Winnebago Industries Inc (WGO) 2007 Q1 法說會逐字稿

At this time I would like to welcome everyone to the Winnebago Industries first quarter 2007 conference call. (OPERATOR INSTRUCTIONS). I will now turn the conference over to Ms. Sheila Davis, Public Relations and Investor Relations Manager.

Thank you, Crystal. Good morning and welcome to the Winnebago Industries, Inc. conference call to review the Company's results for the first quarter of fiscal year 2007, ended November 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, 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 our Website at approximately 12 PM Central Time today. If you have any questions about accessing any of this information, please call our investor relations department at 641-585-6803 following the conference call.

Before we start, let me offer the following cautionary note. This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are inherently uncertain. A number of factors could cause actual results to differ materially from these statements. These factors are contained in the Company's 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 our conference call this morning. I will review the current motor home climate, Ed Barker will provide a few highlights of the first quarter, and then Sarah Nielsen will review the financials with you.

While the motor home market remains challenging, we're proud to remain solidly profitable. Industry-wide retail motor home sales have declined 11.5% year-to-date through October compared to last year. Wholesale motor home shipments have also declined industry-wide, with shipments down 13% year-to-date through October compared to the same period last year.

In addition to lower motor home sales, we continue to see a shift in mix to lower-priced Class A products industry-wide. Because of this trend of lower-priced products, we have introduced several value-priced products this year, of which Ed Barker will talk about shortly.

We are encouraged by our increase in retail market share. According to Stat Surveys, a retail reporting service for the industry, we have captured 19.2% of the retail market for Class A and C motor homes combined year-to-date through October, compared to 17.8 for the same period in 2005.

This market share increase is due to our Class C market share. Winnebago Industries had 25.6% of the Class C market year-to-date through October, compared to 20.2 for the same period in 2005. This is primarily due to the great success of our fuel-efficient Winnebago View and Itasca Navion motor homes, which have definitely been a strong product in the market this year.

At this time I'll turn the call over to Ed Barker for the review of the first quarter. Ed?

Thank you, Bruce. Good morning. Impacting Winnebagos' margins in the first quarter was a nationwide RV show promotional program that offered incentives on Class A products to retail customers during the major fall (indiscernible) season. This program was created in an effort to stimulate sales at the retail level, assist the dealers in selling the 2006 models, and stimulate dealer orders to replace retail units with new 2007 model product to help support factory production during the late fall and early winter.

We believe this program was successful in helping support our factory schedule and assisted our dealer in reducing last year's model inventory. However, based on early Stat Surveys data, retail success appears to be somewhat limited.

Also having a negative impact on profit margins is a shift in the mix of products to lower-priced motor homes, and commodity price pressures. Effective November 1, 2006, the Company did implement a price increase to help offset increases in raw material commodities.

With the market favoring entry-level models, we felt it's important to have a strong presence in this market segment. Consequently, we introduced new value-priced gas-powered motor homes at the recent National RV Trade Show in Louisville, Kentucky -- the Winnebago Vista and Itasca Sunstar. The Vista and the Sunstar are offered at a popular price point we have not previously had a presence in. We will be shipping the Vista and the Sunstar into the dealer channel during the second quarter of fiscal 2007.

Also making their debut in Louisville were the all-new 2008 Class A rear engine gas or diesel pusher Winnebago Destination and Itasca Latitude motor homes, which will be available at Winnebago and Itasca dealers beginning in late April or May. These additional Class A products should assist Winnebago Industries in the Class A market segments.

Also in the first quarter our total inventory increased $20 million, of which 18 million is due to chassis inventory increases. These increases were a result of having to inventory certain chassis to bridge production schedule adjustments by chassis manufacturer, and an overoptimism on our part regarding the Class C market. This chassis inventory is planned to be reduced to normal levels by the end of the fiscal second quarter of this year. It should, however, be recognized that during the second quarter of fiscal 2007, finished goods inventory may increase as we attempt to balance winter and spring factory schedules with anticipated spring market demand.

Now I'll turn the call over to Sarah for a financial review.

Thank you, Ed. Good morning. I'm pleased to review with you the financial performance for the Company's first quarter of fiscal year 2007. Revenues for the first quarter of fiscal 2007 were 201.8 million, a decrease of 13.1% from the first quarter of fiscal 2006. The decrease was primarily a result of reduced volume, as unit deliveries for the first quarter of fiscal 2007 were down 11.4% compared to the first quarter of last year. Also, the average selling price of our motor homes decreased from 87,756 to 85,257, or 2.8%, as compared to the same quarter last year, due to the mix of products sold.

Our gross profit margin was 10.6% for the first quarter compared to 13.4% for the same quarter last year. The 280 basis point decline in our margins was a result of the decrease in volume, increased retail promotional programs, raw material commodity pressures, and increased healthcare costs.

General and administrative expenses increased 1.5 million from the prior year. This was primarily a result of an increase in stock-based compensation due to an increase in the number of retirement-eligible employees in the first quarter of fiscal 2007 as compared to last year. As required by the accounting standard on stock-based compensation, awards granted to retirement-eligible employees must be immediately expensed as opposed to recognition over the three-year vesting period.

While stock-based compensation expense was higher in the first quarter as a result of this accelerated vesting, it is anticipated to be lower for the full fiscal year compared to fiscal 2006. Last year, stock-based compensation reduced diluted earnings per share by $0.12. We estimate that the stock-based compensation impact in fiscal 2007 will be $0.10 on a diluted per share basis.

Financial income increased 641,000, or 60%, and our effective tax rate was 270 basis points lower compared to the same quarter last year, which partially offset the decline in operating incomes. We anticipate that our effective tax rate for the remainder of the year to be approximately 33%.

The Company completed the quarter with 142.1 million in cash and short-term investments. Net cash used by operating activities was 11.6 million during the first quarter, primarily a result of an increase in raw chassis inventory. As Ed indicated, we anticipate that we will work through this increased chassis inventory by the end of the second quarter.

We continue to expect capital expenditures in 2007 to be approximately in the 4 to $6 million range, consistent with our spending in 2006.

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

Thank you, Sarah. As we said earlier, it continues to be a challenging environment for motor homes sales. To meet the demands of the market, we have developed several new product -- value-priced motor homes for the industry.

We introduced the new Winnebago Access and Itasca Impulse Class C this summer at the Winnebago Industries dealer day, and have now introduced the Winnebago Vista and Itasca Sunstar Class A gas motor homes at the Louisville show, along with the exciting new Winnebago Destination and Itasca Latitude, which are slated, as Ed said, to be delivered early spring.

We are encouraged by the stability of fuel prices and the pause in the interest rates by the Federal Reserve. At this time, however, we see no clear signs in a change in the motor home buying patterns of our consumer, and expect continued softness throughout the second quarter.

We continue to believe in the long-term growth of our industry and for Winnebago Industries. Winnebago Industries has a strong balance sheet and no long-term debt, and we intend to maintain our primary focus on profitability in spite of the challenging market conditions that we are facing.

At this time I'll now turn the call over to the operator for the question-and-answer portion of the call.

(OPERATOR INSTRUCTIONS). Ed Aaron, RBC Capital Markets.

A couple questions for you. First, I wanted to talk a little bit about the seasonal progression of your earnings from the first to the second quarter. The second quarter is usually a lower earnings quarter, just because of seasonality. I'm just wondering if the magnitude of that seasonal slowdown is expected to be a little bit less this time around with the new products that you introduced at the Louisville show in the pipeline, so that you might be getting some of those products in the current quarter?

Certainly our new Vista and Sunstar will help us in the second quarter, but I think that's going to be somewhat offset by the fact that the dealers are still, as we believe, in a mode to reduce inventory. So, we think that's going to be offsetting that.

The other new product we introduced at Louisville that was very well accepted was our new gas pusher and diesel pusher products. We're not anticipated to begin production until the third quarter, and mid third quarter is when those units will begin to appear in our dealers' lots. So, taking all those into consideration, particularly the (indiscernible) as well as the weakness in the retail side of the business, Ed, there's no really, I don't think, any way we can anticipate it's going to be anything other than a traditional second quarter.

Did your order backlog after the Louisville show look -- on a year-over-year basis look a lot different than before the Louisville show?

Certainly, we did take orders for our new Vista and Sunstar. So, the backlog today, in terms of units, particularly on the A side of the business, is stronger. But we certainly -- it's up from where it was at the end of -- what we reported at the end of the quarter.

Could you also maybe kind of clarify the comments you made about Class C and the chassis inventory build there that you thought might have been the result of lower-than-anticipated demand of the product? All the retail numbers have looked really strong, up until the last Stat Surveys numbers that we've seen. So I'm just trying to get some clarity on that. Thanks.

We were looking at what our forecast for the fall and early winter production was on conventional Class C products. We ordered chassis according to what that forecast was. And as it turned out, the forecast was a little stronger than what the dealers and the retail market environment resulted in. So, we come out of the quarter in the first quarter with a heavier Class C inventory than we normally would have, and we'll simply reduce our orders from the chassis manufacturers to adjust that inventory to a comparable level, or appropriate level during this next quarter.

Also, I think you're aware of the fact that the View and Navion chassis changes next year. And there was some stocking of some of that chassis that we had to do ahead of time also to run until we got the new chassis.

Thanks. I have a couple more, but I'll jump back in the queue. Thank you.

Gregory Badishkanian, Citigroup.

This is Daniel in for Greg. Could you break out the ASPs between the different classes?

Yes, I sure can. For the first quarter, our Class A gas average selling price was 88,597. The Class A diesel was 160,311. So, our average Class A was 110,569. Our Class C is 59,552, to bring it to a total average of 85,257.

Thank you. Any more color on why you guys anticipate weakness in 2Q, overall softness in demand?

I don't think we mentioned that it was going to be any weaker. We just said that we haven't seen any real uptick to our market conditions that we are experiencing today.

Craig Kennison, Robert W. Baird.

Your dealer inventories appeared to drop below our expectations. Where do you think that number should settle out? And as it something that could continue to trend lower? Are you comfortable with the current level?

I think it's fair to say that we -- the prime part of the dealer inventory hit a high in April, the third week in April. And I think it's fair to say that we would anticipate this next year to be a typical year, in that dealer inventories right now are love, and have gone down. But we expect them to go up as they do every other year to that -- to about the third week in April, where we will see a high in inventory again.

Do you feel like you're getting your fair share of the shelf space that dealers are allocating? I understand that all dealers are reducing inventory, but are you getting your fair share of that reduction?

We always worry about making sure that you -- whether you have enough. And we always talk to our sales department that they don't have enough shelf space. But if you look at -- on the market share, I think we're doing okay. We could do a little bit better in Class A's. And hopefully, with the new introduction of the Vista and Sunstar and some of our new A-body products, that should come back and continue to help us in that area. I think we're doing very well in Class C's. So, that's how we're going to continue to focus on it.

Thank you. Ed, you frequently will comment on your expectations for gross margin in the coming quarter. Could you talk about that, and also comment on the margin profile of the new units that were launched at Louisville?

The margin profile on our new units -- it is an entry-level, value-priced product, so therefore, it's going to be on the bottom end of our margin curve. It's just where the competition is. We are in a relatively weak market condition right now. A lot of competitors are aggressively trying to keep their factories running as high a capacity utilization as they can. So, when we introduce the product, the product is very sensitive to those market environments. So it's -- it's at the lower end of our margin index.

In terms of the second quarter, Craig, with the dealers reluctant to add to dealer stocks, and they may even particularly in December yet continue to decrease dealer stocks to improve their financial profiles, we're going to -- our factories are for the most part going to have to follow the retail curve until the dealers have been added to, probably in mid to late February, to start adding to those dealer stocks. That's going to put pressure on margins, and we anticipate that primarily simply because of low utilization at the factory level, volumes in the second quarter will follow a traditional pattern in which the second quarter margins are historically the lowest margins we have in any fiscal quarter we have. So, we don't anticipate that's going to change this year.

Thank you. With respect to the Destination rear engine gas pusher. What's the margin profile of that product? I assume it's better.

It is. It fits into the mid-priced, between the class -- well, depending upon whether it's a gas or diesel, but it fits into that margin profile in the middle of our margin profile. And when shipments occur in those products, certainly at the latter half of this fiscal year, that should help our margin profile.

Barry Vogel, Barry Vogel & Associates.

First I want to talk about product innovation. It's evident to me, by going to these shows for many years, that the towables part of the business have been the big product innovation area. And Class A, even though it's improved, is still behind the curve. And when I was at the show at Louisville, there was something that I thought could be a very exciting product innovation in Class A's. And that was, from what I saw, three different companies had toy hauler concept on Class A's. I didn't see a Winnebago toy hauler. And I know that that toy hauler has been very, very successful in attracting younger, hipper RV'ers in towables, and that's amounted for a big portion of the growth in towables over the last five years. Can you comment on your reaction to those -- to that innovation, and what Winnebago may or may not do about it?

We looked at some of those products also. And without a doubt, toy haulers have been a big part of the trailer market. It looks like it's now entering the motorized market. As always, we will continue to review and take a look and see if there's any opportunity for Winnebago. We have -- we introduced two new [lines of] products again this year at Louisville. And this summer we introduced some new products. And again, we have to just go through each product segment and say which is the next product segment that we want to get into. And that's definitely an area. And I think we've also said to you that we're definitely interested in more in the diesel area. And that was part of the reason for the rear pusher Destination and Latitude, both on a gas pusher and a diesel pusher. So, it's a part of the market that we need to -- we don't have anything to announce today, but it's definitely a part of the market that we will continue to review.

How would you make the decision on moving forward on that? What will you base it on?

The product development groups, they go through and they analyze the entire market. And naturally, what we analyze (indiscernible) is what's the next sector that either we want to develop and try to create a new sector, like we did with the View and Navion, or is there a sector that we're not in that's doing well in the market, such as toy haulers. And if so, then we need to make sure that we get into that sector.

I guess the earliest you could possibly come out -- and I'm guessing now -- with a class a toy hauler would be, the earliest, maybe July? Or is that too -- can you do that if you decided to go forward with it? Can you come out by July?

We would rather not give anything out on what our developments of new products are. We will continue to review and determine what sectors we need to go into. But we have several things -- several different products in the works, as we always do. It seems like our introductions are almost coming twice a year. We have them at dealer days. And just like at Louisville this last year, we introduced two new product lines there again. So, product introductions aren't necessarily one time a year anymore; they could be at our dealer days and at Louisville.

I think it is important to recognize when we're talking about innovations is if I was a shareholder, and I had my choice between whether Winnebago had a Class A toy haulers or Winnebago had a new View and Navion, in terms of earnings power, I think I know where I would be. So, while we may not hit on each new idea, I do think the Company has certainly been successful, certainly in this last two-year period, of bringing innovative products to the marketplace.

On that same subject, I believe that your monopolistic position on the Sprinter chassis is in the process of ending, based on comments that were made by several of your competitors. Let's assume that three or four of your competitors get Sprinter chassis, let's say, sometime by -- let's say the latest, June of '07. How are you going to react to that versus what -- how you've been doing it so far with your monopoly?

First of all, it's our belief that while we may see some competitors start to ship products mid calendar of '07, they still won't have, in my opinion, a substantial amount of inventory at dealerships for the prime selling season next year, which is April through August. So, we still think we're going to have a very substantial market advantage, even in calendar 2007. Certainly in the latter half, after the prime selling season, I would suspect to see competitors' products in the late summer, early fall start to show up in significant quantities at the marketplace.

We still believe we're going to have an advantage. We are a strong player in Class C's. Even before our new View and Navion, we led the industry in terms of Class C market share, Barry. And I really think with new product innovations, particularly in that chassis platform, we could continue to be probably the leader in that particular chassis Class C market segment.

So, we think our cost structure here at (indiscernible) is going to give us an advantage. And certainly our reputation for quality will also, I think, maintain a significant market presence in that segment.

The other questions I have -- can you tell us what your operating rate was on average in the first quarter, and where is it now? And what do you expect it to be in the second quarter?

It weakened in the first quarter. Our capacity utilization was -- ran right about 54%. And we expect that to probably weaken a little bit with retail. Going into the second quarter historically is weaker, the weakest part of the period. As well as the fact that dealers are reluctant to add more inventory until maybe the spring market. (multiple speakers) probably soften slightly from where that was in the first quarter.

Maybe 50 to 54% in the second quarter?

That's probably a pretty fair range, Barry.

The last question I have is, by looking at the Stat Surveys figures, it's totally obvious that Thor -- who was a laggard, definitely a laggard in diesel, and had a very paltry market share -- is gaining share in Class A's on everybody, including Winnebago, and obviously has taken share from you. And it looks to me like if this continues, and there's no reason why Thor will not continue to gain market share given their tremendous financial strength where they can virtually do anything versus the rest of the industry, what can you do about it? Notwithstanding the fact that I know you came out with the lower-priced gas products at the show, and that's going to be a price point that will compete with Thor, but what else can you do about it? Because Thor's goal, I believe, is to continue to go up to the area where the Big Three have been, which is like a 20% market share between you and Fleetwood and Monaco. How do you respond to that, given what we know today?

It's got to be product. Thor deserves a lot of credit. They came out with that lower-priced product that the market shifted to. And a lot of us had to respond to some of that other lower-priced product. That -- they deserve a compliment for that, just like a few years ago when Monaco recognized the diesel area and then other people get into that.

And just like with our View and Navion, maybe we need a new, different type of product in Class A's and different things that we need to develop for the future. The people who are going to win out are have the unique products that are going to that the consumer wants. And all I can tell you is Winnebago is going to work very hard to continue to maintain its market share, and to maintain its profitability, and to maintain its -- making sure that it has the right product for the marketplace.

That's great. You've answered all my (technical difficulty) appreciate it.

Kathryn Thompson, Avondale Partners.

In terms of -- your gross margins came in at 10.6% for the quarter. How much of that was affected more by mix versus what you referenced earlier as just an overall lower production rate? Just to get a sense of the mix between the two going forward for modeling purposes.

We looked at the volume and mix to be approximately 30% of the entire reason of our margin decline. Then you have allowances in regards to the promotional program being about equal to that. And then, to a lesser degree, materials and healthcare increases.

So [volume and mix] were more the lion's share of the impact.

Yes, (indiscernible) one of the largest factors.

Just to confirm, starting in Q1 of last year was when you started your channel fill for your View and Navion. That's really when you started seeing the big effect in the quarters. And that said, we should see just tougher comps going in for the remainder of the year because of that channel fill. Just wanted to confirm that, too. And that would explain the lower overall backlogs in Class C's.

That's correct. During the first and second quarter of last year are the two quarters that we used to primarily drive our dealer partner inventory to where it needed to be for the spring selling season. And by the time we got to March 1st of last year, we had succeeded in getting what we believed to be an adequate level of View and Navion product into the marketplace. So the comps, particularly on that product on a year-to-year basis for the first half of this year, will look weaker because of the stock in the dealer share channel last year. You're correct.

Also, did you take any production days off in Q1? And do you anticipate any beyond your seasonal slowdown between Christmas and New Year's?

We did not take any days off during the first quarter. We do traditionally have two periods in the year in which we do take time off. We take a week off in the fourth quarter, or in the summer period, for plant vacation; then we take the Christmas -- period between Christmas and New Year off for also vacation days. And we'll do that also this quarter.

Do you see anything above and beyond in terms of days off for Q2?

We're just going to have to look -- watch how retail comes in and how dealers respond to some of our new product. We're not anticipating any. But I wouldn't indicate that as we get into mid January, early February, if the market happens to continue to be weak, that we -- we wouldn't say we wouldn't do it. We're just going to have to take it a month at a time here.

Finally, what are you seeing in the market in terms of the level of discounting? I know that it was -- you're still seeing a fair amount in Q1. Has that trend continued into your second quarter? What's your general outlook? The general sentiment is that there's going to be some recovery in the market by spring of '07. What is your opinion on that?

First of all, your opinion of the last part of your question is what we picked up at Louisville also. As I said, we do not see any increase -- big increase in our business activities today. But on the same hand, with dealer inventory low like this, we're hoping to see a stronger spring because of the business activity and inventory activity both. So, we just have to wait and see if that happens. The other part of your question was what, Kathryn?

It was just the level of discounting in the market. What types of discounting are you seeing, and is it as aggressive in Q2 as it had been in Q1?

Yes. I guess the bottom line is there's -- anytime you're in a down market there's always a few different programs and different things that -- maybe not on a consistent basis, but everybody's looking to try to figure out how they can stimulate and create a little more business. And there definitely are some programs out there, and we've tried to even do a few ourselves, as Ed said, the first quarter. But again, our objective, as we stated, is definitely to continue to focus and make sure we remain solidly profitable.

Do you anticipate doing any type of national sales programs like you did in the first quarter?

No, we do not.

I needed to clarify an answer that I gave on a question in regards -- you asked in regard to plant shutdown in the first quarter. We did take some days off in our Class C plant in Charles City during the first quarter. We did not have any down days in Forest City, but we did have some time off in our Charles City plant, our Class C production plant.

Okay, great. Thank you very much.

Scott Stember, Sidoti & Co.

Sarah, could you give the ASPs for last year by product, if you don't mind?

Sure. The first quarter of 2006 Class A gas, 91,852; Class A diesel, 158,687; and the average Class A, 113,171. Class C was 59,042 for an average of 87,756.

Did I hear you guys right? You said capacity utilization was at 54% for this quarter?

That's correct, Scott.

And anticipating second quarter, a little bit of a ratchet down to about 50%?

Somewhere in that range, yes.

On the SG&A side, I'm not sure if I heard. Obviously there was a pretty big ramp up over last year. Could you just maybe talk about some of the components in that?

The primary reason for the increase in the D&A expense was an acceleration of stock-based compensation vesting. And that was -- just due to the accounting standard, we have to immediately expense for all the retirement-eligible employees awards are granted to. And we had more of those this year than last year, just for a few people that had a birthday. So we expect overall that expense in 2007 will be $0.02 lower than last year, but we just have more of it in the first quarter.

So, there was nothing else besides that that stood out?

That was the primary reason. There were no other significant items to highlight.

Could you just clarify or break out the raw material pricing, the actual raw materials that you're seeing pressure on right now?

We're seeing commodity pressures in lumber and in sidewalls, fiberglass, steel, copper wire. Those are probably some of the big ones that we're seeing increases in.

Last question. In this quarter you guys didn't repurchase any shares. I think you still have probably like 700,000, 800,000 worth of shares that you can buy back. Game plan here hasn't changed at all?

No. We're just like all other investors when we feel the opportunity. We had a shorter window the first quarter of actual opportunity time in which to buy the stock. And during that period the stock was moving up, and so we decided to sit on the sideline for that period. But we will continue to review it, as we have in the past, and buy stock when we feel it advantageous to us and to shareholders both.

Richard Keim, Kensington Management Group.

I have a quick question following up on the commodity price question that Scott asked. Has the commodity prices -- what you referred to, the increases -- has that continued to increase? Or is that, say -- has it leveled off from, say, earlier this year?

The ones I highlighted were the ones that we're still seeing going up on a monthly basis, even in the month of November. So, that's what we're experiencing right now.

Are they significant again, or are they -- they leveled off for a while, I think, from earlier conversations. Is that correct?

Steel and stuff went up, kind of leveled off; actually went down a little bit. Now we're seeing it starting to go back up some. That's probably why we, as Ed announced in his talk, that's why we had to have (indiscernible) price increase in November for our products.

Okay. The other question I had was -- I got on a little late, so -- but I don't think you answered this. I know you said the backlog is up from the end of the quarter. But how -- just referring to the show by itself, the Louisville show, how were your orders compared to last year?

First of all, our orders were not in the backlog that we reported in this news release for the Louisville show. All those orders came the first week in December, the week after that we closed our books. So, they are not included in that backlog list that we have given. All we can tell you, we only read -- give our backlog at the end (indiscernible) we just think that we had a pretty decent Louisville show. Our new products, the big thing that you're interested in is how well they're excepted. And we did take quite a few orders on our new Vista and Sunstar, and then we had very good reception on our Destination and Latitude, the rear gas and diesel pushers that we're going to be offering in the spring.

Not to push you too hard, but to -- just to get a better feel of the industry as well as your performance at the show, could you tell us the -- you did how many orders (multiple speakers)

We do not release the numbers. Again, we will report at the end of each quarter. We think that's the only time that we should continue to release it. But you know, again, you were there. You've seen our product. You talked to some of our dealers. I think you've seen that our response was just like a lot of the other competitors. We felt that it was a pretty decent show, especially for the market conditions.

Michael Ware, Citigroup. (OPERATOR INSTRUCTIONS).

Just a question on the margins. Obviously we've seen the margins come down pretty substantially over the course of the last several quarters, and pretty sustained shift to lower-priced product. Just wondering if you guys would comment on the longer-term view for your margins. Do you view this shift to lower ASP products as kind of indicative of a structural shift down in your margins, or something that you think can potentially recover from here? Thanks.

A couple things that have created that. First of all, the Company over the last 18 to 24 months has put a lot of new fresh Class C product out in the marketplace, which simply by the way it's positioned in the market itself, is lower-priced product. So some of that has to do with our product development cycle.

However, the market has shifted towards -- particularly on the Class A side of the business, toward entry-level type products. We believe that that's temporary. 2004, we saw an absolute perfect environment to buy higher-priced Class A-type products, both in gas and diesel. We had a lot of new innovative products as an industry, and certainly as a company. We had interest financing rates that were at a 30-year low. We thought that -- we really think, looking back at it, that that environment, coupled with the fact there was a lot of home equity freed up in refinancing people's homes, that probably borrowed some business out of '05 and '06, and maybe it continues today.

We see a trade cycle, particularly in these large Class A products, somewhere in that three to five-year range. And we believe what's going on in the marketplace is simply the mid-price or the higher-priced Class A product buyers are simply not in the market as much as they have been in the past because they've made their trade.

We do believe that when -- if we can get a continued moderation in energy prices -- hopefully, interest rates don't go any higher -- that that mid to high-priced Class A buyer will come back into the market.

I think the trend we see, at least it's our belief, in the entry-level or value-priced products is simply that that first-time buyer, in terms of Class A's, are still in the market, and that's really kind of what's making that market look like it has a tendency to favor the entry-level or value-priced product. And we simply think these other customers simply are sitting on the sidelines right now.

Historically we've seen this happen. Historically, if the pattern continues, at some point in the future those people will come back into the market and we will see, in terms of the Class A market, it rebalance itself to what we've historically seen in the past. When that happens is, obviously, a difficult question to answer.

So, until that time, we should expect the margins to be toward the lower end of your range, your historical range. Is that a fair comment?

Correct.

Ed Aaron, RBC Capital Markets.

Just a couple of follow-up questions. The last month of wholesale industry data, which I think was for October, showed that the Class A and Class C sales have kind of flattened out. I think we kind of took that as an indication that maybe the dealers had -- were no longer destocking their inventories, and there was a sign of some stability, at least in the channel. Can you kind of -- can you kind of give us your thoughts about that in the context of that data point?

I can tell you that -- again, we've mentioned this several times. We have seen the dealers drop inventory over this last year. And as you've seen our inventory down over 10%, you know, we expect things to happen over the next probably 60 to 90 days, similar to what retail. Dealers were going to -- since they got their inventory down, they're going to kind of replace at the retail rate. The whole question, I think, that everybody is looking for is how strong is the spring going to be? We would like to know that just like everybody else. And there's a lot of optimism from a lot of people. But again, as we said, we've just got to wait and see whether it happens.

Just with the capacity utilization, it's hovering around a 50% level right now. Is there like a number that you feel like you have to go out and protect and make sure that it doesn't really go lower than that from the perspective of maybe the trade-off on discounting, where maybe 50% is the magic number, so you kind of have to -- to keep it from going below that, it makes sense to discount that much more heavily?

As we stated, our objective is to make sure we remain solidly profitable. We did try a national program, as Ed stated in his review, and we have tried some different things. It still goes back to making sure you have the right product and the right quality and the right services that you can offer the consumer. And to try to buy the market -- we've tried it before, and we'll probably have different programs off and on, just like all the other people we compete against. But overall, it still comes back to how good your product performs.

At this time there are no further questions. Do you have any closing remarks, sir?

Yes, I do. We would like to just thank everyone for joining Winnebago Industries' conference call today, and we look forward to talking to you again in March when we'll report our second-quarter financials for the 2007 quarter. Thank you very much. Have a happy holidays, everyone.

This concludes today's Winnebago Industries first quarter 2007 conference call. You may now disconnect.