Winnebago Industries Inc (WGO) 2006 Q1 法說會逐字稿

Good morning. My name is Crystal and I will be your conferences facilitator today. At this time I would like to welcome everyone to the Winnebago Industries' first quarter fiscal year 2006 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Sheila Davis, Public Relations and Investor Relations Manager. Miss Davis, please go ahead.

Good morning and welcome to the Winnebago Industries Inc. conference call to review the Company's results for the first quarter of fiscal 2006 ended November 26, 2005. Conducting the call today are Bruce Hertzke Winnebago Industries Chairman of the Board and Chief Executive Officer, Ed Barker, President and Sara Nielsen, Vice President and Chief Financial Officer. I trust each of you have received a copy of the news release with our earnings results this morning. This call is being broadcast live on our website at Winnebagoind.com. A replay of the call will be available on this 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 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 statements are contained in the Company's filings with the Securities and Exchange Commission over the last 12 months, copies of which are available from the SEC or from the Company upon request.

I will now turn the call over to Bruce Hertzke. Bruce.

Good morning and welcome to our conference call this morning. First I will review with you our current motorhome climate. Then Ed Barker will provide a few highlights of the first quarter and then Sara Nielsen will review our financials with you.

Decreased consumer confidence level, driven primarily by high fuel cost, had a negative impact on the first quarter. In spite of these difficult conditions, we are very proud of the results. Ed will review the details of the quarter in just a moment.

I believe the recent industrywide RV show in Louisville, Kentucky says a lot about the state of the current RV market. With dealer traffic down approximately 5% compared to last year's record, this was also the second highest attended show in history. The reaction to Winnebago Industries' new products at the show held in early December was very positive especially for the Winnebago View and the Itasca Navion fuel-efficient Class C diesel motorhome that went into production earlier this year.

We also introduced some new floor plans such as the new Class C Winnebago Aspect and the Itasca Cambria 29-8, as well as a Class A diesel Winnebago Tour and Itasca Ellipse 36 LD, all of which were well-received at the show.

Also during the Louisville show, Winnebago Industries accepted an award that we are very proud of. The prestigious Quality Circle Award from the Recreational Vehicle Dealer Association. We were very proud to receive this award for the 10th consecutive year. We were the only public motorhome company to receive this award this year and we were also the only RV company that has received this award for all 10 years. We believe the DSI is critical to providing us with an annual benchmark that shows us how our dealer partners perceive the quality of Winnebago Industries, its products, and its services.

It is our continued goal to have the most innovative and highly quality products, services and support for our dealer partners and our retail customers. At this time, I'll turn the call over to Ed Barker for a review of the first quarter. Ed.

Good morning. The first quarter revenues and net income were negatively impacted by lower motorhome deliveries caused primarily by lower consumer contest which, in our opinion, is due mainly to the increased cost of fuel. A shift in the mix of products sold to lower-priced motorhomes particularly Class C's also had a negative impact on the quarter.

Deliveries of the new Winnebago View and Itasca Navion Class C motorhomes continue to be strong. We believe these innovative new products have had a positive impact on our Class C marketshare.

Our sales order backlog was 2,013 units at November 26, 2005 -- essentially flat compared to the backlog of 2,080 units one year ago. A breakdown of the components of the backlog, however, demonstrates the continued shift of mix to lower-priced units, particularly Class C's. The backlog also shows the continued strength of the new View and Navion Class C diesel in the marketplace.

We anticipate that low consumer confidence levels, higher fuel cost and rising interest rates will continue to have a negative impact in our seasonally slow second quarter. Now I'll turn the call over to Sara for the financial review. Sara.

I am pleased to review with you the revenues and earnings performance for the Company's first quarter of fiscal 2006. Revenues for the first quarter of fiscal 2006, which ended on November 26, 2005 were 232.3 million compared to revenues of 266.1 million for the first quarter of fiscal 2005. Operating income for the first quarter was 21.4 million or 9.2% of revenues compared to 30 million or 11.3% of revenues for the first quarter last year.

Net income for the first quarter was 14.6 million compared to 19.5 million for the same period last year. On a diluted per share basis, the Company earned $0.44 for the first quarter of fiscal 2006 compared to $0.57 a share for the same quarter last year. The Company began recording expenses related to stock options in the first quarter of 2006, which reduced net income one -- by 1.5 million or $0.05 per diluted share. Option expense for the rest of fiscal 2006 is expected to reduce net income by approximately 2.4 million or $0.07 per diluted share.

The Company ended the quarter with 135.8 million in cash in short-term investments. Cash generated by operating activities during the quarter was 32.4 million, an increase of 15.9% from the first quarter of 2005. This was primarily a result of a decrease (ph) in receivables and improved inventory levels at the end of the quarter.

Significant uses of the cash during the quarter were 5.2 million for stock repurchases, 3 million for the payment of cash dividends, and 1.4 million for capital expenditures. We estimate that 8 million will be spent during the remainder of fiscal 2006 on capital expenditures and the Company has approximately 24.8 million remaining on the current share repurchase authorization. I will now turn the call back over to Bruce.

Industrywide retail motorhome sales have lagged behind the record performance experienced in calendar 2004 with staff surveys reporting that Class A and C motorhomes are down approximately 7.7% calendar year to date through October. While every year can't be a record year, we are extremely proud of the performance during the first quarter and continue to believe in the long-term growth of our industry and for Winnebago Industries.

Winnebago Industries continues to be the top-selling motorhome manufacturer in the industry with 18% of the combined Class A and C markets for the first ten months of calendar 2005. While our marketshare has decreased slightly in this very competitive market we have continued to achieve our primary goal, which is to remain the most profitable motorhome manufacturer in the industry.

I will now turn the call over to the operator for the question and answer portion of the call.

+++ q-and-a.

(OPERATOR INSTRUCTIONS) Kathryn Thompson with BB&T Capital Markets.

First question, are you seeing any changes in the pattern of sales wholesale orders later in the quarter, specifically November versus, say, September, October? And is it somewhat reflective of what dealers were starting to see which is a little bit better business starting the second half of October and into November?

At the Louisville show, as many of you have seen there, we continued to see that business is softer. And we continue to think that until after the Christmas holidays and the first of the year and we get to the spring show season there's probably going to be a better reflection of exactly how strong the spring market will be. So not sure. We've seen some indications at the show and as Ed said, at the show we've seen probably more of an indication for some lower-priced products in the marketplace and we haven't seen any other major shift or trends since then.

So November -- in other words, November was not meaningfully different than say October, September sales?

No. I cannot say that.

In looking at your backlogs do we anticipate softer Class A gas backlogs which were down pretty -- in the 40s. Why were diesels not down as much and if you could give a bit of clarity about that and your outlook on backlogs going forward?

I think part of the reason is any time you introduce some new products you have an opportunity for what we call pipe sale and a few more sales there. And also I think there are also some value products in the diesel area that are still doing quite well also. We did think, we did announce a 36 B series program at our corporation. And that seemed to give us a little additional business during this period of time. I think we were able to sell some products from that program that we had.

Could you talk a little bit more about that program?

It was the Journey. It's our -- the Journey was the most popular selling diesel motorhome in 2004. And so we took one of our popular brands and we just ran a program, a Special Edition unit. And we ran a program with that coach.

Okay; that's fine. Finally, with gross margins came in at 13.4% which is a bit better than the 12 to 13%, could you give any kind of forward view on margins going to the second year seasonally slower quarter and for the balance of the year?

Yes. Our margins were a bit better than we had anticipated. I think a lot of that had to be due to the fact that I think we, actually at the end of the quarter, produced and shipped a few more units than we had earlier had in our model we talked on the called in mid-December or I should say mid-October. That helped us.

Our plant stayed fairly efficient also and that helped us gain a little bit on the gross profit side. On a going forward basis, we continue to guide, indicate that based on market conditions, based on the mix of our backlog we are going to continue to see a lower than where we historically have been gross margin certainly for the second quarter.

So a 12 to 13% into the second quarter is not unreasonable?

No.

Just, finally, production dates in the quarter?

You talking first quarter or second quarter?

Both.

The first quarter we had 62 production days available now. Dependent upon plant, we worked like on our Charles City plant C plant or our View and Navion plant we obviously worked all those days. We did have some days off in the first quarter in our Class A assembly plant.

In terms of the second quarter, there's 59 available and again it is going to vary on a product and plant basis. Obviously it is going to be certainly probably as weak if not weaker then the first quarter simply because we are into the seasonally slowest part of the year. The second quarter is traditionally always a soft quarter for us and not only from a production standpoint but as (indiscernible) mentioned earlier from a gross profit standpoint. That is going to show up on our gross profit line. So it's just this time of year.

Craig Kennison with Robert W. Baird.

First question following up on Kathryn's question with respect to gross margin. Why did you produce and ship extra units at the end of the quarter? What was the driver there?

I think a lot the success -- one of the things we tried to do, Craig, is the fact that coming out of September or certainly in mid-September because of higher fuel prices and general consumer confidence that was really weak during obviously September and October, we tried as aggressively as we could be to try to promote our product. We knew we believed we had a number of customers kind of sitting on the fence, hesitating. We did have a national program in conjunction with the California National RV Show there. We did think that stimulated business a little bit.

We have been trying to aggressively promote some of our product, as Bruce indicated. We put together a value-priced diesel product that seemed to sell very well for us. And that is one of the reasons you see a little more strength in the diesel backlog. So we simply -- I don't think it's as much a function of the market as it's a function of the fact that we had just been trying to be out there in the marketplace and have some programs that are attractive for our dealer partnership.

Is the margin on that value-priced diesel lower than your average diesel margin?

It is slightly.

But above your C's?

Yes.

Second question. Average selling price, Ed, by category?

I will have Sara have that. She has those numbers.

Yes it was 87,756 overall. For Class A it was 59,042. For Class A diesel it was 158,687 and Class A gas 91,852 and overall Class A was 113, 171.

With respect to stock compensation expense, it was $0.05 in the quarter. That was a bigger number than I had anticipated. Is it just the volatility in the stock and what should we expect going forward?

In regards to option expense in the first quarter we did incur more expense due to the adoption of the share-based standard. So on a go forward basis, we are forecasting it to be $0.07 per diluted share for the remainder of fiscal 2006.

So why would it be -- just help me understand some of the sensitivities of that formula if it is $0.05 in Q1 but only $0.07 for the balance of '06?

Historically for the pro forma disclosure, we have recognized option expense on a straight line basis over the vesting period of three years. This policy differs from the policy that is required to be applied after we adopt 123R, which is required that we expense over the requisite service period of the Award or to an employee's eligible retirement date of earlier. So we needed to revise how we treat any of the grants that we -- that were granted in the first quarter of '06 differently than we had historically. And that resulted in $0.05 on the first quarter of '06.

Was that a catch-up, essentially, a catch-up provision in Q1 of this year that would not necessarily repeat in Q1 of next year?

No. It's reflective of the -- on the grant itself and the people that are being granted the options. And so it's fairly, it should be fairly consistent and on a go-forward basis that the first quarter will be higher than the rest of the year.

I thank you for that. Next question has to do with your cash. It continues to accumulate even in a tough industry environment. $136 million. What are your plans for cash?

No. 1, OE, Craig, will be for expansion and growth; and then, No. 2, we will continue to look at returning net to the shareholder through cash buybacks and also our stock buybacks and, also, the last three years we also reviewed dividends also. I think we had some pretty decent dividend increases over the last three years.

And yet despite -- .

Our philosophy really hasn't changed on that.

But I would say that given those categories you are not -- you are accumulating a lot of cash. You still bought back some stock but you still have a lot of new authorization. At the end of the day, probably got an extra $100 million that could be devoted to one of those activities. Anything seem more likely going forward?

I think we will continue to review all of those. All the way from what's the next best step in growth, which way would be is it through acquisitions? Or is it to start plants and other types of businesses? Or is it to continue to buy back stock when it gets undervalued? We are going to review them all.

I can tell you, we have nothing to announce.

Edward Aaron with RBC Capital Markets.

Actually this is Adam (indiscernible). I have a couple of questions. I really like what I'm hearing today. Regarding rising raw material costs what has been the financial impact of rising material cost? And what is the risk in moving forward with major raw material such as steel, aluminum, resins and other similar materials?

We monitor that pretty closely every month. We have seen pretty consistent declines in steel prices since a year ago. We did start to see in September those flatten out. Actually they actually went up, I think, in the month of September just slightly. But the trend is still pretty solidly in place. There is a fair amount of weakness in steel.

Those are being offset by increases in commodity prices related to petroleum-based products, such as fiberglass, resins, paints, etc. But for the most part since we implemented '06 pricing we've seen a pretty reasonable environment in terms of commodity inflation. So right now, we don't see that as a substantial risk at all.

So do you have any supply side initiatives in place to offset new raw material cost increases?

I'm sorry?

Do you have any supply side initiatives in place to offset any particular raw material price increases?

We planned a material inflation in our '06 pricing and as we monitor that we currently don't have any need to have any increases or anything like that, if that is what your question is.

Yes. That's exactly what it is. I really like what I'm hearing. Final question, what is the degree you have of vertical integration versus outsourcing manufacturing? Do you have a strategy to move either direction?

Our vertical integration at Winnebago Industries for a lot of people who have followed us, we have always said that we are more vertically integrated than most of our competitors. We continue to make a lot of our component parts. We have our own (technical difficulty) plants, rotation molding plants, metal stamping, fiberglass plants, cabinetry. We make all the component parts and one of the things that we can do when things slow down is we can review some of the stuff that we outsourced before to see if we can more cost-effectively make it in for city or at Winnebago Industries' plants to utilize the opportunity to keep our people working and also to see if we can make some more money off our products.

So there are other ways you are looking to outsource and (indiscernible) overseas to China and some other low-cost countries?

Actually we do -- we compare -- we get all of our appliances, TVs and electronic components overseas. All the individual smaller parts are actually probably more designed strictly for RV applications. And in most cases there's probably not a big market for that because the volume is so low for our industry. Again, I think that's why it's enabled Winnebago Industries to integrate and make some of these parts ourselves and be cost-effective by doing it that way.

I wish you continued success. Thank you.

Scott Stember with Sidoti & Co..

Could you maybe talk about the level of discounting, maybe quantify it on a dollar and EPS standpoint and talk about if there's any promotions going on in the quarter that we're in right now?

The level of discounts, obviously, is substantially less than since last spring and summer. I think we, along with the rest of manufacturers, have become a lot more rational with our production schedules, trying to monitor our inventories. And any time a company, I think, keeps their inventory in check, doesn't get in a situation where they've had excess inventory, you can substantially lessen the potential for excessive discounting. So I think that environment is much improved.

We have tried to be a little more promotional to try to generate the little activity this quarter, maybe more so than historically. I think a lot of that came from the recognition that, because of the effect of the hurricane on gasoline prices. And ultimately that, I think, had certainly a negative effect on the RV consumer conscience. We've tried to approach the market a little more aggressively and I think that's overall helped us.

In terms of the amount of pressure it has on margins it's not really all that significant. Yes, we have got some programs out there I think that maybe are a little more aggressive or on a little bit of a higher level than we have in the past. But I think that's just our reacting to the marketplace in a market environment that's maybe a little more challenging than what we've seen over the last two or three years.

We think, overall, it worked out pretty good for the quarter. We think our results are pretty respective. We did get recently the October retail staff survey information and we think some of what we've done has actually showed up as early as October. And I think in the coming months, we will continue to show up in a positive light in terms of the marketplace.

And this value diesel product that you mentioned as part of that program, which one was it?

It's actually the Journey and Meridian 36 foot floor plan.

Scott, I think it's important to know that was just a single product with a single line. I mean it wasn't an entire product line. It was just a special promotion product.

One of the things we've seen in the marketplace is a rotation to more value-orientated products and what we did is take that Journey product and changed some of the equipment levels to make it a more value-priced product. We think that is having a positive effect.

And as far as your current capacity realization. Where would you quantify this?

We ran a current quarter at just slightly under 70% capacity utilization in the first quarter.

Do you have the ASP for last year's numbers on a comparable segmentation basis?

Yes, I do. Overall, it was 90,278 for Class B, it was 54,106, for Class A, 107,272. And to break that out, Class A gas is 86,839 and Class A diesel was 152,732.

Ed Aaron, RBC Capital Markets.

A couple of questions for you. First on, in terms of your gross margin -- the 170 basis points, the year-over-year contracting, could you give us a sense of how much of that is mixed versus lower capacity utilization?

I think the bulk of that is lower capacity utilization. We take a look at it -- we reconciled the EPS last year this year, Ed; and the bulk of our whole EPS adjustment is volume. There is a slight mix component to that. Certainly the mix is not as positive this year as it was last year simply because of how our products are selling. But the bulk of it, at least two-thirds of it is really volume-related.

I don't know if I am doing the math right on this but could you give your shipment numbers as well as your retail inventory numbers so it kind of is a way to back into the amount of retail activity that is in place in the given quarter. Based on the numbers that you've given us, I come to like a 3% retail growth number for the quarter. That would imply actually a pretty big up month in the month of November. Am I thinking about that the right way?

Certainly if we look at consumer confidence, we have a grab -- we kind of grab that. One of the things we saw that September, October consumer confidence was as low as it has been all year-long. We did see a pretty nice spike in November. Consumer confidence did return. We did hear at the Louisville show from some of our dealers that as gasoline prices approached $2.00 they did report that -- at least some dealers reported that they had seen better traffic than they had previously. I think there is some evidence out there both from a consumer sentiment standpoint as well as from a gasoline and a dealer input at Louisville sediment the fact that November was a little better environment than we saw in September and October.

Can you talk to us about how you think about your product development cycles? When you see a shift in the marketplace the value-priced diesel you talked about was kind of an example of what I'm asking about it. You know if you -- to the extent the market is becoming more value-oriented are you adjusting your product development for the next year or two or however long you plan it in advance to cater to more value market or do you kind of just proceed, generally speaking, business as usual with your product development?

We definitely have to adjust to the marketplace. There were signs a few years ago, the diesel market took off very strong and we had to get into the diesel area. We learned then that we were a little late to the marketplace but we're seeing Winnebago builds 94 different models. You have to have some of everything covered with your product lines. Right now there is definitely a shift mix to this and we are going to be into that market so we have changed some of our development cycles.

And just like we announced, we actually did some special SE (ph) programs to make sure that currently we have a product that's available for the marketplace that we had to adjust to. To answer your question you definitely have to adjust to the market.

Lastly on your G&A if you back out the stock option expensing, there wasn't a whole lot in the G&A number this quarter. Can you talk about why it is down so much on a year-over-year basis and what we should look at, going forward? Lastly, there were some layoffs done over the summer and I was wondering if there's any consideration given to bringing people back at this point or if it's too early to tell yet?

Part of the decline in G&A expense is the fact that (indiscernible) incentive compensation is a fairly substantially less this year than it was one year ago simply because our performance is down. In terms of -- what was your second part of the question?

That's about layoffs.

In terms of layoffs, we did have a layoff in August anticipating weakness caused by the marketplace as well as the seasonality. We currently have about 130 or 40 of those people still on layoff. Again, this is the seasonally slow time of this year of our season. The marketplace just doesn't dictate at least at this time. We are hoping that come the better spring market, we can bring those people back to work.

Greg Badishkanian with Citigroup.

My first question is October retail sales in October. Really strong, up 9%, and you had the onetime promotion October 14th and 23rd you had the consumer rebate. Is that primarily what drove it? What do you have planned, I know you talked about it but for November, and December, that might pick up sales there. And would you expect a response if you continued to be a little bit more invested on promotions?

I think what actually helped Winnebago -- and we have said this all the time -- I think it is not so much the promotions that we're doing. I think it's an awful lot of the promotions that other people aren't doing. I think that Winnebago Industries has been able to regain some of the marketshare because you have to envision that a lot of manufacturers have what we call rightsized the inventory and there isn't as much as dumping product on the marketplace. So I think now it's determined on the products.

We did do a couple of show specials and different things to try to promote a couple of individual product lines. I'm sure that has helped a little bit. But I still think the biggest issue is that it's more of a -- the market is more of a rational market today than what it was earlier this summer in the May, June, July time period.

Greg Badishkanian; When you are looking at November, November, part of December, are you seeing dealers' replenishment and sort of one-to-one or are they right now how are they doing their inventories?

I think what we are seeing now is that the marketplace is reacting to retail. The one-to-one comparison, I think, is pretty accurate and it is going to continue to be that through the rest of the calendar year and, probably, January. Probably the first time hopefully we will have a strong spring market and dealers will feel that they can stock a little bit more and take a little more product to the marketplace because they are anticipating a fairly strong spring market.

A maintenance question. Tax rates seem a little lower this quarter. Where do you see it for the year?

Yes our tax rate is lower than the prior year and that's primarily a result of the American Jobs Creation Act. The manufacturing company, Winnebago Industries is eligible for a domestic production activities credit. So we are estimating it to be approximately a 1% reduction in the tax rate for the year. So the tax rate that we have used in the first quarter is what we are estimating our annual rate to be.

Just a follow-up. Some of the assumptions you've given for gross margin, sort of SG&A. What type of retail sales is that assuming for the balance of your fiscal year?

I'm sorry this is Ed. I didn't quite hear all that question.

Right so you gave some expectations on gross margin and SG&A and just wondering what type of expectation that assumes for retail sales in the next few quarters?

In terms of based on where dealer inventory is at right now as Bruce indicated, we expect the dealers to basically replace it on a one-to-one basis until we'd get into probably mid-February or March in which they possibly based upon how they view the spring market and may increase their dealer inventories. Given that and given the fact that we are in the seasonally slower time of the year, we are going to see some lower gross profit numbers than we historically have put up simply because -- not only because of the product mix but also because of the slower market environment we are in right now. So I think you're going to see our growth profit level, certainly for the next quarter, be weaker than they historically have been. And dependent upon where the Class A market evolves, if we continue into this value market, we are going to continue I think to trend to see a little bit lower gross profit performance than we have historically been. But again it is going to be pretty market dependent.

We are optimistic that come the spring market, if we can get consumer confidence at reasonable levels and reasonable fuel prices, that we will see a bit of a resurgence in the Class A market. But that is just going to have to be dictated by the market conditions.

Some things are basically not much changed in the next quarter until spring?

I think that's a fair way to look at it.

Barry Vogel with Barry Vogel and Associates.

I've got a few questions that were not asked. First of all, Ed, are you comfortable with your finished goods inventory and how much were they at the end of the quarter?

We don't report those until we come out with our 10-Q. We have been working on our inventory. I can tell you that we are certainly pleased that our inventory did decrease from 120 million down to 114 million. I think we talked last time on the call, we've talked the last couple of quarters about the fact that we had wanted to do a better job there. I don't think we are done yet. I think it can improve beyond 114.

We really want to try to continue to be as efficient with our inventory as we can. So I think there is some potential opportunity there.

On those discounts or those promotions in the month of October are they fully reflected in your P&L?

They are.

I have a couple questions for Bruce. Are you comfortable given the mix of dealer inventories in current market conditions with the level of dealer inventories?

I think right now, we expect dealer inventory to be held down a little bit. They are definitely lower than last year. Even with some of our new products that we have introduced and I can tell you that we really don't expect to see dealer inventory increase until, again, we get closer to the spring market. But, yes, I am very comfortable with where they are at today.

Now as far as product development, I've gone to the show for many years and usually you are one step behind someone else coming out with a new product innovation. Then you tend to catch up, if you think it's worthwhile.

Bruce, I would like your opinion on the fact that the leading diesel company in the industry which is Monaco introduced two nameplates with a base wholesale price of $100,000 dollars and they were diesels. One was a Vacationeer and one was the Impala and they were 30 foot long. So my first question was since Monaco is a leading diesel company for them to come down to $100,000 dollar base wholesale for a diesel product that could be important. What is your opinion of that, relative to Winnebago?

I think, without a doubt, that we are seeing value products be more acceptable today. I think, without a doubt, that that is -- that is going to be a product area that will be important for the future. So we looked at that product just like everybody else at the show did. And if that's a new market segment that's somewhere that we need to be also.

But do you think that if that's what you just said is true that probably when you introduce your new products in the summer that you might have a similar price point in diesel?

Just like always, Barry, we have all kinds of things on the drawing board that we are working on and we like to save our announcements to our dealers' body (ph) for our shows. The bottom line is just like always we are going to be in the markets. In fact, part of this was we actually probably reacted before some of the others. We did this 36 Journey and Meridian Special Edition one, which was a lower-priced diesel product. So I think, without a doubt, we have recognized that already and, again, we plan on being in those markets in the future.

What do you think of Monaco's introducing a full wall slide out which of course they didn't have before and, again, they are a major competitor and I know you don't have -- you didn't have full wall slide outs in the show. So what is your opinion on that?

Everybody has different floor plans, different things. Fleetwood last year introduced a full wall slide unit. I think their full wall was 22 foot slide out. We had several different units at the show that had two (indiscernible) slide out and if you actually looked at the square feet, we actually had more square feet in those units than the full slide out wall.

So, again, these are all innovative things that everybody is working on. Nobody has one single item that's going to dominate and take over the industry that the other people aren't going to have. So I think everybody is continuing to look at how they can do slide outs that add more floor space to the unit; and we are going to do just like all of our competition. We are going to be continuing to work on that also.

I have another question for Ed. Can you give us the number of orders at the show for this year's show versus last year? For the broad category of Class A gas, Class A diesel and, in particular, the View and the Navion versus last year in terms of orders?

I don't really have that information. Obviously last year, because of the View and the Navion debuted at the show the response was particularly strong. The fact that we have been in production on that product since early spring, we've been able to work off some of that backlog. But I think as you look at our backlog in the news release we continue to see a very strong demand for that product and our manufacturing plant is working as diligently as they can to try to get more product of that nature to the marketplace. But I don't have the specific numbers on the show, Barry.

Bob Simonson with William Blair.

On your pension expense, does that all go through the (technical difficulty) G&A or is some of that (technical difficulty) ?

We record the option expense in relation to the individual wherever their typical compensation will be recorded. So it is included throughout cost of goods sold, selling and G&A.

Do you release how that percentage dropped down?

I can give you the breakout. It's 51% in G&A and 11% in selling and 38% in cost of goods sold.

38 in the cost of goods?

Yes.

on your pricing for the units this year versus last year on a posted basis what was the percentage change in your pricing?

For comparable (MULTIPLE SPEAKERS)

I'm sorry.

On the same units from the prior year or the (MULTIPLE SPEAKERS)

Setting aside the equipment differences and options made standards from a pure economic standpoint, our price increases range from about 1% to as potentially as high as 1.5% is essentially how our prices went up taking away features and options made standard.

There was an item on the in-place tax credit. Is that stay in place next year? Is that an ongoing thing or does that drop out the following year?

That's an ongoing credit.

Speaker: That's an ongoing one? Could you just give some general comments? You've talked quite a bit about your competitive positioning; how do you view the industry at this point versus three months ago or 12 months ago?

I think as far as the industry itself, again, we've seen where the inventory supply during the summer months was high at the dealers and manufacturers and that had to be worked through. I think that is a definite improvement that many manufacturers in the industry along with Winnebago have corrected. I think now everybody is just waiting for when the market takes off again so that, hopefully, we can go have a stronger market. Because right now as we talked before on the conference call, we are trying to see in retail and wholesale matching pretty close and we continue to expect that through the (indiscernible).

There have been comment over time that well, in recent times, that there's too much capacity in the industry. Have you seen any go away?

Yes I think there've been a slight reduction. I believe that I know of a couple competitors that have closed down some facilities and reorganized and moved some of their production to another plant.

Is that motorhomes and travel trailers or --?

That's in motorhomes. I think travel trailers' capacity is probably pretty well being utilized because of FEMA yet. But in the motorized area I do know of some plants that have been shut down this last year and some of the production moved to other facilities or reduced.

I guess you push, there would've been more but is it an amount that you would have expected or was it less than you would have expected or --?

I think it is fair to say that it's not a majority. I think probably everybody in the industry has excess capacity right now. But on the same hand I think everybody has learned that if you build the inventory it costs an awful lot to sell it and move it to the marketplace. So I think everybody is being more rational, controlling this inventory.

Last question. Interest rates are moving up. How might that impact the retail level? And what are you seeing terms of how much financing rates are for the consumer, say, over the last three months?

We have seen obviously interest rates historically have had a negative bias in the RV market. We suspect, obviously, if we look at our retail financing rates compared to where they were a year ago, obviously, that will have a negative impact on our consumer. As they trend up, we expect that, as I indicated in my opening remarks, that will have a bit of a drag effect on the market. Hopefully the Fed is just about through with that process.

I don't think -- we are not hearing a lot of pushback from our dealers that interest rates are a big issue. But there's no question about it. The RV buyers' dollar doesn't go as far today as it did a year ago simply -- particularly if he is financing other units. But about a third of our customers do pay cash. So that is helpful there.

Timothy Jones with Lysander (ph) and Associates.

I apologize to the listeners about I was off the call for about ten minutes. If you covered maybe you can expand. Your deliveries were about what I expected a little bit different on the A's and the C's but what I am really shocked that is the magnitude of differences in the backlog which is where also implies a tremendous differential between C's. The diesels were about what I expect all the way across the board. I'm talking about this tremendous difference in backlog in the A's and the C's which would also be magnified on sales, given your deliveries.

Did you go into that or could you go into it more -- is it -- what is really causing it? Is it the demand side or is the dealers still being out of whack on the inventories or where is it? Are you losing marketshare or what is it especially in the A gas?

What we're seeing in the marketplace is, particularly in the higher priced points in gas, a very weak market. I don't necessarily think that is solely a function of just Winnebago products. I think industrywise we are seeing a lot of price points on the mid- to high end of the gas products start to run into that low-priced value-priced diesel market.

What are you talking about 100,000 plus, 110, 20,000?

I think Class A gas between 120 and 150 is starting to compete with the low end of the Class A diesel market. Particularly in the lower price points and I think that is where we are seeing a pretty weak market in terms of the high-end Class A gas market. I think a lot of it potentially has to do to some degree with the energy situation but I think consumers as they look at more value-orientated products, we see a pretty good book of business on the value end or the low-priced Class A gas. But as we go up the price point ladder on Class A gas, the market is pretty weak right now and I think part of that is because the price points on diesel are starting to come down and as I said earlier compete with Class A.

Well to follow up on my old friend Barry Vogel's question this Monaco product gets to 100,000, it's got to affect your margin someway. This product comes out and you're already having a competition in the 120 to 150 and they start introducing a 100,000 it will just put more pressure on the 100,000 gas -- Class A gas, won't it?

That's correct. I think you are very observant, Tim. That will have some pressure particularly on our Class A gas and low-priced Class A diesel.

You've talked about three or four times that your gross margins would be low in the second quarter. I mean one thing about -- I think a couple of quarters ago you had a 20% increase. Decrease in revenues and I think your margins stayed the same. Which I think I commented was unbelievable. You sort of talking sequentially in other words versus one thing of course you've got 59 days versus 62, also we're going into the weaker seasonal.

But you are implying something else. You are saying you're not having material cost. Is it because of an increase in discount, increase in competition? There's something else in this picture or a mix or something that is going on because you are unbelievable in keeping your margins even in lower sales.

The two things that are driving our outlook in terms of gross profit and our mix and you can see it in the backlog. We have a very strong mix of Class A products which historically carry poor margins and volume. Right now we look at our December, January February time frame. Our second quarter is going to be a pretty soft spot in the marketplace. Our dealer inventory is what we think pretty respectable where it ought to be. So therefore we are going to -- do the best we think we can do in the next three months is pretty much replace retail on a one-to-one basis until we maybe get to mid-February.

So between the seasonally slow part of the year, Tim, and the fact that we have got a bias towards a pretty soft mix that -- those are the two things that are really driving our outlook in terms of gross profit.

Can you tell me what the difference in the gross profit margins of the three classes are?

Class C (MULTIPLE SPEAKERS) on product mix. Typically carry anywheres from 250 to 400 basis points less margins than a comparable Class A.

I'm sorry. The Class C is 250 to 400.

Basis points dependent upon what particular product we are looking at. I think we looked at it in the third quarter or in the first quarter and we were just slightly under 300 basis points less margin in C's versus A'S. And one of the things that did help us in the first quarter is the fact that we did have a pretty good shipment flow of our new View and Navion which is our Class A diesel which does carry a little stronger margins in terms of C's and what we would consider a normal C.

What's the difference, let's say of the A's -- the gas A's and the diesel A's?

They are pretty close to the same there isn't a whole lot of (MULTIPLE SPEAKERS)

Really. I was under the impression that the diesels were quite higher. (MULTIPLE SPEAKERS)

You get up to the higher priced points that we compete in in diesels yes, they might be 100 basis points higher. But it's not that much more.

You said the comparable how do you say, what is a comparable C to a gas A? Obviously, there's a way difference in size and so forth. I don't understand that word -- comparable.

I'm not sure I understand the question.

In other words you said that basically that the Class A and then C was on a comparable to an A was about 300 basis points lower in gross margin. I don't know what you mean by comparable A and C.

Maybe I missed the boat there. I don't necessarily think there is -- they are comparable. Okay? Obviously the Class C, ASP is 60,000 (MULTIPLE SPEAKERS) than that. Right, no, I probably misspoke there. I apologize.

That is just on an average right around 300 basis points, can go from 250 as high as 400.

Right.

The other ones are roughly the same, which surprises me except for the high diesel being maybe as much as 100 basis points higher. Thank you so much. Very helpful as usual.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Mr. Hertzke, are there any closing remarks?

Yes thank you. Once again I'd like to thank everybody for joining Winnebago Industries' first quarter fiscal 2006 conference call today. We look forward to talking with you again in March when we will report our second quarter. From Winnebago Industries we wish all of you a happy holiday season. Thank you and goodbye.

Thank you for participating in today's Winnebago Industries' first quarter of fiscal year 2006 conference call. You may now disconnect.