Winnebago Industries Inc (WGO) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Winnebago Industries fourth-quarter fiscal-2012 earnings conference call.

My name is Lisa, and I'll be your operator for today.

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

Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Sheila Davis, Public Relations and Investor Relations Manager, Winnebago Industries, Inc.

Please proceed.

Thank you, Lisa.

Good morning, and welcome to Winnebago Industries' conference call to review the Company's results for the fourth quarter of fiscal 2012 ended August 25, 2012.

Conducting the call today are Randy Potts, 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 Central Time 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 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 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'll now turn the call over to Randy Potts.

Randy?

Thanks, Sheila, and welcome, everybody, to our conference call.

Sarah will get into the details of the financials in a minute, but first I'll make a few general comments about our fourth quarter and fiscal 2012.

We are very pleased with the positive reaction of dealers and retail customers to our new 2013 products.

As demonstrated by the growth of our sales order backlog, we've been particularly successful with our Class A products, with 140% year-over-year increase in forward orders for those products.

The new entry-level Winnebago Vista and Itasca Sunstar 26HE model has been very successful.

The new model, introduced early in the summer, is allowing price-conscious customers to affordably get into a high-quality Class A product.

On the opposite end of the price spectrum, we continue to have tremendous success on our highline Class A diesel products.

The Winnebago Tour and Journey, and the Itasca Ellipse and Meridian, particularly the 42-foot tag-axle models, have experienced market share growth.

We plan to keep the momentum in our motorized product lines going by enhancing our product development process.

This process will use product managers to further strengthen our ability to reduce design cycles, and bring innovative products to our dealers' lots and show rooms in a timely manner.

Winnebago Industries' towables revenue increased during the fourth quarter.

Unfortunately, they were not profitable in the quarter for a number of reasons, primarily due to operational challenges.

We're working to correct the operational headwinds, and still believe the towables group holds a significant growth opportunity for us going forward.

As a result of the positive response we have received from dealers and retail customers on our 2013 products, and as a reflection on the improved RV market, our sales order backlog has dramatically improved over last year, up 116% in motorized and 40% in towables.

We believe that the level of dealer inventory is also lower than what it should be, given the improved retail demand for our product.

To meet this increased demand, we've been ramping up production and hiring additional employees, increasing headcount by approximately 12% in the past fiscal year.

We plan to continue the increase in production during the fiscal-year 2013.

We're very encouraged by the positive signs we see in the general economy.

Past experience has shown that motorhome sales closely correlate to both consumer confidence and new, single-family housing starts, both of which are now showing real signs of improvement.

We believe that is translating into an improved RV market with recent dealer and retail shows showing record attendance and increased sales, all of which are very encouraging for the recovery and growth of the RV market.

With that, I'm going to turn the call over to Sarah for a financial review.

Thank you, Randy.

I will now review the financial performance of the Company's fourth quarter of fiscal 2012.

Net revenues for the fourth quarter were $162.5 million, a 24.5% increase from the fourth quarter of fiscal 2012(sic-see press release "2011").

The net increase in revenue was primarily a result of increased motorhome deliveries, which were up 233 units, or 21.4%, as compared to the fourth quarter of last year.

The other significant increase in our net revenue was derived from our towable division, which produced an incremental $8.1 million on a year-over-year basis.

In the fourth fiscal quarter, we increased gross margin by 350 basis points on a year-over-year basis.

Several factors impacted our margins, one nonrecurring, and several which we believe will be sustainable.

In the fiscal quarter, we recognized a $1.5 million LIFO benefit, versus a $900,000 LIFO expense in the year-ago quarter.

This resulted in a 110-basis point improvement to quarterly gross margins.

This is a non-cash benefit, and we do not expect this dynamic to be re-occurring.

However, the increased volume in motorized sales, coupled with the ability to better absorb our overhead expenses, allowed us to improve margins by 220 basis points.

The margin improvement we experienced in the fourth quarter is also up on a consecutive-quarter basis when compared to our fiscal 2012 third quarter.

In the third quarter, we achieved gross margins of 7.8%.

Excluding the fourth-quarter LIFO adjustment discussed a moment ago, our gross margins increased 130 basis points on a consecutive-quarter basis.

Once again, this is directly related to better fixed overhead cost absorption, and highlights the impact of incremental sales on our margins.

We did incur $2.7 million of additional expense in G&A in the fourth quarter.

The majority of this incremental expense relates to bonuses accrued for annual and long-term incentive programs.

A portion of each respective bonus has been paid to officers in the form of equity, and therefore, we have issued approximately 35,000 shares this week.

There's been some time since we've recorded bonus expense.

The last annual and long-term bonus expense incurred was in December of 2008 and October of 2006, respectively.

As Randy discussed earlier, the increased total revenue that we achieved in the fourth quarter did not convert into operating profit.

However, we did make slight improvements to our gross margin.

The towable division does not contain the same level of operational leverage as compared to our motorized division, as most of their costs are variable in nature.

Thus, incremental revenue does not flow to the gross margin line at the same rate.

During the fourth quarter, we better absorbed our SG&A expenses, and coupled with the small increases to gross margin, we were able to reduce the operational loss on a quarterly year-over-year basis by approximately $300,000.

As anticipated, and communicated during our last call, the Company was able to reestablish our deferred tax assets, thus recording a significant non-cash tax benefit in the fiscal year.

As a refresher, we established a valuation allowance against all of our deferred tax assets in fiscal 2009 in light of the significant losses incurred that year and the challenging Company and industry outlook at that point in time.

We have kept nearly a full valuation allowance against our deferred tax assets since then, due to the fact that we had a three-year historical cumulative loss position.

In the fourth quarter just completed, we have now accumulated a three-year cumulative income position.

This positive factor, along with our favorable future outlook, eliminated the uncertainty of realizing our deferred tax assets.

Our motorized backlog strengthened during the quarter, moving up from 1,237 units at the end of the third quarter, to nearly 1,500 units at the end of our fiscal year, a 19% increase.

In response to this increase in demand, as Randy touched upon earlier, we've been adjusting our production schedule upward throughout the fourth quarter.

The pace of how quickly we can make these schedule changes is dependent on how long it takes to hire and train new people, and also the lead times of key material components, notably our chassis.

The 12% increase in our headcount as compared to last year occurred almost entirely in our fourth quarter.

The acceleration in production did notably impact our balance sheet, with the growth in our FIFO inventories of $16 million during the fourth quarter.

The largest portion of the inventory growth was within the WIP category.

The increase in inventory was marginally offset from a cash flow perspective, as our accounts payable and accrued expenses grew by $2.7 million.

As we have discussed in the past, our physical plant has the capacity to produce at a much higher level, but we will not be able to fully reach that potential until we sufficiently hire additional plant personnel.

As noted in the press release, another significant use of cash in the quarter was a repurchase of 592,000 shares for approximately $6.3 million.

Over the past several years, management has worked diligently to improve the Company's balance sheet.

Knowing that a rebound would require investment in working capital, and the uncertainty about the near-term future of the industry, we were hesitant to return capital.

Having made the necessary investments in working capital, experiencing continued strength in demand for our product, and the relatively low share price, we felt a share repurchase was the most effective way now to reward our shareholders.

We have continued to purchase shares since the end of the fiscal year by utilizing a stock repurchase plan under Rule 10b5-1 of the Securities and Exchange Commission, which provides us the ability to repurchase shares during our self-imposed blackout period prior to the announcement of quarterly results.

This has allowed us to buy an additional [369,000] shares for an incremental $4.2 million.

In total, we have repurchased approximately 3.3% of our outstanding shares since this last July.

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

(Operator Instructions)

Kathryn Thompson, Thompson Research Group.

Thanks for taking my questions today.

First question is on gross margins and appreciate the clarity you gave in the prepared comments.

And of the roughly 130 basis points that you cited for the consecutive-quarter basis improvement, how much was driven by the bump up in inventory?

I know you talked about you saw about higher inventory levels.

And then to what extent was driven by overall lower discounting or lower -- or any other material changes in raw materials?

Kathryn, this is Sarah.

Good morning.

In regards to the sequential comparison, notably what's been a positive impact in our -- on fourth fiscal quarter is the fixed-overhead absorption is significant.

We produced a similar level incrementally more that we sold.

In addition, we have a dynamic where we are selling primarily model year 2013 pricing for priced products on not the prior year's model year product.

So there's an element there that improved margins somewhat across the board.

From an inflationary standpoint, when we compare where we've been tracking, and we really evaluate that monthly but reset standards twice a year, that was -- it actually was a huge contributing factor to our LIFO adjustments, because we're seeing deflation.

And when we compare our parts and pieces costs from August of '11 to August of '12, and when we compare where we were in the second and third quarters and where we are in the fourth quarter, and notably it's not just in our materials, it's in our labor as well, because we have hired so notably inside our fourth quarter, just slightly under 200 people.

That's also introducing a lower average hourly wage.

And that's also been a help in regards to our cost structure.

Okay.

And also, obviously this is the second big quarter of outsize backlogs.

Could you clarify better, are you seeing channel fill, or is this driven by retail?

We obviously do our own survey work and are seeing definite improvement, but this definitely seems to be above and beyond feedback from retail demand.

I'll quickly comment, then maybe Randy would like to add to that.

From -- we definitely don't see enough inventory yet at our dealer level, at our dealerships.

Our dealer inventory went down in the quarter, and it's down year-over-year.

We have in the low 1,900 units on hand at the end of August.

Our retail -- notably, inside the fourth quarter, retail registrations of Winnebago product increased almost 11.5%.

So it was definitely a pop for us inside the fiscal fourth quarter, and a part of it I think is the excitement that Randy touched upon with some of the new product introductions that we've had.

However, a lot of that wouldn't have had that opportunity that retail throughout the entire quarter as we started shipping some of that product in June.

But we think our dealer inventories could definitely -- it would be helpful for that to move up quite a bit in light -- and then that's also reflected by our demand continuing to build.

I think our dealers are interested in having more on their lots.

Kathryn, I've been to a few shows and several dealer visits throughout the fall and late summer, and there's a lot of excitement of building around our product.

We're hitting price points and market segments very successfully that we just haven't hit in a while.

And as I've said all along, our goal is to outperform the market, and that remains our goal.

Okay.

Okay.

Finally, what exactly are the towable production issues?

Yes.

Is this -- maybe a little bit more clarification on that?

We've accomplished some things very well.

We got a lot of appealing product out there.

We're generating the revenues, as you can tell, which is very important to get cash flowing through the business.

We need to go back and clean up some of the supporting activities around that, notably bills and materials, better capturing of the cost of goods sold.

I think that's fair to say where our biggest challenges are, and it's all mechanical.

It's doable.

Our challenge now is to go back and fix some of those things that we didn't do a very good job of to date.

Okay.

Great.

Thanks for answering my questions today.

Greg Badishkanian, Citi.

Hi, good morning.

This is actually Alvin Concepcion in for Greg.

We've seen some pretty strong retail sales growth lately and wondering if you've seen a change in retail demand since then?

Historically in election years, we see consumers hold off on purchases until there's some certainty.

Are you seeing that at all?

Or would you expect to see that?

I think it's fair to say that it remains quite robust.

That's great to hear.

Also was wondering about commentary on the retail credit environment over the past couple months.

Have you seen changes there?

I think there's access for those that are credit-worthy.

I don't think that there's been any change.

It's still a dynamic of if someone's willing to borrow to purchase a discretionary item such as this, but I don't think there's any availability issues in the marketplace.

That's great.

With regards to the competitive landscape, are you seeing any changes in the promotional or discounting environment?

Has it gotten better since the end of the quarter, given the strong demand?

It was really pretty reasonable at the end of the quarter, actually.

And I don't think it's changed much.

All right.

That's all for me.

Thank you.

Mark Altschwager, Robert W. Baird.

Good morning.

Thanks for taking the questions.

Couple questions.

Starting with the buyback, Randy or Sarah, could you just discuss your philosophy behind the capital allocation?

And is the buyback sensitive to a valuation model?

Is it all the 10b5-1, or how are you thinking about that?

I'll begin with the general perspective of why that's the avenue that we took.

And Sarah could probably explain some of the details of the tools that we're using more appropriately.

We've discussed this early in the fourth quarter as to -- we achieved the point where we thought that it was appropriate to start to utilize our cash in a way that went back into the stock.

Naturally, the two most popular methods for that are through dividends or buyback.

We debated that, and we had a lot of discussion with the Board, and we had discussions with some of our investment banker relationships.

We just arrived that given the situation of where our business is at, where the stock is at, what we see going forward, we think this is the best method right now for accomplishing that, and it gives us a great degree of flexibility.

Going forward, we still have -- and we've stated this on many occasions -- that we have this open share repurchase authorization.

And even to date, we have 49 million left on that authorization.

So it gives us a lot of flexibility.

I think that's what was most appealing to us.

From the standpoint of your question as to how we are executing as we move forward on that, in the summer before our self-imposed blackout timeframe began, we were doing open-market purchasing, but we are following a formula, using a grid to concentrate the logic.

It's definitely based upon what we project the future to hold.

Then once the blackout period commenced, a grid was provided, and that will end tomorrow.

On a prospective basis, it's now at that point where we evaluate and refresh our calculations and see where we want to go prospectively.

That's very helpful.

Thank you.

Jumping to the backlog, just following up there.

Couple of quarters of very strong backlog.

If the dealer places an order today, how long does it take for that dealer to receive that product?

And then talk about how that lead time compares to a year ago or a couple of years ago?

Well, first off, it would depend on what product he orders, naturally.

Some products take longer just to get through our systems than others simply because there's more labor involved and more processes involved.

So in a -- a year ago, where the backlog wasn't so much present, we have production offsets if it was a special order unit.

Our production offset, say, from the time we receive the order to the time we physically build the product is about four weeks.

And then of course, there's finishing and shipping involved in that.

That would be the simplest of products.

Products that require more value-added content would take longer than that.

Naturally, our order position and our ability to respond to increases in production rates change that and lengthen that.

So it varies dramatically.

Right now, if it's a series that's not as popular as another, we could still be close to that timeframe for delivery.

But if it's a product that has higher labor content and has a stronger order backlog, naturally, that could get pushed out many weeks beyond that.

Also, keep in mind that some of these order positions aren't necessarily for immediate delivery.

We may have some dealers placing orders for winter delivery.

So it's not like everything in the order bank is necessarily for immediate delivery, either.

But I don't want to get into a lot of specifics of exactly where that puts us, but it does stretch things out, as you would anticipate.

Thanks.

Jumping around here, I see you recently hired a new VP of sales and product management in the towable division.

Yes.

How did that addition influence the strategy, if at all?

What we're trying to do by accomplishing that is to address exactly what I spoke about to Kathryn.

We needed to go back and do some tightening up of bills and materials and those types of things.

We think this person is going to bring that discipline to the table, and that's a big part of it.

Thanks.

And one last one.

Sarah, just housekeeping on the tax rate.

It's been quite volatile the last few quarters.

Just for modeling purposes, what's a good tax rate to use going forward?

Now, with our deferred tax assets reestablished, ideally that will eliminate a lot of complications on a prospective basis.

So we would think a reasonable range of rates to be using going forward be in the low 30s.

That's helpful.

Thanks again for taking the questions.

Morris Ajzenman, Griffin Securities.

First question on the cash flow.

Clearly, this year with the buildup in inventories, it was a good reason you had to build up because of demand, but it caused drag on cash flow even before CapEx -- excuse me, before share repurchase.

How does that play into next year given demand's still pretty strong?

Things are building.

Are inventories -- I think you said it was work-in-process that kind of drove it up.

How does that play out for next year?

Inventories, without tipping your hand as far as looking at revenues and earnings, but how does that play out?

Do you become much more cash flow positive or even towards working capital [stays on consume] a lot of capital, et cetera, et cetera?

Inventory definitely has been an area in this past fiscal year where on an annualized basis, we've grown FIFO inventories of over $17 million.

So if we continue to see demand move dramatically, that could drive inventory levels up to some degree.

On an annualized basis, another element that -- depending on what additional progress we make, or on a stock repurchase front, that was a use of cash inside the fourth quarter.

And as I mentioned, it's continued to be use of cash here outside of the operational activity cash flow.

But when I look ahead to the next fiscal year, I think inventory -- it's going to be dependent upon demand.

To your point, without trying to go into any kind of guidance on the top line, there's definitely going to be cash generated from operations.

Our goal would be from a cash provided -- to be in a cash provided by operating activity net position at the end of the fiscal year.

All right.

Just switching gears, unrelated to that question, can you give us a feel, Class A diesel particularly, what sort of price increases you experienced during the quarter and how that plays out going forward?

Do you mean pricing to our customer, or the pricing of the components we use to build that product?

The pricing to your customer.

In the transition from our model year to the model year 2013, which was primarily what we delivered inside the fourth quarter, there's always a dynamic of a price increase.

But it's going to be a function of what did we change to the product, if at all, and what kind of other features or option changes that did occur.

On a unit-by-unit basis, that was not material.

We're talking in low single-digit percentage ranges in our diesel category.

But we do have a very wide range of diesel price points.

And so our average diesel ASP, for example, can move quite significantly inside any particular quarter, depending on which products we do deliver, because we have a price point on a [footer-based] diesel product that's in -- around $100,000, all the way up to 42-foot tag-axle that's $250,000.

So that swing of what is ordered and delivered can really influence it.

But on an individual product basis, there weren't material increases to the pricing to our dealers.

Thank you.

I would now like to turn the presentation over to Mr. Randy Potts for closing remarks.

Thank you.

We believe we're seeing positive signs in the marketplace.

Dealer inventory continues to be conservatively low.

The inventory on the dealer's lot is fresh new product, and the RV market continues to recover.

I'd like to thank everyone for joining our conference call today, and I look forward to talking to you again on December 20 when we report our results for the first quarter of fiscal 2013.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.