Winnebago Industries Inc (WGO) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2013 Winnebago earnings conference call.

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

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

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

(Operator instructions).

I would now like to turn the conference over to your host for today, Ms. Sheila Davis, PR/IR Manager for Winnebago Industries.

Please proceed.

Thank you.

Good morning and welcome to Winnebago Industries' conference call to review the Company's results for the second quarter of fiscal 2013, ended March 2, 2013.

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 11 o'clock 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.

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 will now turn the call over to Randy Potts.

Randy?

Thank you, Sheila, and good morning to everybody joining our conference call today.

Sarah will provide the financial details in a moment, but first I will make a few comments about our second quarter of fiscal 2013.

Simply put, we had a great quarter.

We had positive comparisons against our performance a year ago in nearly every aspect of our business.

The motorhome products are in demand but, compared to last year, wholesale motorhome shipments to dealers grew 42% during the quarter and 45% for the first six months.

We have reason for even more optimism going forward.

Our motorized sales order backlog has grown in the last five consecutive quarters.

At the end of the second quarter, it had grown in every motorized category and was up 174% year over year and 30% sequentially from the first quarter.

Our motorhome products are also in demand at the retail level.

Not only are industry retail volumes increasing, but Winnebago Industries is outpacing the industry.

Retail sales for Winnebago Industries' motorhomes increased 17% in the US and Canada during calendar 2012 compared to the industry's increase of 7% for the same period in North America.

Good traffic and retail sales have been reported during the RV show season held since the beginning of the year.

In addition, our dealer partners are reporting good traffic and sales on their lots.

The demand is driven by multiple factors.

First and foremost is our continued emphasis on the development of great new products.

Additionally, we are encouraged by an improving economy with rising housing starts, a growing stock market, lower unemployment levels and attractive interest rates.

Operationally, though, we do have a few opportunities in need of our attention.

First is our inventory, which is higher than we would like.

Some of this is the result of the increased pace of business, but frankly, there are some execution issues as well.

We are implementing several changes aimed at reducing inventories going forward and will continue doing so until we are satisfied with the levels.

The second opportunity is our towables business unit, which has not been performing to our expectations.

A year ago, we were pleased with the direction that operation was heading, but the success was not sustained.

We have made many changes there and we are committed as ever to the success of this market, which holds a great deal of potential for us.

The travel trailer and fifth wheel segment is significantly larger than the motorized market segment and we intend to be a larger presence in that market.

Sarah will speak to that in more detail shortly.

We will hold our Dealer Days event in Las Vegas in late April and plan to introduce a host of sensational new products to our dealer partners at that event.

We have diligently been developing new products that we believe will excite the marketplace.

We have historically been a leader in new product development and we are continuing to blaze the trail as we move into the next generation of products in both motorized and towable.

Now I'll turn it over to Sarah.

Thank you, Randy.

Before I cover the consolidated results, I wanted to specifically address the disappointing financial performance of our towables division.

The subsidiary generated an operating loss of $850,000 in the second quarter.

Thus, we have lost $2.2 million for the first half of 2013.

These results are obviously not acceptable, so I wanted to briefly cover the significant reasons for the losses and, more importantly, what we are doing to address them.

The most noteworthy issues that have a negatively impacted towables operating performance in the past few quarters were increased warranty expense due to escalating claim experience and unfavorable overhead variances due to lower production.

In light of the increased warranty, wholesale demand was negatively impacted as well, resulting in lower revenues.

We also incurred one-time employee separation costs in the second quarter.

To address the continued under-performance of this business, we made several management changes, including naming a new towables President in January to leave the turnaround efforts of the operation.

He has begun to take corrective actions in his new role.

Notably, in February, he temporarily idled one of the two assembly plants where production issues had been pervasive to better align with current demand levels which prevent further warranty issues.

Our intention is to reopen the plant once the appropriate employee training has occurred and the capacity is needed.

Another change that was made that I want to highlight relates to warranty and service.

We have now centralized the leadership responsibilities of towables, warranty and service to the Company's headquarters in Iowa to better leverage our industry-leading capabilities, processes and expertise of long-time motorized resources.

Our goal in regards to towables, based on all of the efforts underway, is to achieve breakeven results in the fourth fiscal quarter.

As Randy noted, we are as committed as ever to the success of towables and this market holds a great deal of future growth potential for us.

Moving onto the consolidated results, net revenues for the second quarter were $177.2 million, approximately a 35% increase from the second quarter of fiscal 2012.

The primary growth in revenue was a result of increased motorhome deliveries coupled with a 2.1% increase in selling price.

Not only did we achieve a significant growth on the top line, we were able to convert the revenue expansion into a $0.25 EPS improvement on a year-over-year basis.

The impressive growth in earnings is primarily attributable to our innovative products.

The new motorized models that were introduced approximately one year ago have been well received by our dealers and, more importantly, the retail customer.

The innovative products that we launched last spring helped generate the improved market share that we achieved in calendar 2012.

The improved volume was not a result of increased sales incentives.

In fact, on a quarter-over-quarter basis, our sales incentives dropped meaningfully when measured as a percentage of revenue.

Increased volumes also allowed us to continue to leverage the cost structure within our business model on multiple lines.

Our gross margins increased from 5.2% in the second quarter a year ago to 9.7% in the second quarter of fiscal 2013.

In addition, our SG&A expenses dropped from 6.1% to 4.7%.

The demand for our motorized products has not subsided as we continue to see strong growth in our backlog for this segment of our business.

During the quarter we continued to raise our production rate to accommodate this increased order position.

Our daily production rate was up 24% as compared to the rate in our first fiscal quarter.

The added production was achieved in part due to an increase in headcount but also a result of continued overtime in most areas of the Company.

The balance sheet remains healthy and in a position to support the recovering RV industry.

During the quarter our cash decreased by approximately $18 million which was directly a result of our increased inventory.

The majority of the inventory build was related to our in-transit finished goods category which was converted into receivables shortly after the quarter end.

We will continue to manage our balance sheet in a prudent manner as we balance the capital needs of the business with the opportunities to return cash to the shareholders.

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

(Operator instructions) Mark Altschwager, Robert W. Baird.

First question, just on capacity -- Sarah, what was capacity utilization in the quarter?

What would you say are the biggest capacity constraints today, and how much ability is there to continue to add capacity both in terms of people and production space?

Well, from the standpoint of our physical capacity, the lines are completely filled and running and, as I mentioned, we have been hiring.

Unemployment is around 5% in the state of Iowa, so it is lower than the national level.

But we have, on a consistent basis on Mondays, weather permitting, been starting 20-plus people a week.

We have attrition to consider as well as incremental increase to plan for.

So our headcount at this juncture is a little bit under where we need to, but we have been keeping up for the most part.

When we look at capacity in maybe the more traditional sense that we talked about it on a historical basis, what our physical plant can do measured in our Forest City campus, that measurement would be in the 63% range.

We have an opportunity to run our towline on the assembly areas faster, but all that takes a lot of planning and the people to support it to be trained, is a balancing act that we manage day to day.

So we are working through expanding the run rate, and that, to Randy's point, did result in the increased inventory levels inside of the last few quarters, but a lot of the efforts are underway to address the issues that have come up on running at a faster rate.

Great, and I know chassis supply has been an issue so far this year.

Where do things stand on that today?

The Ford gas frame rail chassis has continued to be a constraint for the entire industry and I think will be a constraint for the foreseeable future, just based on what we anticipate the demand to be going forward versus what Ford says they will be able to supply.

Great.

Then a bigger picture question on margin -- I think if you look at the prior cycle, EBIT margins averaged nearly 10%, I think peaking close to 11%.

I know mix is a little bit different today and you have entered towables, but is there anything else structurally different today that would curb the ability to achieve that 8% to 10% EBIT margin as the motorized market continues to grow toward the pre-recession levels?

I think the biggest factor is going to be a margin profile of new products introduced.

We are more competitive and entering segments that we have not been as notable of a factor in the recession time frame.

So the added volume that brings -- provides leverage to our cost structure, but the larger profile is at the low end for both C's and Class A gas and Class A diesel more competitive.

So that, I think, introduces a new dynamic, but offsetting that would be new product introductions.

If you have something that the retail consumer wants, you have the opportunity to set the pricing there for that, which we have had great experience on some product categories in that range.

But probably most notably, I would say, is the evolution of new product categories or lower price point categories can put pressure on that potential.

Great, thank you.

Just one last housekeeping -- Sarah, could you give ASP by category, motorized and towables?

Certainly.

I will go through the second quarter as compared to last year.

From a Class A gas our average selling price was $91,987 as compared to $95,478, so that was actually down almost 4%.

That is mix-weighted, as we are gaining market share in that lower price point Class A gas space.

From a Class A diesel perspective, our average selling price was $209,634 as compared to $191,178, so that was up 10%.

So Class A in total, the average was $137,818 versus $133,726, up 3%.

On the class C front, very similar to a year ago; we were at $74,411 versus $74,077, so it was up just 0.5%.

A and C combined was $113,873 as compared to $110,919.

That's almost 3% up.

On the class B segment, $77,800 versus $75,338.

That was up a little over 3%.

For the all-in combined ASP for the quarter was $111,458 versus $109,177, up 2.1%.

On the towables side, our travel trailer ASP, down based on mix to $19,684 versus $22,051.

The smaller price points -- a great example would be the Minnie Winnie's, or the Minnie's on that side of the fence, the very, very small travel trailers have created new opportunities for us but are lowering that price point.

On the fifth wheel side, it was $30,490 versus $29,942, so that was up a little under 2%.

In total, we were at $21,853 versus $25,673, down almost 15%, notably influenced by more travel trailers sold as opposed to fifth wheels compared to last year.

Congratulations on a great quarter, and I will jump back in the queue.

Kathryn Thompson, Thompson Research Group.

On the gross margin improvement, we know that last year's Q2 had greater motorized discounting, so that would be a tailwind for you guys.

How much of the margin was impacted by volume versus lower discounting versus any other factor?

You're right in relation to a year ago, and it had a dynamic of maybe -- let's say 20% of our margin from expansion was due to fewer discount incentives; that's about 90 basis points.

The remaining upside was a function of the leverage in our model.

A good piece of that was on the fixed side, but we also saw improvement on the variable cost side.

So kind of an 80/20 dynamic with 80% really flowing through due to the expanded volumes and better efficiencies and 20% on the pricing side.

Given that we have had another quarter were fairly sizable lead times, is it safe to say I think when we last spoke that lead times could be bumping up against eight weeks?

Are we still at that standpoint, and how should we think about managing lead times as we go into the seasonal peak?

Well, not a lot has changed since we talked about this last time.

Some products, for instance, our backlog of gas A's, starts to get into that supply constraint issue, so naturally lead times are going to be dictated by our ability to get those chassis.

So those are some of our longest lead times.

There's just so many variables, Kathryn, it's really hard to properly put it in a context that spreads it across the whole business because there's a lot of different factors there.

Some products will go through our system very quickly because they are simpler.

It just depends on a lot of things, but I guess it's probably fair to say that the discussion we held about it at the close of the first quarter is still pretty appropriate.

Okay, you give some commentary on dealer inventories in the release, which is always appreciated, but in your conversations with dealers, balancing traffic in retail sales versus where their inventories are now, do they feel -- if you could maybe give a little bit more color on do they feel that there's a 1-to-1 ratio in terms of replacement?

Or is that ratio even lower or even potentially higher?

Can you talk just a little bit about that, that ratio of retail sale to wholesale order?

Well, we are confident that the dealer inventory levels are very appropriate to the market.

They have grown slightly.

The market is growing.

We are growing faster.

So most dealers -- well, all dealers have a turn rate that they are trying to achieve and that will vary depending on dealer to dealer and their lender and what kind of products they carry.

But the turn rates are improving based on our calculations.

So we don't really look at it so much as a one to one because there is some seasonality to it.

Inventories build probably slightly over winter and then pick up in the spring.

So there's dynamics there that it's kind of hard to look at it as a one-to-one relationship.

But we tend to just look at it as are the turns appropriate?

And I think, absolutely, the turn rates are -- I think everybody is comfortable with them.

Okay, great, thank you so much.

Morris Ajzenman, Griffin Securities.

In the press release, you stated at the end of the verbiage there that we believe the motorized RV market will continue to grow toward pre-recession levels.

Can you give us a little more color?

2006, 2007 revenues were $864 million, $870 million, but yet 2004-2005 it was north of $1.1 billion and just under $1 billion.

Where exactly are you looking towards pre-recession levels as far as returning the RV motor industry returning to, which of those years?

We tend to look at pre-recession levels more as an average of years leading up to the recession.

They did absolutely spike just prior to the recession, but the industry average for over a quarter of a century prior to the recession was around 60,000 units a year, in all of north America.

So that's what we tend to look at as an average.

When we talk about things getting to normal, I guess that's the best I could describe it.

Internally, when we talk about when things are normal, we're looking at a market that is somewhere in that 55,000 to 60,000 unit a year market.

That's helpful, but let me take another stab at this, then, pre-recession levels.

I think capacity utilization -- the answer was 63%.

I'm not exactly sure.

But if you were able to run optimal and throughput was whatever that level is to be optimal, what sort of revenue run rate can a company generate with current capacity, current productivity, etc., etc.?

What could you optimally get to?

Well, we did speak about the motorized side, and we look at it -- if -- there's a lot of variables, so I guess I'll caveat -- if we had the labor, unlimited access to the labor and could run the facility with the physical ability that we believe we do have here, we would probably have an upside of, let's say, in that 10,000 to 11,000 unit range.

And if I just use the ASP that we reported on here, on the motorized revenue alone, that's over $1.1 billion of revenues before we consider any of the other revenue streams.

But the labor elements at that level -- that's a lot of people that we would need to be hiring.

And that is something that we are navigating successfully and something that we continue to plan for on a prospective basis.

Alternatively, we could be looking at production in other locations to tap into other labor markets, which we have done that in the past as well.

But if that provides you a little bit of insight to your question, I will leave it there.

That's helpful.

Let me just ask one last unrelated question.

Inventories exiting this past quarter, $124 million.

You basically stated it was higher than you would like to.

There will be some execution issues you have to get your hands around.

Assuming that had been under control, where you would like it, where should have inventories been exiting the quarter?

We would like to say it's about 10% higher than it should have been.

Thank you.

David Whitson, Morningstar.

First question for Sarah on capacity -- is normal straight time -- is that two shifts, and then overtime is three shifts, or does overtime mean two shifts?

It depends on what part of the business we're looking at because we have both dynamics.

On the assembly areas, we want to run a one-shift with overtime, but some of the support facilities we have second and then third shift areas.

So we have a combination of both.

Okay, on the cash drain, it sounds like you are expecting a normal second half reverse of permanent working capital benefit.

So you do you think you're going to have to draw on your credit lines this year, given where cash is today?

From the standpoint of looking at the back half of the year and what we are planning for, from an inventory perspective, and we definitely touched upon that, we don't anticipate having to utilize the credit facility, but the whole purpose of having that in place is if there's opportunities or if things play out in a different manner than we are modeling, we have that flexibility.

Okay, and the share buyback pace slowed this quarter with the stock running.

Can you comment at all on what you think you want to do with that in the second half of the fiscal year, and is there a target price you would resume or something?

We continually reevaluate in regards to laying out a grid to repurchase from, and that's going to be our process on a prospective basis.

So we are going to continue to balance the use of our cash for internal purposes, be it capital or investing in our facilities, needs of the business today versus using the cash to buy back stock.

But it is all based on looking longer-term and making some judgments in regards to that and executing accordingly.

Finally, any update on M&A pipeline?

No, no new news.

We are still very busy working the opportunities we have at hand.

Sarah talked about towables.

We have mentioned our transit bus project a time or two, and we are still working that very hard.

We are sure we will have more to talk about there in the coming weeks, as far as our distribution plans and what not.

Do you think towables would be helped by another deal?

Pardon me?

Do you think the towables business results could get helped out by another deal, or would that be a distraction right now?

Well, it would depend on what the deal was so, yes, that would be hard to answer.

Okay, thanks very much.

(Operator instructions) Barry Vogel, Barry Vogel and Associates.

First question for you, Randy -- how would you -- well, first of all, as far as your retails in the second quarter for A's and C's, do you have an idea of what the percent -- what the change was in the second quarter versus last year?

Yes, our retail growth in front of our second quarter was 23.5%.

Is that for both A's and C's combined?

That was actually A, B and C, all of our motorized product combined.

Okay.

And, Randy, how would you characterize current business condition -- characterize business conditions in the towables business, as well as motorized?

I will start with towables, Barry.

We are very small there.

We are around 1% of the market.

I so see, and I will editorialize -- I do see the really big players there talking a lot about margin pressures competing against each other, and that tells me that to be profitable in that business, you need to have a product that isn't just selling on price.

That has always been our goal, to bring that Winnebago brand name into the towable business with a product offering that is unique with the name, that brings to the market things that people would expect to come with the Winnebago brand name.

So it's kind of a two-staged answer there.

I think in the big picture, where people are selling more of a commodity-based product and they are selling it on price, they are having a hard time maintaining margins.

You need to differentiate yourself from that business model, and that is probably not ever going to get you 30% of the market, but that's okay.

In that towable market, that is so big.

I think maybe a bigger opportunity is to be -- and this has always been a strategy.

We started with a very small operation and you probably have a better margin opportunity to be on the smaller side and have a distinct product that's in demand.

On the motorized side, we are -- as I said in the opening statements and you see in the stats, we are outperforming the market.

The market is lifting some.

The market was up 7%, roughly 7% in calendar year 2012, and we are up over double that.

That really speaks to the work we have been doing here and the way we are changing the business.

Naturally, we are going to take what the market gives us, but we are not going to stop there.

We have to do more than that.

So, again, where you see any competitor talking about margin pressures, in the motorized part, it is because they are not differentiating themselves.

They are not giving the market something other than price to go to their product.

That's what we need to stay focused on is building our brand, building the differences between us and the market and growing.

Have you started to produce Winnebago brand towables?

Oh, absolutely.

That has actually been very successful.

The Winnebago brand out of Middlebury is probably 80% of what is being produced.

Is that fair, Sarah?

-- currently.

So many parts of that strategy have worked very well.

As I said a quarter ago, the parts that did not work are the details that we need to get shored up and get the thing back on track.

And we are working on that.

We will get there.

Can you tell us who the new President is and what his background is?

Yes, absolutely.

His name is Johnny Hernandez.

Johnny has a long background in the RV industry.

He has worked for many of our competitors, very seasoned individual in the industry.

He ran his own business, his own towable operation for a while.

Johnny has got -- Johnny is a team player.

He understands the big picture and he is working very closely with us in all the things that Sarah talked about.

Okay, I have a couple questions for Sarah.

What is the situation with the ARS's?

There hasn't been much activity.

We see every six months a small redemption, and all those redemptions have been at par so, so far, not a lot of movement this fiscal year.

So we are patiently waiting because we don't have the need to access that cash immediately.

There is a secondary market, if we would choose to sell it in that manner, and there's always interest, and that has cropped up a bit, but not much to say on that topic at this point.

Okay.

Could you tell us what the effective tax rate will be for the full year?

What are going to be your capital expenditures and depreciation and amortization this year?

From a tax rate standpoint, we are modeling about 30% for the year, in that range.

When you look at the CapEx, we are planning in that $6 million range on a year-to-date basis for capital expenditures and slightly underneath that, a little under $5 million, from a depreciation perspective.

Okay, that's great.

It's good to see (technical difficulty) you, and obviously the dealer inventories really have not gone up that much in terms of the motorized deal inventories.

Yes, that's a spot on, Barry.

Yes, so I was surprised there's only 2392 units when it had been averaging for, what is it, 13 straight quarters, about 2000 a quarter.

Yes.

So, really, that's not a big lift, and yet things are really progressing nicely.

So keep up the good work.

Thank you very much.

Thank you, Barry.

There are no further questions at this time.

I would now like to turn the call over to Mr. Randy Potts.

Thank you.

The motorhome market is growing, but still far below pre-recession level.

The opportunity for growth of the motorhome market coupled with our plans for growth within that market give us two reasons for optimism.

We have made great progress in the last year and everybody at Winnebago Industries is focused on continuing down that path of success.

Thank you for joining our call this morning.

Please note that the next conference call will also be two weeks later than normal due to the 53-week year calendar we have this year.

We look forward to talking with you again on Thursday, June 28, when we report our results for the third 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.