Winnebago Industries Inc (WGO) 2010 Q3 法說會逐字稿

Greetings and welcome to the Winnebago Industries third quarter 2010 earnings conference call.

At this time all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms.

Sheila Davis, Public Relations and Investor Relations Manager.

Thank you, you may begin.

Thank you, Jackie.

Good morning, and welcome to Winnebago Industries's conference call to review the Company's result for the third quarter of fiscal year 2010 ended May 29, 2010.

Conducting the call today are Bob Olson, Winnebago Industries's 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 WinnebagoIND.com.

A replay of the call will be available on our website at approximately 12:00 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 today.

Before we begin, it is my duty to inform you that 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 12 months, copies of which are available from the SEC or from the Company upon request.

I will now turn the call over to Bob Olson.

Bob?

Thank you, Sheila.

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

It has been an extremely long journey, but we are pleased to achieve our first operating profit in over two years.

In addition, we have continued to see sequential improvement in revenues and gross profit in the third quarter.

Sarah will go through the financial details in a moment.

But these results were driven primarily through the improvement in motor home deliveries throughout the quarter.

Another important improvement during the third quarter of fiscal 2010 is the fact that our deal inventory levels have remained flat, the end of the second quarter as retail inventory of Winnebago Industries product kept pace with the increased wholesale shipments.

We feel this level of inventory is appropriate in today's market as dealers and their lending institutions are mindful to ensure the inventories are consistent with retail demand.

The good news is that the dealers for the most part, have purged their inventories of aged product on their lot so retail customers now have newer products to choose from.

The ramp up in production we initiated in mid October of 2009 has also allowed us to keep our sales order backlog at reasonable levels.

We anticipate this backlog to increase as we launch our exciting new to 2011 motor homes to dealers this month as we have a lot of very exciting new 2011 products, particularly in the diesel line which we anticipate will drive our sales order backlog up as the year goes on.

Another area we are extremely pleased with is the retail market share activity.

According to Statistical Surveys Incorporated, our combined class A and class C retail market share was 19.5% for the first four months of calendar year 2010.

We are particularly pleased with the class A diesel market segment with 13.4% market share compared to 9.4% for the same period last year.

As I mentioned in the news release, as we continue to recover from one of the toughest periods our industry has ever seen, retail activity will be the single most important factor to sustain our current production rates and for continued growth going forward.

While increased business in the third quarter allowed us to increase our bottom line, we will need continued retail activity to complete the cycle.

It is obvious that the RV lifestyle continues to be a very viable alternative for consumers as they contemplate their other vacation and retirement choices.

We will see this first hand in a month when we hold the Annual Grand National Rally event and welcome home hundreds of our Winnebago and Itasca friends for a week of fun-filled activities.

I think a good reminder to everyone associated with this industry is the fact that the RV lifestyle is still embraced by many Americans, campgrounds are full and it is one of the most affordable getaways you will find.

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

Sarah?

Thank you, Bob.

I will now review the financial performance of the Company's third quarter of fiscal 2010.

Revenues for the third quarter were $134.8 million, a 165.1% increase from the third quarter of fiscal 2009.

This was primarily a result of an increase in our motor home deliveries of 746 units or 120.3%.

Revenues also sequentially improved over the second quarter up $24.3 million or 22%.

Our average selling price increased by 22% for the quarter as compared to last year.

This increase was both a function of a shift in our sales mix to more higher priced products and also a reduction of product discounts offered at the wholesale level due to improved wholesale market conditions.

Another positive impact to revenues was that our retail promotional allowances decreased by 4.7% as a percentage of net revenues when compared to last year.

Lastly, contributing to the revenue increase was an increase in our nonmotor home revenues of 40% or $2.6 million as opposed to the 16.1% decline we saw in the first six months of fiscal 2010.

Increased motor home production during the third quarter resulted in improved labor efficiencies, reduced labor costs as a percentage of net revenues and increased absorption of fixed costs as compared to the prior year.

These items had a positive financial impact and resulted in a gross profit margin for the quarter of 7.2%, as compared to a gross deficit of 16.3% last year.

During the quarter we recorded tax benefits of $2.4 million, these were primarily due to the positive resolution of federal tax audits which resulted in a release of unrecognized tax benefit liability, and also due to the fact that we amended our 2009 federal carry back return to accelerate certain tax deductions.

We did not record any tax expense related to the operating income earned during the quarter.

However these tax benefits did reduce the fully reserved tax benefit associated with the first six months of fiscal 2010 pretax losses.

Moving to the balance sheet, we continue to strengthen our cash position, with an increase of $34.7 million during the quarter.

The primary factors in the increase were due to reductions in inventories of $20.7 million, reductions in accounts receivable of $9.2 million and net income of $6 million.

Note that due to the amended federal carry back tax return filed in the quarter, we increased income tax receivable by approximately $1 million which we expect to receive during the fourth quarter.

We also continue to see redemption activity of our auction rate securities during the quarter, which were $2.5 million, net of borrowing.

The significant reduction in inventories during the third quarter was comprised of reductions in all categories.

Inventory reductions were in part a result of large rental order shipments near the end of the quarter and fewer raw material chassis on hand.

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

Jackie, we are ready for questions.

Thank you.

(Operator Instructions).

Thank you.

Our first question is coming from Craig Kennison of Robert W.

Baird and Company.

Good morning and congratulations.

Thanks, Craig.

First question on retail, it seems to have strengthened in May relative to what we have saw in the statistical survey data.

Is that a fair analysis or is there something else going on.

When we look at retail activity, we are, nearly 1400 units in the quarter through May to arrive at our ending deal inventory.

So on average 107 per week for us.

Rental can really widely impact that and skew certain months.

But that is what we had experienced in the quarter.

Would you say that any month in the quarter was particularly good or bad?

Well, we were very pleased with April data that was just released earlier this week.

Okay.

That's helpful.

And could you comment on promotional activity?

Well, the key driver if for the reduction is we look at last year, when we had much higher deal inventory that is retail activity that was happening at that point was very much supported by manufactures, we had a variety of programs in place to try to stimulate retail demand.

So that's the toughest thing to try to compare year-over-year even though from an industry standpoint, you look at retail, it is not quite at where we were a year ago, but there was so much support happening to try to bolster up that last year, but this year we are in a better spot.

So that's really the catalyst because we have less inventory and it is not nearly as aged as it has been last year.

I think that's a good point.

To really, expound a little bit on as well because not only were all of us manufactures helping the dealers trying to remove some of the aged inventory, but we had several manufactures that had distressed product out on the dealers lots that they were trying to move those through as well.

And so when you look at all of the negatives that were in place last year, to be able to not have the discounting that we had back then and still almost be with what we were last year, I think is an accomplishment in itself.

And Sarah, I know the break even targets can be a difficult target to hit or to estimate, but where do you see that today given the promotional environment?

Is it roughly where it was last quarter?

Yes.

That improvements sequentially are not as dramatic as on a year-over-year basis from what's happening at the top line of revenues.

Last year at this time, we still had a lot of repurchase activity.

But it was all fully reserved for.

On a year-over-year basis, it is really not an item that causes any comparable differences.

So sequentially, from second to third, a little bit of an improvement, but we are kind of holding our own, and with the improvements in the nonmotor home revenue category, for the first time, this fiscal year, that has been helpful as well.

So, we are definitely seeing the variables that we have highlighted at length over many conference calls.

We are, all of the things are working out at this juncture, but in a perspective basis, it is the, their key is retail.

Will it sustain itself to support our production schedule is the key question that we will continue to be reviewing daily.

Great.

Thanks.

I will get back in the queue.

Thanks.

Thank you.

The next question is coming from Scott Stember of Sidoti and Company.

Good morning.

Morning, Scott.

Do you have the ASPs for this quarter and last quarter, last year?

Certainly.

Class A gas we had 92,302 as compared to 87,421 last year.

Class A diesel was 167, 074 versus 163,258.

Class A combine was 121,886 versus 114,136.

Class C was 64,472 versus 61,704.

Total A and C was 95,182 as compared to 78,066.

Class B was 62,547 versus 60,946 so all in we are looking at 92,366 this year as compared to 76,519 last year.

Okay.

And just based on your comments in the press release, is it fair to assume that we are starting to see the dealer restocking is coming to a close here?

And the question would be, going forward at these levels of profitability, are there any other things you would need to do from a cost cutting perspective that you can envision to help you get off of these levels here?

Well, I think first of all, you are right from the standpoint that I think that the dealers, their inventories levels are about where they need to be with the retail activity we have got today.

So I think the, the up surge of orders, I think are going to level off now.

As we have stated many, many times before.

I don't want to sound like a broken record but the sustainability of this recovery now lies in the hands of our retail customer.

I think it is very important for our industry in total that retail customer does come to the lot and purchase the vehicles.

As far as additional cost cutting, I think you know that over the course of the past two years we have taken out a lot of costs that we would have had before.

We've have tried to surgically remove where we can keep our identity as a corporation.

If we are looking at other things to cut, we will have to take the same approach because we really don't want to become something that hasn't got us to this juncture.

And so, any additional cuts would have to be looked at very, very under a microscope just because we have been very successful at who we are for 52 years.

We don't want to do something to take that success away.

We continue to look at ways to reduce costs everyday.

That's just part of our culture now.

We have a couple of assets up for sale.

We will look continue to look for ways to find buyers for some of those to reduce costs.

We are still vertically integrated, a manufacturer of motor homes and not an assembler and we plan on saying that way.

So to this point, there's no plans or, you guys aren't entertaining the idea that you have to make any major changes?

No.

Okay.

And the new models you got new product lines coming out.

I know you don't want to tip your hand one way or the other but can you give some indication of which direction these products might be going, A to Cs?

There's not a lot of secrets now because we have started to launch this product, our district manager, sales managers have been out on the road with our dealers showing them web based presentations, showing them what the new product is.

I think that we have got our top of the line product, our tour product that is we have redesigned the exterior substantially, and I think that, of course I'm a little biased but I think it is one of the best product offerings we have ever come out with.

We have really upgraded the interiors in those two lines.

We have got some of the lower end gas product, that we have offered, we are offering some different floor plans extended lengths in that product.

We are coming out with C body product that is tags on our entry level C body product that gives us a premier package.

So, we have got a lot of new things.

I they we just, it is an extension of what we did in 2010 if you remember right, 2010 we came out with a product line that the majority of it was redesigned and refurbished and we just continued that trend with the 2011.

Okay.

What was the capacity utilization this quarter, and if we look into the fourth quarter with the backlog, sequentially down, is it fair to assume that things should start to tail off a little bit?

We don't like to give any forward guidance but as we said in the news release and I think I said it in my script, with a 2011 launch now upon us we hope we are going to start to see that backlog increase a little bit.

So I don't think so, the utilization that we did have in the third quarter was right at 40%.

Got you.

Okay.

That's all I have.

Thank you.

Thank you.

The next question is coming from Kathryn Thompson of Thompson Research Group.

Hi.

Thanks so much.

Can you give us an update of your capacity utilization during the quarter and where it is right now?

Through the third quarter we were at 40%, and that compares to 43% last the second quarter and as I had mentioned to Scott, with our 2011 product now starting to be launched, we are hoping that we will see orders that bring that up and we will stay at the run rates that we are at today.

Heck, if we see retail activity, we hope to improve or increase that production rate.

But as we have stated many, many, many times before, it is all going to hinge on retail.

Well, in thinking about that 40%, does that mean production you are at a five-day week production?

How can we think about that?

Yes, right now we are at five day week, on all three assembly lines.

We look at our capacity calculation, we are looking at what can our physical plant do, we don't necessarily have the resources currently employed to do much, much higher but the reason it can move up or down between quarters would be a function of the mix.

We have the ability to produce a lot more Cs because it takes about half the labor hours.

So when we look at the utilization third quarter, it is based on the mix we did produce and if we had that level of mix, how much could we in total produce.

So, there's a lot of ways to calculate that, but it is definedly a five day week schedule.

And how many weeks does your current backlog represent and how does this compare to a normal lead time?

Right now our backlog represents in the eight to nine week lead time and our cycle time and that's about in that area where we like to be.

Have you seen this creep up since last quarter?

No, no.

Our backlog as we stated in the news release is that its up from last year, its down sequentially from second quarter.

With our 2011 product coming out, our intentions are that we will see that maybe increase a little bit.

But we are at about a level where we think it is servicing our dealers, the correct way.

If you get too far out, there are going to look at it and say I need your product if they can't, they may go to somebody else.

So, we walk a fine line there.

We have to meet our customers expectations of delivery performance as well.

Given that you had a rental order and I assume this product is primarily class Cs, that hit in the quarter, is it a correct assumption that your order mix shift right now is more skewed to class As?

Rental product is definitely a large majority of it would be C and on a perspective basis we look at transitioning production to that new model year product and rental is primarily for us a third quarter event.

So in other words, more class As it sounds like?

The backlog reflects the mix that we see our dealers ordering through the end of the quarter.

So, that's reflection of a lot of what will happen in the quarter.

I know you have talked around retail trends that the order rate is in keeping with current trends, any other type of color you can give in the May and June timeframe?

In particular, given that you have gained some market share over that time period?

I don't know if we have anything to haven't touched upon, it is the reality that rental orders are a part of retail registration data fairly immediately, because its placed in service, so there is a baseline level of demand outside of rental that has to be the catalyst for what we produce perspectively.

That is the key, and we were running on average a little over 100 a week for retail inside the third quarter but a piece of that is rental.

And we need the next few quarters, we need to have that retail run rate excluding rental support our weekly production.

Okay.

Great.

Thanks so much.

Thank you.

Thank you.

Our next question is from Bret Jordan of Avondale Partners.

Good morning.

Continuing on the rental subject, your comment was large rental order shipped in the quarter.

How large was that rental order and I guess given the fact that Q3 is a rental quarter, how does that compare to rental volumes last year?

We don't -- for competitive reasons we don't break out that, that proportion.

In regards to where we are a year ago it is definitely improved because of our perspective a year ago is many of the key rental operators just chose to keep their fleet in tact or run it another season.

And there was more optimism out there this year and they only have the ability to do that for so long.

But, when we look back in history annual basis, rental volumes for us have been in the 5% to 10% of the annual volumes, and the last two years things are not really following historical patterns per se but I guess that's a little more color I can provide you.

Okay.

On nonmotor home revenue, is that consistent run now, the 40% growth or is that something that was one off in the quarter?

One of the key elements of our nonmotor home revenue quarter is our extrusion business, and that can be a little bit of a fluctuating revenue stream due to what bill-up prices are.

So that, I think that improvement we are seeing there is so many of our customers in that category, are automotive and housing-related.

We finally saw a little improvement on that base line business and we also saw billet rates go up.

But there wasn't any one unique unusual item.

There is a some seasonality into that because of the category, in that section would be our customer service, and our part sales, and their seasonal up ticks definitely in third and fourth quarters for some of that business.

It is a lot more enjoyable for our customers to come back to Iowa in summer months opposed to cold winter months.

But we are definitely interested in seeing that come back and improve more, so in future quarters.

With the extrusion business, if the RV business is an early indicator of economic improvement, we are hoping that they're going to start seeing that improvement as well because they have taken a hit just like every other industry, in the United States, over the past couple of years, and if the economy starts to straighten out we should see improved business there as well.

One last question, as you look at the 2011 product launch, and expectations of improving backlog, do you get the impression that dealers have opened a buy they have not filled their inventories as they wait for to 2011 or for 2011 product launch to drive a lot of revenues or do they need to clear out inventory than to replace?

No, I don't think so.

As we mentioned before, we think the inventory levels that our dealers have right now are in good shape.

The finance companies aren't going to let them get carried away as far as the level of inventory because they won't give them the wholesale financing line, and so we think right now, that the age is relatively good shape on our dealers lots.

There has been great improvement made over the last year to 15 months and so, there's relatively new stuff out on the lots, the turn rates are where the financial institutions are wanting them.

We feel there might be room for growth with our dealers as they see 2011, but we don't think it is something they will get carried away with.

Okay.

Great.

Thank you.

Thank you.

Our next question is coming from Richard [Whitting] of Broadview Advisors.

Good morning.

Good morning.

Sarah, you can speak a little faster than I can write.

So if we could just flip back to ASP for a second, what was the all-in ASP?

93,366 for the third quarter ended.

Versus?

76,519.

Excellent.

Would it be fair to say that I would imagine that the rental companies would not order gussied up RVs, whether it was Cs, As, whatever would that skew toward more rental volume be depressing that ASP a little bit?

From a mix standpoint, it is typically a class C product, I would say that there was comparable or we had a level of rental shipments in the prior year, that would have been a dynamic, the biggest delta or what's driving, we see a stronger mix of our class A gas and diesel.

I guess that's really lifting us from a mix perspective even with the rental.

And also, as we touched upon in my prepared remarks, the level of wholesale discounting has improved on a year-over-year basis.

Would it be fair to say that the customer rebates have declined as well or strictly on the wholesale level?

The promotional activity at retail, is definitely improved, that's not reflected in our ASP because of how we sell it to the dealer but that's very much improved over last year as well.

Bob, in the past, we have talked about wanting to have enough of an inventory flush in the industry but the dealers got back to the one to one order rate.

With inventories being flat at the dealers, would you say we have reached that milestone?

I think we are real close.

I think based on turn rates and expectations that the finance companies have of the dealers inventories, there may be room for a little bit of inventory growth, but I think all in all we are at a level, that's why we keep talking about the importance of retail because --

Sure.

That completes that cycle.

This inventory replenishment, which had to happen and they are still at historical levels, but based on the retail activity that we have, we think that there are in pretty good shape right now.

The manufacturers have stepped up, the dealers have stepped up and now its in the retail customers hands.

And you know what, we don't have any visibility to outside of our own dealer inventory levels, is if you would see the same dynamic.

With our deal inventories flat since the end of February, that's indicative that what we ship is flowing through appropriately.

If I look at the industry in regards with what's been shipped in the last four months opposed to what's retailed.

You see that inventories have grown by about 1,600 units.

It leads me to believe that maybe we have some buildup somewhere, but we don't have that, that's as far as we can take it.

Okay.

And last, Bob, as you had mentioned earlier in the call, it feels like manufactures who were carrying distressed inventory, that flush has occurred.

And for the most part, its moved through the system.

Yes, we think so.

And again to Sarah's point, we don't visibility with the entire industry, dealer inventory but we can base it on ours and several of our dealers are multiline.

So we have got access to what they have for competitive products, and for the most part, compared to last year, it is much improved from the standpoint of distressed inventory.

Would you say there has been an improvement or mitigation in the quantity of repo or distressed retail merchandise that's in the chain.

Yes, I would agree with that as well.

We have talked to several of our financial friends, and they have way less of that type of inventory than what they had a year ago.

So we have seen improvement all through the inventory, that aged inventory category, it is much better this year than it was last year.

Thanks for a nice quarter you guys.

Thank you.

Thank you.

(Operator Instructions).

Our next question is coming from Greg Badishkanian of Citigroup.

This is Alvin Concepcion in for Greg.

Congratulations on the quarter as well.

Just wondering if you can give us some color on the retail and wholesale credit environment over the past few months?

Yes.

We routinely check in with the major players there, and what we are hearing is there definedly is capacity on the lines, and dealers are not using 100% of what they have available to them, but as we see the levels are prudent based on what the retail run rate would be, and I think that the rates are still not bad rates, the environment has tipped it a little bit but you are looking at LIBOR plus maybe 4.5% on the wholesale side and retail maybe 5.5% for the larger loans or better customers, but I think that there's access to the financing from the dealer standpoint, but that the discipline has continued to be enforced in regards to the payments on curtailment.

The system seems to be working appropriately.

We didn't really hear anything that was a significant change from what we heard last quarter or the last two quarters.

Okay, and then, I just want to see what your outlook is on commodities and do you expect an impact from that?

Well, we definedly have seen pressure on metals and oil based commodities from an inflation standpoint especially in the last four to five months.

So that is a relevant consideration if for us when we look at our costs.

And we have also about our human costs in regards to our people.

And on health care it is a topic of discussion as to what that will cost us on the perspective basis.

That can be a significant pressure for us.

When we approach evaluating the pricing for each model year, all of that information is what we review, and now at the same time we are looking at what can we do differently with our product to take costs out.

So, that is a fair point on the process.

Another element that is definitely a factor is unemployment taxes, with the high unemployment and continued expansion of those benefits.

So there's a multitude of challenges and we are dealing with them one by one, but that's a few points to comment on to your question.

Great.

Can you talk about for your model year 2011, what kind of price increases you are baking in?

Well, I think, from an economic standpoint, we have looked at your very question as far as commodity pressure, but when it comes to the product itself, we are trying to do as much as we can to hold the line on pricing because we know how difficult it is for everybody right now to handle any kind of price increase.

The one thing that I will say, I think we as an industry have an issue from a pricing standpoint, and that's where the new 2010 emissions that most manufacturers will be switching to this summer.

We had one of these changes back in 2007, that resulted in, an $8,000 to $9,000 or $8,000 to $10,000 price increase for the retail customer on diesel emissions.

We now have another one for the 2010 emission that is will hit our 2011 products.

That's going to be another probably $8,000 to $10,000 cost increase to that retail customer.

So, I mean in a matter of four years with we have seen a price increase on diesel product to the retail customer in that $18,000 to $20,000 range, and at that time when this industry really can't afford those kind of cost increases but it is federally mandated and we have no choice.

Okay.

Thank you.

Thank you.

That concludes the question-and-answer session for today.

I would like to hand the floor back to Mr.

Olson for any closing comments.

All right.

Thank you, Jackie.

I want to thank everybody for joining us today.

Again, we are extremely pleased with our results for the quarter, and the sequential growth that we have achieved each quarter as we progressed throughout fiscal 2010.

This is a very positive sign, but I caution that in order to continue this growth, we need to see an increase in retail sales as we go forward.

We remain very optimistic about the long term outlook of the industry and are prepared to capitalize on the increased demand for our products as the market continues to recover.

I would like to thank everyone for joining Winnebago Industries conference call today and I look forward to talking to you once again in October when we report the results of the fourth quarter and fiscal year 2010.

Thank you.

This concludes today's teleconference, thank you for participating.

You may now disconnect your lines.