tell you that oil prices as an actual cost of operating an RV are a small percent of the cost. We have said that all the time. It is pretty hard for me to say that it does not have an impact on consumer confidence, and I think consumer confidence is another factor that helps drive our market, and the high gas prices will have a negative impact on consumer confidence.

Thank you.

Scott Stember with Sidoti.

Ed, do you have the actual selling price of ASPs for As and Cs this year and last year?

I do, Scott. Overall, our average selling price was 89,693 for the second quarter of 2005. And a breakdown, on terms of Class C, our ASP was 53,893. Class A gas was 85,424. Class A diesel was 156,098. Last year, those same numbers were overall, our average ASP was 84836 in the second quarter. Class C was 50,938. Our Class A gas was 79,325. Our Class A diesel last year was 143,736.

Okay. And maybe you could talk about capacity utilization, maybe this year versus last year, and maybe just give us the timing of when Charles City started coming on last year so we could see how much of the decline in backlog really has to do with that.

Our capacity right now, we're probably in the 70 to 75% capacity. Again, this is Bruce speaking. And that last year we were probably at about -- the peak, we were probably about 82, 83% capacity at that time.

And how much production were you getting out of the new facility at Charles City at that point?

Last fall during this same period, the November/December/January period, it had ramped up to its full production -- to the full production level that it is at today.

So it was an apples-to-apples?

Yes.

Okay. And as far as share repurchases, you obviously generate a lot of free cash flow. And could you talk about how aggressive you will be with completing this $25 million that you have left and if there is anything going on with the founding family at this point?

What we do, we never give any indication -- at the end of each quarter is the only time we ever announce any type of share repurchase program that we're doing. As we have done over the last 7 years, Winnebago has bought back in excess of $250 million worth of our stock. I think it is fair to say that we announce each time at our stock buyback that we continue to utilize our free cash flow in some way, but we do not give any indication at what point in time we are buying.

Okay. And could you talk about (multiple speakers)?

It is still part of our strategy. I can tell you that. It is like we have announced -- when we announced our buyback authorization.

In the third quarter coming up, could you talk about days of production you plan on having or talk about maybe how many days will be off versus a year ago?

Again, we do not ever produce any of our production scheduling. The only thing that I can tell you is that we will continue to manage our business. To tell you the truth, Scott, I wish I knew totally, exactly if there were going to be any more changes. Right now, we don't have anything to announce. I will say that we do not have any weeks of shutdown to announce.

That's all I have for now. Thanks.

Barry Vogel with Barry Vogel & Associates.

First question I have is for Ed Barker. You showed on your balance sheet at the end of February a measly $27 million in receivables. How the hell did you do that?

Actually, Barry, $27 million in receivables is what it normally should be. When you look at last August, after dealer days, when we showed our product to our dealers in Las Vegas essentially the first August, we did have a rather substantial push of product go out right in August. So our 46 million was unusually high for the end of August. And actually, last February it was higher than we like. 27 million is what it should be, and it is basically well within control, so we are happy with what it is right now. We try to avoid any quarter-end pushes and it's certainly reflected in our receivable balance at the end of February, and I think it is pretty much close to where it was at the end of November also.

Because that is pretty damn good. Bruce, the Aspect, Cambria, View, and Navion. Can you tell us in the first half of the year how many units you shipped of the Aspect and Cambria combined?

I can tell you that Ed is digging out the number right now. That product, if you remember, we introduced at our dealer days in August. And we have shipped 394 in 2005, and year-to-date -- the last quarter was 394 -- is 601. So we have done a little over 600 of those units the first half of this year.

Okay. And would you expect that in the second half you would equal that or do better?

I think it is fair to say that some of that is what we will call pipe fill or dealer lot. Now what we need to see exactly how it does in the retail market. We have been pleased that -- if you notice, Winnebago last year lost some market share in Class Cs, but the last few months have come back up and we believe that the Aspect and Cambria have.

Is it fair to say you might ship a similar amount in the second half?

Yes, because it should be a stronger part of the market. Like I said, the market will dictate now how fast the retail turns come on it.

And as far as the View and the Navion, I am presuming you did not ship any in the first half.

That is correct. That is going through our production cycles right now. We are getting the first units ready to ship. We will be filling the dealer lots this next quarter, and we expect retail to start happening in anywhere from 2 to 4 months from now we will start to see the retail happening.

Considering you don't have that product in inventories at your dealers, it's a totally new product, what would be the normal pipeline fill for something like that?

I think we have like 310, 315 dealers, and I have got to believe a large part of them will be signing up for this new product lines and will be filling all those dealers with the products. And then also they will start retailing them, and then we will start the replacement cycle right away.

So would you say that if you took 315 dealers, that the average might be two for each location?

That is going to vary. You'll have some that have 4 or 5, and you'll have some that have 1 or maybe even a dealer, a small dealer that won't take that line.

Will two be an average at least?

I am sure that over the next six months, the last half of this year that you're talking, we will ship way in excess of 600 units.

Over 600?

Way in excess of that.

So does that mean maybe 1000 units?

I'm not sure our production -- we will be ramping up to do this, but we'll have to see what level of production that we can out.

Okay. Now, we know that Fleetwood --

Your two number will definitely happen. Your two average is a good (ph) assumption.

At a minimum, okay. Now we all know, because publicly Fleetwood has announced that they have been discounting motor homes and they are a major factor in Class A motor homes. And then they claimed on their conference call that they stopped discounting near the end of the month of January. Have you done any discounting whatsoever during this period?

I think if you see -- when Ed told you about our -- if you look at our operating profits level, they are in the range that we always kind of hit, especially for our second quarter, which is our weakest quarter. So I think you can see that we didn't. It is pretty hard to say that when a company, whether it is Fleetwood or other companies, end up with excess inventory, they have to push it to the marketplace. And they are going to have to continue to do some discounting. Even though they say they have not done it at the end of quarter, they still have to move all their excess inventory to the marketplace, because this is old 2005 product. So we expect a tough industry for probably the next 3 to 6 months.

Okay. And obviously, there are other manufacturers that are also discounting.

Yes, we know of others that are discounting also.

Ed, can you fine-tune the operating rate at Forest City versus Charles City in this quarter?

In terms of utilization and capacity?

Correct.

Overall, we operated about in the 70 to 75% for the quarter. Charles City ran just a little bit stronger than that, more like in the mid 75% range of their capacity.

And how about Forest City?

Forest City is right around 70%.

Okay, so you had a 9.1% operating margin despite operating at those operating rates?

Correct.

That's pretty damn good.

We think that -- again, it was a difficult comparison, but quite frankly, we talked to our Board yesterday. Management is pretty proud of the fact that we are still maintaining our margins in a market that is a difficult market at the wholesale level right now. I think it is important to understand and how we look at it is that from a retail environment, we have a retail environment very similar to what we had last year.

Right. Thank you very much. Keep up the good work.

From Robert W. Baird & Company, Craig Kennison.

Good morning, everyone. First a point of clarification. Do you plan to classify Class C -- the View and Navion as Class C or as diesel?

It will be Class C. First of all, the Class C market does not have a diesel category because we are going to have the first product in that category, basically, that is being sold to the marketplace. So as far as we know right now, it is going to be classified just strictly as a Class C motor home and not in the diesel category.

Okay, and Ed, do you have by chance the finished goods inventory balance or at lease directionally where it has headed?

We will disclose that in our 10-Q, Craig. I think if you look at the overall balance sheet, I think our inventories are pretty well in line with where we want them. I will tell you that historically we will build product at the end of January and February for shipment in March and April, particularly in the rental segment of the marketplace. So it is not uncommon to see at the end of February finished goods just to be slightly higher in anticipation for the seasonal demand from the marketplace in the third quarter.

It we can go back to the competitive situation, based on some preliminary stats from StatSurvey, your diesel market share in January was in the neighborhood of 10%, which is below the 13% and even 14% at which you operated in some months last year. First of all, do you think that is accurate? Second of all, do you think that is attributable to just the discounting environment, and would you expect therefore to move that number back into the early teens?

We definitely anticipate to move it back in there. The heavy discounting by a couple of competitors definitely impacted some of that. If you look, 50 more units would have moved the market share up considerably just in that diesel category for us. And I think that we did notice that some of the competitors did buy some of the diesel market share. But again, it is only one month. They can't continue to discount like that. Again, I think we will be able to get to a point where our product will -- again, people buy it when it is competitively priced and the competition does not just have discount programs to promote their products.

That's helpful. And then --

The other thing is I think you should also know -- I think the information that we got, I think there were 14 states that were incomplete on some of the data, and so that is pretty hard. It is one thing if one or two states are missing. You can just say that you have to be really pretty close to accurate. But when you start getting 14 states that are incomplete information, it is hard to make a judgment for that one month when 14 states are missing from that information.

We agree with that statement. Could you help us reconcile your comments in the past, I think you have talked about how the second year of a product introduction, in this case your diesel product, tends to the very healthy year because the product has a chance to establish itself in the marketplace. How can we reconcile that viewpoint with the idea that it seems like diesel shipments may be down in fiscal 2005?

I think, again, just like our new product that we're introducing this year, the View and Navion, it's going to take us the first half of the year to get this product to all our dealers' lots. And once you get to the dealers' lots, then you have the training and teaching of all salespeople and add a chit (ph) in the marketplace. And so just about all of these on all our product introductions, we have always seen our product perform better on a retail standpoint, especially the second year, than what we ever do the first year.

And again, we continue to believe that Winnebago Industries -- we are number 1 in Class C and number 1 in gas -- we believe that there is some room for us to continue to grow in the diesel area. And so we will continue to offer products and different things that hopefully will allow us to continue to gain that. Again, the Winnebago Journey finished as the number one single selling diesel product last year, and we were very pleased that Winnebago actually had the best-selling diesel brand of product in the marketplace. And that is a long ways from were we were three or four years ago.

And then finally, it certainly seems as though there has been an overproduction on behalf of some of your competitors. But it also seems like there might be more discipline in the marketplace from a production standpoint, I guess in the last few months. Do you think that is true or if that is just us having some wishful thinking here?

No, I think that lot of the manufacturers have realized that the numbers, the wholesale numbers for the industry outpace the retail numbers. And that is okay at certain times for a small variance, but some point in time you know retail has to catch up with that. And I think that is exactly the position that we are in right now for an industry -- that wholesale did outpace retail for a long period of time, and now we have to get it more in line. And from Winnebago's standpoint, we feel we are fairly disciplined and like to control our inventories. We hope that the whole industry does that, because it definitely gets us in a tough situation when we have too much product for the marketplace.

And if I could, one more question. I think in the past you have commented relative to the RVIA forecast, which at the time was fairly pessimistic. Now the RVIA forecast is slightly more optimistic, but still forecasts a down volume year in 2005. Are you still thinking 2005 for the industry is a year of growth?

I guess from Winnebago's standpoint and my personal view, I think that 2005 the wholesale numbers will be down some, but I think retail will actually be pretty comparable. I think the wholesale numbers, because everybody built so much more up through 2004, I think that you will actually see retail has an opportunity to maybe outpace the wholesale a little bit.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Timothy Jones (ph) with Wasserman Capital.

A couple questions. First of all, on this retail situation, talking to one of your major competitors, implied that there has been a pickup in the last couple of months at the retail level and people -- a lot of them are happy with the shows and so forth. Are you seeing that? In other words, you quoted the January numbers, the three-month numbers. But sequentially, have you seen a pickup in the retail, because I'm getting that impression at least on one or two.

I guess what I would have to say is we continue to see it similar to last year more. I guess I would classify it more as just flat. It jumped 1.2%, but I don't know if you can call that (multiple speakers)

Yea, but that is through January. How about February?

We still see everything as just pretty much flat. We don's see any major increases.

To follow up what Berry said, it is amazing for you to be down 1/10 of a percent on your operating margins, given the fact you had lower inventory and substantially less high-margin diesel. First of all, looking at those average prices that you gave out, they are up around 6, 7% across the board. How much of that is mix and how much of that is price?

This is Ed, Tim. Obviously, part of the story here is we have seeing ASPs go up. Right now, our 2005 prices I should say are up about 3.5 to 4% because of commodity increases that we passed on to the marketplace. The balance of that is simply product content between 2004 and 2005.

I think one of the stories in terms of being able to maintain our operating margin is the fact that we have been pretty diligent as a company of passing commodity prices on into the marketplace, that we feel we have kept up with it. I think that has certainly helped us maintain those margins, so that is kind of the view there. We've been particularly concerned about managing our cost structure to maintain our profitability, and I think overall, the management of the Company has been very diligent in not letting costs get out of line.

Am I not correct to say that the Class A diesels do have a higher margin? It does for most everybody else. And so you actually had a negative effect, if I am correct, on the mix because of the Class A diesels being down a couple hundred, 150 units.

Generally speaking, I think you're correct, Tim.

Well, that was an excellent job anyway. One other thing I had. You got 113 million of cash versus 77 and you bought back $2 million worth of stock, and with the price of the stock down here, I know you can't -- I'll ask it this way. When you go back into the market? When is your inactive period after this conference call?

We are allowed back into the market to repurchase stock on Monday, Tim.

Okay. And let me see if I have one more. No, that's good. Thank you so much.

Greg Badishkanian from Smith Barney.

Thanks. Just with respect to the Louisville show, coming out of the show, I think orders were up about 53%. I know the Class C diesels are not shipped until the third quarter, but how should we look at orders after a show as an indicator of forward sales and backlogs?

Greg, this is Bruce. All I can tell you about a show, when we take a new product to the show like that, naturally we will generate -- I think our orders are up 52%. Naturally, they should be up when you're introducing a new product line, because all the dealers will be putting that in. Next year, it is possible that our orders are only up 5 or 10% and it still could be a very good year just because we have not introduced a new product. So it varies a whole lot depending upon what product offerings you're taking to a show and what new you're introducing, and if you are going to have what we call, again, a fight (ph) sale with that product.

By my calculations, your backlog's about 10.5 weeks, I believe. And I guess that is driven in part by lower shipments, but they are still pretty high -- a sequential sort of basis. Are you still targeting 6 to 8 weeks (multiple speakers)?

Yes, we are. I guess we feel that it is actually getting closer to that 6 to 9 week period right now. So we feel that we can provide the product to a dealer in a very timely manner.

So over the next quarter or two would like to see that your target range or is that going to just take anything you could do by then?

In the ideal situation, it would stay in that range, but business would pick up so that everything turns faster. But I haven't figured out who to explain in the economy to keep everything smooth. We will have ups and downs and you'll see that number. There will be a point in time where dealers all of a sudden order 2006 product and the order bank will probably jump for awhile again.

Just one quick one on Florida. It's a pretty big part of industry's motorized home sales -- I think 13%, I believe. Could you just provide some color on how the market has recovered after the hurricanes?

Greg, this is Ed. We talked about that on the last call in December. We did see the market in the Southeast come back. What we shipped to the Southeast market in the second quarter was almost identical to what we shipped a year ago in terms of that Florida situation; I think it was within three units. So that has recovered. What we did not see is particularly we did not catch up the number that we lost during the first quarter, though.

Right. But I guess it's better than the overall company, if your shipments were down but you're flat in Florida.

Right.

Okay, great. Thank you.

From BB&T Capital Markets, John Diffendal.

Looking at this second half, obviously your margins normally will come back, and I guess you're comparing in the third and fourth quarter to gross margins that were 14.7, 14.8. Is there anything that -- admittedly, with the kind of unstable competitive situation, do you feel like you can match those margins or we are going to see some decline in those margins versus the second half posted last year?

John, this is Ed. I think going forward, again, we are pretty sensitive in terms of trying to get in -- to protect our margins in this competitive environment. But given the current retail trend, if retail continues to trend at the same level it was a year ago, which is what we are currently seeing, we believe we can probably do that the same numbers from a gross profit perspective that we did a year ago. But a lot of it is going to depend upon what kind of a retail environment we're in. As we talked out in the release, we believe that our level of production is going to depend upon the retail pull. So if it can be the same as last year at the retail level, I think those are attainable, somewhere in the 14s.

Okay. As you say, a number of your other competitors have been really scrambling to reduce their inventories; hopefully, Fleetwood more on a production basis than discounting. And I know you want to stay above the fray on discounting. But can you tell us that if indeed you continue to see a loss of market share, say those January numbers kind of hold for a month or so, that you just will not discount and let the market seek a level as we go through the next sort of 60, 90 days, getting into the middle part of the summer, that you still just feel like it's just not necessary for Winnebago to do that in the motor home side.

John, this is Bruce. The bottom line is it is pretty hard to say. If our 2005 products don't move out in a timely manner, we may have to use some dollars to move our year-end 2005 products to get to 2006. I definitely do not want to go into a new product year and start discounting right out of the chute, because it is so very difficult to get that stopped once you start this.

But if retail is strong, as Ed says, I think we can go through the end of the year and go into our new 2006 product. If it slows up a little bit or we see too much push out in the marketplace from the competitors because they've got way too much inventory, we may have to use a few dollars. But I think you kind of understand our philosophy is definitely not get into that bidding war. And our products try (ph) sell off the quality and the innovation and the floor plans that we develop is our attitude.

Right. What is the critical point that you would reach that you want to make sure your '05 is out of the way? Is that sort of May/June?

Yes, May. The month of May, we will want to make sure that -- before the end of this quarter, actually we will want to make sure that our 2005 product has moved out to the system.

And from a material cost standpoint, you say you've passed that on. Are you seeing anything in particular that is moving right now that you're having to react to or we've started to see a stabilization there?

John, this is Ed. We pretty much follow that an absolutely month-by-month basis on what our commodity costs are doing. We have seen an essentially flattening off of our commodity prices starting about December. We have seen steel over the last 90 days come off their highs that we reached in September and October. We are still seeing those come down, although we have seen replacing some of those commodity pressures increases in petroleum-based products such as plastics and styrofoams.

But for the most part, we have not increased our price of our '04 products since about the end of November because material commodities have pretty well stabilized. And we are anticipating that they stay relatively flat, at least until we get into May. We will see what happens to the market, particularly in the steel area. We do see -- obviously, the news out by GM yesterday, hopefully because of lower demand, some of these steel commodities will maybe stay at a low, where they are now in terms of cost pressures.

And of course your Class A units were down 16%, I think, versus the year ago. But we will have gotten through the first half and into the second half comparisons. Should we be building in a decline, do you think, that is sort of mid single digit in the second half, or do you think, like you say, it was sort of a stabilized environment that something very flat is a better thing to use when we're looking at units in the second half of the year, if it all?

This is Bruce, John. The only thing I can tell you is that we have received and seen an awful lot of pressure in the marketplace in discounting. Since that has happened, I think that we have seen a couple of our competitors who have announced layoffs, cutbacks, shutdowns. I think they realized that that doesn't work for them either to discount to the marketplace. I hope we go back to what I will call more of a competitive atmosphere in the industry. Naturally, our intentions are to remain similar, at least in market share, than where we were last year at this time.

Right, that's about all I have. Thank you.

Neal Miller (ph) with Fidelity.

I agree with Barry and Tim's comments earlier about managing through a tough period, your good marks. What I was wondering about, in part of the Q&A here, there was a reference to maybe this year reflecting down wholesale. And I am just wondering whether people have to scale back too much to accommodate that in terms of both you and Ford's (ph) initiatives on diesel; it just seems that that category is more exposed -- or other players are more exposed and they have to scale back considerably, and I am just kind of wondering about getting from A to B on that. To what extent did people have to scale back to not get into a messier situation?

I think if you've read some of the news releases of our competitors, you know we have some of our competitors who are actually shutting down for weeks at a time. We have had competitors that have laid off hundreds of people. I can tell you at Winnebago we're very pleased that we have not laid off anybody and we actually believe there will be a point in time that the market takes off and we will be back on overtime and scrambling the other way.

So we're trying to very much keep our inventories in line and yet keep our people, because we want to be ready for when the market does turn and we get rid of what I call this kind of wholesale glut of products that was in the inventory for a while. And so as far as commenting on the competitors, how far they are going to -- or how well they will control their inventories or how much they will cut back, I guess I don't feel real comfortable that I have enough information to do that.

I guess there's a new chapter here at Fleetwood, and the chap coming back, I guess, was there in '97 and got very high marks in the RV industry. Any reading on what his mindset might be in the context of coming through this period?

I guess at Winnebago we don't have any comments to pass on as far as their new management. I'm sure we will have to see what his attitude is when he comes in as far as the profitability and how well he controls inventory. I guess I'm not sure we should have any other comments than that.

I appreciate it. Thanks.

Gabriel Kim with Basswood Partners.

My question here is, just in general, when I think about Winnebago and the ability to manage your production throughout the cycle, you have typically always been sort of an industry leader. And what I'm wondering about is what happened this time that you would overproduce probably to a lesser degree than your competitors did, but what put you in that situation where you just sort of ended up overproducing?

Well, we really don't believe that we have overproduced. We are not -- we have not been announcing, as I said before, layoffs or big week shutdowns or anything like that. We have had schedule adjustments, but we do that, we manage that through the whole quarter. And we actually believe that we know that inventory will continue to get corporations in trouble and that you've got to keep it under control. You really cannot force product to the marketplace because it is going to retail at a certain level, and to try to force too much at the marketplace just doesn't work. It is going to catch up to you later. So that is our philosophy.

So ultimately, is it just that retail demand fell off more than anticipated?

Well, I actually think wholesale demand increased more than what the retail demand has. As we said before, retail is still tracking for our industry similar to exactly where it was last year, within 1%. The wholesale, we have actually as an industry built more product for the industry than what the retail market could absorb. And I think that is where a lot of companies are having some adjustment periods now.

Okay, thank you.

Doug McLane (ph) with Cerius (ph) Capital Management.

Just a couple clarifying here. I was just curious, I know you took two Fridays off, I think, in the first quarter. Did you have any incremental days off this year in the second quarter?

No, we did not have any days off in our second quarter. (multiple speakers) there may have been one in early December before we got back from the Louisville show and plugged in all those orders. But there may have been one day in December.

So you were on like 57 days, then, I guess (multiple speakers) 58 last year?

Pretty close to that. We have our Christmas holiday and Christmas shutdown week in there.

Right, okay. And I was just trying to check my notes here. Last year in the third quarter, I had in my notes that you were running on overtime at that time. Was that correct?

That is correct (ph).

But you're not going to be on overtime this year?

We ran overtime, to let you know, in March and April last year. In May, we were able to finally catch up and we got back to a 40-hour workweek.

My notes also show you were running at 90% capacity last year in that quarter.

Probably, because we were pushing overtime in that time, so that is probably a correct assumption.

And you're coming out of this quarter at 70 to 75. Is that the run rate I should use kind of year-over-year, 70 to 75 versus 90 last year?

You have to understand that we -- there's seasonal adjustments in that. But you probably wouldn't be too far off.

Following up on one of your earlier comments, you talked about the 14% gross margin being achievable in maybe the back half of the year. Could you walk me through with capacity utilization being down so dramatically year-over-year, what is the offset there? Obviously, there's a lot less absorption going on, so where's the benefit coming from that can get you back to that 14?

This is Ed Barker. Typically the low part of our seasonality is the second quarter, so the fact that we ran right around 70% factory utilization the second quarter, we will see that increase probably to that close to 80% in the third quarter provided -- as is the caveat I said earlier, provided that we see the retail market continue to run close to what last year's rate is. So the way we are able to attain that 14% gross profit number is if our run rates and the terms of utilization move up into that 80% of capacity rate. And again, like I said, it is going to be retail-dependent. That is what we indicated in our release. It is going to the dependent upon what kind of a market we see.

Okay, so if we see continued kind of negative year-over-year retail registration data in the mid-single digits, would you be able to get to the 80%? Or do you need positive numbers in that retail registration data year-over-year?

I think we really need to see -- to get to that 80%, we need to see a retail environment similar to last year.

Okay, so just flat.

Right.

Okay, great. Just one other one. On the gross margin, just wondering if you could give me some of the benefits and offsets there. It was up 20 basis points I am showing here, but you had that 70-basis-point hit last year, so just -- I thought it would be up more given the fact that you had that one-time charge last year. I was kind of expecting you were going to get most of that back. Can you just tell was it raw materials that was the offset there? Was it mix?

No, it is utilization. It is volume. We had more (multiple speakers) in the P&L during the second quarter this year than a year ago simply because of lower factory utilization.

Okay. And then just one clarifying statement on something you said before. Did you say for Winnebago you expect -- I guess your units year-to-date are down 10%. Did you said that you expect for Winnebago or for the industry the wholesale shipments to be down in 2005?

That was referring to the entire industry.

Okay, so for Winnebago, we are sitting at about -10 now. Should we expect kind of negative mid single digits as we end up the year?

Again, it is going to be retail dependent, and then also as we introduce new products, the new View and Navion, we will have to see how that will help impact the Company.

And just from your perspective and looking at things in the past, you mentioned that the wholesale shipments obviously coming were a little bit too high and it'll take some time to work down. Given the current retail data you're seeing and you commented on it before, how many months away -- if it stayed at that kind of level similar to last year, how many months are we going to need before we can catch up here?

I think it is fair to say that all this is 2005 product. By June 1, I'm sure everybody is going to want to make sure that 2005 product is out into the marketplace and that the dealers have a chance to move that through the retail system. So from a manufacturer's standpoint, I think it will probably work its way through the system by June 1. Through the dealer or the retail system, it will probably take maybe a few months more than that, but I think it should be pretty well under control by June 1; at least I sure hope it is.

So maybe just this next quarter coming up, it looks like just your utilization will be down a little bit and we're going to have this industry dynamic going on. Still, that 14% gross margin something that I can put in there?

Again, as Ed said, that is true unless, again, the retail doesn't happen and we have to spend a little extra money for some promotion to move out some of last year's product or something like that. But again, it is going to be retail dependent. But if the business is there, it will draw it through the market in good shape.

Okay, great. Thank you.

A follow-up from Craig Kennison with Robert W. Baird & Company.

One quick follow-up. A lot of questions on margin. I just want to press you a bit. Most of your comments have to do with the gross margin. Anything unusual at all below gross margin from a cost perspective, or in other words, if your gross margin is in line with your expectations, would your EBIT margin also be in line?

Yes, this is Ed, Craig. We don't anticipate any unusual activity in SG&A.

Okay. Happy St. Patrick's Day.

A follow-up from Barry Vogel with Barry Vogel & Associates.

Ed, I have two quick questions for you. What is your best guess for the tax rate for the full year?

Should hold right where it is at right now, about 35.7 to 36.

To 36? Okay. And in terms of your motor home dealer inventories, on your press release you had a number of 5601. Can you break it down between Class A and Class C?

No, I don't have that, Barry.

Okay, thank you very much.

John Butler (ph) with MacKay Shields.

Most have been asked and answered, but Bruce, last time you were in here to see us, you had indicated that the typical RV cycle lasts for 10 years or more and then you see a contraction anywhere from let's say a year to 1.5 years. Do you view the current weakness right now as sort of a blip in that long up trend, or are we entering a hopefully brief downtrend here?

Well, I guess what I see right now, again, is I still see a market that is pretty good, but I see the blip downturn is more in the wholesale from the manufacturer's side. We will have to continue to watch the retail, but I think our industry and even the forecasts by RVIA, whether it is 2.5% down or 3% down, is a pretty small type of correction. And I think that the real issue will be as we continue to watch the consumer confidence; the gas prices with the consumer confidence seems to continue to hurt. We need the economy to get a little more confidence and I think that we will continue to enjoy a nice overall growth cycle for our industry.

But as far as the ten-year-old products, those products 10 years ago were all older products that did not have slide-out rooms, and all the new products today are totally different products than what the industry was selling 10 years ago. So we have definitely given them a reason to upgrade all those older products.

Okay. And you touched on gas. And I buy into the argument and the math that gasoline prices really don't matter as much as consumer confidence. But let's say the jobs number holds up well, consumer confidence holds up well, but gasoline, as some predict, spikes in the summer driving season. Is there a point at which gas prices do begin to matter?

I guess the only thing I can tell you is that all of us consumers will be upset that gas continues to go up, but if you actually look at it, nobody is willing to stay home. I don't think anybody can say that travel is necessarily down or vacationing, and I think that is going to continue to grow. It is going to take a while to get used these higher prices and different things; but still when you compare us to other countries, the price of gas here is still considerably less than in most places anywhere else in the world.

Clearly, but it is all relative in the sense that people -- I think your average person does not really appreciate or realize that.

And I think just like airline tickets, when their fuel costs go up, they increase also. But I don't think people are going to quit flying. People are going to -- in fact, our industry feels very good about the fact that we have a lot more different demographics of people coming into the market; rather than just campers or people who are retiring, we have baby boomers that are coming in to buy units to go to NASCAR races and go to tailgating to sporting events and to use their vehicles to actually support a lot of other different hobbies or different things. And I really don't see that changing.

Maybe some time if somebody is really cost-conscious about gas, instead of going 400 miles a trip, maybe they will go 300 or 200 miles. But I don't think you're going to get the public to stay home.

Okay, thank you, Bruce.

And that is all the time that we have for questions today. Ms. Davis, I would like to turn the call back over to you for any additional closing remarks.

This is Bruce Hertzke, and I would like to thank everybody again for joining Winnebago Industries second-quarter conference call today. We look forward to talking to you again in June 16, which is the date that will have our third-quarter results and conference call. Thank you and have a nice day. Goodbye.

And that concludes today's conference. Thank you, everyone, for your participation. Have a wonderful day.