Winnebago Industries Inc (WGO) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2008 Winnebago Industries conference call.

My name is Jasmine and I'll be the operator for today.

At this time, all attendees will be in a listen-only mode.

We will conduct a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

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

Sheila Davis, Public and Investor Relations Manager.

Please proceed, ma'am.

Thank you, Jasmine.

Good morning and welcome to the Winnebago Industries conference call to review the Company's results for the third quarter of fiscal year 2008 ended May 31, 2008.

Conducting the call today are Bob Olson, Winnebago Industries' Chairman of the Board, Chief Executive Officer and 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 noon today Central time.

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 Bob Olson.

Bob.

Thank you, Sheila.

Good morning and welcome to Winnebago Industries third-quarter conference call.

While our spring quarter is traditionally the strongest for Winnebago Industries and the RV industry, this year was certainly an exception.

The motorhome market has declined significantly, with retails sales down double-digit percents each of the last six months.

The significance in market decline has further accelerated in recent months.

Retail sales of Class A and C motorhomes calendar year to date through April are down 26.1%, while March and April, the last recorded by statistical surveys, are down over 30%.

In addition to the declining retail market, dealers are currently reluctant to replace sold units on their lots on a one-to-one basis as they reduce their inventories and focus on increasing their dealership churn rates.

Our dealers' inventory of Winnebago, Itasca and ERA brand products at the end of the third quarter was 4341 units, a decrease of 5.7% for the third quarter last year and 10.3% less than dealer inventory at the end of the second quarter of fiscal 2008.

We anticipate that dealers will continue to lower their inventories.

Once the dealers and their customers regain confidence in the economy, both wholesale and retail activity should once again pick up, and those manufactures and dealers who have survived this downturn will be in a great position to meet the next upswing in this cyclical industry of ours.

On a wholesale shipment basis, RVIA's economist, Dr.

Richard Curtin from the University of Michigan has also revised calendar 2008 downward to 42,800 Class A, B and C motorhomes, a 23% decrease from actual shipments of 55,400 motorhomes in calendar year 2007.

As a result of these negative market conditions and as I said in the news release this morning, we are very disappointed with our operating results for the third quarter.

This quarter was frankly more than challenging.

As we began the third quarter, we were optimistic the traditional spring market would return to us more favorable conditions.

When it became apparent in April and May that it wasn't headed in that direction, but rather deteriorating further, we were forced to make some very difficult decisions.

First, we reduced production with three weeks of shutdown and nine weeks of shortened work schedules in the quarter.

This has enabled us to keep control of our finished goods inventories, but unfortunately, it didn't address our overhead expense.

It was also extremely challenging for our employees who haven't had the benefit of a full paycheck for most of the quarter.

Consequently, as we announced on June 2nd, we will be idling our Charles City Manufacturing Facility by August 1, 2008, bringing the production of Class C products back to our Forest City campus.

Secondly, we have made further adjustments within the last few weeks to our workforce of salaried, direct and indirect employees in an effort to right-size our organization to the current market demand.

After August 1st when the Charles City Manufacturing Facility is idle, we will have reduced our employment level by approximately 850 people or 26% of our workforce through layoffs and attrition since the beginning of our fiscal year.

These have been extremely difficult decisions for us to make, but certainly necessary in the current environment.

In addition, we continue our lean journey to drive out waste in our product and processes wherever possible, and we continue to reduce budgetary expenses in an effort to match spending to current production volumes.

On the product development side, we continue to work diligently on new products.

We have been very pleased with the reaction by our dealer partners and retail customers to our new ERA Class B motorhome as it enters the marketplace.

We continued to ramp up production of the new fuel-efficient ERA and delivered 47 of these motorhomes during the quarter compared to one in our previous quarter.

We continue to have availability issues of the Sprinter van chassis, which has limited our ability to meet our customers' demands for this popular new product.

Our new 2009 motorhomes were successfully introduced in May at our Dealer Days event in Las Vegas.

We've broadened the product differentiation between Winnebago and Itasca brands for 2009, providing our dealer partners with new and exciting motorhomes to fit each of their needs.

We introduced the newly redesigned Winnebago Adventurer Class A gas motorhome with exciting new floor plans and aggressive pricing.

Our totally redesigned Itasca Suncruiser was also introduced.

The Suncruiser is now more widely differentiated from the Adventurer and features unique new floor plans at a tremendous value.

We also made significant upgrades to our Class A diesel products, particularly the Winnebago Destination and Journey, as well as the Itasca Latitude and Meridian, while holding the line on pricing.

We believe these changes will allow us to capture addition diesel market share as these products make their way into the marketplace.

We also made some very positive changes to our Class C product lines, particularly with the Winnebago Aspect and Itasca Cambria.

In total, we have 78 floor plans for 2009, 46% of which are new or redesigned.

While we continue to be very bullish about the long-term outlook for the RV industry, we remain concerned about the current economic environment and have yet to see signs of a motorhome market recovery.

Bad news dominates our newspaper and television coverage every day.

So it's certainly easy to understand our customers' hesitancy to make a large discretionary purchase.

We will continue to monitor the economic conditions of the country and of our own industry and continue to make adjustments, whether that be in labor, facilities or other spending in an effort to right-size to the demand of our customers.

These tough decisions were made and will continue to be made to help us achieve our primary objective, which is to build quality motorhomes profitably.

With that, I'll turn the call over to Sarah for the financial review.

Sarah.

Thank you, Bob.

Good morning, everyone.

I will now review with you the financial performance for the Company's third quarter of fiscal year 2008.

Revenues for the third quarter were $139.7 million, 39.7% decrease over the third quarter of 2007.

The revenue decrease is primarily the result of unit delivery declines of 942 units or 36.7%, and a decrease in the average selling price of 7.5%.

The decrease in the ASP was primarily due to the increase in rental unit sales as compared to last year, which the majority are Class C products.

Our gross profit margin was 1.9% for the third quarter compared to 11.3% for the same quarter last year.

Gross profit was significantly impacted by the decrease in production and resulting low absorption of fixed costs.

Also contributing to the decrease in gross profit margins were additional wholesale and retail promotions and increased Class C mix due to more rental sales.

Selling expenses were down $426,000 or 7.7%, due to reduced bonus and advertising expenses.

General and administrative expenses decreased $1.6 million as compared to the same quarter last year, due to reduced product liability and legal expenses of $980,000 and a reduction in bonus expense of $800,000.

Unfortunately, the reduction in operating expenses of 17.8% was not nearly as significant as our revenue decline and gross margin degradation.

As a result, we incurred an operating loss of $6.9 million in the quarter as compared to operating income of $14.7 million last year.

Financial income decreased $746,000 over the prior year, due to nearly $90 million less invested during the quarter.

We did earn a slightly higher rate on these investments in this quarter.

During the third quarter, significant tax benefits were also recorded that relate to the followed three items.

Approximately $4.2 million was recorded based on the favorable settlements of uncertain tax positions with various taxing jurisdictions.

However, as a result of these settlements, estimated payments of $6.3 million will be made in the fourth quarter.

Secondly, the effective tax rate was reduced to 23% from 32%, due to lower year-to-date pretax income which resulted in a reduction of the income tax previously recorded of $1.7 million.

Lastly, benefits of $1.4 million were recorded due to tax blending initiatives that were recognized during the quarter.

In addition to these significant items, a tax benefit of $1.4 million was recorded on the quarterly pretax loss.

Net income for the quarter was $3 million as compared to $11.3 million last year.

I will now highlight a few significant balance sheet items.

Inventories have increased $9.8 million from the end of the fiscal year, but have decreased nearly $18 million from the second quarter of 2008.

This is primarily a result of reduced finished goods inventory, which was down 34%, accomplished the reduced production during the quarter.

Our chassis inventory is down 6% from the end of the second quarter, but still too high, and efforts are ongoing to reduce this inventory position in the coming months.

In regards to our auction rate securities, we did see $11.6 million or 21.4% of liquidity to par value redemptions during the third quarter, primarily made up of municipal bonds.

We hold $42.6 million of par value auction rate securities as of May 31st, of which we have recorded a temporary impairment of $2.5 million, approximately 6% against the assets.

We continue to classify these assets as long-term, due to the uncertainty of when we will see further redemption.

Over 90% of our remaining portfolio consists of student loan auction rate securities, of which we have experienced nominal redemption activity thus far.

We don't expect that we will have a similar level of liquidity out of these investments in our fourth quarter as we did in our third.

However, we do continue to earn a tax equivalent yield greater than what we are earning on our cash balances.

We completed the quarter with $46.2 million in cash and cash equivalents.

During the first 40 weeks of this fiscal year, cash generated in operations was $10.5 million as compared to $25.1 million of cash generated from our operations last year.

Approximately $23 million was generated in the third quarter, primarily due to the reductions in inventories that I've already discussed.

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

(OPERATOR INSTRUCTIONS) Ed Aaron.

Thanks.

Good morning, guys.

A couple of questions for you.

So, first of all, it looks like you didn't really maybe get your full share of the industry's wholesale shipments this quarter, particularly in Class A.

The Class A numbers that you reported down, I think over 50% on a unit basis, which is far worse than the industry.

And I realize that your retail share might be down a little bit, but it's still kind of hard to reconcile.

I was wondering whether you think it is fair to say that your competitors are maybe overproducing in this environment while you are maybe being more disciplined about what you are putting into the channel?

Ed, this is Bob.

I don't know if they are overproducing.

But I think it's a case where we know that our dealers that we talk to are still reducing their inventories.

I think you've got another dynamic out there, that we've had several competitors go out of business the last few months.

And I think you've got some of those products that are out there hitting the channel as well.

One of the things that we have really watched very closely, and you can see that by what we've reduced our finished goods by, we are being very, very critical on ourselves not to build open inventory because we do feel that until this thing turns around and we get some good economic indicators out there that dealers are going to continue to lower their inventories.

We think they are just being very, very conservative right now as far as ordering product.

And we know from us for sure, and we are assuming that it is probably from some of the other manufacturers as well.

Okay, thanks.

Then last quarter you mentioned with your inventories that I think you were targeting a number of, I think, 100 million or so, or maybe even somewhat less than that by the end of the year.

I was wondering if you are still on track for that.

Yes, that is still our goal.

And it looks to be a feasible goal based on what we see now, to be in that $100 million range by the end of the fiscal year.

Thanks.

And then last question, you mentioned earlier about the companies that survived the downturn are going to be well-positioned for the next cycle.

And just kind of wondering what you are hearing out there in terms of -- I mean, we know of a few smaller companies that have kind of gone by the wayside here, but wondering what you are hearing out there as far as anything more that maybe we haven't heard about yet but you think might be coming?

Well, I haven't heard anything specifically about any individual dealers or manufacturers.

But I can tell you that we hear how tough it is out there.

If you don't have your company on solid ground going into something like this, it's going to be tough to be able to survive it.

There is a lot of companies that weren't making a lot of money when things were good.

And so when things get to the situation that they are right now, it's going to make it that much more difficult to survive this.

One thing that I can tell you is that we were notified by Ford during the last couple of days that their chassis plants, they've extended their shutdowns.

They are going to be shut down from basically the last two weeks of June through August.

I think that really sets the tone for how difficult this industry is right now.

Yes, makes sense.

Well, you guys are doing the right thing, so keep it up.

All right.

Thank you, Ed.

John Diffendal.

Good morning.

A couple of different things.

Just in terms of the capacity moves you've made, and certainly I just want to sort of think through post the plant mothballing next quarter.

Given where the industry run rate is today in Class As or just general motorhome business, would the moves taken here and then the other ones incrementally you mentioned, would you be profitable?

Would you view that your operating income line would be at a profitable level post these moves, or are there still more to do?

I think we are still sorting that out, John.

We've done a lot in a very short period of time.

I know Sarah and her crew are going through the numbers now, trying to identify.

I guess we're trying to let the dust settles so we know is this enough, or are we going to have to do more?

I think one of the variables that are out there right now is just what is the appetite of our dealers from the standpoint of ordering more versus reducing their inventories.

I think that's a very difficult question that we've got right now.

You go back into the '90s when things were probably more comparable to where we are today, and you look at what the average inventories were back then compared to today, and I think there is still room for inventory reductions.

And that doesn't bode well for us or any of the other OEMs that are out there, because the dealers are looking at it that they need to reduce their inventories in order to get the turn until this retail turns around.

Okay, thank you.

I know that is a long-about way to answer your question, but this thing is so volatile from a standpoint of there's so many variables that impact it that I really think that we've got to monitor this thing each day in order to figure out do we have enough cuts made or not.

I guess part of that -- I think you've mentioned that your utilization rate in the quarter was less than 35%, but that was on the old configuration.

Yes.

Another way to ask it maybe is after the changes where you are today, what sort of utilization rate would you hope to be running at?

That's a little different way to cut it.

Again, a tough question.

Preliminarily, what we see right now where we are at, and if nothing else changes from a demand standpoint, we think we will be up above 50% someplace.

Okay, good, thanks.

And secondly, comment on the industry promotion and discounting environment.

I guess we've had -- Fleetwood announced recently they are taking some promotions on their Sprinter chassis product line.

Can you just give us some general thoughts on what is going on right at the moment in terms of discounting given the environment?

I think we are seeing an increase in discounting by everybody.

I think everybody is looking for ways that they can stimulate this business to try and get people to buy.

I will be the first to admit, our discounting dollars are up higher than I would like to see them.

But on the same hand with the economic conditions that we are in right now, if we don't do something to try and stimulate the market, we could get left in the dust.

I hate spending those kind of dollars, but on the same hand, you've got to do something.

As difficult as it is -- and John, you read the newspapers and listen to the radio like I do.

We are not alone in this.

I mean it's the auto industry, it's the truck industry, it's the boat industry.

It's anybody -- there's very few segments out there that aren't impacted by all of the issues that are going on with today's economy.

Great, thanks.

And my last question is, Sarah, you were breaking down the tax benefit.

Did I hear you correctly in saying that just on a normal basis given where the loss was, the regular tax benefit would have been about $1.4 million?

That is correct.

So what would that tax rate have been before all of the sort of moving around there?

We had a 23% effective tax rate excluding all of these other items that I touched upon.

Now, the fourth quarter brings a whole new situation for us as we've tentatively quantified restructuring costs, which changes that dynamic even more so for us in the fourth quarter.

But it was a pretty complicated tax provision in regards to all the pieces we had going on.

So I expect that to be even lower on a fiscal year-to-date perspective because of some of the other items that will be expensed on our fourth quarter for restructuring.

So you are -- so a lower rate than the rate cumulatively through the first nine months.

That is correct.

Okay, thank you.

Kathryn Thompson.

Thank you.

First a question on gross margin.

How much was the year-over-year decline driven by volume versus promotion?

You don't have to give a specific number, but just give a sense of proportion for each of those two key components.

And then also how much mix was a factor of that.

Okay, certainly, Kathryn.

We look at a majority in regards to the production and the lower fixed cost absorption.

About 60% of our decline was associated to that challenge in our quarter.

On the promotional side, that had about a 20% impact to our margins.

And then lastly, the mix and the pricing, and even to an lesser extent inflation is really the balance of that.

Okay.

And speaking of just raw material pricing, I know it is just yet another issue that you have to deal with.

How have you been able to manage rising steel prices in particular, and have you been able to pass those prices along?

Well, we just came out with pricing for the model year 2009 products this spring.

And we always incorporate into the pricing process an element of estimation on inflationary, on pressure that we anticipate, materials and labor, etc.

So we are on the early side of that, that helps mitigate what we are seeing.

But our normal process is if we see more escalation, we are going to have to consider some type of adjustment.

We always do have adjustments that happen later in the year in regards to new model year chassis entries.

And some of that happens in the August through October timeframe, depending on which chassis manufacturer we are talking about.

But it was not that long ago -- it was, I think, November of 2006, we had a mid-year price adjustment.

That has been our approach in the past.

And you are right, the pressures that we are seeing are very significant in just very -- just short amount of time span.

So it's something that we are closely watching to determine our next step.

All right.

As far as capacity utilization goes, I think you had indicated earlier in the Q&A with John that after the Charles City closure, assuming the current run rate remains unchanged, your capacity utilization would be just above 50%?

I wanted to confirm that.

Yes, probably just a little bit above 50%.

It would be in that range, yes.

And what is your capacity utilization about now?

As we reported in the release, we ran third quarter about 35%.

Okay.

I just wanted to make sure it wasn't any different than what was in the release.

No.

I know you talked about Ford taking that big chunk of time off, and that's something that we definitely heard when we recently visited some plants in Northern Indiana.

How much time did you take off in June in total, and how much time do you anticipate taking off?

I know it is very difficult to quantify, but could you see something similar to what Ford is doing?

God, I hope not, not that long anyway.

I mean that -- they are down a long time.

The one thing I will tell you, Kathryn, is that right now we've already -- and I think it has been in some of the publications that we've announced -- that we are going to take an additional week at our normal summer shutdown.

We always have one week, and we've extended that to two.

One of the reasons why we shut or idled Charles City was that our hope is, is that we can get our capacity capabilities in line more with demand.

We want to be able to try and run five-day weeks on the three remaining lines and staff accordingly so we can get our employees full-week paychecks.

That has been very difficult for us, is because not only do we have the people that it has been just gut-wrenching to tell them that they don't have a job because of no fault of their own, but the other side that doesn't get a lot of publication is that we've got several hundred employees here that don't get to take home a full week paycheck.

With gas prices going up the way they are, food prices going up the way they are, my hat's off and thanks to our employees.

Because as tough as that pill is to swallow, I think they understand.

So that is our goal, is we're going to do everything we can to try and right-size so we can operate on 40-hour weeks and hopefully earn a profit doing that.

Okay.

And my final question, would you say that the current slowdown has already eclipsed the slowdown we saw in the early '90s?

And would you liken it closer to what we saw in the late '70s and early '80s?

I have been asked that question a lot probably in the last couple of years, and I have kind of answered that that I don't think it is as bad as we have seen it in the past.

I'm starting to change my mind a little bit.

I think it is now starting to get to a point.

I'm not so sure it is to the point where we were back in the late '70s, early '80s, but I think it is there on par with what we saw in the '90s.

Okay.

Great, thank you very much.

Scott Stember.

Good morning.

Sarah, could you give what the ASPs were by class versus last year?

Certainly.

For Class A gas, in the third quarter of '08, our average price was $85,045.

Last year it was $87,462.

That's down approximately 2.3%.

For Class A diesel, our average price this year, $174,718.

Last year, $157,599, so it's up 10.9%.

Our average Class A based on the volume and the mix, it was $107,646 versus $108,865, down 1.1%.

From a Class C standpoint, we're at $60,647 versus $60,229, slightly up 0.7%.

Average A's and C's, $78,733 versus $84,859, down 7.2%.

And our Class B ASP is $69,426, and overall we're looking at $78,464 versus $84,859, down the 7.5% I mentioned earlier.

Okay.

Could you just go over the tax issue again, the fourth quarter what we could expect to see as a tax rate?

And also maybe excluding any benefits, and what would be a normalized tax rate to assume for fiscal 2009?

Well, in the third quarter we had quite a few significant items that we don't expect to be part of our fourth quarter.

As I touched upon, we had $4.2 million recognized or is based on favorable settlements on some of our uncertain tax positions.

And that was an item that we had discussed in our Q and our second-quarter conference call, that that could happen in the next 12 months, and it did all happen here in the third quarter.

We did have a pretty large true-up moving our effective rate down from 32% to 23%.

And then also we had some tax initiatives that were recognized in the quarter based on efforts that had been ongoing.

On a prospective basis because we have a restructuring charge that is ranged anywhere from $2.5 million to $5.5 million, that is going to further complicate the tax rate for our fourth quarter.

So I expect that to drop yet again in our fourth quarter.

On a normalized basis when we look at 2008 -- excuse me, fiscal 2009 -- I would expect it to return to the levels we have been historically on the 33% range on a prospective basis.

But it is fairly complicated here in the third and fourth quarter due to these unusual items, and then further complicated by the operating loss position.

All right.

Could you talk maybe a little bit about the View and the Navion?

That has been one of the bright spots, so a few bright spots over the last year or so.

Are you starting to see some weakness similar to the rest of the Class C market there?

Well, I think a little bit, and primarily that is due to general economy.

I don't care if it is a View or if it's a Vectra, people are looking at it.

I think they are hunkering down.

So we've seen some degradation just because of general economic conditions.

But the other side of the equation is we've got a lot of competition in that category now.

We've got several manufactures that have not been able to get that chassis in the past, and they now do have it and they have come out with some products.

Some of them are being very aggressive on pricing.

So it is not a stand-alone product anymore.

It's got to go out there and fight for its place of market share.

So we are seeing some things there, but I will say that we continue to look for ways to exploit that chassis because we think that is a good products for this industry right now, with the fuel economy issues that are out there.

We just introduced our ERA product, which is on the van chassis of the DaimlerChrysler Sprinter product.

And if we could get that chassis in the quantities that we want, we think that that would help our profit situation immensely, but they are on worldwide allocation and we can't get them.

The other thing that I will say is that just because we've introduced the View and the Navion, we don't sit on our hands.

We are looking at other ways that we can take that chassis and bring new products out to the market as well.

So, stay tuned.

Okay, that is all I have.

Thank you.

Craig Kennison.

Good morning, everybody.

So the first question just has to do with the additional consolidation opportunities you mentioned in your press release.

Obviously, given that it's a separate location, Charles City was a more obvious choice.

Could you talk about other opportunities you could have to reduce costs?

Well, I think there's several things that we are currently looking at and doing as the news release said, that we've had some additional reductions in both salaried, hourly and indirect employees.

That's obviously the first place that you can look.

But you have to be extremely careful of that so you don't start getting into muscle instead of just fat.

But we've got, as you know, Craig, we are very vertically integrated.

And in good times, that is a very positive for you; in bad times it's a lot of overhead that you've got to absorb.

We are looking -- continue to look at different things that we might be able to do in the future, whether that be consolidation of processes, maybe even consolidation of facilities.

We don't know yet.

But like I tell my staff, there are no sacred cows out there, and we're going to look at every nook and cranny to try and get our cost structure to where it needs to be to be profitable.

Okay, thanks.

It seems like you have an opportunity to regain significant market share in the diesel category if others exit and some of your strategies pan out.

What would you say is the key to regaining share in the diesel market, and when would we most likely see the impact in the statistical survey data?

Well, I think the obvious answer to that, Craig, is the product has got to be right.

I've said this probably in the last three conference calls, is I don't think we did a very good job of coming of getting two of the products that we offer in the diesel category, I don't think we did a very good job of getting them right out of the chute.

And that is obviously the Destination, Latitude, and the Journey and the Meridian.

We took a gamble and we lost.

We are in the process of still getting those through the retail chain, but we did introduce the Destination and Latitude and Journey and Meridian with a lot of changes at our Dealer Days activities out in Vegas this year.

And I can tell you that the dealers seemed to receive it very, very well.

We put a new front end -- and I may be a little biased -- but I think the front end that we put on the Destination and Latitude is one of the best looking front ends that we've got on any of our product lineups.

Then probably the biggest thing that we did is we did go back to conventional cabinetry with the curved European look as being optional.

We had to learn a hard lesson that the buyer of that product is looking more for a traditional type interior than he is something that is probably more contemporary.

So we've done a lots of things, and probably one of the biggest things on all of our diesel products in 2009 is we've held the line on pricing.

There is very few, especially in today's economy, that can stake claim to that.

And we think that those -- there's several different things there that we think might give us a leg up in the diesel market share.

To answer your question on when we will start seeing that, a lot of it is going to depend on the general economy when people really start buying again.

It is also going to depend on if there is any other manufacturers that go out of business and have fire sales.

It also depends on what kind of discounting goes on.

I mean this end up being a discounting war, and which a war I don't want to fight, but it may come to that.

So there's a lot of variables that are beyond our control right now that could impact when we see market share gain in the diesel product.

But we've got every intention to try and get some of that market back.

Okay, thanks.

And with respect to gross margin, that is a number that fluctuates a great deal, with absorption being one issue and then pricing being another.

Can you give us any sense for where you see that headed in the fourth quarter, given some of the charges you are taking?

And sort of longer-term given that, yes, you are cutting your capacity, but you've also decided to be more price conscious on some of your higher-margin products?

In regards to our fourth quarter, because Charles City -- the date that we are going to have that idled is the 1st of August.

We're going to have two months in our quarter where those costs are still part of our structure.

The fourth quarter is going to be a challenging one in that regard, as we work through that process.

We do plan to segregate all of the restructuring-related costs in one line item, so you see that on a stand-alone basis.

But we are going to have one month of benefit.

And in regards to some of these other things that we're doing right here in June, there's more benefits to be had, and the goal is to improve what you see here in the third quarter.

So I agree with you, it is a pretty volatile number when you look at where we are here in this third quarter.

But the other challenge for us is in regards to what dealers do do on their inventory positions, because that is where we have I think the biggest challenge on a prospective basis, and where is the right level for that amount of inventory to be at our dealer locations?

And are they going to continue to pull it down or is there a stabilization here in the coming months?

That is a hard one to really I guess identify what the right number is.

As Bob commented earlier, the '90s our dealer inventory was at a lower level than where we are at now.

And if we are really at the '90s kind of demand or wholesale on market, there is more declines that we need to have the right spot.

Yes.

Greg, I think the other thing we can't lose sight of is it's going to be a tough remaining calendar 2008.

We all talk about the volatility in fuel prices.

We talk about the lending situation where it's tougher to get credit right now.

You've got the situation with the election.

You've got the housing issue that is going on, but there is other things out there that I'm as equally concerned about.

One being what Sarah just talked about is how far are our dealers going to take their inventories down?

Because when they are taking their inventories down, they are not ordering from us.

The other thing that hasn't gotten a lot of discussion here lately, and I'm very, very concerned about it, is the fact that I think unemployment rates are going to start to increase.

And when unemployment rates increase, that means that they don't have that discretionary income to buy our products.

So I think this whole industry is in for a tough go for the balance of calendar year 2008.

That is very helpful.

Last question just related to your cost structure.

What would you say your fixed cost structure was prior to the Charles City plant idling?

And what do you think it would be annualized post that closing, in rough figures?

We looked back before we made that decision.

Our fixed costs on an annual basis have been in that $48 million to $50 million range.

The savings that we are anticipating seeing out of a lot of activities this year, not only with Charles City.

We're looking at reducing that on -- I would say in a range of $3 million to $5 million.

We are pulling out of other lines as well, in regards to some of the fixed natures and G&A and selling.

We have some improvement on that -- we are planning on there on a prospective basis.

So the challenge is that the proportion of what we are doing there isn't matching up with the revenue decline.

So we are really -- we're in a state of, is this enough; have we done enough?

Would it be that difficult -- I'm sure it would -- but you're closing 30% of the capacity and the resulting savings is only $3 million to $5 million.

Would it be much more difficult to find another $3 million to $5 million if market conditions dictated that?

Well, I think it will be critical.

I mean that is our goals and objectives, to right-size this so that we are a profitable organization.

To answer your question, yes, it's going to be very difficult, but we are going to figure out a way to find that.

And if necessary, we will take the appropriate actions to get this place right-sized so we meet our goals.

As I said before, we want to build a quality product profitably.

We are talking a lot here in regards to cutting, but that is not the only focus of our efforts.

Really ideally, the way is to look for new opportunities that present itself to us, be it new products.

And we're not losing sight of that.

There are a lots of things in-place in regards to our future on the product category standpoint that is still a significant focal point and that have to play itself out, but we aren't ignoring that that is really where our true opportunities lie.

And I think the other thing along those lines is, as you know, we are very vertically integrated.

We've got all of our plant managers going out trying to be the bush to see if there are things that they can do in their field of expertise to maybe pick up some revenues as well.

So I think the question was asked before, is all this vertical integration a good thing or a bad thing?

It does give you some opportunities if you can find the business.

Now, one of the challenges that we have is the fact that there is very few industries or businesses or sectors in this country right now that are not negatively impacted by the economy.

So what we are trying to do is figure out where are those niches that we could get in that we could bring in some additional business into our support facilities and possibly generate some revenues.

Because it is difficult to cut your wage of prosperity.

So we want to take a more proactive look at this thing and try to generate additional business.

Okay, thanks and good luck.

(OPERATOR INSTRUCTIONS) Bob Simonson.

Good morning.

I know, Bob, you referred to we've got to let the dust settle to see whether we need more or whether we've done enough.

But can either of you give a guesstimate as to a range or a level of sales that you need to be at breakeven on an operating basis?

We do that internal calculation very frequently, and we look at it in a number of ways in regards to revenues, and we look at it on a unit basis.

And because our cost structure in regards to some of the changes we've made is going to be different on a prospective basis, that is moving around.

But in, I guess in a simple answer to that question, $500 million is a pretty critical revenue point.

For the year.

On an annual basis.

Okay.

Small question on the tax settlement that you had, the $4.2 million, was that -- is there a cash change in that?

Did you get money or is it a change of reversing an account?

Well, when we adopted a new accounting standard in the first quarter, we had to establish a reserve for uncertain tax positions that was significantly greater than what we had had historically.

So that is a reversal of a reserve, but it does have an element of a cash outflow, as I commented.

We'll have to be making $6.3 million payments in our fourth quarter.

So there is -- I guess there's two elements there in regards to that event.

It is not a cash inflow for us.

Okay.

Your G&A came down significantly from first- and second-quarter levels and from the year-ago third-quarter level.

How much does that move in the fourth quarter?

Now, if it is just under $4.5 million in the third quarter, does it stay there; does it go up to $5 million?

Well -- and I commented on that.

Two specific items that really were decreasing our G&A in the quarter over last year, one was positive experience or reduction in product liability and legal expenses comparatively.

That is driven by our history and that is something that can move around a bit, but we've had a lot of positive trends.

The other side of that was from a bonus standpoint.

Obviously, there aren't any bonus expenses or accruals to be had in this quarter or this fiscal year.

And last year we had met the objectives to some degree.

So you are going to still see that dynamic in the fourth quarter where I anticipate it to be lower in regards to that, because on an annual basis I don't anticipate there is going to be an opportunity there.

So I don't think there's going to be a lot of significant dynamic changes between the fourth quarter this year and last year.

You are going to see it down year-over-year.

So if I heard you correctly or if I interpreted it correctly, it's the fourth quarter could be higher than the third-quarter expense, but lower than the fourth quarter of last year.

I guess my point is that I would anticipate it's still going to be down year-over-year in regards to the bonus side.

The other items in regards to product liability and legal, that will be a function of the events that happen in the quarter.

But I don't anticipate it to be significantly different from what we saw in the third.

Okay.

And the final question, you've been asked a couple times about the competitive situation and the other manufacturers.

You have some very strong and large dealers.

You probably have some smaller ones, too.

How would you assess them as opposed to the manufacturers?

Is the industry losing dealers; might some of the larger ones go or get out of the business?

How do you view that?

Well, right now we think that we've got some of the strongest dealers in the industry in the Winnebago fold.

But I think we'd be remiss to say that that exposure isn't there.

I think in these tough times, you've always got an increased exposure for dealers going under.

Now, we've had a couple small ones that have run into some trouble, but nothing major.

And we've not heard anything from our large dealers where they are in any financial difficulties that we know of right now.

I can't say that for some of the competitive dealerships that are out there, but I can only speak for Winnebagos.

And that is one of the reasons why all along our strategy is to align ourselves with some of the strongest dealers that are out in the marketplace.

And that was one of our main topics at Dealer Days, is that right now in times like these, I think it's fair to say that both dealer and manufacturer want to align themselves with the strongest possible partner they possibly can.

And that is why we've always taken that stance to align ourselves with strong dealers.

And hopefully, dealers look at that and want to align themselves with a strong partner, which I think Winnebago fits that build.

Our hope is down the line that as some of these other OEMs start to struggle that maybe some of our dealers will start dropping their product lines and align themselves more specifically with Winnebago or Itasca.

When some of these small ones that did handle your product, when they decide to close down, don't the finance -- the floor plan folks -- do they have recourse back to you on those units?

We have a guarantee repurchase obligation with many of the financial institutions that floor our dealers' products, and the terms are such that if a dealer defaults and inventory on their lot is one year or less or up to one year old and the inventory is repurchased, we will buy that inventory back at pre-agreed percentages or values.

If it's six months old or less, we will pay 100% of invoice, assuming the condition of the product is not changed.

If it's six to nine months, we'll pay 90% of the invoice, and if it's 9 to 12 we'll pay 80%.

So yes, we have an obligation in those instances, and that has been a fairly rare frequence or occurrence for us in the last five to ten years, but it does happen from time to time.

I agree with Bob that in an environment like this, there is probably more risk, but we haven't seen a dramatic change in that activity as of yet.

We do resell that inventory.

It's just resold to other existing dealers.

So the losses that we've incurred have typically been very nominal in regards to our activity or our history.

Very good.

Thanks very much.

Ed Aaron.

Thanks, just one follow-up question with a couple of different pieces to it.

I'm just trying to understand how to think a little bit more about the fourth quarter.

Obviously, it is a difficult environment and going to be a tough quarter, but just a couple of questions about it.

First, does the restructuring charge you've talked about account for the inefficiencies that you are going to experience in that consolidation process, or is it somehow separate to that?

The items that we can identify from a restructuring standpoint would be the potential impairments if we do determine that there is a valuation write-down on the facility itself for the idling.

And then if there are costs associated with a specific event such as severance, the inventory that we would maybe need to move back to Forest City or equipment, but that is the extent of what we can include in restructuring.

Other items like you're touching upon, the two months that we will still have that plant up and running, you're accurate to say that that is probably not going to be as efficient in light of the activities that are taking place, and that is going to have to just be part of cost of goods sold.

I think that is a great question, Ed, because what you are going to find here is you are bringing into the Forest City fold a new product that they haven't seen in five years.

There's going to be a learning curve there.

We are going to have some inefficiencies till we get up to speed on how to build some of these C bodies that we are bringing over to Forest City.

Like Sarah says, that will just come as a variance in our normal day-to-day operations.

Now, I would say that we historically have built primarily Class C in Charles City.

There is -- a lot of those products had been built in Forest City from time to time, and we are very flexible in regards to our ability to produce either location.

There is one particular product that hasn't been in Forest City for many years.

That will be new, and I'm going to feel there is a learning curve associated with that.

But two of the other product categories we've had over here even just a few months ago.

So some of that is going to be stuff that some lines over here have seen before.

But as in -- you know, there's just going to be a lot more --.

Complexity issue.

-- complexity; more different models to run down three lines here.

What impact does the model year changeover have on the numbers?

Because essentially, you're keeping prices flat in the new model year with input costs that are going up and even in some cases, the addition of more content on the coaches.

So is that going to be something that -- hopefully, it will translate into somehow better sales volume.

But absent that, is that something that you think is going to create more of a headwind on the gross margin relative to what you even might have seen in the most recent quarter?

Well, one clarification I would want to make is that was a strategy specific to diesel in regards to really having a competitive price point and not having an increase over last year.

And in the gas lineup, there were some changes in regards to the offerings with the Adventurer specifically and the Suncruiser.

But the diesel is where we really highlighted on holding the prices.

The rest of the products, we really used the same assumptions and models that we normally have that had that element of the inflationary pressures we are baking in to kind of add for the next year.

And that is primarily hitting our third quarter in the month of May, and our fourth quarter is entirely all the new model-year product, and that dynamic is similar.

In some years, there has been pretty significant chassis changes or elements that really increase the price, and we saw that in our diesel lineup last year.

And we also saw it with the diesel Class C product where that price went up to some degree associated with the chassis that we produce on.

That is going to make its way through our strategy on the diesel side as the added volume and to be more competitive in the marketplace was going to be much more of a benefit to us than the offsetting pricing decisions that we were making.

And we're going to have to see how that plays out in our fourth quarter and if that is going to be an effective strategy there.

Okay, thanks.

And I guess just to wrap the question up, and I know -- obviously, I know you guys don't really give guidance.

But just curious to get your thoughts on the probability that you would assign to being positive on a gross profit basis in the fourth quarter.

Well, I guess in the third quarter, we were positive barely at 1.9%.

We are making all these changes to move that needle back up, so our gross profit and the percentage basis going forward is more similar to levels we've been.

We can't do it all immediately in the first day of the fourth quarter, but that is our goal to move that back up and really see the significant benefits in fiscal '09, more so than we will in the fourth quarter.

Okay, thank you very much.

At this time, I'm showing you have no follow-up questions.

I would like to turn the call back to Mr.

Bob Olson.

Okay.

Thank you, Jasmine.

I would like to thank everyone for joining Winnebago Industries conference call today, and we look forward to talking with you again in October when we report our fourth-quarter and fiscal 2008 results.

Thank you.

Thank you for attending today's conference.

This concludes your presentation; you may now disconnect.

Good day.