Winnebago Industries Inc (WGO) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2007 Winnebago Industries earnings conference call.

My name is Tolisha and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS).

As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Ms.

Sheila Davis, Public Relations and Investor Relations Manager.

Please proceed, ma'am.

Good morning and welcome to the Winnebago Industries conference call to review the Company's results for the third quarter of fiscal year 2007 ended May 26, 2007.

Conducting the call today are Bruce Hertzke, Winnebago Industries Chairman of the Board and Chief Executive Officer; Bob Olson, President; and Sarah Nielsen, our Vice President and Chief Financial Officer.

I trust each of you have received the copy of the news release today with our earnings results.

This call is being broadcast live on our website at www.winnebagoind.com.

A replay of the call will be available on our website at approximately 12.00 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 will now turn the call over to Bruce Hertzke.

Good morning to everyone.

And welcome to Winnebago's conference call this morning.

First I would like to welcome Bob Olson to the position of President.

He was elected to this position in May following the retirement of our 38 year veteran, Ed Barker.

Bob has been employed with the Company for 37 years and has served in a number of management roles, most recently as our Senior Vice President of Operations.

His experience with the Company and his solid background in manufacturing management will suit him well with his new role.

Bob will be a valuable asset for the Company and its shareholders in his new position.

And we welcome him on the conference call this morning.

As for the Company's third quarter results, we continued to be pleased with the Company's revenues and earnings in this challenging market.

Our focus has not changed.

We continue to manage the Company with a focus on profitability and returning profits to our shareholders.

Winnebago Industries continues to make industry-leading returns for our shareholders even in this downturn of our current market condition.

Our return on invested capital for the trailing 12 months ended May 26, 2007 was 22.4%.

Sarah will review the details of our third quarter financial results in a few moments and give you more detail.

We introduced our new 2008 motorhomes to our dealer partners at our Dealer Days event in Las Vegas in May.

Winnebago Industries' 2008 line up features 25 model lines with 93 floor plans, of which 49% were changed or redesigned in 2008.

We were very pleased with the positive reactions that our dealer partners -- with our new products that we introduced to them.

It was with [that as] goal to increase our Class A diesel market share.

And to accomplish this we have redesigned our entire diesel line up for 2008.

As part of our long-term strategy of returning profits to our shareholders we repurchased 627,900 shares of our Company's common stock during the third quarter for $20.5 million.

As of May 26, 2007 we had $1.7 million remaining under the April 12, 2006 Board of Directors common stock repurchase authorization of $50 million.

Since Winnebago Industries began repurchasing stock on December 31, 1997 we have repurchased a total of 24.4 million shares of common stock for $356.8 million.

Winnebago Industries has a very strong balance sheet with no long-term debt and approximately $156 million in cash and short-term investments.

We intend to maintain our primary focus of profitability in spite of our challenging market conditions.

We believe Winnebago Industries is well positioned for growth with our future current product offerings and our current facility.

I will now turn the call over to Bob Olson for a review of the third quarter.

Good morning.

During the third quarter we were stocking the dealer channel with the new value priced Winnebago Vista and Itasca Sunstar Class A gas motorhomes that were introduced at the national RV tradeshow in Louisville, Kentucky in December.

The Vista and Sunstar are offered at a popular entry-level price point that we had not previously had a presence in.

We also began production of the all-new 2008 Class A Winnebago Destination and Itasca Latitude motorhomes during the third quarter.

As you may recall the Destination and Latitude are unique in that they can be purchased with either a rear gas or diesel engine, providing less engine noise in the front and a more residential look and feel.

We started building these units in March and began filling the dealer channel during the third quarter.

It may take several months before we have details on how these new motorhomes are being received in the retail market.

In addition to the Destination and Latitude the rest of the diesel motorhome line up is either brand-new or redesigned for 2008.

The Winnebago Vectra and Itasca Horizon, as well as the Winnebago Tour and Itasca Ellipse were we designed, and are now build on a new maximum chassis.

We worked closely with Freightliner in the design process of their new XCL chassis that features a lower rail design.

We further enhanced this chassis with our own superstructure design, creating a stronger chassis configuration with a vast amount of storage capabilities and a superior ride and handling qualities.

Production of these units and the rest of our new 2008 models began in April.

In an effort to more closely align our model year production schedule with the introduction of these new products to our dealer partners, we moved our Dealer Days event up to May from June.

While allowing us to showcase our products to our dealers earlier, this also had a positive impact on our sales order backlog which showed a 45% increase compared to the third quarter last year.

Most dramatically impacted by our Dealer Days event was a sales order backlog of both our Class A gas and diesel motorhomes with 1,316 units as of May 26, 2007, a 137% increase compared to the 556 units as of May 27, 2006.

We believe the sales order backlog increase is due to the timing of our Dealer Days event, as well as the acceptance of our new 2008 products at that event.

Also last year's backlog was lower due to our higher dealer inventories at that time.

We received the April report from Statistical Surveys last Friday which reported continued softness in retail motorhome sales.

According to the report retail sales of Class A and C motorhomes industrywide were down 9.5% year-to-date through April, 2007.

Based on that we do not believe the 45% increase in our sales order backlog to be a reflection of current market conditions, which continues to show negative year-over-year comparisons.

(technical difficulty).

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

Good morning.

I'm pleased to review with you the financial performance for the Company's third quarter of fiscal year 2007.

Revenues for the third quarter of fiscal 2007 were $231.7 million, a 5.2% increase from the third quarter of fiscal 2006.

This is primarily a result of the increase in the average selling price of our motorhomes due to a higher mix of Class A motorhome delivery.

The total Class A deliveries increased 178 units, or 15.9%, over last year.

This is due to the introduction of new Class A product that was not available last year.

Our gross profit margin was 11.3% for the third quarter compared to 12.7% for the same quarter last year.

The 140 basis point decline in our margin was primarily a result of the increase in the mix of lower margin motorhomes sold, both in the Class A and Class C category, and also escalating materials and labor costs related to our model year 2007 product.

This margin pressure was specifically addressed as we developed and priced our 2008 model year product to improve our margins prospectively.

We began shipping model year 2008 products in May, however approximately two-thirds of our deliveries during the third quarter were comprised of model year 2007 product.

As Bob had indicated in his comments, we held our Dealer Days event this past May in the third quarter as opposed to the timing in the prior year in our fourth quarter.

As a result our selling expenses increased approximately $1 million from last year.

General and administrative expenses also increased over $900,000 in the quarter as compared to last year primarily as a result of increased bonus expense.

In fiscal 2006 management's annual incentive compensation objective was entirely based on earnings per share goals which were not met in three of the four quarters last year, despite the fact that fiscal 2006 was the third most profitable year in the Company's history from an earnings per share perspective.

Starting in 2007 the Board of Directors approved a return on invested capital portion of our plan.

This change was made to link a portion of the annual incentive compensation to strong returns on invested capital.

The increase in bonus expense in our third quarter of 2007 from prior year is a result of that change in management incentive objectives.

Financial income increased $381,000 or 27% due to a higher average interest rate earned on our short-term investments and more money available to invest.

The effective tax was 31.6% as compared to 33.5% for the third quarter last year.

The decrease in the tax rate was primarily due to an increase in tax-free and dividend income as a percentage of our total net income.

We anticipate that our effective tax rate for the remainder of the year to be approximately 32%.

The Company completed the quarter with $156.9 million in cash and short-term investments.

Net cash provided by operating activities were $25.1 million for the first nine months of fiscal 2007.

So far this year we have spent $3.7 million in capital expenditures, and we expect total expenditures to be consistent with our prior year spending in 2006 of $4 million to $6 million in total.

We have also paid out $9.4 million in dividend year-to-date this year.

And as Bruce mentioned, in the quarter we spent $20.5 million buying back approximately 628,000 shares of stock.

I will now turn the call back over to Bruce.

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

(OPERATOR INSTRUCTIONS).

Craig Kennison, Robert W.

Baird.

Congratulations Bob.

Thank you.

I appreciate that.

First question just on the margin profile of the backlog.

Sarah, I think you mentioned that the initial shipments into the channel were of some lower margin product.

But can you give us a sense for what the gross margin profile of the backlog looks like prospectively?

The backlog, as Bob had mentioned, was significantly impacted by holding our Dealer event on towards the end of May right before our quarter end.

As is indicated in relation to where the increases are, which are primarily in the Class A category, and the makeup of our backlog -- the new products we introduced we had strong acceptance in relation to the diesel products that we were showing -- we are still are also showing on the channel with our Destination and Latitude.

But the Vista and the Sunstar are still new from -- on a dealer standpoint also.

So can you give us a sense for maybe where the margin range would look in the quarter?

Fourth quarter, and prospectively from a margin standpoint, is really going to be a function of our volume and based on where retail is coming in at this point in time -- you know, we're very retail dependent -- and also a function of what the dealers do from -- on their inventory standpoint.

So I commented also in my prepared remarks that we made a concentrated effort from both a development and a pricing standpoint to recapture some of the margin velocity we're seeing from the pressures, both labor and materials.

So we do see that the 2008 pricing and the cost of what we developed there will be helpful prospectively, but we aren't going to be providing any guidance from -- on a margin range standpoint strictly because it is so dependent upon retail and what dealers do with their inventory.

And could I follow up on the inventory question, it has been dropping every year for the last -- every quarter for the last eight quarters.

What would you expect from a dealer inventory perspective in the fourth quarter?

Typically it tends to drop a few hundred units, but given the backlog is so strong might inventory be flattish sequentially?

Right now we're pretty happy with where dealer inventories are falling.

And I do really think that they are going to be about flat through the fourth quarter, and it's all going to be retail dependent.

Okay, that is helpful.

And then maybe, Bruce, a question for you on your cash balance.

You have got a huge position in cash, very strong cash flow even at the bottom of a cycle.

Why wouldn't you want to introduce more financial leverage to your model, given that you could support those interest payments?

And frankly, if you don't do it, there is a risk that some private equity firm might want to do that.

Well, we have -- our Board of Directors are in next Tuesday and Wednesday and we would continue to have these discussions on the cash utilization.

We will be reviewing that again both Tuesday and Wednesday.

And if there's any announcements to come out we will announce them then.

Barry Vogel.

Barry Vogel and Associates.

Bruce, a couple of questions.

First of all on the C productline, which obviously you had a great homerun with the View and the Navion, can you tell us what your read is in terms of your competitors introducing that particular product this year?

Yes, I can.

We currently continue to supply our products to the marketplace.

There is some short supply and demand with this product.

We were fortunate enough to have some product on hand.

I do not know of -- I'm not sure of any competitors who have met the new certification that is required by DaimlerChrysler, and that they are receiving any of the Dodge Sprinter chassis.

So as far as I know right now our position still remains pretty much the same.

And I actually anticipate that it will remain at least that way at least through the end of our fiscal year, which is until the end of August.

Now can you give us some rough idea out of the 1,268 shipments for the Class Cs, approximately what percentage was View and Navion?

No, we really do not care to disclose that.

That is again -- it is, as you said, it has been a homerun product for us, and we have done very well with it, but we would like to keep those numbers to our self.

Now going back to the inventory question, we know that dealers have been pulling down inventories for the last couple of years.

And that basically speaking over the last several quarters you needed an increase in retail sales to have a dealer restock inventory.

Do you think because of this massive change in product which you just described that dealers were holding down their inventories even more in anticipation of all these changes to your products?

Well I think every year dealers get to what we call the end of our model year, and they will drop their inventories a little bit.

Everything for the dealer though, it is kind of goes back to what we have been talking about, we think it is retail dependent.

They may stock some extra one of our new products for a little while, but they are not going to continue to do that unless the retail turns are there to support it.

So we keep going back to -- we watch the market close just like you guys continuing to anticipate hopefully an improved improvement in those retail turns for everybody.

All right now as far as inventories, you ended up with $90 million in inventories, I believe, at the end of the quarter.

You had talked about in the past getting inventories -- they went down pretty much a lot last year.

Can you tell us where your best estimate is, given your mix, given your orders, given your backlog?

And then maybe you can give us an idea where your goal would be for the end of the fiscal year in dollars?

In our licensed inventory prospectively we do anticipate it will drop by the end of the year slightly in that kind of mid-80s range is what we would look at as being ideal.

The $77 million we ended with last fiscal year was very, very lean.

And we were happy to accomplish that, but that was a low point for us.

We came down on approximately $3 million or so sequentially from our second quarter.

But we are still in the middle of shipping out rental orders, and we think that by the end of the fourth quarter it is going to come down a bit.

Okay now, could you tell us your operating rates in the quarter for each of your facilities or your entire facility?

From the standpoint of third quarter we ran at about 67% capacity utilization throughout our entire organization.

I think if you remember right back in the second quarter that was at about 65%.

Okay, so obviously you are fairly profitable relative to your operating rate?

Yes.

All right, now a question for you, Bruce, about acquisition and share buybacks.

We have seen your competition still do very badly generally speaking, and I'm talking about the public companies.

And there's another -- there is one company that has got a lot of problems, but they are much smaller now.

Where do you -- and you haven't really made any acquisitions for many, many, many years.

In fact it seems like forever.

What is your attitude on developing things internally versus potentially making acquisitions in the future?

Well, first of all your forever is right.

Winnebago has not made an acquisition.

We definitely would like to continue to focus more on internally developing products.

It is not that we won't look, or if there's a really good opportunity to buy somebody that we think that we could really be profitable with, or have the unique product.

In a lot of cases though we have actually found out -- kind of like our View and Navion, if we can go out and develop that, that definitely has a lot more opportunity for making that very good returns for the Company.

And we're always working on a lot of other projects.

Many of them we can't announce yet, but we think that there is some great opportunity for some new product lines that hopefully can be as good as a View and Navion type product.

So we are going to continue to do that.

You never want to say that you won't ever look at acquiring somebody, but I'm not sure I see anybody out there that has really got a whole lot that can add a lot of profitability to the Company.

So we continue to focus more on internal development of products.

Okay, one last question.

What triggered the buyback in the quarter?

We went through -- again, Ed was here at that time, and now it will be Bob and I and Sarah that make the determination, because the Board gives us the authorization, and we had not bought any shares back.

And again our cash position continues to grow.

And we felt it was best to return some of that money to the shareholders, so we went in and bought some of our shares back.

Okay, and as far as your dividend, is it likely that you will just keep the dividend where it is under the current circumstances?

We will be reviewing that at our Board of Directors meeting, along with our cash position, on Tuesday and Wednesday of next week.

Gregory Badishkanian, Citigroup.

Just two quick questions here.

First anecdotally you have been to many of the Dealer Days.

Bruce, I'm wondering anecdotally what is your view of how these new products are going to do based on discussions with dealers, just initial orders?

Is it going to be really strong, average or below average?

Well, all I can tell you it was easy for us to be -- we came back and I talked -- especially Bob and I sat down, and we said that we were very pleased with the reception.

The whole thing is with the new products, even when the View and Navion that came out -- that was a very successful product, it takes six months to nine months before you really know.

I mean, I don't know if our dealers were just very polite and kind to us, but the reception was very good and very strong.

The real proof is six, nine months down the road how fast that they are restocking and turning out in the marketplace.

That is when you really get excited.

And we had that opportunity with the new product in the View and Navion and a few of our other products.

And so we need to get a little more proof under there, other than just dealers saying that they like it.

From the dealer standpoint the reception seemed to be very well.

But it still goes back to turning the units and making sure it goes through the entire cycle.

And sort of just looking back over the past number of years based on your experiences, when do you expect some growth to come out of -- some decent growth coming out of the industry?

Would you expect it to be back half of this calendar year, or what is sort of your thought on that?

I just got back from RVIA Committee Week, and at Committee Week, we had Dr.

Kurten who does our forecasting for our industry.

And I can tell you that as he has gone through he feels very optimistic and bullish for the long term.

Although he has only had -- over the next year or so he had pretty flat to moderate growth in the low digits, 1% to 4%, over the next couple of years.

That changes a lot and will change fast depending upon interest rates, consumer confidence and different --.

But that is kind of what was presented to us just -- in fact it was just three days ago.

Good.

Actually just one more final question, just more of housekeeping.

Did you breakout the ASPs for different classes, or did I miss that?

No, no, I have not done that yet.

I would be happy to.

The overall ASP for the quarter was 84,859.

For Class C it was 60,229, and Class A, 108,865.

And then the breakout between gas and diesel, A gas was 87,462, and A diesel was 157,599.

Ed Aaron, RBC Capital Markets.

This is Paul Burton calling for Ed.

I'm wondering if you could talk a little bit about the negative mix shift in the Class C products, sort of relative to last year when you are filling the channel with the Access and the Impulse models, which I believe were lower margin products?

That is correct.

We started launching the Impulse and Access at the end of our third quarter and then the fourth quarter was a substantial amount shipped to stock the dealers' lots.

And so when we look at the marginal -- the shift in mix, we see an increase between the categories, some of our Cs partially influenced by that.

The third quarter is also a popular quarter in relation to shipping on our rental business units.

But as I commented also, we have that dynamic going in our Class A category too with the new Vista and the Sunstar that has an impact in relation to comparison year-over-year.

And just to confirm on the backlog number, it sounds like the increase in backlog is just primarily due to the timing of Dealer Days?

Is that correct, sort of that assumption?

That is the majority of it, yes.

And then just finally I know you mentioned at the Dealer Days event that you were going to -- for dealers that wanted to carry your product, you were going to try and encourage them to take on sort of the full line of Winnebago products instead of just doing the cherry picking.

I'm wondering sort of what the dealer response has been to that?

Well, naturally we have a dealer agreement and they sign up for a lot of the dealer lines.

And naturally we would like a dealer to carry and stock as many lines as possible.

That is kind of an ongoing process that our sales and marketing department works on all the time.

Kathryn Thompson, Avondale Partners.

Just the first question on your compensation.

Usually it is accrued in the fourth quarter, but I know you outlined earlier in the call about the changes, (inaudible) return on invested capital as opposed to just an EPS.

Should we see an additional accrual in the fourth quarter?

How should we think about those going forward when we model?

In relation to our practice on compensation accruals, when we on a quarterly basis evaluate if we have met the goals or not, we would accrue at that point.

So it has always been a quarterly part of the process.

And so the only time we would have no accrual is if we had not met the objective.

Now it is an annual goal, so we're estimating where we're going to come out at the end of the year.

But it is a part prospectively in relation to the new piece of the adjusted objective, as I mentioned, and it will have an impact prospectively if we're meeting the portions of the goals.

So the past couple of years the bulk of the impact, if there was one, was in the fourth quarter.

So you are saying that it has always been looked at on a quarterly basis.

But some of the changes make it such that it won't necessarily all hit in the fourth quarter, as it had in the past, but could hit in other quarters?

That is correct.

Okay, that is helpful.

And just to reiterate with the materials cost you said you are taking steps to address this.

I assume this translates into increasing prices on your units or are you negotiating better pricing materials?

At the end of the year you finish out your 2007 products.

It would -- hard to go in and have a pricing of a new product when you're finishing out a year end model.

In fact just the opposite, a lot of competitors had some discounting and cleaning up product at the end of the year.

So we addressed the -- as Sarah reported, we addressed our cost inflation with our 2008 products.

Okay.

A couple of the ways we're doing that, one is looking at the cost structure of our materials, but the other one is, probably more importantly, is we're trying to reduce costs through design.

So we're doing it in a couple of different ways.

Is that a new initiative?

It has always been there, but I think we're putting more emphasis on it now.

Also not to beat a dead horse about mix, I understand that you had just a higher percentage of lower margin Class As and lower margin Class Cs in your revenue mix in the quarter.

But still as an overall percentage you had a higher percentage of Class As as a whole in your mix this quarter versus the year ago quarter.

So I guess I'm still just having a hard time getting my head around -- or maybe you could clarify -- maybe the gross margin impact was a greater percentage of a hit on mix, or was it more on materials?

That might actually answer the question too.

Well maybe that kind of helped with the breakout of those -- and we looked at kind of the three primary reasons that I addressed there.

Basically we look at the mix on to the lower margin categories in both Class A and Class C to be about one-third of the margin decline, and the materials piece to be about one-third, and the labor element to be about one-third.

Could you elaborate more on the labor?

From a cost standpoint the dynamics of our average hourly wage can go up and down based on attrition or -- we also have a standard increase that occurs on an annual basis and increases that happen during the year.

But because our headcount has decreased from our max or our high plan in 2004, we have definitely seen our average hourly rate go up because it is the longer employees that have stayed.

And so our historical approach to the pricing has been that we're going to pass on the wage increase, but we felt that as we hired more people that would help in relation to the overall -- put that average back down.

And that has not necessarily been the case.

We also have noted increased health care cost and workers compensation cost as a pressure.

And that is not unique in this quarter specifically, but that has been happening over time.

And so the labor elements has been a combination of quite a few things, I guess to try to answer your question better.

Yes, there have definitely been some higher health care costs.

So it seems like you're just having to hire more people because you're having to produce more products, but you're just having to pay a higher price for them?

No, my point is that because we have not been hiring and more managing our workforce with existing employees, there has been some, but not to the degree that we would have had a couple of years ago.

And as the employees have -- there has just been the natural attrition that average hourly rate has gone up because we have not been hiring the entry-level employees at just that entry-level rate.

And that is where it has been harder to pass on because we look at it from the perspective of once we do hire and the volume levels go back up, that average hourly rate will come down.

And that has not been the case.

Okay.

Just something else, just a clarification on the backlogs.

You indicated that most of the demand is primarily from the Dealer Days.

Is it incorrect, or is it a wrong way to look at it to look at this quarter's backlogs versus Q4 '06 backlogs?

Simply because it was Q4 '06 when you had your Dealer Day last year?

Well, one element that is also new for us is we have never had an event so close to the end of a quarter.

And so last year when we had the dealer event in June, most of that we had worked through and you did not necessarily see a spike at the end of the quarter.

Okay, that is helpful.

Finally, just any outlook on the quarter?

All I can tell you, again I just came back from the industry association meeting, and I think the best answer that I can give you is everybody -- nobody was totally down, but nobody was all excited about our great industry.

Everybody just kind of saying it is flat, and they are waiting to see better retail.

That seemed to be the discussion that we had from a lot of different manufacturers just last week.

Scott Stember, Sidoti & Co.

Sarah, would you happen to have the ASPs by category for last quarter, last year?

Yes, certainly.

For 2006 third quarter overall was 79,767, Class C was 56,334, Class A was 109,876, Class A gas was 90,636, and Class A diesel was 154,000.

Okay.

And Bruce I know that you mentioned that you're having a meeting next week with the Board of Directors regarding capital allocation.

But is it fair to assume that given your history here that we will say another share repurchase authorization come out of this?

I cannot make any comment for the Board or what they are going to do.

I can make a comment that I don't think we have changed our strategy of what we have done over the past seven years.

We don't have any new strategy to change.

Again, that will be our discussion and we will make whatever announcements the Board approve or decide, if there's any announcements to be made, probably next Wednesday.

Okay, and circling back to the capacity utilization, is it fair to assume that that will probably go up modestly, just given -- even though the backlog was -- I guess a lot of it had to do with the timing of the show, it seems like there's still a decent amount of interest in some of these products.

Will we see this going past 70% anytime soon?

Right now we're trying to maximize our capacity as much as we possibly can.

In fact we have got a couple of our assembly lines on overtime, and our were strategy right now is that we will work certain areas overtime if the product is hot, and those that are not we will probably work normal hours.

In fact there is cases where we have got some of our support facilities that may not work overtime.

So we're going to try and maximize the best we can our production facilities to run through this backlog and get product to our customers as soon as we can.

Okay and last question, Bruce, just back to some of the strategic items here.

Are you at liberty to talk about possibly moving into towables at some point, or is that something that --?

No, we don't have anything, Scott, that would be worth mentioning.

Again, we're going to continue to design and develop products that we think will allow us to grow, and also pick which areas that we think that we can be the most profitable in.

And one thing about a flat market, you have got to go out and continue to look at what else you can do, but we don't have anything to announce right now today.

Haken Ipekci, Merrill Lynch.

Two questions, one on the margins.

I know volume are important in driving margins, but when you look at all of your new products, you said roughly 50% is new, and compare them to the margins of your existing products, can you give us an idea with respect to how they are doing?

And then the other question is, obviously gas prices and lately interest rates have been kind of volatile.

They have been rising.

What kind of feedback are you getting from your dealerships, and how is the customer responding to those developments?

I will only address your first question.

From a margin standpoint the priority we placed when we reviewed our 2008 model year product was to maintain our margins or return to where we had been.

So the strategy prospectively there is that the new model year (inaudible) product would be where we have been.

We're hoping from the standpoint of the introduction of new and redesigned diesel product that we can gain some momentum and market share in that category, which overall would be accretive from a margin standpoint.

Okay.

On your second question in relation to gas and interest rates --.

Well, I can address that.

Naturally again the industry we're always concerned about that.

On the same hand we continue to believe that people are going to have to get used to $3.00 gas.

I'm not sure -- at RVIA when we were talking about forecast, we don't see anything that says there's going to be a significant drop.

Although you probably also heard us talk about Europe.

Gas has been very high over there, and in Canada it is considerably higher.

And their markets continue to actually grow.

And so I think it is a matter of US markets getting a little more comfortable with it and used to the prices.

And I think that our market will continue to grow once that happens.

As far as interest rates, we think that -- we kind of just anticipate that they are going to be somewhat flat.

That there is not going to be moving around a whole lot.

That is not necessarily good.

Naturally we would like to see them go down, but we really don't see them moving either way.

And again it is kind of -- the interest rates where they are at now is kind of like where they have been for the last 10 year average.

Not definitely where they were in '04 at a very low point, but also not as high as in '01 when they got to 9% and 10%.

So I think we're just kind of in the average area, and we anticipate that they will kind of stay in that area.

Juan Gomez, Winnebago Industries.

Thank you for taking my call.

Most of my questions have been answered, but I have one quick one.

Just a clarification I guess.

Would you say -- if you look sequentially I guess the backlog for Class A gas units increased a little bit.

Would you say that is mostly due to low end units or the new units, the gas pushers, or others?

I think it is a combination of both.

When we were at Dealer Days this year -- last year at Dealer Days the view was that new product did not show quite hot.

We introduced the Access and Impulse, and we kind of had more introduction of Class C body product.

This year without a doubt we had a lot more introduction of diesel and Class A gas products.

And so your assumptions are correct, because we definitely have more of a backlog in Class A products than what we do with Class C.

All right.

All right, thank you very much.

Bob Simonson, William Blair.

Sarah, can you quantify the dollar amount of the shift in the Dealer Days from the fourth to the third?

It is approximately $1 million.

And your tax rate, this looks like it will be the fourth year in a row it is coming down.

I kind of assume that is because of the tax free investments you have been making.

If you --.

It has grown as a percentage of our overall rate as a positive.

One of the most substantial items that was new for us last year was the domestic production activities credit, and that is also a significant cause for year-over-year decline.

But the percentage of our dividend tax-free income percentage of overall net income is currently the most significant driver of the rate going down.

This is perhaps a difficult question to answer, but in a more different environment where things are more normal and you get more inventories and less cash balances, can you speculate on what a normal tax rate would be?

Well moving into fiscal 2008 the domestic production activities credit is actually going to increase, so that prospectively that is going to continue to be a positive on the rate side.

But you're right, as our cash balance was not as significant, and we do not have the ability to maximize that on the tax rate standpoint, those two probably would more be closer to offset.

So I think a 33% rate might be appropriate modeling out into the future, but that would been assuming that our cash balance is significantly lowered.

To follow-up on the question on the bonuses in the third quarter, it sounded, if I have got it right, it continues into the fourth quarter.

But will there -- can I ask if you hit your goals for the remainder of the year, would you have a bonus accrual in the fourth quarter versus none in the last year?

That is correct.

Finally the depreciation in the first nine months is essentially flat, it is down a [fuzz].

Why does it go down?

We really pulled back from a capital expenditure perspective.

Prior to 2006 we had been spending about what we were depreciating in a year, in that $10 million range.

Even prior to that we had additional facilities that we were building.

Because of the current conditions we have been facing in the last two years, we have reduced what we have been spending on the capital expenditure side, and that does over time have an impact on reducing our depreciation expense.

But we expect that that will be probably overall in the $10.5 million range for 2007.

And do you have, or can you offer, a CapEx estimate for next year?

We are I guess continuing on the same trend in relation to minimizing what we're spending there because we don't see that third substantial capacity or any significant expenditures that we need to make.

So unless that were to kick up at some point during the next year, the depreciation would not change a whole lot again next year?

That is correct.

(OPERATOR INSTRUCTIONS).

Barry Vogel, Barry Vogel and Associates.

Sarah, can you tell us what the actual shares were outstanding at the end of May?

We will be disclosing that when we file our 10-Q, so I guess I will wait at that point in time to provide that information.

And, Bruce, I have one more question.

Is that anybody in the industry currently discounting Class As?

Yes.

You know when we hit this time of year, the May/June time, there is always some companies who are cleaning up their last year's products.

And so the answer is, there is some discounting going on.

I can tell you that I do not think -- is not running rampant and it is not a big -- I mean, anything really major for our industry, but yes, there is some of that going on.

And did you end up with much '07 inventory?

No, we were very pleased how we ended our year and cleaned up.

If you look at our financials you will also see that some of our discounting different things was actually down a little.

There appears to be no additional questions at this time.

I would now like to turn the call back over to management for any closing remarks.

Well, once again I would like to thank everyone for joining Winnebago Industries' conference call today.

We look forward to talking to you again in October when we will report the fourth quarter and our fiscal 2007 results.

Thank you.

This now concludes your presentation.

You may now disconnect, and have a wonderful day.