Winnebago Industries Inc (WGO) 2009 Q1 法說會逐字稿

Good morning and welcome to the Winnebago Industries Inc.

conference call to review the Company's results for the first quarter of fiscal year 2009 ended November 29, 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 news release with our earnings results this morning.

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

A replay of the call will be available on our website at approximately noon today.

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

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

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

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

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

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

I will now hand the call over to Bob Olson.

Bob?

Thank you, Sheila.

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

Obviously current economic conditions and the difficult credit environment have negatively impacted our results for the first quarter of fiscal 2009.

The good news is that the election is finally over.

All of us have been inundated with political rhetoric, and it is now time for the country to move forward and resolve the economic turmoil that has the US economy in a stranglehold.

Also, fuel prices have retreated to near four year lows, falling by more than two-thirds since reaching record highs above $147 a barrel on July 11 versus roughly $40 today.

I do not believe the high fuel prices themselves were the problem for our slowing sales, but the extreme volatility of prices was certainly a trigger to lower consumer confidence, which in turn had a negative impact on our business.

So the lower fuel prices should also have a positive impact on the economy.

We do, however, have several negative factors still impacting our business.

Obtaining credit at both the wholesale and retail level is the number one issue facing our industry today.

Large national lending institutions have become more stringent in their lending practices requiring more financial detail from the retail customer as well as larger downpayments.

In talking with our dealers, they believe there are customers who want to purchase our products, but due to a variety of challenges, the customer cannot secure the financing to do so.

A large percentage of these customers would have had no problems obtaining loans 12 months ago.

At the wholesale level, we continue to see pressure on our dealers from the major lending institutions to reduce their inventory levels.

We have also seen some wholesale lenders exit the RV market, making it more difficult for our dealers to finance their inventories.

So I believe that once the credit environment gets back to some normalcy, there will be pent-up demand for our products at both the wholesale and retail level.

Another negative factor that is weighing on the motorhome market is the declining net worth of our retail customers.

Customers have seen their homes devalued due to the declining housing market and their investment portfolios decline significantly throughout this past year, causing them to take a wait and see attitude before making large discretionary purchases.

Because of all these issues, consumer confidence has fallen to some of the lowest levels in decades.

As a result, retail sales have declined industrywide by nearly 40% calendar year to date through October.

Faced with these negative issues, our dealers have continued to reduce their inventories of our products.

Total dealer inventory at the end of the first quarter of fiscal 2009 was 3269 motorhomes, down 40% from the high of 5436 motorhomes at the end of the second quarter of fiscal 2006 and an 11% decline as compared to dealer inventory at the end of fiscal 2008.

As a result of the decreased demand at the retail level and decreased orders from the industry to dealers, wholesale shipments for motorhomes have declined by over 40% calendar year to date for the industry with declines of over 60% in year-over-year comparisons for the last three consecutive months.

RVIA's economist, Dr.

Richard Curtin from the University of Michigan, once again revised the industry calendar 2008 shipments forecast downward in his latest forecast to 29,600 Class A, B and C motorhomes for 2008, a 47% decrease from the actual shipments of 55,400 motorhomes in calendar 2007.

He has forecasted an additional decline to 20,200 Class A, B and C motorhomes for 2009, a further decline of 32%.

Historically we have never seen shipments that low.

We continue to see a very active promotional environment in the marketplace both from a wholesale and retail perspective.

We believe some manufacturers are selling below cost just for the cash flow.

It is very difficult to compete profitably in this type of an environment.

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

To manage through this difficult environment, we continue to adjust our production capacity through reduced work schedules for our employees.

We also have reduced our workforce with a current headcount of approximately 1700 employees, a 12% decrease since our last conference call on October 16.

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

We have also had further cost reductions throughout the Corporation.

Annual fixed costs expected to be realized in fiscal 2009 are approximately $18 million, and we will continue to investigate other cost savings throughout the months ahead.

We were pleased with our $27.3 million reduction in inventory levels during our first quarter, and we have further opportunities in that area going forward, which will in turn generate additional cash flow.

As discussed in our last conference call, we also suspended stock dividend payments starting in our second quarter of fiscal 2009, which will amount to a cost savings of $3.5 million per quarter.

Even though the 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.

At the recent National RV Trade Show in Louisville, Kentucky, we took motorhome innovation to the next level.

We introduced some very exciting new floor plans, including several new floor plans in concept vehicles, including the Company's first hybrid motorhome featured in the Winnebago Adventurer.

We also introduced the new Itasca Sunstar 32K front engine diesel motorhome, both of which feature superior fuel economy.

But our most exciting new product at the show was the new 2010 Winnebago Via, which has been named the Best of Show by the RV trade publication, RVBusiness.

We believe the new Via and Itasca Reyo based on the Dodge Sprinter F-50 cowl chassis will have the highest mileage per gallon available in the Class A market at more than 15 miles per gallon.

We did not rush this product to market in response to the spiking fuel prices this past year or the current economic downturn.

The Winnebago Via and the Itasca Reyo have been in development for the past two years because we feel these products will give current owners an option for something new and first-time buyers another choice to get into the RV lifestyle.

As a result, these products are perfect for today's market, and we are pleased to be able to roll them out to our dealers in the spring.

Since the Via and the Reyo are not planned for production until later this spring, we did not take orders for them at the Louisville show.

Instead we gathered research from our dealers as to what they believe the size of the market for these products will be.

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

Sarah?

Thank you, Bob.

I will now review the financial performance for the Company's first quarter of fiscal year 2009.

Revenues for the first quarter were $69.4 million, a 67.7% decrease from the first quarter of fiscal 2008.

This was primarily a result of a decrease in motorhome deliveries of 1499 units or 69.6%.

Note that our first quarter last year included 14 weeks versus 13 weeks this year, which accounted for an approximately 2.4% decrease in shipments.

Industry wholesale shipments as reported by RVIA for the first two months of our fiscal quarter were down 63.7% as the RV market continued to deteriorate in September and October.

The decline in wholesale shipments for the industry is a direct result of a very challenging retail market that has declined 51.5% in the same time frame.

Also, our average motorhome selling price decreased 3.8% in the quarter as compared to last year.

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

In addition, our sales mix for the quarter was more heavily weighted to lower price products as 57% of our volume in the quarter was a Class C and our new Class B product as compared to a 44% mix of Class C products in the same quarter last year.

Lower motorhome volume resulted in inefficiencies due to a reduced utilization of manufacturing facilities and low fixed cost absorption.

These negative items, along with increased promotional incentives, resulted in a gross margin lost of 12.8% in the first quarter as compared to a gross profit margin of 11.9% in the prior year.

Selling expenses decreased $1.9 million or 34.6% in the quarter due to reduced advertising expenses, reduced wages and bonuses and other various cost-cutting measures.

A reduction in advertising expense was in part due to the fact that the National RV Trade Show in Louisville, Kentucky occurred in our second quarter of this year as opposed to our first quarter last year, and as a result, the costs associated with this event shifted back into our second quarter.

General and administrative expenses decreased $2.1 million or 32.9% as compared to the same quarter last year.

This was a result of a $1.3 million decrease in stock expense as the Company did not grant stock awards in the first quarter and also due to a reduction of 900,000 in management incentive compensation.

Financial income decreased $716,000 or 57.7% in the quarter as compared to last year, primarily due to the fact that we had $49 million less invested during the quarter at a lower rate of return.

A tax benefit of $6.8 million was recognized during the quarter on the quarterly pre-tax loss.

The net loss for the quarter was $9.6 million as opposed to net income of $10 million last year.

I will now highlight a few significant balance sheet items.

The $5.4 million of short-term investments reflect auction rate securities that were redeemed at par in December subsequent to the end of the first quarter.

We have 34.1 million remaining of auction rate securities at par, which are classified as long-term investments.

During the quarter we did sign a legal settlement agreement with one of our brokers that allow us to put the $13.5 million in auction rate securities we hold with them back to them at par as soon as June 30 of 2010.

Also, terms of the agreement allow us to borrow on a portion of our portfolio at no net cost, which will be available to us in January of 2009.

In regards to inventory, we ended the quarter with $83.3 million, a reduction of $27.3 million or 24.7% from inventory on hand at the end of the fiscal year.

This was due to a $7.7 million reduction in raw materials, a $12 million reduction in work in process and a $7.2 million reduction in finished goods.

As Bob indicated earlier, we were very pleased with the progress we made during the quarter on inventory reductions.

On a prospective basis, the ongoing opportunities we have to further reduce inventories are primarily in raw materials and finished good inventories.

We estimate that we could see another $10 million to $20 million reduction in inventories by the end of the fiscal year.

As we discussed in our last quarter conference call, we did enter into a $25 million line of credit in our first quarter.

No borrowings have yet been made on the facility.

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

(Operator Instructions).

David Wells, Avondale Partners.

First off, I just wondered what you were seeing in terms of the repo market and what effect that is having on new unit sales in the market?

It has definitely been challenging.

We have seen an increase since the fourth quarter and all of fiscal year 2008 in regards to dealer repo.

We had five different instances of repurchases of inventory from dealer defaults during the quarter.

So I characterize that as a challenge, and to your point it does compete with selling new product or taking orders for inventory at the factory.

It is, I guess, an eminence of what is happening in the economy at this point in time.

Sure.

If you could characterized where your capacity utilization stands right now, and has that changed since quarter's end as we get into December here?

Well, it is a difficult one to answer.

I mean we can answer it like with the calculation that we have done in years past.

We are somewhere just a little under 20% right now for the quarter that we've just finished.

However, with that being said, we have done so many different things with our production capacity from the standpoint of idling lines, reducing the capacity of lines from a staffing level, that right now our production capacity when you look at it from a constrained resource standpoint, which is our employees, we have got an average weekly line rate depending on which line we have running at which time in that 40 to 60 per week range.

So when you look at it from that perspective instead of looking at it the traditional ways of facility and equipment, we really ran it at about a 56%, 57% capacity utilization.

Okay.

And what sort of time off are you taking at the plants I guess during the holiday season here?

Well, we have got a normal two week shutdown, and that will vary from year-to-year.

Some years it is one week, some years it is two weeks.

And we will be doing that again this year.

As we have stated before, we basically lock in our schedule three to four weeks out, and it just depends on where the orders are beyond that point.

We will be paid if we have anymore weeks off or anything like that.

Now I will say one of our cost-cutting measures coming up for this quarter that we are in right now is that we have scheduled a week off that we are expecting all salaried and indirect employees, including myself all the way down through the ranks, will take a week off without pay and without vacation.

Okay.

And just I know you had talked about the financing landscape earlier in your comments.

I did not know on the retail side what you were hearing in terms of delinquency rates and if people have just stopped paying their loans, and any color that you could give there.

Well, we hear that the delinquency rates are up as we speak to the major players on the financing side, but no specific percentages that I can point to.

On an annual basis, there is a lender survey that is available, but we are not going to have the '08 lender survey for quite a few months to really look at that data.

But we do hear that it has been a challenge for the significant lenders on the retail side.

They have seen delinquencies on the business that they would have written or booked in the last two years, and that is problematic.

However, they do tell us that the business that they are writing on a prospective basis, maybe on a much lower scale, they look at that to be profitable because they are pricing appropriately the risks associated with it, and the contraction on the credit criteria is changing that landscape also.

Okay.

And then I guess lastly, as you start looking into calendar 2009, what are your expectations in terms of do you think the market will return in late, I guess second-half 2009, or at this point are we looking to 2010 before we are going to see some sort of a rebound?

That is a very good question.

You know, I always tell the story that we have attempted to put together our business plan based on a plan as about as bad as it can get, and we have done that about four times now.

And this downturn has been one of the most difficult downturns that I have ever been associated with to try an figure out when you hit bottom and you're going to start to see a recovery.

I think I have said several times in the past that I expect that we're going to see a little bit of a lift in the spring selling season.

I will be the first to admit that I don't think it is going to be as big a lift as what I originally thought.

And there are just so many variables that are going on right now that are different from what we have had in previous downturns.

My concern is that we all know that the credit situation is probably our number one issue as an industry right now.

But we have had the volatile fuel prices, we have had the election, we have had the housing market, the stock market with the portfolios.

You know losing value.

But we've got another one behind this that is on the horizon that has not gotten a lot of attention yet, and I'm very concerned about it, and that is the unemployment rates.

And with everything that you hear in the media today of a lot of companies and we are no different -- we have laid off several of our employees.

And you have got companies around the world that are laying people off, and it is going to do nothing but drive that unemployment rate up.

My fear is we could possibly see double-digits by the first part of the year.

That also does not bode well for people that are buying discretionary products.

So to answer your question, it is very difficult.

I really think that we are going to see a little bit of a lift in the spring selling season just because of the seasonality of this business.

Is it going to be anything substantial?

No, probably not, and I think we probably are from a recovery standpoint not only in this industry but probably the entire US economy, we are probably looking at a little bit further down the road, and it could be early 2010.

Sure.

And maybe asked a different way, if 2009 say follows Curtin's forecast for the year, are you comfortable that you have enough cash and liquidity available to manage the business through that?

Yes, we do.

Scott Stember, Sidoti.

Could you give me the ASPs by group for this year and last year?

So the average for the quarter in Class A gas, our ASP was 89,812.

For Class A diesel, it was 160,949.

Average Class A in total was 119,473.

Class C was 66,080.

Total As and Cs, 90,412, and our Class Bs, 65,971.

For all motorhomes, 89,108.

You are also interested in the same period last year?

Yes, if you have that please.

Class A gas was 90,528.

Class A diesel was 173,093.

Class A in total was 115,525.

Class C was 63,909, and As and Cs in total, 92,627.

Okay.

And can you talk about -- you were talking about headcount that has been reduced since the last call by 12%.

When this whole process started a few quarters ago, can you talk about where you stand then versus now?

What is the total headcount reduction since then?

I don't have the numbers right here with me, Scott, but it is going to be in that -- if I remember right when you look at everything, hourly, indirect and salaried from where our high point was in 2004, we're right at about 60% reduction from that level.

Okay.

And Sarah, going back to the comment you made about the cost savings of $18 million, for 2009 is that a cumulative figure, or is that an additional figure incremental beyond what you have talked about in the past?

Well, that is a fiscal year number.

When we had our conference call last October, we commented on a $12 million anticipated savings in '09, but had further initiatives in place to try to look for further cost savings.

So that is accumulative, and it would include what we did in the first quarter and what we planned for 2, 3 and 4.

Okay.

And the costs which you said got deferred for the Louisville show from the first and second quarter, could you quantify how much that was?

That is about $400,000.

Okay.

And lastly, I was at the show, and obviously you had a couple of really new exciting products out there.

Can you just talk about -- I know you said you were just gauging the interest level of the dealers and talk about the size of the markets.

Could you maybe share what you found out on that front?

Well, we do not like to give those kind of numbers for forward guidance, but I will tell you that the plan that we had in place for that product for the Via and Reyo I'm assuming you're talking about --

Yes.

The plan that we have in place for 2009 and going into fiscal 2010 was validated by what we found out from our dealer base.

As you know, the attendance rate was down very significantly at the RV show in Louisville.

And so we did not have as many of our dealers there as what we typically would.

But we still think we got a pretty good gauge as to what their appetite for this product is.

Like I said before, it validates what we have already got into our plan.

Alright.

And last question.

Last conference call you shared with us what the repossession reserve was on your balance sheet.

I think it was look like $600,000 and change.

Could you comment on where it is at the end of this quarter?

Due to the significant change in the landscape, especially with what happens in the overall economy and what we started seeing from an activity specific to us, we have increased that reserve to $1.7 million.

Okay.

Alright, that is all I have.

Thank you.

(Operator Instructions).

Craig Kennison, Robert W.

Baird.

The first question has to do just with your outlook for gross margin.

Obviously you are selling product essentially at a loss.

How long would you expect that to continue and maybe to what extent, and maybe when would you expect to return to more normal margins?

Well, I guess one thing I want to clarify in regards to what is happening at the margin level, what we have going on now is a capacity problem or the fact that we cannot absorb our fixed overhead on this low-level of utilization of our facilities.

So not I guess to -- we're not selling product at a loss in I guess the sense that you might be looking upon now.

I would go back to similar comments that we have made in past quarters that we look at our breakeven on a production standpoint to be in that 1400 to 1600 unit range.

And unless we're shipping and building at those levels, even with the cost-cutting measures that we have in place, we're looking at a situation similar to what we experienced this quarter in regards to a profitability perspective.

Okay.

That is helpful and your point is well taken.

So there would be no need, therefore, to write down any inventory that is currently on the balance sheet?

No, we are -- I mean we are definitely experiencing a challenge in the marketplace in regards to what is happening promotionally at the wholesale and retail level.

I mean we're doing more ourselves, and that is hurting us from a profitability standpoint in addition to capacity.

But that is probably 10% to 15% of our challenge as opposed to primarily being a volume issue.

But we are not interested in selling our finished good inventory for less than cost.

The challenge, though, on the repurchase side when we're buying back inventory and having to resell that, even though it is new, depending on how old it is, there's challenges there, and we have a reserve established for those types of losses.

I guess one comment that I would like to make also is the fact that until the dealer inventory gets down to where it needs to be -- and I have made this comment several times in the past -- but I look at it that when we get to that magic number, and I have yet to find anybody that can tell me what that magic number is going to be -- but once we get there and we start getting orders for every retail that they sell so we can have a one for one replacement, we're going to see a pickup in business just by that itself.

Right now through this very difficult time, it has been pretty commonplace to see three or four retails to generate one order.

And we have seen this in the past where things turn around not, only do you start getting one order from one retail, but when dealers start getting more comfortable, they see the economy turning around, they see more dealer traffic and start selling more units; you could end up with a phenomenon that you may have one retail and get two or maybe even three orders for it.

And that is one of the things what I keep telling my guys is the economy may not even have to improve that much for us to see a pretty good uptick in our business.

Thank you.

And then with respect to the Via, I believe the average selling price at the wholesale level is significantly lower than most of your diesel products.

If it is successful, would we expect a pretty steep decline in your diesel ASP?

I mean it is a product that we have not priced yet firmly.

So we are still working through that process.

But it is a fair point.

Depending on how much of that would be in our mix of diesel sales, that would have that impact.

That is very fair.

Okay.

Thanks.

And then with respect to just the auto bailout that is being discussed, do you have any exposure to the big three suppliers that you're concerned about?

Well, I think as everybody knows, every manufacturer on the motorized side has chassis from Ford, from Workhorse, which is tied to GM pretty strongly.

We have also got the Sprinter that is somewhat tied to Dodge.

So yes, there is always a concern there.

Now in talking to our sources, they feel that there is not a huge concern because usually where we get our chassis are more in their fleet organizations.

But, you know, it is only going to be -- time will tell where this whole thing goes with the automakers.

Because -- but a fair question.

It is a concern.

I think it is one that probably all manufacturers need to be cognizant of at least.

Great.

And then last question, with your access capacity, are there any opportunities for you to do non-RV manufacturing work?

Yes, and we have been researching that diligently.

Right now I don't have anything to report on, but we have got several irons in the fire, and that is one of the things because we do have a lot of manufacturing capabilities here.

We think we have got opportunities to utilize those in non-RV related businesses.

Great and great job managing a really difficult environment.

Thank you.

At this time there are no additional questions.

I would now like to turn the call back over to Mr.

Bob Olson for closing remarks.

Thank you.

While the current market continues to be extremely challenging, we are optimistic about the long-term outlook for the RV industry.

The RV lifestyle is a great American tradition that enthusiasts will not abandon.

Customers who have delayed upgrading their motorhomes due to the economic pressures will be ready to trade when the credit environment and general economy begins to turn around.

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

We look forward to talking with you again in March when we report our results for the second quarter of 2009.

I would like to thank everyone for joining Winnebago Industries' conference call today, and on behalf of the employees at Winnebago Industries, wish you all a very happy holiday season.