Winnebago Industries Inc (WGO) 2006 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Winnebago Industries' second quarter of 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) Ms. Davis, you may begin your conference.

Thank you, Angela.

Good morning and welcome to the Winnebago Industries' conference call to review the Company's results for the second quarter of fiscal 2006 ended February 25, 2006.

Conducting the call today are Bruce Hertzke, Winnebago Industries' Chairman of the Board and Chief Executive Officer;

Ed Barker, President; and Sarah 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 and on vcall.com.

A replay of the call will be available on each site at approximately 1 PM Eastern Time today.

If you have any questions about accessing this information, please call our investor relations department at 641-585-6803 following the conference call.

Before we start, let me offer the following cautionary note.

This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that forward-looking statements are inherently uncertain.

A number of factors could cause actual results to differ materially from these statements.

These factors are contained in the Company's filings with the Securities and Exchange Commission over the last 12 months, copies of which are available from the SEC or from the Company upon request.

I will now turn the call over to Bruce Hertzke.

Bruce?

Thank you, Sheila.

Good morning and welcome to our conference call this morning.

First, I will review with you the current motor home climate.

Then we will have Ed Barker, who will provide a few highlights of our second quarter and the first six months; and Sarah Nielsen will review our financials with you.

The market for motor homes was negatively affected by decreased consumer confidence levels, driven by concerns of higher fuel costs and increasing interest rates.

This in turn had a negative impact on our results for the second quarter, due to lower production, utilization, and volume.

Traffic and sales at regional RV shows throughout the country have generally been weaker than in previous years.

We have also seen a shift in the product mix industrywide.

For calendar 2005, Class A motor home retail sales for the industry decreased 12.7% compared to a decrease of only 1.7% in Class A shipments for the same period.

The January industry retail sales report reflects continued weakness, especially in the Class A market.

Our new View, Winnebago View, and Itasca Navion Class C diesel motor homes continued to perform well in the marketplace.

We believe that we have now been able to reach dealer demand for these new products and from now on will generally see the pull of the retail market.

Winnebago Industries continued to reduce factory inventories during the second quarter.

This enhanced our cash flow for the second quarter and will also allow Winnebago Industries to carry less inventory into our third quarter, when we will be converting our production from 2006 product to 2007.

At this time, I will turn the call over to Ed Barker for the review of the second quarter.

Ed?

Good morning.

The second quarter was a challenging period as a result of the market conditions Bruce referred to.

However, I would like to emphasize some key points.

Winnebago did earn $7.7 million after-tax, and cash flow from operating operations was a strong $33 million, up from the second quarter last year in which we generated $18 million.

However, lower motor home deliveries and a shift in the mix of products sold resulted in lower revenues and lower net income for the second quarter and the first six months compared to last year.

Winnebago Industries' Class A shipments decreased 32.3% for the second quarter and 31.7% for the first half of fiscal 2006, while Class C shipments increased 28.4% for the second quarter and 29.1% for the first six months of fiscal '06.

Our sales order backlog was 1,581 units at February 25, 2006, down 25% from the backlog of 2,108 in units one year ago.

A breakdown of the components of the backlog shows the continuation of the shift in product mix to lower-priced units, particularly Class C. Our backlog of Class A products declined 37.6%, while Class C's declined 10.3%.

Winnebago Industries completed calendar 2005 in the number-one position with a combined Class A and Class C retail market share of 17.9%, according to Statistical Surveys, Incorporated, an independent retail reporting service.

Inventories at both the manufacturer and the dealer levels were high at the beginning of last year.

This led to discounting in the marketplace.

As a result of the previous -- as we have previously stated, our primary goal is profitability.

We did not discount at the same level as many of our competitors.

This caused us to lose some market share in calendar 2005.

Our market share declined from 19% at the end of calendar 2004 to 17.9% for calendar 2005.

However, I would like to point out, by the final quarter of calendar 2005, however, excess inventory within the industry has declined along with the discounts previously provided.

We were encouraged to see our market share recover during the fourth quarter of calendar 2005, achieving 19.3% of the combined Class A and Class C markets.

Now I will turn the call over to Sarah for the financial review.

Sarah?

Thank you, Ed.

Good morning.

I'm pleased to review with you the revenues and earnings performance for the Company's second quarter and first six months of fiscal 2006.

Revenues for the second quarter ended February 25, 2006, were $206.4 million, a decrease of 13.8% compared to revenues of $239.4 million for the second quarter of fiscal 2005.

Operating income for the second quarter was $10.5 million or 5.1% of revenues compared to $18.9 million or 7.9% of revenues for the second quarter of last year.

Net income for the second quarter was $7.7 million, a decrease of 38.7% compared to $12.6 million for the same period last year.

On a diluted per share basis the Company earned $0.23 for the second quarter of fiscal 2006 compared to $0.37 a share for the same quarter last year.

At the beginning of fiscal 2006, we began recording stock option expense as a result of the adoption of a share-based payment accounting standard number 123R.

Option expense in the second quarter reduced net income by $804,000 or $0.02 per diluted share.

As I discussed in the first-quarter conference call, there was an acceleration of option expense in the first quarter for options granted to retirement-eligible employees, which reduced diluted earnings per share by $0.05.

Option expense for the remainder of fiscal 2006 is estimated to reduce net income by an additional $0.04 to $0.05 per diluted share.

Revenues for the first six months of fiscal 2006 were $438.7 million, a decrease of 13.2% compared to $505.5 million for the first six months of fiscal 2005.

Operating income for the first six months of fiscal 2006 was $32 million compared to $48.9 million for the same period last year.

Net income for the first six months of fiscal 2006 was $22.3 million, a decrease of 30.7% compared to $32.1 million for the first six months of fiscal 2005.

On a diluted share basis the Company earned $0.67 a share versus $0.94 a share for the prior year.

The Company finished the quarter with $163.1 million in cash and short-term investments.

Cash generated by operating activities during the first six months was $65.3 million, an increase of 41.2% from the first six months of 2005.

This was primarily a result of a decrease in receivables and continued improvement in our inventory levels at the end of the second quarter.

Significant uses our cash during the first six months were $8.3 million for stock repurchases of 292,000 shares of the Company's stock; $5.9 million for the payment of cash dividends; and $2 million in capital expenditures.

We have approximately $21.7 million remaining on the current share repurchase authorization, and we estimate that $5.6 million will be spent during the remainder of fiscal 2006 on capital expenditures.

I will now turn the call back over to Bruce.

Thank you, Sarah.

It continues to be a challenging environment for motor homes as well as a shift of mix of lower-priced products for our industry.

Although it is challenging right now, we continue to believe in the long-term growth of our industry and for Winnebago Industries.

Winnebago Industries has a tremendous cash flow, a strong balance sheet, and no long-term debt.

Winnebago Industries continues to be the top-selling motor home manufacturer in 2005; and we were very pleased to see our 19.6% of retail market share for the month of January 2006.

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

(OPERATOR INSTRUCTIONS) Ed Aaron of RBC Capital Markets.

A couple questions.

First of all, I was hoping you could talk a little bit about the industry manufacturing capacity levels.

There seems to be quite a bit of excess capacity out there.

I am wondering how you -- if business stays (indiscernible) in the next 12 months or so, how you might see that shaking out; whether you might see some more consolidation or plant closures or what have you.

Ed, this is Bruce.

Even our capacity is down from 2004 when we added our new plant, and we were about 62% of our capacity for this quarter.

I think it is fair to say, just with the numbers for the entire industry, that right now there is excess capacity.

But I think the key is, who is going to be able to make money at this level are the ones that are going to survive,

Okay.

I would think that at some level, if capacity utilization is maybe -- I don't know what the magic number is -- if it's 50%, for some manufacturers it makes sense to discount rather than have that level go lower.

That being said, are you starting to see discounting rates accelerate as we head into the spring, with demand still being soft at retail?

No, I think we have definitely seen a less of a discount scenario than what we have seen last spring and summer.

I think that was kind of more the peak period that we had seen probably more in the summer, and discounting for clearing out last year's year-end product.

This year, you can take a look at our inventory.

Our inventories again were reduced fairly significantly.

As I said in my talk, it is our objective to keep inventories lower so that we don't run into that discount scenario.

I am hoping that a lot of our competitors are in that same scenario.

We have seen some of our competitors who this last quarter have actually announced that they were actually shutting down for a couple weeks.

So some of those news releases have been out, and we have seen them.

But I'm hoping that the inventory levels are -- will not be at the pressures that they were last year to discount.

Right.

Then if you look at your dealer inventory levels, I think they were down maybe 3% year-over-year.

Can you give us a sense?

I suspect that your Class A dealer inventories are down quite a bit more than that, just because you have been filling the pipeline with the new Class C's.

Can you give us a sense of where your Class A dealer inventories are versus this time last year?

Well, I can till you that your assumptions are correct.

We have more inventory currently today in Class C on a percentage basis than what we did last year.

But that kind of makes sense with our new View and Navion, that it is being received very well.

So I think the rest of the product line, I think we're just kind of waiting for the industry to pick up, and hopefully that inventory will then be able to pick up to go back also.

Okay.

Then just one last question and then I will turn it over.

On the Class A side, it seems to be very price-point-specific as far as retail demand goes.

Can you talk about what the really kind of relatively stronger price points are so far this selling season?

And kind of how you're positioned in that price point range product-wise versus your competition?

For Winnebago, first of all, I think we have been very pleased that all Class C's have been fairly strong.

If you look at the market share for the last quarter of 2005 and for January 2006, I think you will see that Winnebago's market share has been very strong in that.

So that product we're doing extremely well in.

In the gas area, our market share has also picked up slightly in the last quarter of 2005 in the gas segment.

The toughest segment we have is still diesel segment for market share.

Thanks.

Greg Badishkanian from Citigroup.

Just a few questions.

First is, looking at Class C, it seems like it is clearly outperforming Class A from an industry perspective.

Do you think that this is just cyclical, in that they are lower-cost lower-priced for the consumer?

Or is there something more structural going on within the marketplace?

This is Bruce.

I think it is definitely cyclical.

If you remember just less than two years ago, the real strong, hot part of the market were larger, Class A's in diesels.

We definitely went through a period of time where that was the very strongest part of the market and the fastest-growing part of the market.

Now it has switched to probably lower-end Class A's, whether it be gas or diesel; and then also Class C's.

So I think it will continue to take swings different times.

Scott Stember of Sidoti & Company.

Sarah, or Ed, could you give the ASPs for this year, by A's and C's?

If you have it for last year as well, that would be great.

I sure can.

Overall, our average selling price for the second quarter was $85,344.

For Class C's it was $59,931.

For Class A group, it was $111,992.

Specifically for Class A gas, it was $87,746.

For Class A diesel it was $145,864.

I do have the second-quarter 2005 comparison.

Overall it was $89,693.

Class C's, $53,893.

Class A, $101,742.

Class A gas, it was $85,425.

Class A diesel, it was $156,098.

Okay.

As far as the gross margin in the quarter, could you speak to how much of the contraction really was due to just pure product?

Or how much of it was due to maybe having greater than anticipated demand for C's and having to have some downtime and retooling and stuff like that?

This is Ed, Scott.

I think when you look at the downdraft we took in gross profit, about two-thirds of it was simply volume related and about a third of it was simply mix related, is kind of how to look at that (technical difficulty) profit.

So you guys didn't see any significant inefficiencies from having to move more towards the C's?

Well, obviously, the lower volume creates a lot of unabsorbed factory overhead that gets carried through in the quarter.

That really is a big drag on, I think, our gross profit numbers.

So I don't think, in terms of our variable costs, I don't think there's a lot of inefficiencies in the plant.

Not a lot of opportunity for efficiencies either.

But the big thing is simply the fixed cost drag with the lower volume.

Okay.

As far as looking at your dealer inventory, it looks like you guys are in pretty decent shape.

What are your thoughts in general as you go into the selling season?

Obviously, it looks like we are in a much better position industrywide versus last year.

But all things being equal, are you guys comfortable with where you are right now?

Definitely, Scott.

This is Bruce.

Our inventories are actually down over double-digits in the actual conventional Class (technical difficulty) C area.

The only reason our inventory looks fairly high compared to last year is because of our new product lines, the View and Navion.

So we are still -- we believe that the inventory levels, as you can see by our balance sheet in-house and at our dealers, are very much under control.

We're just waiting for a little stronger market.

I think we can go back to hopefully more of a typical inventory for our dealers for the conventional A and C stuff, and then we can also pick up our numbers.

Did I hear you guys correctly when you said that you saw very little discounting throughout the industry in this quarter?

I said it is reduced.

I don't know if I can say "very little" yet.

It is definitely reduced considerably from where it was in the last summer and the year-end clearance of product from the marketplace.

We haven't seen any big influx.

We have seen a couple manufacturers who have some type of programs going.

And even Winnebago; you know, we will do a little bit of some show specials and different things throughout the season.

But I think you know our objective is to continue to work on our profitability.

Okay, last question.

A lot of us have seen that the total market continues to outperform the motorized segment.

Would you guys at some point -- are you thinking that this might be an area that you guys can get into at some point?

It's always part of the market, and it's always something that we need to be aware of.

If we do not believe that we can fill our capacity back up with motorized, without a doubt we would look at what other products that we could do.

We will have to continue to look and see what -- if that is going to be the growth section of the future, then I'm sure Winnebago will have to give it consideration.

Okay, that's all I have.

Thank you.

Kathryn Thompson of Avondale Partners.

Just (indiscernible) a little bit more on the operating and gross margin softness in the quarter.

In your previous quarter, you said about two-thirds of the weakness was related to volume, also.

But there was still a fairly significant drop off sequentially; and understanding that Q2 is historically your slower quarter.

That said, it is still a bit lower.

You hadn't seen levels like this since really 2001 in the second quarter.

What gives you some comfort that you will be able to improve those margins going forward, if this two-thirds is just volume?

And how much can we expect the C's really affecting margins going forward if demand remains the same?

This is Ed.

We have in the past talked about this quite bit.

One of the things I think I want to certainly remind you, as well as the other people on the call, that I have typically talked about our margin range of gross profit during normal market conditions.

You look back at December retail registrations, off 22%; fourth-quarter registrations off 20% in the Class A segment.

We look at January and we see a 29% drop in retail registrations for Class A products.

That is not what I would refer to as a normal market environment.

So what we saw in the second quarter is a pretty challenging market in term -- particularly in the Class A side of the business.

It even surprised us that the weakness accelerated during the latter half, or the latter few months, or the last few months of calendar '05 and continued in January.

That had a very dramatic impact on our Class A volume that went through our factories.

Obviously as a result, we get some gross profit numbers here in the second quarter that we have not seen for at least four or five years.

But again I go back;

I think these are rather abnormal market environment, right now.

We do think that, like I talked on the call and have in the past, that while the mix is going to degradate our gross profit from where it has maybe historically been, until we see the Class A business pick up, I still think for the year that 11 to 13 range is a reasonable range to look at.

It was -- obviously if we are going to have any weakness, it's going to be in the winter quarter.

December, January, obviously very weak months in the industry from a seasonality standpoint.

But we still think that is the range.

But obviously as we continue to see numbers like we have in the January retail registration, as well as the wholesale manufacturer shipments into the dealers, we are in a rather abnormal Class A market.

Until that recovers there is going to be pressure on that.

Obviously, in a last couple of calls, I have talked about that.

It is hard to exactly pinpoint what that number is because it's so volume-sensitive.

But we certainly have given guidance that directionally that it's going to be down.

Just stepping back and this year versus last year, the industry seems to be in a better position.

You have lower inventories in the field; reduced discounting in the field; and so you're not fighting inventory and discounting pressures as much and more just overall demand.

What is your position on the market?

Your outlook over the kind of next six to 12 months, and where you see the general health going, and any trends that you're seeing on the side would be great.

This is Bruce.

Again, we watch the market pretty close, we also check with RVIA numbers.

But they are still forecasting 2006 to be down.

They do the same thing that anybody else forecasts.

Everybody is just waiting for some type of sign that shows that the industry is going to come back and be stronger again.

Just like I said, we are going to the shows and we are seeing exactly what the spring market is doing; and we just haven't seen any strong indicators that things are picking up yet.

Still even into mid-March?

As of the end of February is our last time; again we are not making any comments of where we are at from the third quarter yet, because we don't try to give any type of guidance or direction.

But you know up through February, we did not see for our second quarter, as you can see by our numbers, we have not seen any major pickup.

As January Stats Surveys show that the motorized sector was definitely weak from a retail standpoint in the month of January.

Okay, just a quick housekeeping.

How many days production did you have in the quarter?

Did you take any time off or have any reduced workdays?

This is Ed.

It is such a mixed bag anymore.

Our Forest City operations primarily produces Class A; we did have some reduced work schedule that occurred certainly in our Class A operations.

Our Class C operations to a lesser extent obviously incurred those kind of situations.

So obviously because of the factory utilization numbers that Bruce talked about earlier, we did have some reduced work schedules.

But it varied between plant based on demand.

Obviously our View and Navion ran strong, as did our Class C's.

But there certainly was some time off, and it varied in our Class A facilities.

Was it like a day off or just a reduced work schedule?

Actually, it was both.

We did take some time, more time off around Christmas than we normally take off, simply because of the business environment we were in.

Okay.

Just to confirm, you said capacity utilization was 63%?

I think we said 62%.

62%?

When was the last time capacity utilization was around that level?

Probably 2001.

Okay, okay, great.

Thank you very much.

John Diffendal of BB&T Capital Markets.

Just want to keep pulling the string on the gross margin situation.

I guess -- and help me remember if this was the right interpretation -- but going into the quarter, I think you were hoping that we might see gross margin in the 12% to 13%.

It came in below 10%; and I understand the utilization issue.

But talk about that in terms of what was different.

I assume just the volume levels really were not what you thought they would be.

Then as we go in the second half of the year, when traditionally you're actually running at seasonally a stronger rate, what -- can you give us some sort of sense, when we look at the second half?

You mentioned an overall number for the year.

But in the second half, how do you sort of see gross margins?

How you how much recovery might you be able to see in a better seasonal environment?

I think you hit the nail right on the head.

It surprised us a little bit.

We did not anticipate that we were going to see the volume drop as much as it did, particularly on the Class A side of the business.

I indicated here previously, earlier, the kind of market conditions we are seeing in terms of the Class A business.

We did talk on the call last time that, certainly on a going-forward basis, we talked about that we are going to continue to see a lower than historical gross profit simply because of mix.

The thing that surprised us a little more though than I think we were even anticipating, in early December when we talked, was the weakness in the Class A market.

That really did back that off.

As I said a few minutes ago, we do think that we can still be in that 11$ to 13% range, depending, on a quarter-to-quarter basis.

But until we see a rotation in the mix in the industry, I think we're still going to be weak compared to our historical numbers.

We will see obviously an uptick simply because of the seasonal activity that -- coming around in the third quarter.

But we need, before we can see much improvement in terms of gross profits above 13%, we need to see the Class A market come around.

This is Bruce.

Also, what we did is we also put a concerted effort to take our inventories even lower.

As I said in my talk, to make sure that we weren't carrying too much inventory into this next quarter, when we will actually have our model year change.

So again, that reduced some of the numbers out of the -- from a production standpoint utilization of the plants.

And that is complete?

That is pretty much complete.

We're down to 90 million.

I have been talking about this inventory situation since last May.

Each quarter I have indicated on the call that we have some more opportunity to be more efficient in terms of our inventory.

We have moved it from $114 million down to $91 million now.

That certainly -- Bruce makes a good point -- that did have an impact, in which we have actually sold more product than we have produced.

Obviously some of those unabsorbed factory costs are going through the second quarter.

But I don't anticipate that we're going to stay at $90 million essentially or under that $100 million level.

And that did have somewhat of a negative impact.

I think the good news is we have got our inventory pretty lean and mean going into our new model year.

Just so I am completely clear on the 11% to 13%, have you reduced that range by 100 basis points?

Or am I remembering that correctly?

We have.

Before it was 12% to 13%, now 11% to 13%.

What you're talking about, is that an overall for the year or sort of what you think -- where we kind of will be on a go-forward rate?

Based on what we know about the business right now, it is down 100 basis points.

The reason for that is because we continue to see more weakness in the Class A segment than we thought we were going to.

You see these numbers; they are in the mid 20% range.

Until we get some recovery there, so we can get our mix back to more of a historical perspective, we are going to see downward pressure on margins.

Right now, I don't -- in terms of guidance, 11% to 13% is where I see our Company this year, this fiscal year.

We have got two more quarters left.

But unless for some reason there's an upsurge in the demand for Class A's.

Got you.

I know you have talked about the shows being weak.

Any other sort of anecdotal -- give us a little more perspective on -- I'm sure different shows show different trends.

But what are your people in the field sort of telling you about the shows?

Traffic, just people are looking, not buying?

What is the --?

Some of the attendance there -- I could give you a report of everything.

I can give you some examples of some shows that actually exceeded where they were last year.

But overall, as in my talk, overall, it is down.

Now I think there are still a lot of people showing up.

I can't say that people are not going to the shows and different things.

But again, what we count is how many units we're actually selling at these shows.

Right.

One last question, just on an operating expense basis, you have been profitable in this last quarter.

Anything that in the second half we need to think about, in terms of what -- either initiatives you might be making, in the sort of lower capacity utilization realm we have been in, that might be trying to control that side of the equation?

I don't think there's anything significant there.

Again, long-term we still think this is a pretty strong industry.

We still think -- believe in the demographics and the fact that our customers will come back into the market, certainly in the future.

So there isn't anything that would maybe significantly impact your financial model, John.

Great, thank you.

Craig Kennison of Robert W. Baird.

Pushing on the gross margin a little bit harder, was there any promotional activity that was unusual affecting that number this quarter?

There was a little bit there.

We talked in the first -- on a call in the first quarter that we had done some things in the first quarter to kind of bolster our production schedules in the weak winter period.

It was not real significant, but I can't say there wasn't anything there.

There was a little downward pressure because of some of our promotional activity.

Then, can you give us a sense for the fixed portion of your gross margin expense, either in dollar terms or as a percentage of revenue versus the variable portion of gross margin?

Our fixed cost on an annual basis is about $48 million.

It's a little greater in the second quarter, simply because we have got winter heating bills, utilities.

But you can divide that by 4 and kind of come up with what our quarterly fixed load is.

Okay, that is very helpful.

Turning to your cash balance at $163 million including some short-term investments, what are your plans for cash?

I think it is fair to say, Craig, that we're going to continue to -- first of all, we have always said the first part is for growth.

Right now, we don't think that at 62% capacity we don't need it for the motorized side.

The second thing that we always say that we're going to do with our cash is see how we can continue to look at returning it to the shareholders.

We have bought some stock the first half of the year.

But the stock has held up quite well, so we will probably continue to look at buying some stocks back.

We will continue to, as we do every year with the Board of Directors -- the come in next week, and we will review whether we announce any type of dividend increase for this next year, like we have over the last three years.

We will continue to see what is the best way to utilize our cash balance and return it to the shareholders.

So I told that our philosophy is going to change dramatically from where we have been.

If we get a real good opportunity, let's say that one or two companies in this industry gets in pretty tough shape, maybe this will be a time that we can look at some of the other companies.

But we will have to see where that goes.

Relative to any consolidation, do you have a preference for organic growth versus acquisitions?

I think organic growth has been Winnebago's best and safest, with the least amount of exposure, that we have had, is just growing within.

Again, there may be a good buy out there.

I don't think over the last -- especially in the motorized category, we haven't seen that many real good buys available for our industry actually over the last four or five years.

Okay, thank you.

Then with respect to your successful Class C diesel product, we have read that Freightliner is ending its production of that Sprinter chassis.

Is that going to have any impact on that product line?

Our chassis comes directly from Germany.

Let me clarify that, Craig.

There was a news release out the other day, they're simply moving the -- it's built in Germany and assembled in the United States.

They're simply moving the assembly from one plant in North Carolina to another one.

We will still continue to get that product.

How would you gauge your exclusivity of that particular chassis, given that it is contributing to your success in the C market, and maybe even to your margin in the C market?

We have always stated that we were the only RV manufacturer that had approval from DaimlerChrysler at that time.

I think some other companies have some terms where they actually work on [V-vans] and other products of that.

But you know, DaimlerChrysler does have the opportunity to look at other manufacturers.

But so far, we are the only one that I know of that has been approved by them to build on this chassis.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Justin Maurer, Lord Abbett.

Just relative to the margin again, I just want to understand the mix issue.

The C's versus A's, the margin as a percentage is not dramatically different.

It is just that there is less gross profit dollars.

Is that fair?

That is not correct.

We have talked on the call, if you look at actually the transcript of the previous call, we talked.

There is a margin difference in terms of Class A versus Class C. It varies on a product to product basis.

But to rephrase the response from last quarter, it is anywheres from 250 to 400 basis points less margin on a Class C than a Class A.

Okay.

Even on the new product, Ed?

On the new Class C's?

Obviously, the new product is on the bottom part of the range.

Yes, okay. (indiscernible).

When you talked about the fact that you're producing less than you sold, any attempt to quantify what piece of that was to the margin?

Or is it too hard to split that out?

You will be able to see that on our 10-Q when we file it.

Okay.

Bruce, back to the dealer comment you made, just you feel like the inventories are in good shape there.

Everybody has tried to debunk what the drivers are to the business over time.

Gas prices, no, consumer confidence, what have you.

Most of the macro stuff seems relatively stable.

What is your sense in talking to the guys out in the field as to what the biggest point of change in their minds has been, as to what is going on in the motorized market?

I can tell you that we have had a lot of discussions on that.

Again, across the United States, you can find certain areas or pockets that are actually doing okay; but most of them are still doing okay more on the low dollar products.

As far as -- you know, we saw consumer confidence coming up last November and December.

We thought, okay, we just need to wait for spring now, because it looks like everything is heading in the right direction for us; and our industry should go back and take off and be more of a typical year.

It is starting up really slow.

I wish I could tell you why it is starting up a little slower than even I anticipated and I think probably 90% of the industry anticipated.

Yes, do you get the sense that --?

I talk to a lot of the competitors at RVIA and throughout the industry, and interest rates are just kind of back to a 10-year average; they are not as low as what they were, but they're not out of line.

Consumer confidence is coming back.

But on the same hand, we have not seen the big jump back into the motorized.

I don't know if that is just the [skittiness] of the gas prices jumping up and down that is making them nervous jumping back in, or what it is.

Just if you look at the different pieces of the business, whether it's people that are already in motorized that just buy new every few years, or the people that are in the towables that are maybe trading up to motorized over time, do you think it is one versus the other that may be weaker, or is it just kind of across the board?

You know, towables have still been relatively fairly strong in this.

Again, we like to see that, because there will be a certain portion of them that do move up.

So it is not like there is not -- the RV industry is still out there.

I think we showed you, we also did a comparison over in Germany and in the European country, on their gas prices, to see it their markets were still growing for the motorized segments over there.

The good news is that the last two years, even with gas prices going up over there, they have still had steady growth the last two years over in the European countries.

So again, why we haven't picked up faster with consumer confidence coming back some (indiscernible) , I wish I could tell you.

Then relative to the inventory in the field, would you say you guys are at lower inventory levels than your sales into it?

Or is it kind of on par?

Well, we're definitely considerably, like I said, double-digit inventory levels lower than where we were last year at this time with our conventional A and C products.

So again, everything has got to do with where the market goes from here on.

Yes, okay.

Just lastly on the use of cash too, you guys have talked on and off for the last year or two about potentially a towables opportunity at some point.

Just philosophically, with the stability that that side of the market has seen, plus the additional juice that the FEMA business has given them, does that make it little bit more difficult proposition now, because you are paying for peak earnings and, obviously, I assume probably peak multiples on that?

So is it a hard equation to make work?

I would be pretty easy for us to get into the trailer industry.

I am not true that we could hold quite the margins that we do in the motorized industry.

That is somewhat of a concern.

The other thing is that we still haven't accomplished what we think that we need to accomplish in the motorized sector.

We're number one overall and we're number one in Class C's and we're number one in Class A gas; but we're still a distant third in diesel, and that is a big dollar segment and a profitable segment that we need to get better in.

We need to continue to focus on that also.

Fair enough, good luck.

Barry Vogel of Barry Vogel & Associates.

On the operating rate, you said you averaged 62% in the second quarter.

Where are you right now in terms of operating rate?

I think we only announce our production rates at the end of each quarter.

I don't think we ever tell anybody our production rates during the quarter.

Let me put it another way.

Since we're going into the season, and even though you have been disappointed so far in the slow start, if any, do you think it is logical to think that your operating would go up in the second half versus the second quarter?

Well, I think that is just fair to say that definitely we expect the third quarter to be better than the second quarter.

That is just the seasonal trend, and we have always seen that pretty much across the board.

I think we definitely expect that.

Okay.

As far as layoffs, the last time you talked about that, you had had 135 people that actually were laid off at the Company.

Have you laid any other people off?

If the industry conditions continue weak on a seasonal basis, do you contemplate the possibility of further layoffs?

No, we have not laid any more off.

In fact, that 135 has actually been reduced.

We have 47 currently on layoff is all.

Okay.

My last question is for Sarah.

You had $90 million in inventories.

Can you give us some idea of the breakdown?

Given the fact that seasonally we're at a low point, would that be the bottom of your overall total dollar inventories for the balance of the year?

We will be disclosing the breakout of the inventories in our 10-Q when we file that.

But I can tell you, similar to Ed's comments earlier, that with the trend of the inventory balance going down, actually since a year ago at this point, we have had a decrease every single quarter.

Being under $100 million is probably a low-water mark in regards to the level we anticipated.

So our goal is to keep it under $100 million going forward.

But I think this is -- it is pretty [lean] as we anticipate being.

Okay.

Now Bruce, as far as product development, based on your comments in the conference call, it seems to me that your weakness right now is in the diesel area.

Even though you had a spectacular introduction of an important price point a couple years ago, and it was evident that you needed that.

From what I hear, price point -- and from you in particular on this call -- price point seems to be sort of going lower.

Without giving any -- giving us exactly what you're planning for the new fiscal year, can you generally tell us where you need new product in the motor home area?

Our new products will be coming out over the next quarter and next three or four months.

Then we will have our big dealer days, and we will be introducing our 2007 product.

But as I said before, it is pretty easy to figure out where we need to concentrate on.

We have done very well in Class C's this last year with that new products that we introduced there.

We have continued to do very well in our Class A gas.

It is no secret that we definitely need to pick up and that there is a lot of dollars in that diesel market that we need to go after.

Great, thank you very much.

John Diffendal of BB&T Capital Markets.

Just going back to the (technical difficulty) Sprinter chassis.

I think we all picked up on RV Business saying that production or the assembly is going to be moved to Charleston.

In the article, they did indicate that Gulf Stream had a Class C. I just wanted to see if that was correct or -- have you seen Gulf Stream get a piece of that production on the Sprinter side?

Secondly, how is the availability of that chassis for you going forward into the -- [for a] seasonally stronger period of the year?

Do you see that that is going to be an issue?

First of all, Gulf Stream did build on the Sprinter chassis also for Class C. They have a few different restrictions.

I did not believe that they can cut through the cab sleeper deck area that Winnebago had been allowed, for the sleeper of the -- up-front in the products.

There was a few other restrictions that they had not approved them to do like they have for Winnebago Industries.

As far as availability, we have no problem telling you that we even underestimated how popular that this product would be.

It took us till probably this last quarter to actually get dealers filled up with inventory.

Because the product took off and did quite well, that we were not able to meet dealer capacity throughout probably our first quarter of the year.

So, as of right now, we have plenty of capacity and we have plenty of product that we have received from them.

You have gotten all you need in the field and the dealer lots; and I think you said early on that you're basically meeting retail demand.

So the dealers are replacing it on sort of a one-to-one basis as they sell the units today?

That is a correct assumption.

Okay.

Then one last question.

On the potential availability of the stock buyback, when would you be free to make purchases under that, given you just reported?

Is there a date at which you are (inaudible) start buying the stock back?

Yes, we have a rule that we make sure that our news release is out for over 48 hours, to make sure everybody has ample time to go through and review our news release for the quarter, before we will jump into the market.

Then naturally we don't buy before a certain blackout period of about three weeks before we announce earnings.

Right, thank you.

There are no further questions at this time.

Mr. Hertzke, do you have any closing remarks?

Yes.

First of all, I would like to thank everyone for joining us today for Winnebago Industries' conference call.

We look forward to talking to you again in June when we will report our third-quarter results.

Thank you.

Ladies and gentlemen, this concludes today's Winnebago Industries' second-quarter 2006 fiscal-year conference call.

You may now disconnect.