Winnebago Industries Inc (WGO) 2011 Q3 法說會逐字稿

Greetings and welcome to the Winnebago Industries' third quarter 2011 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, Sheila Davis.

Thank you, Ms.

Davis.

You may begin.

Thank you, Dan.

Good morning and welcome to Winnebago Industries' conference call to review the Company's results for the third quarter of fiscal 2011 ended May 28, 2011.

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

I trust each of you have received a copy of the News Release with our earnings results this morning.

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

A replay of the call will be available on our website at approximately 12.00 noon today, Central Time.

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

Before we start, it's my duty 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 those 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'll now turn the call over to Bob Olson.

Bob?

Thank you, Sheila, and welcome to Winnebago Industries' third quarter conference call.

First, I'd like to start today's discussion by saying we are very disappointed with the results of our fiscal third quarter, because we felt going into this quarter that a recovery was upon us and continued improvement could be expected, not only for Winnebago Industries and the RV industry, but for the American economy as well.

As we have all seen over the course of the last few weeks, several economic indicators have weakened, resulting in consumer confidence, that had been trending favorably, declining in May to levels of a year earlier.

Leading this decline in consumer confidence has been the uncertainty of rising fuel prices.

Based on information from the Energy Information Administration, the average fuel prices at the pump have fluctuated greatly during the lengthy downturn.

Some argue the first rise in fuel prices started the current recession in 2008, going from $3 per gallon in January that year to a high of $4.05 by mid-July.

As the American consumer became accustomed to the higher price of fuel in 2009 and 2010, we started to see signs of recovery, especially as dealers started to replenish their inventories that had been depleted to historic low levels.

Then at the beginning of 2011, fuel prices started to rise again with the unrest in the Middle East, quickly reaching the $3 per gallon level early in the year.

By mid-May, the average cost per gallon at the pump for gasoline was once again in the $4 per gallon range; and the American consumer was once again in unchartered territory, resulting in concern in the slowing of an already-fragile recovery.

The good news is we are starting to see the price at the pump come down, but only time will tell where the price of this important commodity will settle in.

In addition to the volatility of fuel prices, job creation in America has slowed, home values continue to fall and reports are this may continue for the near future.

Declining auto sales were reported earlier this month, along with weaker-than-anticipated consumer spending.

All these factors have had a negative impact on the Dow which has been trending lower under 12,000 points again.

In addition to all of these negative economic indicators, we have had an unusual number of tornadoes, floods and wildfires across the country this spring and we also have a government that can't agree on a fiscally-responsible budget and continues to argue over the debt ceiling which all contributes to the decline in consumer confidence.

As a result, instead of a recovery continuing as we saw at the end of 2010, we are seeing a recovery that appears to be slowing.

Although wholesale continues to outpace last year's shipments by approximately 18%, the average annualized rate since the first of the year is only a little over [25] units in Motorized segment, approximately half of the pre-recession average in industry volume of 55,000 units.

Our real concern, however, lies in the retail activity of our industry.

Our industry has seen three consecutive months of retail activity that have been less than last year's retail volume.

This is a trend that makes you question the strength of the recovery.

Last week I had the opportunity to attend RVIA's Committee Week in Washington, DC, and discuss the current conditions of our industry with competitors, dealers and suppliers.

Several comments were made of the time the slowing occurred and most of the concerns were centered around the volatility of fuel prices, home values, unemployment rates, stagnant wages and the general uncertainty of what the government will end up doing with the budget and debt topics.

Also at this event, RVIA's economist, Dr.

Richard Curtin, gave an optimistic forecast and raised his year-over-year projections of industry volume.

However, when comparing his spring edition of forecast, he in fact lowered his forecast from 263,100 units overall to 260,200 units.

When comparing his spring forecast for motorized RVs to his current forecast, he has lowered it from 26,900 units from his current forecast of 26,100 units.

Another subtle sign the recovery may be slowing.

I don't like starting our call with such negative comments today but I'm afraid it is reality.

As a Company, as an industry and as a country, I believe we were seeing signs of recovery.

But this current slowdown shows how fragile the recovery process can be.

From a more optimistic viewpoint, there continues to be some who predict the economy in the second half of the year could improve; and if that happens, demand for our product could increase and our industry would have a whole new set of challenges.

There also continues to be positive signs we cannot lose sight of.

Population and demographic trends favor long-term RV market growth.

And RV parks and campgrounds continue to report increases in attendance.

While there remains uncertainty in fuel prices, they are currently going in the right direction.

And the RV lifestyle is still being embraced by millions of North Americans as one of the most fun and affordable vacations available.

I will now turn the call over to Randy Potts.

Randy?

Thanks, Bob.

While the current market is challenging, we continue to believe that product innovation is the key to our long-term success.

We're now in full production of model year '12 products and have been introducing the new lineup to our dealers throughout North America.

All of the new products are exciting and should be well received as they hit the dealers' lots throughout the coming months.

We continue to invest in the R&D of our new product offerings, resulting in approximately 40% of our 2012 products being new or redesigned.

We feel it's very important to continue to give our dealer partners and retail customers new and innovative offerings as we continue through the recovery process.

In addition to our 2012 motor home lineup, we are very excited about reintroducing our ERA Class B product.

This redesigned ERA is in production and deliveries have begun to our dealers.

Early reports tell us they like what they see.

This product is another addition to Winnebago Industries' offerings of the most fuel efficient RVs in the industry.

We continue to see growth in our Class A diesel share, due to new products we've introduced over the past couple of years.

Our Class A diesel market was 16.2% for the calendar year-to-date through April, compared to 13.2% for the same period last year.

That also helped bring our total Class A market share to 19.7% for the calendar year-to-date through April, versus 18.2% for the first month of calendar 2010.

With the introduction of our new 2012 products throughout the coming months, we're poised to continue to grow our market share in all categories.

On the Towable side, the integration of SunnyBrook RV into Winnebago Industries' operations is progressing well.

The first of many redesigned SunnyBrook products are in production and shipping soon.

One of the new Towable products is the 2012 Sunset Creek line, which are offered in three new levels, the Sunset Creek Sport, Sunset Creek, and Sunset Creek Classic.

We're going to continue to introduce new and redesigned SunnyBrook brand trailers and fifth wheels throughout the summer, while a new Winnebago brand product will be launched in the coming months.

As a Towable subsidiary, we've succeeded in assembling an impressive team of industry veterans.

Additionally, our plan of sharing systems and processes from the motor home side of our business is allowing us to leverage our past investments.

While not yet accretive in the third quarter, we feel confident about the positive impact this new subsidiary will have in future quarters.

We will continue to challenge ourselves to bring more innovative products to the market and look for additional efficiencies in our operations in an effort to continue to be one of the leading manufacturers in the industry.

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

Thank you, Randy.

I will now review the financial performance for the Company's third quarter of fiscal 2011.

Net revenues for the third quarter were $135.6 million, a 0.6% increase from the third quarter of fiscal 2010.

As we noted in the Press Release, Towable revenues were $7.2 million.

Excluding the impact of Towable revenues, our revenues were down $6.3 million, primarily due to the fact that motor home deliveries were down 83 units, or 6.1%.

We achieved a modest improvement in the average selling price during the quarter, however, this is partially offset by discounting initiatives to our dealers.

The third quarter was negatively impacted by several incremental, non-cash expenses that totaled approximately $2.5 million.

First, we recorded a LIFO inventory expense in the third quarter as opposed to LIFO income in the prior year that resulted in an incremental, non-cash impact of $840,000.

This was due primarily to higher inventory levels at a higher estimated inflation rate.

Second, an equity grant was awarded during the March meeting of our Board of Directors, the first such grant since October of 2007, which resulted in an incremental stock-based compensation expense of approximately $745,000 in the quarter.

Third, we recorded an additional impairment of $605,000, related to our Hanson facility, that remains classified as an asset held for sale.

Lastly, while we continue to believe that our dealers' inventory remains in line with current retail demand, we did record an incremental $260,000 of expense to increase our repurchase reserves in light of recent information regarding two specific dealerships, one on each coast.

Partially offsetting these negative items was the reversal of $1.3 million of accrued incentives established in the first half of the fiscal year.

These expenses and the accrual reversal impacted both the cost of goods sold and operating expenses of our P&L.

Our gross profit margin for the third quarter was 6.4%, compared to 7.2% last year.

Along with the non-cash items mentioned earlier, a few other key items eroded our margin in the third quarter.

One area that continued to negatively affect margins was commodity pressure.

We saw a consistent rise in metals and petroleum-based products throughout the third quarter and estimate that it negatively impacted gross margin by 62 basis points as compared to the prior year.

This pressure was partially offset by lower inventory scrap loss rates as compared to the prior year.

Another reduction in our gross profit margin of approximately 35 basis points was attributable to increased compensation and benefit expense this quarter.

Our employee base had not received a salary increase since August of 2008, and as you may recall, we also reduced salaries in March of 2009.

The increase we experienced in the quarter essentially restored wages to the August 2008 level.

We felt after four quarters of profitability through the end of the second quarter that it was the right thing to do in return for our employees' hard work and sacrifices during this recession.

From a G&A perspective, legal expenses were also higher this quarter by approximately $565,000 as compared to the prior year, are results of increased Lemon Law activity, due to increased wholesale shipments in the past 12 months, and also costs associated with the pursuit of a trademark infringement case.

We recorded a tax benefit of $581,000 in our quarter, which reduced our year-to-date effective rate to approximately 17.6%.

We estimate that our annual effective tax rate to be approximately the same for the remainder of the year.

We ended the third quarter of fiscal 2011 with $65.2 million in cash as compared to $62.8 million at the end of the second quarter.

This slight increase in our cash balance is primarily attributable to our third quarter EBITDA of $1.9 million.

Working capital changes include outflows of cash during the third quarter for increased inventory of $4.7 million, which is offset by a reduction of our accounts receivable by $4 million.

The $4.7 million increase to our inventories during the quarter is directly related to the lower-than-anticipated demand in our third quarter, as raw material and wood inventory was up by $10.7 million.

This was partially offset by a $5.6 million reduction of the finished good inventory on-hand.

To summarize, the third quarter was very challenging for us with many negative pressures impacting our results.

To counter these challenging market conditions, we continue to make prudent alterations to our business and pricing model.

First, as I already covered, we have eliminated the accrued incentives in light of weaker profitability.

Second, in regards to the recent inflation pressures experienced, we elected to incorporate these incremental costs in our model year 2012 pricing, and began shipping this product at the end of May, which will partially mitigate inflation impact perspectively.

Consistently with our past practice, we will continue to monitor commodity pricing and evaluate appropriate actions during the model year as well.

Third, we priced certain 2012 product series more aggressively with a strategic objective to increase our volumes on a prospective basis over the next model year.

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

Thank you.

Ladies and gentlemen, at this time we'll be conducting a question-and-answer session.

(Operator Instructions) Kathryn Thompson of Thompson Research Group.

Hi, thank you for taking my questions today.

First question, what is the biggest driver for margin pressure other than lower utilization during the quarter?

As I had covered, when you look at on an overall basis, the material pressure was the most significant between LIFO and inflation, and some non-cash, some real cash impact there.

That was the most material element of margin pressure in the quarter.

(multiple speakers) Excuse me?

Would you say it would be half of the pressure or a third of the pressure?

Well, as I walked through on my prepared remarks, we looked at inflation being 62 basis points, and the LIFO equivalent is very similar from a dollar standpoint, so that's essentially on a net 60 basis point range.

So those 2 combined are the most significant individual that was partially offset by the reduction in our inventory scrap loss rates, as I commented upon.

But the challenges are numerous, as we highlighted in both the Release and my prepared remarks, so that's probably more of the challenge we had.

It was just a multitude of many pressures.

Okay.

The repurchase exposure you referenced in the Release and your prepared comments, we assume that 1 of 2 closures relates to Altman, which we learned about in late April and early May.

My question to you is, if this was material enough to point out in today's Press Release, why didn't you better clarify what the potential impact would be as these closures were made public?

Kathryn, the impact of the increase in our reserve actually is primarily related to a separate dealer which we received repurchase notification on the last day of our fiscal quarter.

The whole process that Altman's going through is very orderly, and they are very rapidly selling the inventory off their lot themselves.

That does have an element of our exposure but it's very small in the magnitude.

We reassess exposures every quarter based on every dealer's position but that is not the material item that we are referring to.

Okay.

That's very helpful.

Also, could you give a little bit more color on discounting?

What type of products?

Is there a focus regionally?

What are you seeing in the current market?

From a discount standpoint, probably most notably is in 2 areas; the rental side of the business and then just model year transition, moving from model year '11 to '12.

Okay.

And I guess another question I had is, last quarter you had said Class B production would be in full force during Q3, but [unless you only sold 1] during the quarter.

Could help me understand the ramp-up of your Class B production as it gets to dealer lots?

Production was beginning in the third quarter and shipments are starting now.

But most notably the challenge we had there was a delay in getting the chassis on the ground here in Forest City, or in Iowa, actually.

They're manufactured in Charles City.

That was a delay for us to get ramped up as quickly as we would like.

My final question is, when we look at the stat survey data from January through March, we see that Class A retail sales for Winnebagos specifically were up double digits; and yet your wholesale order picture paints a different picture.

Help us understand the disconnect between those 2.

I would say most simply that what's retailing inside those four months are obviously very different units than what we're selling, and that a pull-through doesn't happen immediately always for all the dealers.

And we just felt, especially as the third quarter progressed, even from a flooring standpoint, if some dealers aren't able to replace maybe as quickly as they would like, but great retail numbers, in any one particular month, probably aren't going to be a resulting shipment on the wholesale side in that same quarter, but we're not happy in regards to what we shipped inside the quarter from a wholesale penetration standpoint.

So it sounds like you're saying that there's either a delay in what you're ordering or just choosing not to reorder on a one-to-one basis.

Kathryn, this is Bob.

I think part of the reason is transitioning from 2011 model year to 2012.

A lot of dealers will try to bring down the 2011 product in their inventory before they take on the 2012.

And we saw some of that this year as well.

Along with the comments that I made in the prepared remarks, I think there's some uncertainty out there; and I think you're seeing dealers starting to be concerned about what the economic pressures are going forward; and I think they're just being very cautious as far as replenishment of inventory.

Okay.

Great.

Thank you very much for answering my questions today.

Scott Stember of Sidoti & Company.

Hi.

Sarah, could you give the ASPs by category, please, this year and last year?

Certainly.

For Class A gas, our ASP was $91,529 as compared to $92,302.

Class A diesel was $186,283 versus $167,074.

Our blended Class A was $122,255 versus $121,886.

Class C was $67,925 versus $64,472.

Total As and Cs, $94,581 as compared to $95,182.

Class B was $71,674 versus $62,547.

And all combined motor home ASPs, $94,563 versus $93,366.

It was up 1.3%

Okay.

And just going back to the discounting comments.

Could you just maybe quantify, compared to past slowdowns, how this level of discounting compares to, let's say, 2008 time frame.

We're nowhere near at that level.

It's just elevated in regards to what we would have seen last year.

Had on the discounting been flat, we would have probably had closer to a 2% ASP, but it's not significantly different, but it was a factor for us in the quarter.

And last year's numbers obviously were depressed as far as discounting, because of the stocking levels that were going on too, right?

Yes.

We, more notably, increased our dealer inventories inside of the second quarter, but we had a very different picture in regards to just the outlook, I would say even.

So that's a fair way to look at year over year.

Okay.

And as far as costs, I know that you eliminate your compensation accruals, but are you guys planning any other things that you can do as far as -- assuming that things do slow down dramatically from here.

Oh, definitely.

That's definitely a topic of conversation.

When we look at the things that we had done in the past few years, it's headcount, it's what days we're working, what lines are working, and then it's also from the standpoint of our geographic locations, but everything is a topic of discussion.

It feels very similar to a few years ago, looking at the outlook and what are the levers we have to manage the business as best we can.

Okay.

And as far as the legal fee, could you just maybe comment on that a little bit more?

Well, I guess, first, I would maybe note that last year's legal costs were very, very low, so it was a tough comp.

And we are seeing -- there's always a kind of a level of Lemon Law cost that is typical in the industry, but I would attribute maybe, there's a cause associated with all of our dealers have contracted; and they have maybe less technicians and service capabilities, which can make the environment more ripe for these kinds of claims.

But we had a very low comp year over year and we've produced a lot more in the last 12 to 18 months that would be a connection.

But also, on the patent infringement -- or the trademark infringement case, it adds a little bit of a different expense for us and more one-time in nature, I would say.

Okay.

Last question, just what was the capacity utilization throughout the quarter?

Capacity utilization is somewhere in that 40% range.

40%?

Yes, approximately 40%.

Great.

That's all I have.

Thank you.

Greg Badishkanian of CitiGroup.

This is actually Alvin Concepcion in for Greg.

I know you made some comments already about concerns of the economic recovery slowing.

Have you seen a change in retail demand from May into June to date so far on a year over year basis?

I think it continues to trend the way the first 4 months have.

We'll know more from an industry standpoint when we get the next stat surveys out, which is probably going to be another 30 days.

But we have not seen a significant switch in the trend that we've seen so far in the first 4 months.

Great.

And then you mentioned you started producing 2012 or model year '12 motor homes.

Was that significant to the shipment number in the quarter, and also does the backlog that you posted reflect demand for the model year '12 products at all?

The backlog does include model year '12 products.

As far as the launch affecting shipments, it would have a minimal effect.

We're filling the orders as a normal process.

It's an ongoing process.

So minimal effect.

What portion of the backlog do you think is related to model year '12?

Well, all of the backlog would be model year '12 -- well, all unproduced orders are model year '12.

There's still -- we have a little bit of '11 product, very few pieces left at the factory to move.

As Sarah said, that's an annual process for us.

Okay.

Great.

And then can you talk about the retail credit environment over the past few months, how that's trended?

I guess the one comment that still continues to come up is, if you are looking to have a retail loan over $150,000, that's more challenging.

But other than that, it's more so, it feels the slowdown of interest as retail -- consumers wanting to buy.

I haven't heard maybe as much that they can't get the financing.

It's just more been a slowdown at the retail level in general.

I think to add to that, Alvin, is the fact that you've got lenders that I think are -- I won't say freeing up credit.

I think what they're doing is they've still got pretty tight expectations, but if you've got applicants that are looking, that have the right credentials, I think they're going to be able to get it much easier than what it was, say, 2 years ago.

But I think the real key there is that the lending institutions have looked at it and said we want to increase our business and our exposure in this arena, but we also want to do it a little more smartly than what we've done back in the days when things were moving and got us into trouble.

They're still looking to have down payments.

They're still looking at doing the reference checks to make sure that people are making what they say they make, that they've got decent FICO scores.

What we've heard, it used to be that as high as 800 FICO scores were getting turned down.

And now, I think it's pretty common that if you're in the 700 to 725 range, you're going to be a good candidate for a loan.

And so, I think the credit isn't as big of an issue as it once was, but it's still tight out there; and I think it will be that way for a while on all fronts, because that was one of the reasons that got this whole economy in trouble.

I think you're going to see the lending institutions be very cautious going forward, [opening up] the buy box a little bit, but still very cautious of doing that.

Do you think they've gotten more cautious in the last few months, given the way retail demand has been a little sluggish?

I don't think so.

I think they've been pretty constant with what their expectations have been.

I personally have not seen and have not heard of any real degradation in what their expectations are.

Okay.

Great.

Thank you very much.

Bret Jordan of Avondale Partners.

Good morning.

A couple quick questions.

One on the inventory, could you give us some color for how much inventory was related to Towable product, and I guess then, what is model year '12 versus '11; it sounds like it's mostly '12, but a little breakout.

Are you asking from a finished goods on the balance sheet standpoint?

What is the context of -- (multiple speakers)

Of the dollar value in inventory, how much of that is represented in the Towable business versus the Motor Home business?

And in the Motor Home category for finished goods, how much is '12 versus '11?

From a Towable standpoint, there is approximately in that $5 million to $6 million range of inventory in total, related to Towables, on our balance sheet.

In regards to the amount of finished goods we have on hand at the end of the quarter related to model year '11, as Randy indicated, it's not significant.

Okay.

And then a question on the capacity utilization that I think Randy said was about 40.

What's the labor utilization versus the plant utilization?

Well, the labor utilization is effectively 100%.

Unless we have shortened work weeks or a layoff, we're using the labor capacity at 100%.

We haven't had any substantial things happen this summer.

We did have a shortening of some workweeks in the third quarter, but just specific to certain production areas.

But as far as a plant-wide shutdown, if that's what you're leaning towards, we're not experiencing that at this point.

Okay.

And then to go back, this used to be a popular topic of conversation, what's the unit breakeven run rate or how do you see that right now?

We break out -- there's a lot of unusual items inside the quarter, even breaking, kind of excluding, all those items, we were marginally profitable.

You go back to our second quarter and we were in that similar range.

So we're slightly above it at this juncture, but with the added cost pressures, not too far any longer.

Okay.

And then what do you see as CapEx in the fourth quarter and maybe CapEx expectation for next year, given the introduction of the trailer business?

The remainder of the year is not significant.

It's under $0.5 million.

In regards to our plans on capital expenditures for fiscal 2012, we're in the process of planning that.

We don't look at the total acquisition to need significant capital infusion, so it's more so planning from an Iowa perspective, what would be reasonable.

You'll see this fiscal year will end up well under $3 million, but we're still planning, prospectively, at the right level going forward.

Okay.

Great.

Thank you very much.

Craig Kennison of Robert W.

Baird.

Good morning, thanks for taking my question.

Sarah, could I ask you to follow up on Scott's question and give us the Towable ASP?

Certainly.

Have to flip to that here, if you'll bear with me.

For the quarter, our fifth wheel average was $29,638, and travel trailer was $18,358.

So our average ASP in the quarter was $21,610.

Thank you.

And then regarding the dealerships that you will have lost, what percentage of sales would those 2 dealers represent?

Very small portion.

These dealerships have been struggling for an extended period of time, so not a material element of revenue contribution for us in the last few years.

Okay.

And with respect to dealer share, how concerned should we be that you're not able to take as much share as you might have guessed, given the loss of some of your competition at the dealer level?

Is that just a function of your dealers maybe being slightly more cautious than other dealers or less promotional activity?

What are your thoughts with respect to your wholesale share?

I think that is part of what -- I had the opportunity to talk to several people this last week when I was out in Washington and there I got a real sense of caution.

I think it's a case where they're seeing some of the same things that we're seeing; and you can't turn on the TV or the radio or pick up a newspaper and not be concerned about some of the things that are going on right now.

And there's a reason that we hitch our wagon to what we feel are the strongest dealers in the industry, and we think that they're being very, very cautious as far as what they are putting on their shelves right now until they see where this thing goes.

So --

And maybe one thing I would add to that, you can see where our dealer inventory is at the end of third quarter.

I go back a couple years, and you look at where our dealer inventories were at that juncture, and the aging problem that we dealt with and the significant investment essentially we made to help our dealers manage through aged inventory, inventory levels that weren't supported by retail demand, was a significant drop, there's a fine balance in regards to getting your piece of wholesale share.

But if that wholesales share isn't supported by end retail demand, you're going to be paying it later.

And so that's a dynamic that's -- it's a tough one to watch.

But I look at our dealer inventories, and they are reasonable based on where the retail run rate has been.

We're up as a Company in this fiscal year about 11% on retail registrations as compared to last year.

But we definitely have leveled off inside our third quarter.

We were essentially flat year over year for our own retail comparisons.

But that's where -- I look at the wholesale numbers; and, granted, stat survey continues to lag; and they'll report more and more in the old months as they have all the complete reporting provided.

But I look now, and as Bob commented in his opening remarks, we're not seeing retail be above last year, but yet wholesale is up dramatically over last year.

I think the other thing, as tough as a pill as that is to swallow right now for us, and maybe even some other manufacturers that you're not getting the business, I would rather have the dealers be cautious and then take advantage of the fact that when retail does pick up, you've not only got that business, but they're going to be in a restocking mode at the same time just like they were a year ago.

And then you get the benefits from that.

I would much rather have those kinds of situations to have to worry about than worry about what Sarah was talking about, having this aged inventory that you've got to help try and move that through the channel.

From a profitability standpoint, I would much rather do -- try to meet the restocking expectations than I would trying to help get rid of aged inventory.

Thank you.

Looking at the backlog, it was significantly lower than last year.

Is there anything unusual about that number?

Are dealers feeling as though there's no need to place an order, because they know they can call and get the unit whenever they need it?

Or is it pretty representative of the fraction of sales you expect to ship next quarter?

I guess what I'm trying to figure out is, usually that's a predictive number for the next quarter and it's significantly lower than we would have guessed.

Well, I think part of it, Craig, is the fact that we're transitioning from our 2011 to 2012 product, and we are now just getting that out there.

In fact, some of our dealers haven't even seen some of our 2012 offerings yet.

We've got our district sales managers out there, beating the pavement as quickly as they can.

One of the detriments that we've got is we don't hold the Dealer Days or we haven't for the last 3 years.

And so, we have to -- it's a little slower getting that new product offering out there to our dealers.

So I feel once they see the 2012 offerings, that you're going to start to see that pick back up.

But I think that's a big share of it.

Okay.

Thank you.

And then lastly, just with respect to your cost discipline and your balance sheet discipline, that really got you through the last downturn.

Maybe just reiterate what you think you can do to protect your balance sheet this time around.

And if necessary, could you reverse some of the cost increases that you saw just in the last couple quarters?

Well, most notably, we've grown our inventory position in the first 9 months of this year.

That is one significant area that we worked down dramatically at the worst of it.

So that's available again.

But to your answer on costs, to some degree, yes.

Inflation, we have to work and contend with passing that on, and how does that impact the demand of our price, our price point product and where does that match up competitively with the marketplace.

And then one of the other areas that, prospectively is when we're planning for this next fiscal year, and it's always an added cost, is healthcare.

And how is that affecting our cost structure.

So you have to cut deeper other places to cover that, but we have to look at how to cut the cost or grow the revenue on a prospective basis.

That's just a requirement.

I guess I did have one more question.

You mentioned growing the revenue.

Randy, you've had some interest in diversifying the revenue stream and looking at other opportunities.

Given we've got a slowdown here, maybe you're less inclined to pursue some of those acquisitions, but any update on that strategy at all?

No, we're not going to be any less aggressive that way.

I think we're all very pleased with how our acquisition of the Towable subsidiary has gone and we're very happy with the direction it's taking.

We do have a person, as I mentioned before, that filled that role of strategic planning and I'm working with him very closely.

I've handed off several of the projects that I was working on and getting him familiar with those and keeping them going.

We actually do have a couple things that we're hopeful for.

But I think just as with the SunnyBrook acquisition, we'll be conservative in how we approach it.

And back to the balance sheet question, it's not likely something that's going to move that dramatically in the beginning but something with really good growth potential.

Thanks again.

Bret Jordan, Avondale Partners.

Sarah, I'm still trying to understand the inventory dollar volume on the balance sheet a little bit.

I guess if we looked at it year over year, because we've got a pretty significant increase given the decrease in the backlog, how much of that increase is inflation driven?

We've got $5 million or $6 million as trailers, which is non-comparable, but how much of the dollar increase is input cost inflation?

I wouldn't say that that's a notable amount in the grand total.

It's going to be more on a function of raw materials in our chassis inventory position, most notably.

It would be on a year over year basis the most significant driver.

Okay.

And would that be that you received a lot of the B chassis that you needed to produce the ERA product?

I'm trying to understand what makes up that increase in year over year inventory value.

As I mentioned in my prepared remarks, part of it is demand that's down from what we are planning.

The chassis procurement process is a very long, lead time kind of an item, especially the items that we source from overseas, all this Sprinter related chassis products.

So we have to forecast that out quite significantly, so, the B is part of that, that whole process.

But in total it's more a function of where the demand is set in, in the recent quarter versus what we were ordering our chassis requirements for.

Okay.

And on the Bs, I guess we look at April retail sales, I think Bs were down 50%-plus year over year.

Is that because the supply problem getting Bs into the market or is the demand for Bs particularly weak?

The B market in and of itself is a pretty small market.

I don't -- we haven't been actively wholesaling Bs for a year and so there's some connection to the presence, or missing our presence, in the market for a year.

But also it's hard to make assumptions in such a small market item.

Okay.

Thank you.

Michael Ting of Goffe Capital.

Hi, good morning.

I just wanted to clarify a point that you made regarding dealer inventory restocking.

I think in the past couple of quarters, we've all been hearing how dealer restocking is largely complete.

And I think some of the comments you were just making, how, about wholesale numbers going up and retail numbers going down.

That would imply that dealer inventory's still going up.

Can you just talk a little bit more about that and your expectations there?

Well, specific to Winnebago, our dealer inventory decreased [since higher] this most recent quarter.

Not significantly, but it did drop slightly.

I think the context of our dealer inventory comments should be taken specifically to us.

But when we look at the industry in grand total, that's where you maybe see a little bit of a different trend.

In the first quarter alone, industry wholesale shipments were up over 20%, and then 7%-plus inside of April.

And you look at the same time frame from a retail standpoint, considering US and Canada, A, B and C retail was down 4% in the first quarter.

And now we're missing Canadian information for April, so I don't know specifically how they're going to land but US was down.

So that would imply that there's some dealer stocking happening somewhere, but it's not included within our dealer set, body.

Okay.

Thank you.

So, I guess just looking at your backlog, how would you think that would impact you for the backlog going forward?

I know the numbers are down pretty meaningfully for this quarter, but going forward, how would that impact the backlog?

I guess I'm not totally understanding your question, Michael.

Well, if dealer inventory restocking, there's going to be some restocking.

Would that show a potential improvement on the backlog?

Well, with our dealer inventories basically down a little bit, we think going forward we've got opportunities for them to not only meet the increased retail demand when that comes, but also because their inventories are lower than maybe what some of the other competitor's dealers are, that they would have to do some restocking there.

So you could see the phenomenon that we saw last year about this time when the feeling, I think country-wide, was that the recovery had really indeed started, that dealers would be ordering product not only to meet retail demand but they would also be ordering in order to restock dealer inventory.

I look at it, as I mentioned before, I look at it is as, the potential is very good.

And I would much rather have to do things like this to pump up production to meet those kind of demands than try to fund discounts in order to get rid of aged product on dealers' inventory lots.

And I think that's one of the strengths our dealer body shows, is that they've got the disciplines to match their inventories to what retail demand is.

I think the best way to look at it is, as Sarah mentioned, our dealer inventories are, we think, where they should be and this whole thing is going to be tied very closely to what the retail rate is.

Until they have a feeling that they need to start increasing their stock because of a general market lift, they're going to stay in line with what their retail rate is.

As Bob said, that's good for us because we don't want aged inventory on the dealer lots.

That makes sense.

And Bob, I think historically you said that consumer confidence rather than gasoline prices had more impact on sales.

Yes.

Are there any shifts in terms of how that's affecting what the consumer purchase decision is right now?

I think you're seeing gasoline being one of many inputs to consumer confidence, and I haven't changed my stance on that.

I said all along -- and I think it's played out since 2008.

You look at 2008, as I mentioned in my opening remarks, gas was pretty volatile.

We got up to a high of about $4.05 in July of that year.

And a lot of people don't realize this, but by December 31 that year, it was down to about $1.60.

And now all of a sudden it creeped back up the next couple of years to about $2.50, $2.60.

And if you would have told people 5 years ago that you're going to pay on average about $2.60 a gallon of gas, you would have had a panic.

But the American consumer got used to that kind of expense and it was just a normal day-to-day thing.

Well, then in 2011 when the Middle East crisis hit, you saw fuel prices go back up pretty dramatically to the $3 range.

By the end of May, it was back up to $4.

I think part of the issue was that you didn't hear a lot about fuel prices up until it hit that $4 range back in May, because we've been there as American consumers.

We were used to it.

We knew we could survive $4 a gallon gas.

Then when it got to $4 again, all of a sudden we were in unchartered territory.

I think it's fantastic that we're starting to see this drop.

But again, it's the volatility of fuel prices rather than when it levels out and plateaus and whether that be $2.60 a gallon or $3 or $5, and I've used the example of the European market, where they've paid $8, $9 a gallon for years and their motorized RV market is twice as big as the US.

So I'm still a champion of saying the volatility's a bigger issue than where the gas prices actually end up plateauing at.

No.

Well, I hope it doesn't get to $8 to $9.

You and me both.

Exactly.

For a myriad of reasons.

Thank you for that.

Appreciate it.

Dick Keim of Kensington Partners.

Thank you.

I have a couple quick ones and I did get on a little late so maybe you did answer it.

Number one, a while back I think you were in the hiring mode.

Have you laid off people or what's the situation now?

No, we haven't laid off any workers.

We're keeping our production schedule pretty much on task.

We did have some overtime in our plan late in the third quarter that we ended up taking out, just because things didn't go as well as we had thought they would, as we said earlier.

We actually are hiring on a replacement basis, and we mixed that hiring with a mixture of full-time and people through temp services so we can remain flexible.

We always have a certain portion of our workforce on a temp basis, just for those flexibility reasons.

So we have a lot of different levers we can pull when it comes to the size of the workforce before it really turns into a substantial layoff.

And right now we don't have any plans that way.

And you don't have any plans to shrink your capacity, I assume?

No.

And I believe you said you're operating right now at 40%?

Yes, about 40%.

About what?

About 40%.

30%, did you say, or 40%?

No, 40%.

40%, good.

Somewhere along the line in your presentation you mentioned something about rentals and I think it was in reference to pricing.

Could you elaborate on that?

Is that rentals that you've cut prices to get the business or what?

Well, hi, this is a time of year that's a very seasonal time to be shipping units for the rental market.

Right.

And the dynamic is always usually a large order of similarly [spec-ed] units at the lowest price point.

So it's just competitive in regards to the business with a variety of manufacturers interested in that.

So that's always the dynamic, but it is definitely a piece of our business here in this third quarter, just like it was in past years.

It's a competitive piece of business, that's for sure, for us.

Okay.

So you had to lower your prices to get the business is really what you're saying?

It's a constant process in regards to competing against the lowest price point, but we are the largest player, and we evaluate the financial rewards to us and evaluate accordingly.

So we don't always look at each piece of rental business to be appropriate for us.

Would you tell me, of your $135 million in sales, what percent of that was rental, to the rental market?

Well, typically it's maybe more fairly to put it on an annual basis.

We're talking usually about 5% on an annual basis, is what our revenue rental stream for revenues would be.

That varies from year to year, depending on the whole rental landscape.

I understand.

Your G&A, is it fair to assume that the big increase of 20%-plus in G&A was maybe the legal?

Yes, that was a very significant portion.

In the prepared remarks in the conference call when we opened, I quantified that to be approximately $560,000 of incremental legal cost this year.

And the $560,000 has occurred already, right?

Yes, that was expense inside of our second -- or third quarter.

So if we want to look at it from a nonrecurring basis, what would you estimate on a normal basis your legal would be?

Well, as I described, the increase was a result of 2 key reasons.

Right.

Increased Lemon Law activity, which is definitely a constant element of our business.

So that's going to be -- that part will be going forward.

The magnitude of it can vary quarter to quarter, and then we also had costs associated with the pursuit of a trademark infringement case, which is a unique or an element that's not the norm for us.

So that's a little bit of the breakdown on why we had increased legal cost.

On an earlier question I did note as well that we had a very low amount in the prior year in the same quarter so the comparable was a tough comp for us.

I think with those kind of big estimates, one would wonder -- one would like to get an idea of what is recurring and what is nonrecurring, in the bunch of expenses you did mention in your presentation.

That makes it be easier, but it may be more difficult for you to do.

It's hard to predict specifically for legal on a prospective basis where that will go.

We wanted just to highlight unusual items we experienced this most recent quarter.

Got you.

Thank you very much.

It appears there are no further questions at this time.

I would now like to turn the floor back to Management for closing comments.

Thank you, Dan.

I want to thank everyone for joining us today on our call.

Although our third quarter was more difficult than planned, I want to thank our employees for their hard work and dedication in helping us once again be profitable.

As I mentioned earlier, we remain dependent on growth of the retail market to drive our business going forward.

We are hopeful that we will see a recovery of the US economy during the remainder of calendar 2011 to provide growth opportunities for us going forward.

The long-term outlook for our industry remains very positive.

The RV lifestyle continues to be one that is embraced by many North Americans.

In fact, Dr.

Richard Curtin's latest consumer demographic study shows that the percentage of all vehicle-owning households, owning RVs, has gone from 8% in 2005 to 8.5% in 2011.

That is a very positive sign for our industry as we work our way through this difficult economy.

Campgrounds continue to be full and the RV lifestyle is a very attractive and viable alternative for consumers as they contemplate their other vacation, retirement choices.

We believe the economy will improve and we are prepared to take advantage of the market growth when it occurs by bringing innovative new products to the market.

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

And I look forward to talking with you again in October when we report our results of the fourth quarter and fiscal 2011.

This concludes today's teleconference.

You may now disconnect your lines at this time and thank you for your participation.