Winnebago Industries Inc (WGO) 2009 Q2 法說會逐字稿

Good morning, and welcome to the Winnebago Industries Incorporated conference call.

My name is Onica and I will be your operator for today.

(Operator Instructions)

At this time, I would now like to turn the call over to Sheila Davis, Public Relations and Investor Relations Manager.

Please proceed.

Good morning, and is welcome to the Winnebago Industries Incorporated conference call to review the companies results for the second quarter of fiscal year 2009, and February 28, 2009.

In the call today will be Bob Olson, Winnebago Industry's Chairman of the Board, Chief Executive Officer and President, and Sarah Nielsen, Vice-President, Chief Financial Officer.

I trust each of you has received 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 12:00 p.m.

central time today.

If you have any questions about accessing any of this information, please call our Investor Relations Department at 641-585-6808 following the conference call.

Before we start, it's my responsibility to inform you this presentation may contain certain 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 identified in our filings with the Securities and Exchange Commission over the last twelve months, copies of which are available from the SEC or from the company upon request.

I'll now turn the call over to Bob Olson.

Thank you, and good morning and welcome to Winnebago Industry's second quarter conference call.

With the news of troubled banks, home foreclosures, stock market volatility, government bailout, and unemployment rates rising, consumer confidence levels continue to fall to record levels.

Unfortunately, the nation's economy has not improved as many of these same topics were discussed during our last call.

These issues resulted in continued deterioration in the marketplace and resulted in our second quarter of fiscal 2009 being negatively impacted.

Our second fiscal quarter is historically the most difficult of all quarters, due to it's seasonality with the Christmas and New Year's holidays typically reduced demand for our products and the fact that we incur higher utility and maintenance costs during this quarter.

Lower motorhome shipment volumes, increased incentives, and a less favorable mix of products sold resulted in lower revenues and a loss for the quarter.

Obviously, depressed economic conditions in what is turning out to be the number one issue in our industry today, a difficult credit environment, continues to negatively impact our business.

While we were pleased that motorhomes were included in the federal stimulus package, as well as the Federal Reserve's health program, we are not yet seeing that these programs are working as intended.

Again, I repeat, credit at both the wholesale and retail levels remain the number one issue facing our industry today.

Although this has been a difficult quarter not only for us but the entire RV industry, we did benefit from lowering our inventories and obtaining a $9.1 million no-net cost loan from UBS which was secured by our auction rate securities held with them.

Sarah will get into more detail about the financials if just a minute.

From a fiscal quarter perspective, dealers have continued to reduce their inventories due to the lack of available floor planning and financing for the new product.

Consequently, inventory at Winnebago industries products on our dealer partners lots has declined 11% sequentially since last quarter and 40% as compared to a year ago.

The decline in the net worth of the buying public is also a growing concern.

As consumers heal their personal balance sheets with increased savings, they are delaying their purchase of discretionary products such as motorhomes.

As a result of the decreased demand at the retail level, and decreased orders from the industry's dealers, wholesale shipments more motorhomes have declined dramatically with the decline accelerating throughout the past few months.

Wholesale shipments of class A and class C motorhomes industry wide declined 49.5% for calendar year 2008, 75.2% for the fourth calendar quarter of 2008, and 80.6% for the month of January, 2009.

Retail sales while not as drastic are still down considerably with a decline of 41.6% for calendar year 2008, 54.8% for the fourth calendar quarter of 2008, and 58.4% for the month of January.

RVI's economist Dr.

Rich Curtain from the University of Michigan has revised the industry's calendar 2009 shipment forecast downward in his latest forecast to 14,100 class A, B, and C motorhomes for 2009--a 51% decrease from actual shipments of 28,300 motorhomes in calendar 2008.

This forecast is by far the lowest we have on record for the industry, with data available back to 1971.

We continue to see a very active promotional environment in the marketplace, both from a wholesale and retail perspective, with some manufacturers selling the low cost for the benefit of cash flow.

It's extremely challenging to compete profitably in a market of this nature.

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

All of our hourly and salaried employees were required to take a one-week furlough during the second quarter, and another one-week furlough is scheduled for our fourth fiscal quarter.

We also have salary reductions through out our salaried workforce with a 3% reduction in most salaries, 10% for our Vice-Presidents, and 20% for my position.

Further cost reductions continue throughout the corporation with fixed cost reductions in excess of $21 million now anticipated to be realized in fiscal 2009.

We will continue to investigate other cost savings throughout the months ahead.

We continue to work on reducing our inventory levels and we're pleased with the $10.5 million reduction during our second quarter.

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 the 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 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.

While several major competitors currently face very difficult circumstances, we are confident of our financial strength and competitive position in this economic recess.

As the top selling motorhome manufacturer, we are in an enviable position with strong brands and recognition as a leader in high quality and innovative products.

We also have the financial stability to withstand this downturn with a strong balance sheet and no long-term debt.

In the short-term, however, we know we will have added competitive pressures from highly discounted product in the marketplace from struggling manufacturers.

We also know it will take time for this distressed inventory to work its way through the dealer channel, but once that is accomplished, Winnebago Industries will in a great position to take advantage of customer demand in an industry that appears will have less capacity.

It is my belief that when the housing market is finally corrected, the stock market recovers, and personal balance sheets improve with increased savings, the US consumer's sense of wealth will improve and normal spending patterns will return.

Lending institutions will free up capital for RV consumer loans, once again realizing these are quality customers with timely payments and low default rates.

Once that happens, we will have pent-up demand for our products that will be a challenge to satisfy.

We welcome that challenge.

This recession has been one of the most difficult periods I have seen in my career, and although there continues to be many negatives reported daily by the media, there appears to be some signs of improvement.

Oil prices continue to be relatively low, and just as important, they are stable.

Interest rates continue to be at historically low levels.

Banks are starting to report they are actually making money.

The dollar remains relatively strong.

Investors are beginning to wade back into the equity market.

The severity of this recession was first felt by the RV industry in April 2008.

We are quickly approaching the 12-month anniversary of these very difficult times.

Even though none of us know for sure when this recession will conclude, we do have a good portion behind us based on the length of previous downturns.

I am not saying the recession is over, but there may be positive signs starting to appear.

With that said, we should never lose sight that this recession occurred at speed never seen before, and, who knows, we could see a recovery just as fast.

With that, I'll 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 second of fiscal year 2009.

Revenues for the second quarter were $31.8 million, an 80.6% decrease in the second quarter of fiscal 2008.

This was primarily a result of a decrease in our motorhome delivers of 1,382 units, or 81.4%.

Industry wholesale motorhome shipments as reported by RVIA for the first two months of our fiscal quarter were down 82.4% as the RV market further deteriorated in December of 2008 and January of 2009.

The decline in wholesale shipments for the industry is a direct result of a very challenging retail market that has declined 55.6% in that same time frame as well as a disrupted credit market.

During the quarter, we also had a number of retail incentive promotions in place to help stimulate dealer retail traffic which negative impacted revenues.

Retail promotional allowances increased 5.5% as a percentage of net revenues as compared to the prior year.

Their retail programs had a substantial impact in helping to reduce our dealer inventory levels, but as a substantial cost.

Our average motorhome selling price net of discounts decreased 2.6% in the quarter as compared to last year.

This was due to an increase of product incentives we offered at the wholesale level, and also due to a shift in mix.

Our sales mix for the quarter was more heavily weighted to lower price products as 61% of our volumes in the quarter were class B and C products as compared to 51% of our quarter last year.

Lastly, revenues were also negatively impacted by $1.4 million, due to additional inventory reprepare touch-tone.

During the quarter, we brought back 18 units and resold 28, incurring a loss of nearly $500,000.

This is similar tow the loss we incurred in the first quarter.

As a result of this continuing negative experience, the reserve associated with repurchases was increased to $2.7 million from $1.7 million.

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

These negative items, along with the increased promotional incentives at the retail and wholesale levels, resulted in a gross margin loss of 37.1% in the second quarter compared to a gross margin of 7.4% in the prior year.

Selling expense decreased $1.4 million, or 33.9% in the quarter due to decreased wages and bonuses, reduced advertising expenses related to direct marketing and retail shows, and other various cost cutting measures.

General and administrative expenses decreased $1.5 million or 26.6% as compared to the same quarter last year.

This was primarily a result of a reduction in litigation and product liability related expenses and reduced wages and stock-based compensation expense.

Note that in the second quarter of last year, approximately $500,000 of severance related costs were included within G&A associated with the job eliminations that had occurred.

I will now highlight a few significant balance sheet items.

As discussed our our first quarter conference call and disclosed in our quarterly SEC filings, we signed a legal settlement agreement with one of our auction rate security brokers that allow us to put the $13.5 million that we hold with them back to them at par as soon as June 30, 2010.

The terms of the agreement also allowed us to borrow on a portion of our portfolio at no net cost, and, as a result, we borrowed $9.1 million under this arrangement which is presented a short term ARS borrowings on our balance sheet.

Terms of the legal settlement provide us with the ability to name the new net cost loans until that securities are either liquidated or reach the June 2010 put date.

In regards to inventory, we ended the quarter with $72.8 million, a reduction of $10.5 million, or 12.6% from inventory on hand at the end of the previous quarter.

This was due to an $11.2 million reduction in raw materials primarily a result of Chafee utilizations, a $1.8 million reduction in finished good inventories, which was partially offset by an increase in our work-in-process materials.

As Bob indicated earlier we very are pleased with the further progress we have made during the quarter on inventory reduction.

On a trailing 12-month basis, our inventory levels will have been reduced by nearly $56 million.

We estimate that we could see another $10 million reduction in inventories in the next two fiscal quarters.

At the end of the second quarter, we had generated an income tax receivable of $19.5 million, primarily due to the current year's loss, which we have the ability to carry back to our fiscal year 2007.

We did file our fiscal 2008 federal tax return during the quarter, and in early March, after the end of our second quarter, we received a federal tax refund of $5.4 million.

As mentioned in our earnings release, we have continued to reduce our fixed cost structure over the past 12 months, and expect fixed cost reductions in excess of $21 million to be achieved in fiscal 2009 as compared to last year.

Numerous actions have been taken thus far, which include headcount reductions of approximately 50%, the salary wage reductions effective March 1, 2009, elimination of 2009 stock grants and bonuses, reductions to the 401 company match, the two mandatory unpaid weeks off, and cancellation of certain promotional events that we typically hold.

Additional cost reduction activities will continue during these challenging market conditions.

I will no turn the call over to the operator for the question-and-answer portion of the call.

Thank you.

(Operator Instructions) Your first question comes from the line of Kathryn Thompson with Avondale Partners.

Please proceed.

Hi, thanks.

I want to first focus on inventories at dealer lots right now.

In your opinion, how many months of inventory do you think there is in the field given current run rates, and what is really normalized dealer inventory given the current market?

Well, that's a very difficult question to answer, Kathryn, because, we've been monitoring, our dealer inventories out there, and, a year ago, we thought it was going to be one level.

As time progresses and the dealers continue to keep lowering them, I will say we've blown by that number that we thought it was a year ago, be and it just continues to decrease.

It's going to end up being that you're going to be looking at, turns that are going to be two-plus for the dealers.

I think the financial community is going to demand that.

I will say that we've got a little ways to go yet, but we've made significant in-roads to that, as reported before.

We're down over 40% from last year at this time, and I think we're getting closer, but it's really one of those things that it's a hard one to get your arms around.

What were turns in the peak market, and what have turns been in the quarter that you just reported?

I think when things were really cooking back in 2004, we were looking at, turns that were a little over two.

I think right now, we would be pushing it to say we're getting one turn a year.

And how are dealers going to be incentivized to increase turns to essentially doubling their turns?

Well, they have to lower their inventories, and I think their lending partners are forcing them to do that, and we've seen, as our dealer inventories continue to lower, we're seeing improvements in those turns, but we still have to get more units off the dealers' lots, and/or have retail pick up, and I would much prefer the latter, of course, and as I mentioned in our prepared remarks--there are some signs of some positives going on out there, that that along with the spring selling season that we're hopeful we're going to start see something of that retail pick up, which we already have.

When you look at what retail was from November, December, January, and we've had a steady growth up through those months, and I don't think it's so much a part that the economy is improving at great leaps and bounds, I think it's the case that it's more seasonal because we are into the time of year that retail does usually pick up.

And I would clarify from a retail standpoint on the improvement we're seeing is on a sequential basis not year-over-year comparison.

I mean we're monitoring that daily and weekly, and we always expect retail to continue to accelerate as we get closer to spring, and even though we're at levels that are abnormally low, there have been sequential improvements in the last eight to nine weeks.

Are you running into a situation where orders are getting turned back due to dealers not being able to secure enough floor plan financing?

We have had some of that, but I think you can go back even when times were even better than they are not, and you would have some of that, maybe not so much to the fact that they couldn't get the financing, but for different reasons that you put something into production and the order would get canceled.

We have seen some of that now and part of it has to do with financing.

Well, just to given kind of relative, has it progressed?

I mean, what's an update for the current month?

And has that trend accelerated, or has it remained the same over the past three months?

I think it's been pretty constant over the past three months.

I think the dealers are a little bit more cautious now before they place an order.

I think they want to make sure that their inventories are on line before they actually place an order with the factory.

You know, when things were really cooking in this industry, a lot of dealers would throw orders in just to get their place in line secured, and obviously with the low production rates that we're running right now, that's not an issue for them, and so I think the dealers are being extremely cautious when they do place orders, and so I really don't think there's been a big up tick in that phenomenon.

And the change in the current month?

Well, I would point from a comparative base, you look at the beginning of this fiscal year, we had a little over $41 million in finished good inventory, and that moved down to under $35 at the end of our first quarter, and now we're under $33.

So regardless of some of those dynamics, which are real, and have happened, when you have a backlog as you low as you can see that we have, and did have at the end of first quarter, so much of that that has been squeezed out of the system, we have very, very good visibility of each single order, because we're dealing with such small levels, and we're continuing to work our finished good inventory position down.

So it's a function of the times more than it ever has been for the flooring to be a reason for an order to be canceled, but it's not a significant part of what's happening with our backlog.

Okay.

Just shifting gears to your cash preservation, you did a great job just particularly in the inventory time in terms of cash preservation.

Do you think you'll need to tap into your line of credit in the current fiscal year?

Well, due to the fact that we had the ability to tap into our auction rate securities in a different format, we're currently looking at, on the next two quarters, to be still in a similar level to where we've been, and we don't anticipate having to borrow on the line of credit.

Now, things could dramatically change, but we wanted to have some of that flexibility in place, in case there's working capital ups and downs, but we are very closely watching that day by day, and are happy thus far to where that's at.

Yes, I think the other thing on top of that, Kathryn, is that we've got a plan in place right now that is really, really conservative, so if we see any kind of an up tick in business, which we are confident with some of the positives out there right now that we could, it's going to mean that not having to tap the line of credit at all.

So that's our hope right now, is that we have put together a plan that's as conservative as we think it will be, and it might end up being better than that.

Okay.

And, also, any trends in the repo market-- what are you seeing there?

Well, we're hearing reports from a lot of different shows.

It's spotty.

I will say we're hearing more positives than we are negatives.

Attendance appears to be up in a lot of the different shows.

There has been some buyers at the shows that are serious about doing it.

With that said, I will also say that when you compare it to other years, we're still not seeing the kind of activity that when things are extremely good, but we're getting good reports out of the shows, and with some of the discounted product that we've got out there, whether that be from other manufacturers, or whether that be from the repo market I their that if you're a customer right now, it is an absolute great time to buy an RV, because I doubt very seriously you're of going to find a better deal than you would out there right now.

And my final question is what is your current capacity utilization?

Well, as I reported last time, we're looking at it in a couple of different ways right now.

The typical way that we've always looked at it is with facilities and equipment, and I'm sorry to say that it only ran around 15% for the quarter.

If you look at it based more on a staffing situation, we did run in the low 50% range.

Okay.

All right.

Great.

Well, thank you so much.

Thanks, Katherine.

Your next question comes from the line of Craig Kennison with Robert W.

Baird.

Please proceed.

Good morning, everybody.

Hello, Craig.

To begin with, could you give us the ASP data?

Certainly.

For the second quarter for A gas, we had 95,000 - 013, diesel was 159,844, and total A combined was 118,926.

Class C was 69,535.

Class B was 65,000.

So the total was 88,549.

Okay.

Thank you.

That's helpful.

Next question.

Could you give us an idea of your fixed cost level at the cost of goods sold level, and the SG&A level, and then where you think your break-even is?

In regards to our fixed cost structure that we look to be included within our cost of goods sold, we're currently looking at 2009 to be in that $40 to $43 million level.

SG&A we look at all to be fixed.

There's some elements that will move up and down, but, for the most part, we just look at those two line items to be fixed.

So in aggregate, you're all in looking at that $70 to $74 million range, in regards to the fixed cost structure.

To compare and contrast, where we are in previous years, that's our bogey in regards to the $21 million that we're pulling out, and what we have pulled out thus far.

Break-even-wise, we look at on a normal ASP level, so I'm looking at an average selling price without substantial discounts.

Our break even is in the range on a quarterly basis of 1,200 to 1,400 units.

That's improved sequentially a bit, but obviously not to the degree of the shipments that we've had in recent quarters, and so we are not done in our efforts on what additional fixed costs we could pull out.

Could you quantify the discounting environment?

For competitive reasons, we don't want to get into that detail.

When I commented on our ASP as compared to a year ago, we see that the 2.6% decline to be primarily a function of discounting, partially a function of mix.

The retail incentives that are in place that, we have programs active to help reduce inventory levels, have been substantial, and I commented how that, as a percentage of revenues, your quarter over quarter is at 5.5%, and the third category of this repurchase dynamic is also a net revenue reduction, and that's been significant, but the promotional environment, as you might imagine, in regards to what's happened in our industry and what has probably yet to play out, has been pretty significant.

Thank you.

And talking about your dealers now, how main dealers have you lost?

And is there an opportunity to add dealers as some of your competitors exit the market?

And maybe if you could just quantify the market share opportunity that you may see unfold over the next couple of years.

Well, from a dealer location standpoint, we had 280 dealer locations at the end of August, and at the end of our second quarter, we are at 255 dealers.

So we lost 25.

That's about a 9% reduction in dealer locations.

Some of our dealers are just choosing to exit the business.

Some are running into financial troubles.

You know, there's a variety of reasons.

So there's contraction on distribution points that's driving some of the dealer inventory decline, but, no, there's obviously new factors to consider in regards to what will happen prospectively with some of the other product categories.

We looked at, especially in regards to what our dealers carry of other product lines, so we understand what opportunities we have for added shelf space, potentially, and, also, on the other side of of the fence, what's our risk if these dealers have additional challenges ahead of them in light of some of the recent announcements.

There's a lot of opportunity long term, but short term, it's probably going to be more pain on the retail market share standpoint, because there's a lot of product that's got to get blown through the channels, similar to what we saw with national RV, and you still see a few units come through each month, and all the other manufacturers that have closed their doors.

So we see that there's significant opportunity, but its hard to quantify when and how much until we see a little bit more how things play out.

Yes, I think to add to that, Craig, is that we've looked to see in our dealer network what we share with other manufacturers, and I think that's going to be a real opportunity, because we've worked very hard over the years to make sure that we've hit the open points through without the United States, and we feel like we're in pretty good shape there.

But where the real opportunity, I think, is going to come from, is the fact that as this distressed product goes through the channel, and if we have more manufacturers go out of business, and we're already seeing the fact that a lot of the dealers are looking at this and saying, maybe I do need to take a closer look at who I've hitched my wagon to, and make sure that I hitch it to somebody that's going to be around for the longer run, and, as that distressed product goes through the channel, I think we've got a better opportunity to pick up more shelf space because of that.

If you were to say that the distressed product would be product from manufacturers that are no longer producing product, how many units do you think are out there in the market that we need to clear?

Well, that's a good question.

You know, we've made some stabs at that, but it's just our opinion.

We really have no data to substantiate what that number is.

You know, we think it's significant, obviously, but we look at some of the other manufacturers that have gone down earlier, and when you look at what piece of the overall industry they had and how long it's taken for that inventory to get through the channel, and then you compare some of the inventory that's probably out there by some of the later announcements, it's significantly higher number, and it could take longer for that to get through the channel, but with that being said, I think there's much more aggressive pricing going on right now, so if the economy does turn around, you might see more active buyers trying to pick on good deal.

It's going to be an interesting time because you have to weigh costs versus after market support and those types of things, but we think if it plays out like it could possibly play out, there might be quite a bit of inventory out in the dealers' channels that has to get retailed.

I mine, would you think it would take the entire selling season to make a dent in that?

I don't know if it would mean to put a dent in it, but I think you're going to be looking at least the selling season to get through everything that's out there.

I think it could easily be 12 to 18 months if you were truly liquidating all of that inventory.

That's helpful.

And then in the past you've talked about trying to do what you can to fill your factories with perhaps some nonRV projects.

Yes.

First of all, address that, and second of all, given the exits in the total markets, just address whether that you may rethink your view on Winnebago's place in the total market.

Thank you.

I guess, first of all, to talk a little bit about the non-RV related stuff, we continue to work on that diligently.

We've had a lot of things that we've analyzed.

We've had several things that we've opted not to get into.

We have several things we're working on right now, and obviously I can't share it with you, because we don't know where we're going to go, but we continue to look for ways that we can augment our RV production, and we're getting closer on some things, so I'm hoping that we'll have something that will land, that will help us absorb some of this overhead that we've got right now.

As far as the travel trailers are concerned, I think for the last eight or nine months I've basically taken no out of my vocabulary, so to say that we would never get into travel trailers, I guess I'm not going to say that anymore.

I know you and I have had several discussions and I've been pretty emphatic we would not get into travel trailers, but I'm not saying it would never be out of the realm of possibilities.

We continue to look at that and what the best strategy would be if we would want to get into that, and that's all the way from we green field it here to acquisition to partnering with somebody, but we have nothing to announce at this time, but we are looking at that.

Well thanks again.

I know it's a difficult time, but you guys doing a very nice job of protecting the I company.

Thank you.

Great.

Thank you.

Your next question comes from the line of Scott Stemper with is a Sidoti and Company.

Please proceed.

Sarah, could you give the ASPs for last year broken out?

Oh, certainly.

A gas - 92, 223, A diesel - 171,676, total A of 119,434, class C - 663,089, class B - 69,000, and total all in motorhomes of 90,916.

Okay.

And just getting back to the topic of taking share as some of your competitors are falling away by the wayside.

You've had some new products that you came out with as of last show, the Via and the Adventurer hybrid.

Could you talk about maybe how these are being received at the dealers?

Have they gained enough traction that when the market comes back you should really envision these things taking off?

Well, first of all, they're not in production yet.

We did introduce them at Louisville, for a couple of reasons, one is to show our dealerships that we are being innovative and coming out with new product.

That will be started here shortly in our 2010 line-up.

We expect that those units will be available to the dealers probably sometime late-May, early-June, and, at that time, we'll see how they stand on their own, but I can tell you that from the reception that we did receive at the show, and I'll preface that by saying that we did not openly take orders for the product there, that we got rave reviews, that it was the right product at the right time, especially on the Via and the RAO, and we're expecting that it's going to be one of those products that are going to give our dealer partners the incentive to want to buy something that has a chance of selling in today's marketplace.

The hybrid, again, we brought that out, trying to show people that there are other options out there that we are being innovative, and when we introduce it with our 2010 product line-up, we'll have a better idea if there are potential customers out there.

Okay.

Just a follow-up on the environment with dealers right now.

Is it conceivable that from this point forward that as we look out 12 months we have a potential market share gains and failure with some of your competitors that your dealer count could be actually flat or slightly up from where it is now?

Well, I go back to what Bob had indicated earlier that geographically we have covered every key territory for the most part in Canada and the U.S., so the coverage has always been strong.

There are certain dealers that may be attractive to add incrementally on a prospective basis, but we don't have open gaping holes from a distribution standpoint.

We're really more approaching "do we have the ability to have more shelf space".

You know, we've already partnered with most of the largest dealers in every key market, so the near-term concern is how much inventory do they need to work through, and then what's incrementally our opportunity to be a bigger player in regards to their offerings, so that's what we would look to in the future, so I don't necessarily expect the dealer count to jump up.

You probably near term are going to have more degradation for maybe some of the continuing small dealers, if they struggle financially and decide they just can't continue.

And I think along with that, Scott, is that once we get through this down turn, and we get through the product that has the potential of being distressed out there, I think the other question that's unknown right now, is what size are these dealers going to come out of this and want be to be at?

I think obviously we may have a smaller market for a while, until the general economy turns around, and it kind of goes back to Kathryn's question earlier, about turn rates and those types of things that if, in order to get the turns that I think are going to be dictated that they need to get, I think you're going to see some of the dealerships that are probably going to have to be just a little bit smaller in order to accomplish that.

That's all I have.

Thank you.

Thanks, Scott.

Your next question comes from the line of Barry Vogel with Barry Vogel and Associates.

Please proceed.

Good morning, ladies and gentlemen.

Good morning, Barry.

First, Bob, I have a couple of questions for you.

Could you look back at that credit situation, which you have alluded to as being the most serious problem for you, right now, who are the main floor plan lenders to your dealer body?

The two main ones are Bank of America and GE.

And what would you say the percentage they might account for your floor plan lending of your product, each of them?

Well, in aggregate, they're probably 40% to 50% of our total flooring dollars.

Okay.

Are there any other player that have an other meaning, or do those guys dominate?

They are by far the largest and BOA is much larger than GE.

We stilt do have an active portfolio that KeyBanc has't walked away from, and that's still less than GE's size, but at the top end of the dollars of our dealer inventory, then it moves down into U.S.

bank, Wells Fargo, and then a lot of the reasonable kind of local that dealers choose to use, and that's been an evolving dynamic and some of the rates that are being charged have been increased dramatically at the dealer level, and so they're looking for other options, but there's not a lot of choice today in regards to where they can go, but the credit unions and some of the location lenders have been an attractive choice in certain situations.

Yes, I thank to add to that, Barry, if you go look back at what RVIA has been doing here lately, they're trying to work with the credit unions in fact, I think they've had some meetings with the national credit union association in order to try to get a more active role in the financing side of our industry with credit unions.

So Bank of America is larger than GE?

Yes.

Okay.

Now, is it truth that in the last six or eight weeks of the year, GE basically stopped it's floor plan lending and then resumed since the beginning of the new year?

Yes, basically from, if I recall, I think it was sometime late- or mid-November, all the way through probably all of January, it was more of a case where they put their lending on hold to evaluate where they wanted to go from there, and I think mid-to-late January, they kind of opened it up more on a dealer by dealer basis, and in some cases, on a manufacturer by manufacturer basis.

And did Bank of America do the same thing?

No, they've been a player all the way through this.

Okay.

now, Sarah, can you tell me how many Winnebago dealers went into Chapter 11 in the first and second quarter of the year?

In the first quarter, I guess I don't have it by dealer basis.

I have, I guess, how many units we bought back in regards to the bank coming in and exercising their repurchase agreement, which doesn't always necessarily mean that the dealer has filed for bankruptcy.

It could be that they have defaulted on their payments, and the bank has come in prior to that, but if you look at the 25 dealers that we lost, in probably the 10 to 15 range of those dealers were due to financial distress, and we have other dealers that are literally choosing to close locations of get out of the motorhome business, not predicated by a bankruptcy or imminent financial issue.

Okay.

Now, could you tell us Bob and Sarah, because I know you're looking at this very closely, and you had talked about the potential of some of the very large competitors filing, and unfortunately in the last two weeks, basically two out of your three largest competitors, one was Monaco and one was Fleetwood, both filed for Chapter 11, could you realistically tell us the effect that that's likely going to have on your business given the size of these competitors over the next 12 months?

Well, we've kind of touched on it before.

I think what we're going to see is a large pool of motorhomes that are going to be candidates for discount.

We saw it a little bit with some of the earlier, smaller manufacturers that went out of business.

There was big concerns by the dealers, by the retail customers from a market support standpoint, who is going to cover the warranty, what kind of a deal can I get on it, and I think we're going to continue to see that, only on a larger scale.

I think with the smaller ones going out first, it gave a lot of the dealers now some experience on how to handle some of these, and I their what you're going to see is a long-term or extended warranty packages bought.

I think you're going to see huge discounts.

And like I said before, if you're in the motorhome buying market right now, you're probably going to see some deals that you'll never see again.

And that will have an impact on us, there's no doubt about it.

You know, I think it's going to extend this downtime for everybody else that remains, and a lot of it is going to hinge on just how deep some of these discounts go.

That's what's the largest that you've seen so far?

We've heard more on a wholesale side of it anywhere from 30% to 50%.

And that's before Fleetwood and Monaco filed?

Yes.

All right.

So you think it's fair to say, all things being equal, that it's very doubtful you're going to have any kind of strong V-shaped recovery in this economy, that this would extend duress of the motorhome business for at least 12 months, these two filings?

I think from a manufacturer's perspective, it's going to extend it, but from a retail standpoint, you might see an increase in business.

Okay.

Sarah, I was a little surprised and I just wanted to make sure I got this right, you said that the repurchases were only 18 units in the second quarter, and you resold 28 units.

That seems pretty small.

Is that correct if your presentation?

Yes, we bought back 18 units and we resold 28.

And what was the total loss that you booked against your P&L in the quarter?

The total of revenue reduction which is a function of both the losses incurred and then an increase for the reserve, was approximately $1.4 million.

Did that affect you negatively in your P&L by $1.4 million in the quarter?

Yes.

And what was it in the first quarter?

$1.7 million.

Okay.

Does that affect you to negative $3.1 million so far?

That's correct.

Okay.

And the reserve is $2.7 million - why hasn't it been raised, given the new losses?

It was raised by $1 million since our first quarter end.

Still pretty small, don't you think

We have looked at our exposure on a dealer by dealer basis, based on their age of inventory, their turns, a multi-attitude of factors, and weighed that against the repurchase agreements in place to develop what we felt was a reasonable reserve.

We've lost in aggregate in that $900,00 to $1 million so far this year, we have a decreasing amount of dealer inventory.

As, you, it's down sequentially about 11% and 40% year-over-year, so the exposure in regards to what we're calculating this reserve against, has been decreasing a at pretty fast rate, and we aren't shipping a lot of new product when you see 315 units shipped in our second quarter to add back against that dealer inventory, so that mitigates it to some degree.

You know, we're using the best information that we have to try to establish what the reserve should be at the end of each quarter.

And, Bob, is there any signs of a seasonal pickup in I mean your quarter extends through February as opposed to the other reports that came out of a couple of weeks ago from Thor, which only extend through January.

Is there any sign of any seasonable pick up whatsoever?

Yes, I think I mentioned that before.

We are see something retail pick-up, but I think it's more due to seasonality more than improvements in the economy.

We've seen continued sequential improvement from November up through mid-March now, and each month it continues to get a little bit better.

Barry, I want to go back to the other question that you asked prior to the repurchase the impact that this distressed product is going to have out there.

You know, there's two ways to look at it.

I think retail is going to benefit from this.

It could have a negative impact on the manufacturer, but with that being said, it depends on if the dealers, as they get through this distressed product still want to have shelf space, they're going to start ordering it from the guys that are still around, so it could be more of a recovery from those guys still left standing maybe than even what we think.

Yes, I understand that.

There's no question that long term in you're a floor plan lender for for your retail customer, you want to make sure that the company you're lending to, with you guys on the hook for the repurchase agreement, is going to be able to take care of their obligations.

Exactly.

No question, but that's long term.

The first key is obviously survival.

Yes.

Now, as far as the wholesale pick up--have you seen any wholesale pick up?

Not really.

I think dealers are still reducing their inventories, and the wholesale side outfit, the order activity is still pretty slow.

All right.

Sarah, going back to the P&L, notwithstanding additional cost cutting, is it logical, without any wholesale pick up, that you will continue to lose $16 to $18 million operating loss quarter each quarter for the last two quarters?

One of the previous questions commented on our break-even point, which we've moved a bit, but its nowhere near the levels we're shipping, it's all a function of what we do which is.

So if we have essential sequential improvement in our third quarter, which seasonally, it should be than our second quarter regardless of the environment we're in, that would reduce the operating loss that we are experiencing at this point.

Well, but there's no seasonal wholesale pick up yet.

Yes, but we're still a little early in that cycle, Barry.

You know, usually we start saying a pick up in orders in April, when we've got our new product lines, the new model year that's coming out.

Okay.

So basically April will be key to get any pick up seasonally wholesale?

Yes.

Thanks a lot.

I think you're going to survive.

I mean, after all, Monaco and Fleetwood to fall, that's quite significant.

I think it goes back to what I said before, that I've been in this business a lot of years, and this is by far the most difficult time we as an industry have seen.

You're not the only one.

You're not the only industry.

Absolutely.

You are exactly right.

Thank you very much.

I appreciate it.

Thank you, Barry.

Your next question comes from the line of Richard Cain with Kinnison Partners.

Please proceed.

Good morning.

Good morning.

Most of my questions have been answered.

But I do wonder on a couple of things.

On your dealers, do you know how much in inventory they're carrying of, say, bankrupt companies; i.e.

the Fleetwood and Monaco and maybe even go back to National RV?

I'm talking about your dealers.

We are very aware of our dealers, what other product lines they carry, but having specific reporting on the level of inventory that they have on the other manufacturers, there's public information available on the dealers' websites that you can go to, but that's the only way we would have visibility as to the magnitude from a unit basis, but we definitely understand, especially from the recent announcements by two of our competitors, how many dealers we share.

Am I wrong in my conclusion that the ones that the dealers that that you have, that you're sharing with the bankrupt company, that's going to be a negative, because they're going to push those units out and take these enormous discounts and push those out first.

On a long term basis it would be beneficial for you, because they're going to replace them with Winnebago?

I that a fair conclusion?

Near-term it's going to be bad, but somewhere out there, it's going to be good.

Yes, think you're right, and it's going to depend on each dealer, because if you do have dealers out there that do have some product and as they discount it and get rid of it, they're going to be replacing that at an earlier rate, and so we should benefit from that.

So it's really hard to predict when we're going to see the upstick from that.

You break it into short term and long term, and to know exactly where that long-term is going to start, it could be relatively soon with some of the dealers that we've got.

But another risk that we're obviously concerned in evaluating is the dealers that we share, what is the financial strength of those dealers, and will this be something that they can't work through, will they be a going concern in the long-term, so there's risk there to work through as this plays out.

Talk about risk for a second.

A lot of people come back and look at your contingent liabilities and your obligations to buyback this stuff, and I know you said you've increased the reserves, in this economy, which gives you a lot of problems out there, is this reserve really adequate, or are we just playing it -- say, hey, it's got worse, so we're going to add a little more reserves, but are we looking out a year and saying I really probably under-reserved?

I mean, how do you approach that?

As I had mentioned in regards to a previous question, we analyze this on a dealer by dealer basis based on the inventory they have in place and the age of it, how quickly it's turning.

A number of credit score factors, to establish what our exposure is under the agreements that, we have the place, so we very carefully look at what is out there and establish a reserve based a that, and we're looking at what the current losses we have experienced in the last six months with are not something that we have any data and history to compare to, and assuming that we're going to continue at these lost rates and escalates losses as, I have to move them and sell the units twice is how we construct and develop the reserves.

So we think that what we have established is supportable, and based on the best information we have today.

And I think I'll add to that that if you look back a year, and many years before that, this was nonissue, and your analogy was probably closer then than what it is now.

It's here is what we think, really not based on a lot of input, but this economy and then some restructuring and repurchase agreements, has forced us to look at this thing from the standpoint of we have to have specific day to look at, and as Sarah says, between dealer strength with credit scores, with aged inventory, the amount of inventory they've got, we've laid out a really good formula from the standpoint of what we think our exposure would be.

Now, some of that stuff is based on numbers that we've put in there, but we think that they're all defendable, and we're better off forecasting what that reserve is today than we've ever been in the history of our corporation.

Okay.

On another subject, you have consistently said you weren't interested in going into the RV market, now just to play contrarian for a second, aren't you going into a much more competitive market, and why pick now to go back into the travel trailer market?

Okay.

As I assumed you meant travel trailers.

Yes.

Well, first of all, I need to clarify, I didn't say we were going into it.

Well, you implied that you're going into it.

It is a reversal, right?

you've always said that, we're a motorhome manufacturer, we're not a travel trailer manufacture per.

I will tell you that all we're doing is studying it right now.

There's nothing in the works to get into it.

All I'm saying is we've taken no out of our vocabulary and we're going to look at every potential in order to put our people back to work.

So it's really almost, like, hey, you're going to put unutilized capacity to work, and why not go into something you're somewhat of an affiliate manufacturing?

Yes.

And as one of the other callers asked, about non-RV related type things, we're looking at those, as well, so depending on what comes to fruition first, is going to depend on what we have for announcements later.

Okay.

Thank you.

I guess I just want to make sure that we don't give the wrong impress that we are actually getting into the travel trailer business.

We are not.

We are keeping all options open and the point I make is we are not unequivocally saying no.

Okay.

Well, it is a change, and we'll take it at that.

Okay.

At this time, I would now like to turn the call back over to Bob Olson for closing remarks.

Thank you.

While the current market remains extremely challenging we continue to be optimist about the long-term outlook for the RV industry.

The RV lifestyle is a great American tradition that would won't be abandoned by RV enthusiasts.

Customer who have delayed their motorhome purchase due to the economic environment will be ready to buy when the credit markets and general economy turns around, and when that happens, we'll be ready and in a great position to take care advantage of it.

I would like to thank everyone for joining Winnebago Industry's conference call today, and look forward to talking with you again in June when we report our results for the third quarter of fiscal 2009.