Winnebago Industries Inc (WGO) 2005 Q3 法說會逐字稿

Good day, and welcome, everyone to the Winnebago Industries third-quarter 2005 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to Ms. Sheila Davis. Please go ahead, ma'am.

Thank you, Jamie. Good morning and welcome to Winnebago Industries conference call to review the Company's results for the third-quarter fiscal 2005 ended May 28th, 2005.

Conducting the call today are Bruce Hertzke, Winnebago Industries' Chairman of the Board and Chief Executive Officer, and Ed Barker, President and Chief Financial Officer. I trust each of you have received a copy of the news announcement about our earnings this morning. This call is being broadcast live on our Web site at WinnebagoInd.com as well as at shareholder.com and Vcall.com. A replay of the call will be available at each site at approximately 1 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 notes. This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are inherently uncertain. A number of factors could cause actual results to differ materially from these statements. These factors are contained in the Company's filings with the Securities and Exchange Commission over the last 12 months, copies of which are available from the SEC or from the Company upon request.

I'll now turn the call over to Bruce Hertzke. Bruce?

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

Winnebago Industries results for the third quarter were impacted primarily by lower motor home deliveries, as well as lower production efficiencies caused by a reduction in our factory's (inaudible). Since the beginning of calendar 2005, we have also seen an industrywide oversupply of motor homes in the market caused by manufacturers producing to a higher level than the retail pull of the market. In order to move out our 2005 motor homes in the distribution channel prior to the new model year introductions, a higher level of discounting was needed during the third quarter compared to the discounting we offered over the past year. As a result, we will continue to monitor our inventories on hand and our inventories at the dealer level very closely to ensure that we continue to produce to the market demand.

Winnebago Industries continues to be the top-selling motor home manufacturer in the industry with 17.8% of the combined Class A and C markets for the first four months of calendar 2005. While our market share has decreased slightly in this very competitive market, we have continued to achieve our primary goal, which is to remain the most profitable motor home manufacturer in the industry.

Delivery of the new Winnebago View and the Itasca Navion Class C products began in the third quarter. We believe these innovative new products will have a positive impact on our market share as they reach the retail market. Our sales order backlog was 1523 units at May 28, 2005 compared to a backlog of 2444 units one year ago. The backlog was lower this year due to weaker demand of motor homes and also the competitive conditions of the market. But also, to some degree, it's to the increased capacity we were able to achieve with our new Charles City manufacturing facility.

At a meeting held yesterday, Winnebago Industries' board approved the tenth stock repurchase program, authorizing the purchase of outstanding shares of Winnebago Industries' common stock for an aggregate price of up to $30 million. Our primary strategy for the use of cash is for growth. However, it is the Company's goal to return any excess cash not needed for the RV business to the shareholders in forms of stock repurchase programs and cash dividends. We believe that we have utilized both of these strategies very effectively. Since December 1997, we have repurchased 21.8 million shares of our stock for an aggregate price of $278.5 million.

Winnebago Industries also announced that the Board of Directors increased its quarterly cash dividends by 29%. In the meeting held yesterday, the board declared a quarterly cash dividend of $0.09 a share payable on October 3rd, 2005, to shareholders of record as of September 2nd, 2005, an increase of 29% from the previous dividend of $0.07 a share.

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

Good morning. I am pleased to review with you the revenues and earnings performance for the Company's third-quarter of fiscal 2005. Revenues for the third quarter ended May 28th, 2005 were 255 million, a decrease of 17.8% compared to revenues of 310.2 million for the third quarter of fiscal 2004.

Operating income for the third quarter was 26.4 million or 10.3% of revenues compared to 28.1 million or 9.1% of revenues for the third quarter last year. Net income for the third quarter was 17.6 million compared to 17.7 million for the same period last year.

On a diluted per share basis, the Company earned $0.52 for the third quarter of fiscal 2005 compared to $0.51 a share for the third quarter last year. Net income for the third quarter of fiscal 2004, however, did include the charge for a legal settlement net of income tax effect of 4.6 million or $0.13 per diluted share.

The Company finished the third quarter with 114.3 million in cash and short-term investments. Cash generated by operating activities during the order was 30.2 million. During the third-quarter of fiscal 2005, we completed our ninth stock repurchase program with the repurchase of 807,721 shares of the Company's common stock for an aggregate price of approximately 25 million. On a fiscal year basis -- year-to-date basis -- Winnebago Industries has repurchased 860,321 shares for an aggregate price of approximately 27 million. Other uses of cash during the third quarter were 2.5 million for the capital expenditures and 2.3 million for the payment of dividends.

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

Thank you, Ed. We continue to believe the long-term prospects remain very positive for the RV industry and we continue to remain very optimistic about Winnebago's future. We continue to see motor homes used for more and more lifestyle activities and the increased popularity continues to grow. The demographic trends continue to be very positive for the industry for the continued long-term growth.

And last week, I had the opportunity to be at the Recreation Vehicle Industry Association's Committee Week, where Dr. Curtin gave the long-term forecast for industry. He is saying that this next year, in 2005, that we will see a slight downturn in our industry but the long-term prospects continue to remain very strong.

Winnebago Industries, we feel that we are very well positioned for a strong future with a strong balance sheet and a strong cash position to continue to grow with our industry. At this time, I'll turn it back over to the operator for the question-and-answer period portion of our call.

(OPERATOR INSTRUCTIONS). John Diffendal, BB&T Capital Markets.

Just a question on -- you had really great control of your SG&A, and particularly in the G&A side, which fell off I guess about $1 million or a little bit more than that the last couple of quarters. What was going on there, that you were able to have that big a decrease in the quarter on G&A?

A couple issues there. Our performance last year was obviously stronger than this year. Some of the key management people, bonuses are reduced in this fiscal year because of our earnings are down slightly. The other thing that is impacting that also is the fact that the Company adjusted its retiree health care program a year ago last fall. That was disclosed in our annual report and that also is benefiting in terms of lower retiree health care accruals during this fiscal year when you compare it to a year ago. Those are primarily the two issues that are lowering G&A, John.

But particularly looking at the November and February quarters, you were 5.5, 5.7, and it fell off to 4.5 in the May quarter. You know, like I say, a pretty stiff decline. Did those things -- some of those hit additionally in the May quarter? Was the bonus just simply because -- I'm trying to get some sort of magnitude on what may have dropped it as much as it was.

During the first half of the year, we ran pretty good numbers, pretty close to last year. Obviously the third quarter fell off and it's reflected in the incentive compensation numbers that go through that line in the third quarter, John.

As much as a million bucks?

Yes, sir.

Okay. And from a production standpoint, can you give us the number of days you expect to produce in the quarter? And especially, I'm just -- around the Fourth of July, you might just talk about how many days you would normally take off and what you're expecting to do this year.

Well, normally, we take our -- we take two periods during our fiscal year for normal plant vacations. The one period is in the week of Fourth of July, which is currently planned for this year as normal. We also take the period between Christmas and New Year's as another time for the employees to take some of their vacation and have time with their families.

So you're taking basically the week and that's not changed from last year, was a week off both years?

Correct. And we do that pretty much every year that way, is the way we plan our plant vacations.

Right. And the total expected number of days of production in the quarter?

Well, we had planned our production at the Company's factories in the fourth quarter, really, John, to reflect current market demand. And as a result, that does include some shortened workweeks or some idle days, which we also had during the third quarter. However, I might add that our View and Navion plant is scheduled on an overtime basis because of demand there. So it varies from assembly line to assembly line, but we do have -- have had to reduce our factory schedule to meet current market demand right now.

Okay. And then just taking it one more step, so how many days did you not work in the last quarter and was your schedule to do that similarly in the fourth quarter? In other words, how many blackened days did you have in the quarter?

During the third quarter, we typically, obviously, on a 13-week period, would normally have 65 work days scheduled there. Obviously, we have a floating holiday or a holiday during the third quarter of Good Friday. So we were off that day, so we have available 64 production days in the third quarter and we actually worked 56, so we had shortened workweeks -- four shortened workweeks in April and four in May to adjust to what current market conditions were.

And as far as what your scheduled in the current quarter, how many days shortened -- are you also looking at a similar situation in the fourth quarter?

We are. Again, that varies dependent upon how we feel about the market. If you'd asked us ten days ago, it was probably a different number than it is today. It just varies. Again, we meet every morning at 7:45 with our people to kind of take a look at business conditions in terms of retail orders, as such. And we do have some additional days as we did in the third quarter. Like I said earlier here, some idle days to back the schedule down appropriately with the schedule -- what we see in our current market conditions.

I do want to add that we have had no permanent layoffs. These are simply shortened workweeks. And quite frankly, it's in terms of the middle of the summer, I don't think is too bad a time to do that.

Right. Thanks. I'll let others ask questions. Thank you.

Gil (ph) Alexander, Barfield (ph) Associates.

Good morning. Could you give us some color as to where you'd like your inventory levels to be at, or how much they are out of line with what you're currently seeing as demand in the market?

Certainly. And I suspect you're talking inventory levels at Winnebago here. We did reduce our inventory level this quarter. It went down from 140-something million down to 130 million, so we were pleased with that. We would like to take that down a little further, probably down to the $120 million level by year end.

You say (ph) -- thank you very much. Good luck.

Craig Kennison, Robert W. Baird.

Good morning, everyone. Could you give us first the average selling price for diesel, gas and Class C's?

Certainly. Dig it out here. For the quarter, Class C average sales price was 54,972. Class A gas was 91,540. And Class A diesel was 153,364.

And can you give us a sense for what the View and Navion average selling price is in that mix?

This is Bruce. The average retail selling price is $78,600, in that price range. That's the retail price.

Okay. And getting to capacity utilization, where were you on your calculation in the third quarter and where do you expect to be in the fourth quarter?

It ran between -- this is Ed, Craig -- between 70, 75% for the third quarter. And if you look at the Class, Charles City probably ran about 85%, Forest City about 70%. But in that low 70% range in an aggregate.

Okay, that's helpful. And can you give a sense for the current level of discounting? Your gross margin was 100 basis points lower than it was last year, but not nearly as bad as we had feared given the discounting environment in the industry. Where are you now relative to discounts?

Well, for the 2006 product, which we're building and shipping today, there is no discount structure. We had the discount during the third quarter, the tail end of our '05 production, most notably in the Class A category, particularly in the diesel categories, where the (indiscernible) competitive and market condition resistance is right now, but that's kind of where we're at now.

Okay. And then if you could give me a characterization as to the makeup of current dealer inventories. We're interested in the percentage I guess of '06 units in that inventory relative to maybe '05 units last year. How stale, in other words, is the current inventory?

I wouldn't consider the current inventory stale at all at Winnebago. We started our '06 production in May. We've shipped a few units, obviously, into the field, so the bulk of our inventory in the field right now is very typical to what it would always be in a year in which we just started our new model your. The bulk of that is '05 products and we -- I know I looked at that number back early in the third quarter and the amount of '04s and dealer inventory was pretty consistent with what we've seen in past periods; it was pretty low. So for the most part, our dealer inventories, the bulk of it is the '05s with certainly some new '06s in there starting to hit the dealer's lots in last six to eight weeks.

That's helpful. And then on your diesel market share, that was a big success for you in 2004. You've given up a future share points as the market has gotten more competitive. Where do you think that should settle out?

Well, what you say is correct, Craig. In fact, Winnebago's market share position on Class A gas actually grew. And in Class A diesel, we've actually given some of that up. And that was, without a doubt, primarily due to we were just not willing to sacrifice all the margins that maybe a lot of the competitions were willing to do. Again, at some point in time, I always say when we get to maybe more of a level playing field, we still believe that our product is being received extremely well and we believe that Winnebago's product will do quite well in the marketplace and we definitely know that that's an opportunity area that we can continue to grow in and that's going to be our goal.

Terrific. Thank you very much.

Barry Vogel, Barry Vogel & Associates.

I guess you guys are magicians.

Good morning, Barry.

Good morning, Barry.

Good morning. Spectacular results in this quarter. This first question is for I guess for Bruce. You said the operating rate for the quarter that just ended was about 70 to 75%. What is your current operating rate and do you believe that that probably will be close to what your operating rate will be in the entire quarter?

Well, again, Barry, we meet every morning. When people ask us about where we're going, like last year at the end of our dealer days, which we have in July, we came back and we actually even went to some overtime because we have our dealer days again this year in July. When we come back from that, things could change a lot. Right now, Ed actually reported that, we're running in the 70, 75% of our rates, similar to where we ended our third quarter.

Okay. And Ed, on finished goods inventory, which would be the -- I guess predominately would be the '05 model, is that correct?

That's not true. The bulk of our finished goods inventory at the end of the quarter were '06s in queue ready to be shipped, but -- (multiple speakers)

Okay. How many '05 models of finished goods did you have in unison dollars at the end of the quarter?

I'm sorry, could you repeat that question?

Out of the finished goods inventory that you had at the end of the quarter, how many units were '05 models and how many dollars of finished goods inventory were '05 models?

We approximately had about 160 '05s remaining at the end of the quarter. I don't have the exact dollar amount, but I would imagine that's somewhere in that 14 to $15 million range.

All right. So is that sort of okay, given historically what usually happened?

It was higher than we wanted it to be at the end of the quarter. Again, our plan was to bring our inventory down actually further than the 130 million that we did accomplish. We were successful in driving our inventory down during the quarter, but it wasn't to the level that we're happy with. And a lot of it reflected simply weakness both at the wholesale and retail end of the market. We're going to continue to I think try to pull that down a little bit further in the fourth quarter. But to be realistic, Barry, we would have liked to not have had any '05s left at the end of May and we had some. But we're working on them. The number is substantially down today versus where it was at the end of the third quarter. So it's just something you try to plan it the best you can and react accordingly.

Right. But you said that you had discounted some models in this quarter or some of your shipments, correct?

That's correct. Primarily '05 Class A's.

All right. So do you think that the level of discounting to get rid of the 160 units will be similar in the fourth quarter versus the third quarter?

Most likely, yes.

Okay. And another question for you. On the backlog of Class C's at 834 units, can you tell us how many units were the View and Navion?

We just as soon not talk about the level of backlog on a by-model basis, Barry. I can tell you that demand as I'd indicated earlier is very good for that product. We have our View and Navion assembly line actually on 45-day workweeks.

45-hour.

Or 45-hour workweeks, excuse me. But certainly a higher percentage of our Class C backlog is the View and Navion, but I don't think it's appropriate to give a specific number.

Okay. And can you tell us exactly how many shares were outstanding at the end of the quarter?

I don't have that number in my file but I will get that for you, Barry.

Okay, thanks. If you can do this again in the fourth quarter, then my hat is off to your whole organization.

Well thank you, Barry.

We will try.

I know you will. Thank you.

Greg Badishkanian, Smith Barney.

Thanks. The backlogs seem to have come down, so it seems hard that you will actually do that next quarter. Can you talk about the diesel going from 532 to 123? Is there something, an adjustment that we need to make in that in the backlogs coming down on that particular model, or that line?

No, I think what you have, Greg, is that at this point in time right now, I think it's fair to say that the diesel business is very competitive. We have some competition out there that has some pretty aggressive discount programs. And that's the biggest issue is that -- and if I was a dealer, I'd probably do the same thing. You put in your order, you probably would shop and see what opportunities that there are out there. And we're just glad we don't have any more than what we do for '05s to get rid of, and we believe that we have some competition that probably has a little bit more product to get rid of. So I'm sure the dealers are just holding off a little bit on that order. If you take a look at the overall retail, the stat surveys just came out again. You know, 50% of the Class A market pretty much was diesel sales again, so I don't think the retail market has dropped off. I think there's just a little more shopping around to see where you can buy -- the dealer can buy his inventory right now.

So your competitors are offering better promotions. Have you -- and that's the reason for the backlog --

No, I think what's happening is, is when the order becomes available, in a lot of cases, they will take it out of inventory. And so it ships right away so there actually isn't a sales backlog order in some cases. But they're not going to order until they can see what they can get for a deal.

Right. And what are you doing in terms of specifically anything in the diesel area or in the Class A to sort of help sales there?

That's why we have a dealer day for our dealers every year in July. We will -- (multiple speakers)

That's like more promotional.

(multiple speakers) and showing them our product introductions at that point in time.

I was speaking more maybe promotions to sort of counter the competitive threat there.

Well, we'll again, our objective is we will continue to -- we just don't want to get into that big discount game. If we lose a little bit of market share, as I said, for a little bit of time, if they want to make any money, they're going to have to get out of it also, so.

Okay. Well, I mean you guys are very disciplined, so I think that's great.

Thank you.

Yes, they should all be similar. In terms of your gross margin, last quarter, when you sort of gave guidance, you were sort of assuming like a 14% gross margin, but you said it sort of assumes retail is okay and the promotional environment doesn't accelerate. You did close to that with shipments being down more than I think a lot of people thought. I was just wondering, looking out in the fourth quarter, is there -- what do you expect the gross margins to come in at and what would that assume?

Well, obviously, I think in terms of the demand at the marketplace, it's a little softer than maybe we had thought it was going to be in the prime selling season of April and May. And we looked -- we talked about that on the call on the 17th of March. We understood there was probably more inventory at the manufactures than needed to be, but retail had held up for the first two months relatively well. Obviously with the retail results that were issued during April, there obviously is continued a little more softness that we saw on the last call in terms of the retail environment. We expect that will probably, certainly in the near-term continue, which will probably put some pressure on margins. Primarily, simply because we've got to adjust our factory run rates to the market demand as well as what the dealers added to toward stocking inventory is. So I suspect there's going to be a little pressure this quarter in that in terms -- simply -- not necessarily because of discounting as much as we have to set our factory run rate to the demand of the marketplace. So that's kind of where we're sitting. I still look forward -- in that 13% range, but it's obviously going to get some pressure.

Yes, so you say 13; it's not 13, but 13 to 14, something like that.

Something like in that range.

Yes, and again, that would assume from a retail perspective and a shipment perspective, what sort of targets would that assume?

Well, we don't really target per se. A lot of it's going to be retail dependent and particularly, we're interested in where the dealer's attitude is. If the dealer wants to take their inventory down, at any substantial level less than a year ago, we're probably going to be looking at potential more schedule adjustments probably in the latter half of this quarter. So it's really difficult to forecast that. I wish I was that smart. We don't know.

Yes. Good. And maybe Bruce, to the extent that you can comment, you mentioned dealer days. What's your sort of thought on the new products coming out? I know you don't -- you may not be able to comment really specifically, but any thoughts there?

You're right, I can't really comment. We try to keep everything quiet so we can take our dealers to show them some new products at that point in time. And just like every year, we think we have a few new products and exciting things to show them.

Good. Good luck then. Thank you.

Scott Stember, Sidoti & Co.

Ed, do you have the ASP's from last year in the third quarter by any chance?

I don't have them -- I guess we do here. Class C's was 49,894. Class A gas was 81,439. Class A diesel was 142,697.

Okay. And if you could just maybe quantify the level of discounting or how much of an impact it really had on the gross margin in the quarter.

On an EPS basis, it accounted for about $0.03.

Okay, good enough. And the tax rate -- should we expect that going forward that you guys are going to be in that 35 to 36% range?

Correct.

Okay. And with regards to the dealer inventories that you have right now, would you just characterize it as a comfortable level for now? (multiple speakers)

Obviously, it's similar to where it was last year. It's following what we consider normal seasonal trends. Keep in mind though that dealer inventory has the benefit -- we have our new View and Navion as well as our new Cambria and Aspect; neither of those two products were at the dealer level last year. So we expect it to be a little higher, but in terms of -- we have retail market conditions that are softening, which would indicate that maybe they would pull their inventories down, but then you have to adjust that upward for the new two products. So we think that they're comfortable levels, appropriate levels.

The two new products, are they fully into the pipeline yet or that will take another couple of quarters?

One is. Obviously, the Cambria and Aspect. We started to ship that late June and early July last year, so that's at appropriate levels. But we're still, in the distribution channel, have a lot of pipe fill to do on our new View and Navion.

Okay. And if you had to strip out the new models because the dealer inventory, it would actually be down from last year?

It would.

Yes.

Okay. And Bruce, maybe just one higher-level question here, last one. Could you give any of your expertise to try to explain why the market is soft right now on the retail side when all signs are pointing to low interest rates, low inflation and a pretty decent environment; is there anything else that you have seen out that you can talk about?

Well as I said earlier in the conference call, we spent last week at Committee Week in Washington D.C. for the Recreational Vehicle Industry Association and a lot of discussions were on the fact that the -- why are things kind of topping off and different things. You kind of got to put it back in perspective. This is probably still going to be our second-best year in 25 years for the industry. And it's going to be Winnebago's second-best year in the 48-year history of our corporation. And so, again, I think last year, the manufactures overbuilt and right now, we're actually retail on a year-to-date basis, calendar year-to-date basis, is only down 2.3% even in motorized. That put the wholesalers down considerably more because the manufactures just built more product than what the retail market consumed last year. And I think it's still somewhat part of this is that it's a correction period to get that more in line. And then I think there is some consumer confidence, interest rates crept up a little bit, the gas prices. They will all affect a little bit, as far as the market, but I think when we get to a little more stable economy, myself, a lot of people in the industry, Dr. Curtin believes that we will go back to more of a what we call a normal cycle and that things still look very good for the future. So that's my perspective on it.

Okay. Thanks a lot, guys.

Ed Aaron, RBC Capital Markets.

Thanks, good morning, everybody. A few questions. First, I was hoping to circle back to the margin in the quarter and it came in quite a bit higher than I had thought based on the trends. And you guys obviously did a good job managing costs. I'm just trying to -- let me put this into historical perspective because if you look at the revenue decline on a percentage basis this quarter, it was comparable to what we saw in the May quarter two years ago. But the margin decline was much less significant. It was about 100 basis points this quarter versus I think about 400 basis points in the same quarter two years ago. I'm just trying to figure out how you were able to keep margins up as much as you did compared to what happened two years ago in the same quarter.

This is Ed. I guess I haven't went back and looked at two years ago. We have a better mix of product to some degree I think than we had then. Again, this is a Company that has more penetration in the diesel market which is certainly a better margin product. Typically, in the third quarter, prior to us being a more significant player in the diesel business, we would see a higher percentage of our product in terms of mix at the Class C level, particularly in the third quarter. We now have more diesel product to help offset the weakness margin wise that we experienced and we have a little more accelerated mix in terms of Class C. I think that's it.

I talked about a couple of those other things that I think helped improve margin. One, health care is down from where it was a year ago, and certainly, two years ago. And of course the other factor in there is that we're just trying to run as lean and efficient a Company is possible. Our manufacturing operation has a lot of lean training that's going on and I think we continue to try to focus on being very efficient at the factory level irregardless of what the market rate is.

Okay. On the capacity utilization, if we were to assume that it stays in that 70 to 75% rang throughout the quarter, would the revenue decline on a percentage basis be more or less significant than it was in the May quarter? Because I think we're coming off of a period where we're comparing -- where we were comparing against quarters with overtime to a period where we're going to be comparing against a quarter or two with basically just full workweeks without any overtime.

You need to keep in mind that the fourth quarter is always a little weaker margin wise simply because that's the week we plan more vacation days than in the third quarter. So sequentially you're going to see a little more weakness at the GP line in the fourth quarter simply because we always plan that week of vacation. We just don't -- we're not -- we don't absorb that factory overhead. So the fourth quarter, you're going to see a little weakness. We always have that and there's not going to be any difference this year.

Yes, but at 70 to 75% capacity utilization, would you expect a revenue decline to be more or less significant, assuming this capacity utilization stays where it is throughout the quarter, would you expect revenues to decline more or less significantly on a percentage basis than they did in the May quarter?

Well, that's -- we don't really try to forecast. And really, what I think as I understand the question is, how is revenues going to stack up this current quarter versus a year ago. And I really think that we still don't know enough about how the market is going to merge and what our book of business is going to be over the next three months to really give you a good answer, Ed.

Okay. And then I wanted to circle back on a comment that you made earlier about your views on the trends sort of changing by the day. And you mentioned that your line of thinking is different than it was ten days ago. I was wondering if you could elaborate on that. Is there something really that has changed in the last ten days or --?

Well, the comment I make to clarify that is that we sit down and look at what we believe our factory schedule needs to be on a going forward basis over the next two to three months, and we're simply adjusting that thinking based on what we see in terms of current market conditions. We constantly monitor retail on a year-to-year and month-to-month basis. We also try to get a perspective on what the dealer's attitude is going to be in terms of stocking inventory. And my point was that it's difficult to say we're going to be -- we're going to adjust our production schedule X days this quarter because it changes on a week-to-week, month-to-month basis was my point. There isn't anything in terms of significance or material that has changed our thinking from ten days ago. The trend is obviously weak. We see that, as evidenced by the numbers that came out this week in terms of stat survey numbers for April. We kind of knew that, but what we do is that simply verifies some of our own data, Ed.

Okay. And then just one follow-up on the dealer inventory situation. Obviously, trying to forecast, predict how dealers are going to act is difficult, but do you have some sense of when you think dealers might get to the point where they're going to be replenishing all of their retail sales because you know, dealers will tell you now that there may be for every two that they are selling they're taking on one. Do you have any idea of when they might go to just like a 1 to 1?

I guess -- this is Bruce. The only thing that we can say, that's kind of the comfort level or the inventory level that the dealer is going to carry. To try to forecast when our dealer is going to -- business isn't that bad out there. If you -- again, on a year-to-date basis, it's still only down 2.3% and this is the prime -- we're in the prime retail season of our industry, if you look at May, June, July, kind of the prime retail period for the RV industry. They're the highest months. So I think they will be able to go through, clean up their inventories, then they're going to want to stock with 2006 products.

Okay. Great. Thank you very much.

Bill Lerner, Prudential.

A couple of questions. One, just, as I calculate the backlog, I think you've got about six weeks of backlog ahead of you. Is that proactive to some degree on your part? I recall over the last couple of years, you guys have tried to get it down from, I don't know, say 11 weeks towards the six to eight-week range in order to preserve for really to preserve market share. Or is it more that dealers had been aggressive and now they're a bit more conservative?

It's a combination of both. What we have is dealers are definitely taking their inventories down. But you know, as we've stated over the last probably three or four conference calls, our Charles City facility is up and running efficiently and we're able to get product to our dealers in a more timely manner. And so that's part of it, but I never -- the bottom line is the market is weaker and the sales numbers are down also. So it's a combination of both those things that the reason that our backlog numbers are down.

Okay. Then the follow-up is, I recall that in recent months, you guys have said that with flattish retail sales, we'd be able to work out of the glut by May. 2%, down 2% feels like we're in the ballpark with that commentary. And of course, the market is fluid in the interim, but what's kind of the updated thinking there? Let's say that retail remains at this kind of flattish level off a phenomenal year last year. When do we work through the more rational inventory environment?

Well I think there's two factors to that. Again, first of all, retail is happening, but I think it's fair to say that in a lot of cases, dealers are dropping their inventory also. And so it's when they get the confidence and things start going a little better for them that they can continue to not only match sales with retail, but they are willing to maybe take their inventories back up slightly again. So I think it's a combination of both those things that we are experiencing yet.

I guess as far as the overall industry, again, we continue to talk about business is happening out there. Retail is happening. We just have to continue to watch that. I don't think that in 2005, as far as for Winnebago products, that we feel that we have an awful lot of 2005 product at this time of year compared to last year 2004 products. It's just a matter of what the retail space will be to move it through the system, and I think that's the same question you're answering. We just got to continue to watch the retail to see how fast we can move this through the system.

Thanks, Bruce.

John Diffendal, BB&T Capital Markets.

Yes, I just want to go back to that G&A just for a second. The $1 million drop and it seems like it is primarily I guess on bonuses with the business coming off. Looking to the fourth quarter, is that third quarter -- basically had some catch-up from the first couple, so should we assume that we're talking about a similar $4.5 million number or something a little higher than that since maybe some of that bonus might have been accrued from the first half as well? Or a reverse from a first-half level, let's put it that way.

I think you can look at a similar level. I don't think there's anything unique in G&A in the third quarter that won't carry into the fourth.

So again, another similar sort of 4.5 million?

Yes, I think that's effective.

Good. And, as you're mentioning, we've had some weak April numbers that came out -- not a lot of breakdown at this point. But is it your sense that also -- they continue -- as you say, April kind of confirmed what you'd seen from some of your numbers. How did you sort of feel that May and coming into June? Has there been any change one direction or the other from what we've seen in April that you're sort of tap on the market is telling you?

Can you repeat that again?

Well, just that as you say, we've seen some stat survey numbers; as you mentioned, those numbers on the motor home side I guess showed similar things to what you were seeing in your touch on your dealers and the market. I'm just curious if you have any thought on -- when the May and early June numbers are the retail -- is the retail sort of continuing to be April trends as best you can tell, any pickup or deterioration?

I think the only comment that I can make is we really haven't seen a big swing from last quarter, what was happening for our last quarter and what we're experiencing so far this quarter.

Okay, thank you.

Craig Kennison, Robert W. Baird & Co.

Thanks, again. Most of my questions really have been addressed. I just wanted to go back to the backlog issue. For those of us who build models, how concerned should we be that the backlog number at 1500 units is maybe 50%, 55% of what you just produced last quarter, and that's historically a pretty low number. Is there some mitigating factor that shouldn't force our numbers down low? Or maybe you can just comment on that.

Well, I think the only nothing I can say, Craig, is it's going to depend how fast that dealers start replenishing with 2006. Dealers are going to try to sell off a lot of their 2005 products so that when he brings the 2006 product in, he can start focusing on that. And this year, I think with a little slower market, it's just going to take a little bit longer. But again, as far as the backlog, that changes daily. The number that we have here from the end of the quarter to what we have today has already changed and it's going to change daily. After we have our dealer meetings, it's going to -- we hope it's going to change substantially.

And so as we go through this, again, we would like a little higher backlog also because now we're -- before, we were at the high end of our backlog and we didn't really like that. Now, we're probably closer to the lower end of the backlog. So I guess those are the only comments that we can pass on, Craig.

And then just early in June, has it improved since the levels in May?

We don't give any forward comments like that as far as trying to give an indication of where it's going. It's just similar to what we have experienced last quarter right now, yet.

Okay. And congratulations again on the margin discipline. Thanks.

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

Good morning, Ed. A couple of questions. First of all, you talked about that you had 160 '05 models left. I trust that's mostly Class A's, right?

Yes, sir.

And what did you last year, how many '04s did you have left at the end of the quarter?

I don't have that number off the top of my head, Tim. It was a smaller number probably slightly. We might have had a few, but it was larger this year than last year.

Okay, but not that much difference?

I don't think it's huge.

Okay. Of your Class A's, how much of those shipments were '06 model? In the quarter?

Not too many of them. We started our '06 production in the month of May, so I don't have the number off the top of my head.

It was 1600. Would it be like 160 or --?

Yes, there were more Class A shipments of '06's in the quarter than that.

I mean like, just give me a rough number, because what I'm trying to get at is virtually all the -- you're going to have a dramatic more '06 units in the fourth quarter than you did in the third quarter and you said you're not going to discount them as you are the '05's. So that should help your margins a lot more than you sort of -- I know you're trying to be a little conservative because of the production and so forth, but you had that week off last year, too. So I mean on a comparison basis, your gross margins should be better than the 1% decline that's achieved in this quarter. Substantially better.

Tim, this is Bruce Hertzke. We just kind of looked back at the schedule and different things for the third quarter, and we probably had somewhere between 150 and 200 units that were available of '06's.

How about the comment that you still have dramatically more '06's in the fourth quarter, that your margins, despite the lower production from the week off, should compare much more favorably with the margin last year?

Tim, this is Ed. I think there's going to be obviously less discounting of the Class A motor homes obviously in the fourth quarter than in the third, which is your point. But from a gross profit standpoint, while that might benefit us, I agree with you. To some degree, a lot of it is going to depend upon the level of volume that we are able to obtain both at the factory and the delivery level. So I think you're right, but on the other side of the coin, a lot of it is going to be volume dependent. Keep in mind that typically in the third quarter is usually a stronger volume quarter than our fourth quarter.

I know that. What do you have in your backlog in 2006 units rather than (inaudible)?

Well the backlog is primarily made up of all 2006 units.

It is now all 2006? Okay.

Right. We started producing 2006 units in May --

Other than the 160, it would be all but the 160 I guess is (multiple speakers)

Trust me, if we had an order on one of the 160's, we would have shipped it.

I got you. I missed your first couple of minutes of your product (ph). Did you go into very much on how this -- either your deliveries or something on your new Class C diesels are doing?

We did not, but they are doing very well at retail. We have a number of -- we introduced that product back in Louisville, Kentucky and we started deliveries in the third quarter. The dealers had time to talk to their customers that we've got some new products at Winnebago that's coming into my lot. And I think what we're experiencing is when that unit or units arrive at their dealership, they have a call list that they call their customer base and says, the new View and Navion has arrived if you'd like to come in and see it. And I think based on what we've seen initially in the marketplace, that's been a very positive reception. People have stepped up to that. We even had some dealers indicate that they got it in one day and retailed it the next. So, you know, so far, we're just in a catch-up game trying to produce as many as our dealers need right now and that's going to take some time to do.

Do you want to give me how much of your shipments in the last quarter were the two models?

We can only really tell you that we just got a good start, Tim.

I can understand for competitive reasons. Why hasn't anybody else done that? It seems like it's pretty obvious, given the fact that the diesels have become so popular and they've gone down in price to the lower price A's, why hasn't somebody done a C before you?

This is Bruce, Tim. We started this project actually a couple of years ago with DaimlerChrysler, and we have gone through and we have spent a lot of time proving to them that we could be certified. Our test track and our simulator machine that we have at Winnebago Industries and a lot of our competition don't have allowed us to meet the criteria. And also, the product that we were building before this, the Rialta, we were actually doing some -- the rear structure completely of that product. And we are able to work with DaimlerChrysler to get the approval of this. And as far as I know, we are still the only authorized manufacturer to build on this chassis.

I'm a little confused on that answer if you could clarify it for me. Why does DaimlerChrysler have anything to do with the approval of the product? Wouldn't that be due to governmental agencies or you people rather than the DaimlerChrysler?

No, it's their chassis. This is the Sprinter chassis and they aren't just going to allow anybody to build on it and cut on the chassis and make modifications. We've been told that you're going to have to definitely prove the capabilities and have a lot of this testing before you're going to be able to get approval to even buy that chassis from them to build on.

Are there any other manufacturers close to getting approval from them so they can sell, or do you have an exclusive?

Alls I can tell you is that at this point in time, we are the only manufacturer that have approval.

Thank you so much.

(OPERATOR INSTRUCTIONS). Doug McLean, Serial (ph) Capital Management.

I just have a few here. Just kind of a follow-up from a previous question. Just wondering if you could give me a little help on kind of the decelerating trend in the top line. The top line us down 10% and the 2Q decelerated to down 18% year-over-year in the 3Q. I guess just looking at your backlog, there's been a pretty accurate indicator of revenue. I guess it would have indicated about 250 million this quarter. Just wondering if my thinking is wrong. I'm looking at your backlog of 116 million, it's kind of translating to about 160, $170 million in the fourth-quarter revenue, which is I think substantially below where I would have thought you would have been and where the Street is. Just using the backlog has been a pretty accurate indicator of your top line for the last couple of quarters. Can you tell me if there's a disconnect now? Because I'm coming up with a pretty substantially lower figure than I think everyone's expecting right now.

This is Ed. I would caution people to -- the backlog, I think you have to take it a little bit with a grain of salt. One of the things we see the dynamics of how that works is during very strong market periods in which the manufacturers are scrambling to supply product to the dealerships, I think the dealers have a tendency to maybe react in a very aggressive manner. So therefore, in strong market conditions, we might see a backlog that actually is higher than we like it. Conversely, when we have weakness in the market, which is what we're experiencing now, I think the dealers have a tendency to then pull back. A good example as Bruce has cited earlier here, specifically to diesel, I think it's fairly common knowledge that the manufacturers have an oversupply of diesel product in the marketplace to a degree. certainly in the first three, four, five months of this calendar period. We see production schedules ramped back and usually that's the second reaction. The first reaction is try to incent it into the marketplace. And with the market environment the way we have at the manufacturers, if I was a dealer, I would be reluctant to give a manufacturer a forward order, but more or less play the market, play the manufacturers against each other. And unfortunately, I think some of that is happening and I think the result of that is potentially artificially weak positions in terms of forward order positions.

So what you're saying is they're probably doing more at once business; if they saw retail demand pick up, then they would kind of futures orders?

Their attitude is with the leadtimes at the manufacturers now, I can probably get product a lot more effectively in a shorter period today than I could one year ago. And I think that is reflected in the backlog. So I think it's a little bit OF danger simply to look at the history and say backlog was X and revenue was Y. I think that's a difficult -- there's a little danger doing that.

The only reason I bring it up is just because it's been pretty accurate the last, let's say six, seven quarters. So I just wondered -- you explained partly why there might be a slight disconnect, but also, these guys would have to be saying a big pickup in retail demand in order to make that backlog less representative. And it doesn't -- from your comments, you said that April and May retail, coming in below where you thought. So it seems like that backlog is fairly representative now of kind of forward trends.

I think the backlog also probably represents not only their attitude towards the amount of retail business they see, but also their attitude towards what they want to do with their dealer inventory. I mean as we talked earlier on the call, at some point in time, they get their dealer inventory to the point where they're going to have to reorder.

Right, right. That's actually my next question.

There's two things driving that. Both retail demand as well as the dealer's attitude toward stocking levels.

Right, right. That was actually my next question. Your inventories are up about 2.4% year-over-year. Dealer, I think the unit inventories are up about 1%. Given that they're pretty comparable to last year and we now know that kind of last year's inventory levels at the dealer and at Winnebago were probably in retrospect too high, given the fall off in demand we saw in the back half, given that retail demand -- is shaping up to be much weaker than it was last year, even with inventories flat, I'm looking at those numbers and saying they're, on a relative basis, a lot higher than last year. Can you just speak to that?

I think you've got to go back to the comment Ed made earlier on the call. We got a couple new product lines.

You had some new products last year though, right?

Not completely new product lines.

But on the diesel side, though, but you had new product, which is pretty substantial. I was just -- on an apples to apples, it seems like those would kind of net out on a year-over-year basis.

Well, when we make our comparisons, naturally, we take all our individual models and we see here's where inventory was last year, here's where we are this year. And when you add a new model line out there, naturally, you hope that you can get a little more floor space or inventory shelf space.

Okay. But -- I just look at flat inventories versus a weaker environment as not necessarily flat, just kind of -- I look at them as a little bit more dangerously positioned than last year, but that might just be me.

But I had a follow-up question. You guys talked about discounting impacting EPS by about $0.03. Is that about half of the gross margin decline -- 50 bps? I just did some quick calcs, and that's what it looked like.

Oh, I don't know if I'd characterize it as that. The primary gross margin decline is volume. At the end of the day, when we look at last year's results versus this year's results, volume, that 55 million at the top line pays the bulk of that, but you have to add to that, obviously, a more aggressive discount stance this year because of market conditions than a year ago.

Okay. Sorry, it just looked like -- so I mean those eight days fewer year-over-year, I was just, I think along with everyone else, a little bit surprised at the gross margin, given you guys worked eight days fewer year-over-year and you were working 45-hour workweeks for two out of the three months last year. Is that kind of -- is that what we should be looking at, eight days is only about 50 basis points in gross margin decline from the fixed cost absorption?

I haven't looked at that from that perspective. I'd have to get back to you, Dough, to analyze that more before I really comment effectively on the call here.

Okay. And then I was also just curious, the diesel was a smaller part of the mix than last year. I think it was 34% of sales versus 41 last year. Did that have a negative impact on gross margin?

It does. We have -- last year, I think we had a better diesel market. Obviously, we had some new products that were still I think reaching the dealer a year ago. This year, we have our new View and Navion, which is going to create a higher percentage of our mix to be in the C category.

And those are lower margin, the C's?

They are lower margin than our Class A business, that's correct. So with a little softer market on the Class A side of the business and new products on the Class C side of the business, has allowed about a 6 point shift in terms of product mix.

Okay. Can you talk to how much that kind of -- that mix had in impact on gross margin? Was it a negative -- was it 30, 40 basis points or --?

Oh, no, I really don't think it was all that much. I mean it's there but it wasn't that significant.

Okay. And then just lastly, the $1000 spiff you guys are offering on 2005 models, were you offering that in the last quarter or is that just new this quarter?

No, what we've done here recently is we've tried to identify that part of the market in which we think we'd like to be a little aggressive. Right now, because of the competitiveness in the diesel side of the business, we just feel that with all the pressures out there in the marketplace created by the competitive environment, we've got to step up more in terms of be a little more aggressive on the diesel side of the business. So that's just our current quarter market response.

So the spiff is new this quarter?

Yes. (multiple speakers). We didn't have that last quarter.

2005 product.

We're just -- and it's not on our '06 products. It's just give the dealer a little help in moving out the 2005 diesel products he's got there.

Okay. And then just lastly, given that diesel is kind of falling off a little bit in the mix, it looks like the ASP and the backlog was down, obviously, because Class C was up and in the quarter, the ASP kind of decelerated. Should we just kind of be expecting, given Class C kind of increasing in the mix and diesel being weak, ASP's to be pretty flat going forward?

I think that's fair.

Okay. Thank you very much.

And that concludes today's question-and-answer session. I would like to turn the call back over to you for any closing comments.

Thank you, everyone, once again for joining Winnebago Industries' third-quarter conference call today. We look forward to talking to you again in October when we report our fiscal year-end results and that will conclude our call today. Thank you very much.

Ladies and gentlemen, that does conclude today's teleconference. You may now disconnect and have a great day.