Winnebago Industries Inc (WGO) 2008 Q4 法說會逐字稿

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

My name is Michele 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 presentation over to your host for today's conference, Ms.

Sheila Davis, Public Relations and Investor Relations Manager.

Please proceed.

Good morning and welcome to the Winnebago Industries Inc.

conference call to review the Company's results for the fourth quarter of fiscal 2008 ended August 30, 2008.

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

I trust each of you have received a copy of the press 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 assessing 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.

Good morning and welcome to Winnebago Industries' fourth quarter conference call.

While our 50th anniversary was cause for celebration during fiscal 2008, it was one of most challenging years we have ever had.

Unfortunately, the fourth quarter was even more difficult than the first nine months of fiscal 2008.

Although we are pleased that fuel prices have trended lower in recent weeks, the availability of credit and rising interest rates have become major concerns for our retail customers and our dealers.

Consumer confidence was reported at historically low levels during our fourth quarter, indicating consumers' reluctance for discretionary purchases such as our products.

As a result of all these negative economic factors, the motor home market has declined significantly, with both wholesale and retail sales declining over 50% during our fiscal fourth quarter.

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

Richard Curtin, from the University of Michigan, has revised the industry's calendar 2008 shipment forecast downward once again to 32,500 Class A, B and C motor homes, 41.3% decrease from actual shipments of 55,400 motor homes in calendar 2007.

I am concerned that if dealers continue to lower their inventories as significantly as they have in the past few months, actual shipments may be even lower than Dr.

Curtin's latest forecast.

Dealers continue to reduce their inventories in an effort to minimize their flooring costs and maximize the turn rate of their investment.

They are not replacing the units they retail on a one-for-one basis in an effort to lower their inventories, which means fewer orders for the manufacturer.

Our dealers' inventory of Winnebago, Itasca and ERA brand products at the end of the fourth quarter was 3,663 units, a decrease of 18.1% from the fourth quarter last year, and 15.6% less than dealer inventory at the end of the third quarter of fiscal 2008.

We look for this reduction in inventory to continue until both dealers and retail customers regain confidence in the economy.

At our last conference call in June I mentioned my concern of an increased promotional environment if we did not better -- did not have better retail activity and improved dealer confidence.

Unfortunately, that appears to have happened, and we are seeing an increase in discounting, both from a wholesale and retail perspective.

I'm not sure if there is a manufacturer in business today that does not have multiple programs in place to help stimulate business.

Some bargain buyers are taking advantage.

But until retail improves and dealers gain more confidence, manufacturers' profits will suffer, and some may not survive, potentially resulting in more products that will be available in the marketplace at low cost.

As a result of these negative market conditions, we experienced disappointing operating results for the fourth quarter.

As we announced on June 2, we idled our Charles City Manufacturing Facility on August 1, 2008, bringing the production of Class C products back to our Forest City campus.

During the fourth quarter we reduced our workforce Companywide by approximately 600 employees, which included the CCMF closure, as well as other as other reductions throughout the Company.

Since the end of the fourth quarter we have reduced our workforce by another 300 employees.

We currently have approximately 1,930 employees, a 42% decrease since August 25, 2007.

It is extremely difficult to lose valued employees, but also imperative to reduce our overhead cost to more closely align ourselves to the current market.

In addition, we continue to employ lean manufacturing philosophies in our processes, as well as reduced budgeting expenses in light of the significant changes in our production volumes.

Efforts we have taken so far throughout fiscal 2008 resulted in fixed cost reductions of over $7 million, excluding onetime charges associated with the idling of CCMF and our headcount reductions.

Additional annual fixed cost savings expected to be realized in fiscal 2009 are approximately $12 million.

And we will continue to investigate other cost-savings throughout the months ahead.

With the uncertainty of the economy, and the need to withstand the pressures of managing our way through the current downturn, our Board of Directors felt it necessary to suspend our current stock dividend payment to preserve capital as we go into our seasonally slow period of the year.

Dividend payments will again be reviewed at upcoming Board meetings.

Even though decisions like this are extremely difficult, it is these decisions and many others we have had to make the last few months that will allow us to manage through these very challenging times.

Despite current market conditions we have not lost sight of the fact that we have to continue to develop products that meet the expectations of our customers.

We have an excellent 2009 motor home lineup, with a great selection of fuel efficient products, including the Winnebago View, Itasca Navion, the Navion IQ Class C motor homes, and the Class B ERA, along with our conventional motor homes in the Class C and Class A gas and diesel categories.

In addition, we continue to work on innovative new products for the future with a very exciting lineup to be unveiled throughout the coming year.

While the current market is challenging, we're very optimistic about the long-term outlook of the RV industry.

Not only is the RV lifestyle an American tradition that RV enthusiasts won't abandon, current customers who have delayed upgrading their motor homes due to economic pressures will soon be ready to trade and start enjoying their weekends and retirement again.

Once that starts, dealers regain confidence and start replenishing their inventories, resulting in factory orders that will once again keep manufacturers busy.

When wholesale and retail activity pick up, those manufacturers and dealers have survived this downturn will be in a great position to meet the next upswing in this cyclical industry of ours.

With that, I will now turn the call over to Sarah for the financial review.

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

Revenues for the fourth quarter were $85.3 million, a 64.1% decrease from the fourth quarter of fiscal 2007.

As an RV industry, we saw significant deterioration in wholesale shipments during the summer months, a decrease of over 58% in June through August, with the month of August alone down over 65%.

Correspondingly, we saw a significant decrease in our motor home deliveries during the quarter of 1,660 units, or 64.1%.

Also, our average motor home selling price decreased 5.7% in the quarter.

This was due to an increase of product incentives we offered at both the retail and wholesale level.

In addition, our sales mix for the quarter was more heavily weighted to lower price products, as 59% of our volume in the quarter was the Class C and our new Class B products, as compared to a 50% mix of Class C products in the same quarter last year.

The decline in wholesale shipments for the industry is a direct result of a very challenging retail market that has deteriorated all throughout our fiscal year, but most significantly in the past quarter.

To illustrate how the retail market continued to deteriorate throughout our fiscal year, you must look at the quarter retail registrations.

They were down 12% in our first quarter, 21% in our second quarter, then 32% in the third, and 51% in our fourth quarter.

Due to these negative retail trends, we have seen dealers focus their efforts on reducing their inventory levels, and thus are not reordering products on a one-for-one basis when a unit is sold to the end consumer.

All of these factors have created a very competitive environment in regards to pricing.

We have had in place during the past few quarters a number of retail programs to help the dealers move inventory.

And in certain instances we have increased incentives at the wholesale level to compete more effectively.

Due to the significant volume decline, resulting reduction in plant utilization, and low fixed cost absorption, and increased promotional incentives, we had a gross margin loss of 6.1% in the fourth quarter as compared to a gross profit margin of 13.7% in the prior year.

Selling expenses decreased $1.8 million or 33.5% in the quarter, due to reduced advertising expenses, and reduced wages and bonuses.

General and administrative expenses were $1.5 million lower or 23.6% as compared to the same quarter last year.

This was a result of a decrease in bonus expense of $1.7 million, reduced product liability expenses, and reduced wages.

However, these reductions were partially offset by severance expense recorded during the quarter of approximately $750,000 related to all the position eliminations that occurred at both Forest City and Charles City during the quarter.

We did close our Charles City Manufacturing Facility in August, as we had previously announced in June, due to the challenging market conditions that required capacity reductions to more closely match market demand.

As a result of the idling of the facility, we recorded a non-cash charge of $4.7 million to reflect the impairment of the asset value.

Financial income decreased $774,000 or nearly 50% in the quarter as compared to last year due to $60 million less invested during the quarter at lower rates of return.

A tax benefit of $5.4 million was recognized during the quarter in the quarterly pretax loss.

And net loss for the quarter was $12.7 million as opposed to net income of $14.8 million last year.

I will now highlight a few significant balance sheet items.

In regards to inventory, we ended the fiscal year at $110.6 million, slightly lower than our third quarter balance of $111 million.

Work-in-process inventory decreased over 20% in the quarter, primarily due to the closure of the Charles City facility.

But our finished goods inventory increased by 20%, as market conditions deteriorated so severely in the quarter, and dealers continued reducing the inventories on their lots.

As a result, we saw our dealer inventories decrease by nearly 700 units in the quarter.

With this reduction in dealers' inventories our production volumes were also reduced to better align them with dealer demand.

Consequently we did not make the anticipated progress on working our raw material and chassis inventory to lower levels, and that increased by over 4% in the quarter.

In regards to our liquidity outlook, there have been further developments during and after the quarter that improved our financial flexibility for the coming months.

Although we did not see any redemptions of our auction rate securities during the fourth quarter, we did successfully sell our last municipal bond in September for par value of $3.1 million, and thus classified this as short-term at the end of the fiscal year.

During August one of our brokers announced a legal settlement in principle to repurchase auction rate securities at par from investors, that held them as a February 13, 2008.

Terms indicate that we can elect to be repaid in June of 2010.

In addition, terms of the agreement provide for more immediate liquidity on a portion of our portfolio via no cost loans.

To further enhance our financial flexibility in this challenging motor home market, we entered into a $25 million line of credit in September.

No borrowings have yet been made on this facility.

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

(Operator Instructions).

Scott Stember, Sidoti.

Would you happen to have the ASPs by productline for this year and last year?

Yes, I do.

For the entire quarter our average selling price was $81,377.

And if you break that out, Class C had an ASP of $65,146 versus last year of $63,139.

If you look at the Class B products we were at $69,359.

And from an A standpoint, total As were $103,362.

Gas was $84,362 and diesel was $159,057.

Comparatively last year we had a Class A price of, for the quarter, $88,086.

And diesel was $172,590.

And total Class A last year for the quarter was $109,131.

Could you maybe just touch on the cost-cutting and the streamlining that you have been going through the last quarter or so.

Obviously nobody knows where the market is going to head for the next couple of quarters, but assuming that we're entering a new paradigm where sales levels will be much lower going forward, do you think that the moves that you made so far are sufficient enough going forward?

This is Bob.

We continue to monitor this thing every day.

I don't have a great answer for you, but I can tell you what we have done from past experience.

Starting in the fiscal 2008 time period that we look at what the market indicators are.

And I think Sarah probably outlined it best when you look at the fourth quarter, how significantly that has tailed off each month.

We have gone through and we have reduced a lot of our cost expense.

We think we're there, and then all of a sudden it gets worse, so we have to go do it again.

It is all really going to hinge upon where does this thing really finally level out.

And a lot of that is going to hinge, as we pointed out in our prepared statement, that dealer inventories, I think that is going to play huge impact on where this thing finally does level off at.

Because with the dealer inventories where they are at today compared to where they were even since the first of the year, there's been tremendous reduction of those inventories.

What we can't answer yet is at what level are the dealers going to feel comfortable with the inventory levels that they finally achieve.

Once we get there, I will probably be able to answer your question a little bit better.

But I think this is going to be a moving target.

And I think as the dealers finally get to where they feel comfortable with the inventory levels, we will feel comfortable that we made enough reductions in our overhead expenses.

Fair enough.

Would you be able to comment where we stand right now, as of today, where the capacity utilization is?

For the fourth quarter we were right at around 25% capacity utilization.

And that is considering Charles City.

We really looked at that all-in for the quarter, because August was a transitional month.

And on a prospective basis of approximately 30% of our capacity has been pulled out, and that will be a new calculation for us in 2009.

But 2008 fourth quarter we have really had that available to us for the most part all quarter long.

The cost-cutting that you had talked about, there was $7 million initially, and you have got about another $12 million.

Did I hear correct that in total we're looking at about $19 million?

Yes.

What would the $12 million entail?

Could you maybe just flesh it out a little bit?

A significant portion of the $12 million is related to headcount reductions.

We have contracted our workforce at every area in the salaried ranks, in the hourly ranks, and so approximately $8 million of that relates to just a smaller footprint in relation to people.

And the remaining pieces of that are a reduction of other expense reductions.

Part of it is not having the physical costs associated with Charles City, but the lion's share of that was primarily people.

And these are moves that have taken place already?

Yes.

Just real quick.

Just on the auction rate securities, what is the time you're getting that money back again?

A portion of our portfolio, we have the ability to obtain full par in June of 2010.

The remaining portion of that portfolio, we don't have a settlement in place that has a defined timeframe.

So that is an element where the brokers is more so working with the underlying Student Loan Trust to help them refinance and redeem the securities and pay full par value.

But it has been a pretty volatile credit market in relation to that effort.

Outside of the amount that we were able to redeem here in September we're still looking at all of this to be long-term at this point.

Last question, just on the dealership front.

Have you experienced any of your dealers suffering significant financial pressures at a point where you might be on the hook for -- any repossessions?

From a dealership standpoint, I would say the marketplace is more challenging.

However, we haven't seen a significant change in the amount of dealer locations that we have at the end of '08 versus last year.

That is something that I think there is an increased risk for all manufacturers on a prospective basis.

Our repurchase obligation at the end of the fiscal year is about $200 million.

It has come down from the third quarter just because it is reflective of one year beyond the invoice dates, and that through time does move down.

And obviously when we have a quarter with anemic deliveries like we did, we're not adding as much into the dealer inventory pool.

But I think that it is a relevant risk on a prospective basis, but we haven't seen significant dealer failures.

I might want to add to that that we have prided ourselves over the years that we've got one of the strongest dealer bodies in the industry.

But that is not to say that in times like we are in right now that there aren't going to be some challenging times for these dealers.

And I agree with Sarah that the exposure is probably greater than it was a year ago, but you can't lose sight of the fact that we do have one of the strongest dealer bodies in the industry today.

Kathryn Thompson, Avondale Partners.

What is your breakeven level from a revenue standpoint with Charles City closed?

We knew that that would be a relevant question asked of us externally.

I would prefer to answer that from a unit standpoint.

We look at, on a quarterly basis, we need to be producing and delivering in that 1,400 to 1,600 unit range to cover our fixed cost structure and to be profitable at a very small level.

So obviously you look at what we did in the fourth quarter, and we're not at that level.

And we have had a lot of pressure in relation to future orders on the backlog in light of the environment that we're in.

So that is a significant headwind for us on a prospective basis.

And you said that is on a quarterly basis, total units?

Yes.

Does that take into account your mix shift towards lower-priced products in recent fiscal years?

Yes, that is why we're looking at a range.

It is going to move around a little bit in relation to the number of units we're talking about.

There are so many other factors that are outside of our control in relation to what happens in the marketplace, but that is a fair way to look at it based on the information we have today.

Then surrounding dealer closures, even today we saw a -- we got word of a dealer closure in Virginia, about 300 units.

With any dealer closure, you just have units that go on the market, whether it be a Winnebago product or another competitor product.

How do you manage around dealer closures from an inventory standpoint, from a reserve standpoint?

And what happens to the units, are they distributed to other dealerships?

How does the market absorb these units?

I will answer part of that, and then I will let Sarah answer the other part from a reserve standpoint.

But we look at this as not a good thing for the industry in total, because you are going to have the flea market mentality.

When a dealer does go out, and depending on who is responsible for the repurchase of those vehicles, whether it be a bank or the manufacturer, which you could have both, they have to go back into the channel somewhere.

Usually what will happen is, whether it be through auction or really some very good deals to existing dealers, they will be absorbed into the normal retail channel.

When that happens, it just displaces an order that we may have gotten, or any other manufacturer may have gotten, for a new product.

We have already seen it.

I mean, it has been going on since November of last year.

When some of the manufacturers have gone out of business, they had lot inventory.

The dealers were able to gobble some of us up at some very attractive prices.

And when all of those are in the channel and trying to be retailed, the dealers aren't replacing with normal factory orders from those manufacturers that are still in business.

Would you say -- before we hop over to Sarah on the reserve question.

I hate to put it in a seasonal standpoint, but the dealer going out of business season really kicked up in August.

And I kind of see it tapering off in December.

Is that a good way to think about it?

I think they look at -- they've got the same seasonality as what we have got obviously.

I think part of that is going to depend on where they are located at.

You got some dealers that their season really picks up more towards the tail end of the calendar year.

I use examples of those that are in the Southwest, the Southeast, where you've got snowbirds coming down.

Where you've got a dealer that is in the North, that is probably they're slow time of year.

But when you've got snowbirds migrating down to the warmer climate, there is an appetite that they might want to trade out while they are down there.

It is a hard question to answer from the standpoint of, is there a specific time for every dealer.

Industrywide it is probably more seasonal in the timeframe that you talked about there is relatively close.

But you do have the exceptions with the people that are in the warmer climates.

Do you have any clarity on the reserves that --?

We have historically established a reserve based on where our experience has been.

And at the end of the fiscal year we gave full consideration to the market environments and we looked back at timeframes in the early '90s, where there was a lot more of this going on, and increased our reserves to where we felt it was adequate to mitigate against that.

But it is hard to predict what will happen at this point.

We have a larger reserve established on a prospective basis because of what conditions we're facing.

But it is still not a very material number.

And the locations that we have today through our dealer channel are very close to where we were a year ago.

So I think we do have a competitive advantage with the network that we have established, that maybe we're going to see the benefits of that in the next year during especially the winter months.

But that is something that we will have to see how it actually plays out.

But I think it is fair to say there is more risk there.

So there is more risk to increasing your reserve just because of your concern about dealer inventories?

I think there is a higher risk of more dealers choosing to exit the business or to default.

It is case-by-case.

You have to evaluate what that will do, and how that will impact us specifically.

But at the end of fiscal year we had a higher level of reserves to account for that risk.

I think one of the things is that you look at all of the opinions that have been written out there, whether it be through dealer surveys or talking to manufacturers, and I think everybody agrees that this has probably been one of the most difficult downturns this industry has ever seen.

One of the reasons for that is there is so many variables.

What was the number one issue three months ago now might be the second or third.

I use gas and fuel prices as an example.

Three or four months ago that was a real concern, because every day it was a new record price.

Now that is, in my opinion, probably third or fourth down the list.

The main issue that has surpassed that by far is the inability to get financing for our retail customers.

I think from a wholesale side we've got people that are in the business that have now exited.

I think the dealers are having a much harder time getting the flooring.

They're looking at it.

They're wanting the dealers to lower the inventories.

This has been so hard to be able to predict what is going to happen.

And the dealers have the same situations.

We just aren't sure what is around the next corner.

And those people that are doing what we have done -- and I have been out on the road and visited several dealers over the course of the last 12 months.

And I can tell you that those strong dealers have realized this, and some of them even realized it before it actually occurred.

But they are going to the same thing that we are.

They are reducing expenses, laying people are, consolidating.

I go back to what we said before that we do feel we've got one of the strongest dealer bodies around.

And from what I have been able to perceive in our visits with the dealers, they are taking this thing very seriously.

And they're trying to, I guess right size to what they feel this industry is going to be as well.

Two final questions.

You touched on it just now a little bit, with floor plan financing.

But any comments on the floor plan financing landscape?

And has anything meaningfully changed or become more difficult over the past 60 days?

Then finally, is the Q4 revenue runrate the best way to think about the upcoming quarters?

On the first question, from a wholesale financing standpoint, obviously with the exit of KeyBanc, that is not a positive thing for the industry.

For us specifically, they didn't have a very large market share of the dealers we work with flooring our products.

But it still is not a good thing to have another choice eliminated, both at the retail and at the wholesale levels.

I think that it is challenging for dealers to find a new flooring source.

I think that they are experiencing headwinds on the interest rates that they are going to be paying, or have been paying, because all of the financial institutions are looking to better cover their cost of capital.

They've had a lot of volatility going on and other issues to contend with.

I think it is very challenging.

It has deteriorated in the last 60 days.

And I don't see it to improve here near term.

So was, I guess, my thoughts on your first question.

Just to jump in on that as well, I know when we have been out on the road we have heard dealers tell us that the lenders are cutting a little bit of their line of credit, I think, in an effort to reduce, or force them to reduce their inventory levels.

But we have also heard that the cost of that money to have for their flooring is also starting to cost them more.

Any sense of the magnitude of that cost increase?

Not specifically.

I really hate to answer that, because I don't know if it is different for each dealer.

And they never really shared anything with us, other than their costs were going up because of --.

What was your second question?

Is the Q4 revenue runrate the best way to think about the upcoming quarter?

Obviously you can see our backlog position is significantly lower.

And at least it may be more in line with the deliveries that we saw in the fourth quarter.

We don't see any change in the first part of '09 that would move that needle significantly.

As Bob had touched upon, until we feel that the dealers have reduced their inventories to a level they are comfortable with, we're going to still be challenged from an order standpoint at the factory.

And the point that you brought up, how much inventory is going back into the channel through other means is an added pressure here.

That is assuming all the manufacturers we have today are still here.

And that is another risk I perceive too.

Paul Burton, RBC Capital Markets.

It is actually Ed Aaron.

I just wanted to revisit the -- post the cost cutting restructuring efforts that you guys have done, just trying to understand the margin sensitivity to changes in demand.

Could you give us some framework for thinking about what the incremental margin would be, assuming $1 of sales loss on a year-over-year basis would translate into X number of cents in terms of lost operating profit, post those changes that you've made?

That is a really tough question to try to speculate.

What you see in our financials -- and granted the fourth quarter is a kind of tough one to look at because other things were going on with the closure -- but when revenues are down 64% and expenses are down in the mid-30s to the mid-20s, we can't cut fast enough.

We're still looking to further cut back our fixed cost structure in 2009 on top of what we have already done, because we're not there in relation to what we need to be.

This is the runrate we're going to be prospectively.

Now we don't think that we're going to be at this runrate for an extended period of time.

But we're not interested in building open inventory and further exacerbating that side of the equation.

So I don't think I can give you a simple correlating marginal impact at this point.

We're still contending with a very fierce discounting promotional marketplace.

And that adds to the pressure from a margin perspective, outside of just the volume play that we have going on.

So I don't think I have a very good answer for your question.

Fair enough.

In terms of the balance sheet inventory, I know you had targeted a number closer to $100 million.

Obviously I don't think anybody anticipated the magnitude of the leg down that we saw between when you last talked to us and now.

But in light of the current environment, when you think about where you want your factory inventory targets to be over the next couple of quarters, what is a reasonable number in terms of a goal?

We have significant goals internally on reducing inventories.

I hesitate to speculate, because obviously we didn't reach $100 million by the end of this fiscal year.

But from a work-in-process standpoint, we are seeing continued improvements as we continue to pull back on what we're doing.

We saw that already at the end of the fiscal year.

I guess an example of a point in time, not that long ago we were at $77 million at the end of '07.

There is no reason why we can't be well under $100 million in this kind of marketplace, if we can successfully move the finished good inventory to the dealers' lots.

That is our added challenge here.

We can contract building, but we still have the finished good inventory that needs to be sold.

But we had very significant goals.

And I guess I'll just point to a recent past where we were under $80 million from a comparison point.

But we have more work to do there.

And it is a way to generate some liquidity without tapping into borrowings, and it is a focus internally that is significant.

I guess to add to that, I have put a lot of heat on our folks to do whatever we can to reduce inventories.

Because Sarah's point about that if you can lower those inventories, the need for cash is less.

But in this environment it is very difficult.

I will give you a couple of examples.

Work-in-process we have been able to bring down pretty substantially.

And part of that it has come from decisions that we made with the closure of Charles City.

But we're also trying to do more by reducing our inventory goals through our manufacturing process, which will help.

Now you get to the finished goods, and like Sarah says, we have had and will continue to have a philosophy that we're not going to build any anticipatory inventory.

But what will happen is that we will get orders.

And we are like everybody else in this industry, there are no cancellation policies in place.

So if a dealer orders one two months ago, and then turns around and decides that he doesn't want that, then we have to look for other places to put that unit.

So that makes that reduction of finished good inventory a little bit tougher.

Now I will go to the raw material side, which includes our chassis, that with the reductions that we have seen in the fourth quarter for the demand for our product, to lower that inventory makes it extremely difficult as well.

Part of it, as Sarah said in previous conference calls, our chassis inventory is partly with the Sprinter, which is a very, very, very long leadtime item.

So to shut that supply chain off is a lot more difficult.

It is all going to really revolve around how the appetite for dealers and the retail customer to order the products once we get through this economic crisis that America is in right now.

One last question.

Just over the next one or two quarters, if we were projecting further losses, what might we assume for a reasonable tax rate on those losses?

We had a really unusual year for '08, but if you put aside the onetime settlements and various items that we did, we had an effective rate on the loss of in excess of 60%.

That is primarily due to the fact that the financial income that we earned is primarily tax-free, based on how it is invested.

So that is additional deductible, or not taxable item.

So that has a dynamic of increasing the benefit or reducing the rate in times we are earning income.

It is hard to project in relation to where that will be, because it is completely dependent on what you are dividing it into.

But I guess that is a little bit of more info on where we were in 2008 to use for planning for 2009.

Craig Kennison, Robert W.

Baird.

This is actually Mark in for Craig.

Just a couple of questions.

First, on the $19 million in savings we were discussing, how much of that it is coming out of the SG&A line?

And then going forward, what should we look at kind of a bare bones level for SG&A?

Out of that $12 million that we incrementally have in 2009, in addition to what was already done in 2008, about half that is in the SG&A area, to answer that question.

We think that on a prospective basis there is more to be done, and we're in the midst of those kind of actions.

But that is I guess a breakout of how to look at the savings that we will have on top of what we have already done as a company.

I guess this question is for Bob.

How much capacity have you seen come out of the entire industry over the past few months?

And how much do you think needs to come out in order for the remaining manufacturers to operate profitably in this sort of environment?

That also is a very difficult question.

We have seen a lot of manufacturers go by the wayside, just since last year's Regal show.

We have had National RV, Western RV, Travel Supreme, Weekend Warrior, you can go on and on and on, that there has been some capacity taken out.

I know -- take us for example, we have taken 30% of our capacity out with Charles City.

You've got the other competitors out there, the manufacturers that they have also made announcements that they have closed down several of their facilities.

We at one time as an industry were looking at 70,000 plus capacity in this industry.

And to say that 50% of that is gone now, I don't know.

I only tell you what we have done.

And I'm not sure where the other manufacturers are.

But between what we have done, what some of the other people going out of business have done, there is substantially less capacity available in this industry.

Is it enough?

Tell me where the industry is going to end up leveling off at, and I could probably answer that question.

But you look at what Dr.

Curtin has forecasted.

He is still at -- with As, Cs and Bs at 32,500.

And you look at some of the wholesale numbers annualized over the last few months, and it is probably closer into the lower 20,000's.

So again, this is one of the toughest downturns I have ever been associated with to try and forecast and predict.

Your question is valid, but I don't have a good answer for you, because I just don't know where the industry is going to end up, and how much has already been taken out.

That's fair.

I have just a couple of other questions.

Coachmen recently announced a new distribution agreement with [Gamble] RV.

Have you looked at that agreement?

And does something like that make sense for Winnebago?

To be honest, I have not had a chance to really look at that.

I think that was just announced here in the last couple of days.

And to be honest, we have been tied up with our Board the last couple of days.

We really have had time to do anything as far as looking at the outside world and what some of the competition is doing.

Bob Simonson, William Blair.

On the cash flow outlook for next year, there's a plus in that you -- I am glad you are not going to pay the dividend.

You've got something approaching $10 million in depreciation.

Last year, in the year just ended, your current liabilities went up $61 million.

Your current assets went up $95 million.

So you needed an incremental $32 million.

Piggybacking on Ed's question, can you net it out?

How much do you think you could take out of net working capital in 2009?

An approximate amount, or can't maybe -- it just can't go down too much?

I think we have a significant opportunity in relation to inventories in 2009, in relation to reductions.

Our receivables are at a very, very low level.

So if there is any pick up in business, that is going to actually increase.

One of the dynamics we had at the end of the fiscal year '08 was a pretty sizable tax receivable, which also was a negative working capital drain for us this past year.

And we looked at -- we have some significant opportunities primarily with inventory.

And if we see that pick up on any kind of business on the latter part of 2009, I would say that whatever the increase in AR would be will be offset by the growth in current liabilities in the AP and accrued area.

It is, I guess, primarily dependent on how successful we are in moving inventories down.

Would it be your anticipation that that would be, instead of a negative $32 million, a positive number in '09 or is this just --?

Yes, we intend to reduce inventory levels, and that would be a cash flow generator for us in '09.

If my number, not yours, if you were to lower your net working capital needs by $10 million this year, if you had roughly $10 million of depreciation and amortization, that would shield $20 million in net losses.

If it were to be more than that, what are your financing -- you have still got cash.

How would you finance any needs -- you have got some commercial paper, I think, you set out for?

No, we entered into a line of credit in September for $25 million to provide that additional flexibility, if we have some working capital changes that needed to be absorbed.

We also, as I highlighted in the conference call opening remarks, there is the ability to borrow on a portion of our auction rate portfolio through an agreement that one of our brokers has settled with the SEC in various states.

So that could provide a small amount of liquidity if we choose to borrow in that fashion.

But primarily it is that -- as you indicated, it is cash and investments in the short-term classifications at the end of fiscal year we have on handed $25 million of borrowing capacity, and then the working capital reductions we plan overall primarily in inventory, that would allow liquidity for us in 2009.

The other one, I think I know the answer to this, but I will ask it anyway.

Have you considered any plans to sell Charles City or you're just going to mothball it still the business turns?

Right now our intentions are to mothball it.

Again, it all stems on just where does this market go.

What is going to be the bottom and what is going to be the need for capacity?

I have said this many times in the past, and I will continue to say it, that going into this downturn that we're in right now, I have taken no out of my vocabulary.

If circumstance mean that we have to do something different with Charles City, then I won't say no.

This thing is so volatile right now from a standpoint of it changes every day, that we need to stay very flexible.

So I guess to answer your question, there hasn't been a change of strategy, but that doesn't mean that it won't be.

Barry Vogel, Vogel & Associates.

I know there has been a lot of good questions, and some of the answers I'm not clear about.

So forgive me for going back to certain subjects that have been asked already.

The first question has to do with the inventory situation.

I know it has been asked by several people.

So the way I am going to frame that is if we assume -- and this is really for Sarah -- if we assume that your average of fiscal '09 revenues of -- was it $85 million in the quarter, the last quarter -- if we assume you will average revenues of $85 million throughout the year, as just an assumption, and knowing how your inventory reductions will fare in terms of the chassis, as well as the finished goods, if you know you're going to do -- if we use $85 million in terms of shipments per quarter.

Sarah, I would like your best guess, not a generalization, because I know you're a very smart lady, as to what will be your best guess for the inventory reduction under those circumstances?

In regards to what we think we can do with inventories?

Yes, I want your best guess.

You know more than we do.

Ending the fiscal year at a little over $110 million, I go back to my earlier comments on one of the other questions, we have been at $77 million.

That was when conditions were much better than they are today.

That is a reasonable goal for us to be in the $70 million to $80 million range.

And that is what we working very hard to.

As you point out, depending on what we're actually shipping, and where the production and shipments are all year long is very dynamic.

And that is our challenge is how much will the market bear in regards to the inventories.

That is fair for us to be in that $70 million to $80 million range.

We have done it before and we can do it again.

So your best guess is that you might pick up $30 million in inventory reduction by the end of August for fiscal '09?

Right?

Yes, that is a fair goal.

Now in terms of -- you are trying to run the business for cash, obviously, otherwise you would not have gotten a $25 million line of credit.

Could you tell us what your capital expenditures would be for this new year and the D&A for this year?

We are estimating capital expenditures for 2009 will be in the $5 million range.

Not that far off what we did in 2008.

From a depreciation standpoint, we are estimating to be slightly over $8 million for the year.

It is down because of the impairment we recognized on Charles City, and the fact that we've contracted on CapEx so significantly in the past three years.

Now as far as this savings thing, I have had companies when they do closures talk about savings because of headcount reductions; however, there is a little twist in there, because it is not necessarily -- just a pure headcount reduction doesn't seem to work exactly that way.

Again, I don't know the details of that, but I have had that happen to me.

If we could look at the Charles City closure on its own, and the fact that it was over essentially in August.

And assume you don't run Charles City in fiscal '09, what would the savings be from -- your overall savings be from not having Charles City operate in fiscal '09 versus fiscal '08?

Well, I understand your point on the complication of just looking at pure reduction of headcount and the savings, because unless that position -- the way we look at it, it was a fixed overhead type of position.

Everything else is variable, and obviously we don't have the revenue associated with that location any longer, so you really have to take that off the table.

When we look at Charles City alone there were positions that have been eliminated that do not need to be duplicated at Forest City that are true savings, in that they are included in there.

On top of that it is primarily significant depreciation reduction, because we have accelerated and took a very sizable charge in our fourth quarter.

The savings associated with Charles City alone are in that $2 million to $2.5 million range, out of the $12 million that we quantified for 2009.

It is not a significant portion of the overall total, but it was a relevant part of the process.

If we use $12 million as the number to use, where does the rest of the -- where does the other $9 million come from?

As I mentioned earlier, overall because of all the positions we have eliminated Companywide that are of fixed nature, they are salaried, and fixed positions that no longer are in our cost structure, that was $8 million of the $12 million.

On top of that we have contracted all sorts of different things in relation to what we do in relation to advertising or various expenses -- how many people we send to various shows.

It relates to all sorts of things that we have just contracted.

We don't do what we used to do in certain instances, because we can't afford to.

Really the number to use is $12 million and not $19 million?

$12 million is what is incremental beyond '08 in our fixed cost structure.

Because if you go back to our second quarter, we had a pretty sizable contraction in our workforce and position eliminations that we did before the end of February.

We already saw a half a year savings for actions that we had taken earlier.

So $7 million of that fixed cost we already eliminated in 2008.

Incrementally, right, there's only $12 million in 2009.

But this has been a process we have been living for -- it feels like quite a long time now.

It is relevant to what we have already accomplished, but there's more to be done.

Are you saying that during fiscal '08 the average savings that you accomplished were about $7 million of fixed cost reductions.

And the total for fiscal '09 might be $12 million, which means incrementally is only $5 million.

No.

I said that we did $7 million in 2008, and incrementally we have $12 million more in 2009.

So the total will be $19 million total.

That's correct.

Of fixed cost eliminations, as we speak.

And you will have incrementally another $12 million to do next year?

Yes.

I mean, you'll have $12 million of savings for the new year.

Now as far as the question about dealers going bankrupt and repos.

Can you tell us specifically how many units have been brought back, or been given back to Winnebago through September of '08?

We will be filing our 10-K and including all that information in relation to repurchase obligations.

But in regards to what we have done so far, I don't have that disclosure handy here.

Well, actually I do.

In 2008 we brought back 36 units.

How many dealers have gone bankrupt -- how many of your dealers have gone bankrupt so far?

Four.

Four out of how many -- and how many dealers do you have -- how many dealer locations do you have left?

At the end of fiscal '08 we had 280 dealer locations compared to 285 locations at the end of '07.

Now bear with me one second, because I'm going to [ask here].

As far as the tax rate, I know you give an elaborate explanation about fiscal '08.

But what -- let's assume you lose money in fiscal '09, what should be the tax benefit rate, approximately?

I would say plan for a 35% rate.

I expect it probably will be higher than that from a benefit, because of our financial income that is not taxable.

But I would say conservatively that is the best way to look at it.

Going back to the reserve question, and you did a very good job of doing a tap dance.

You are a good dancer.

You know what your reserves are at the end of year, am I correct?

Of course we do.

So why don't you tell us?

The reserves associated with our repurchase obligation at the end of the fiscal year were slightly over $600,000.

Dollars?

Yes.

That is practically nothing.

When you look at what we had on the financial statements at the end of last year, it was significantly less than that.

Our experience of losses over the years have been very low, and so percentage-wise we increase that reserve fairly significantly at the end of fiscal year.

But we have a history of not significant losses.

You have to take into consideration that when we repurchase a unit, if it is beyond six months we buy it back at 90% of invoice.

And if it is nine to 12 months, it is 80% of invoice.

So there is an element of reduction already embedded into the repurchase price.

Let me ask you this question.

We have never seen a situation like this in the postwar period.

So all your historical experience might not be valid going into this -- going forward.

I'm just trying to be realistic here.

We went back to an as far as the late '80s or early '90s on horrible time parameters, and where our losses have been there.

So we used the information we felt was reasonable in this light.

I hate to ask those questions.

It is almost like we're doing bank analysis here about reserves.

But I think there's a good chance that your reserves will have to be raised.

That's all.

Thank you very much.

I appreciate it.

And I think you're doing a good job.

And it would be nice if you could raise some cash this year, and despite everything, not loss too much money.

That is our main goal.

That does conclude the question and answer session.

I will now turn it back to Mr.

Bob Olson for closing remarks.

I would like to thank everyone for joining Winnebago Industries' conference call today.

We look forward to talking to you again in December, when we report our results for the first quarter of fiscal 2009.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.