Winnebago Industries Inc (WGO) 2013 Q3 法說會逐字稿

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

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

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

We shall facilitate a question and answer session at the end of the conference.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Ms. Sheila Davis, Public Relations and Investor Relations Manager.

Please proceed.

Thank you, Derek.

Good morning and welcome to Winnebago Industries' conference call to review the Company's results for the third quarter of fiscal 2013, ended June 1, 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 AM 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 is 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?

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

We had another great quarter and experienced growth in nearly every aspect of our business.

The continuing strong demand for our motorized products has produced very positive comparisons with our financial performance of a year ago.

Motorhome shipments for the quarter were the highest we have experienced in five years, with an increase of 55% compared to the same period last year.

In addition, retail demand for our motorized products has grown throughout the year, with a 27% increase when comparing the first three fiscal quarters of 2013 to fiscal '12.

Dealer inventory has increased by 36% when comparing the same time periods.

We believe the level of dealer inventory is good and well aligned with current market conditions.

Having our dealers appropriately stocked with fresh product is an important driver of retail activity, ultimately leading to increased wholesale orders.

Our motorized sales order backlog has grown in each of the last six consecutive quarters.

At the end of the third quarter, it had grown in every motorized category and was up 130% year-over-year.

This is a reflection of our dealer network's confidence in our motorhome products as well as their confidence in the overall industry as they prepare for the summer season.

Increased demand for our motorhomes continues to be driven by the introduction of exciting and innovative new products, our well-earned reputation for producing quality RVs, and the financial stability of our Company.

As a result of this improved demand, we have been increasing our production throughout the past nine months.

When measured as units produced per production day, our production in the third quarter of fiscal '13 increased nearly 48% compared to the units produced per production day in the same quarter last year.

We also made progress at towables during the third quarter.

We had a good response to new products that were introduced at our Dealer Days event in late April, as evidenced by the increase in sales order backlog compared to the second quarter of fiscal '13.

We believe the RV market will continue to grow as the US economy recovers.

The most recent RV industry forecast by Dr. Curtin of the University of Michigan Consumer Survey Research Center shows continued growth throughout calendar-year 2013 and '14.

We will continue to introduce innovative new products that enable us to be in the forefront of the upcoming growth trend.

And now I will turn the call over to Sarah for the financial review.

Thank you, Randy.

I am pleased to review the financial performance of the Company's third quarter of fiscal 2013.

Net revenues for the third quarter were $218.2 million, approximately a 40% increase from the third quarter of fiscal 2012.

The primary growth in revenue was a result of a 54% increase in motorhome deliveries, offset by a 3.7% decrease in selling price.

Compared to the year-ago quarter, our gross margins expanded from 7.8% to 9.7%.

More importantly, our operating income dollars grew by over 190%.

On a year-to-date basis our operating income has grown nearly 10 times compared to a year ago.

One factor that assisted in the growth of operating income in the quarter was a low level of sales incentives as compared to a year ago.

This was marginally offset by the seasonal mix that historically occurs in our fiscal third quarter.

During the third quarter, rental and value-priced products accounted for nearly 17% of our net revenue dollars.

While the rental sales are generally a once-a-year phenomenon, the increase in value-priced product volume appears to be a trend.

We anticipated this shift and fully intend to capitalize on this dynamic going forward.

As you may recall, a year ago we introduced a value-priced Class A gas product that retailed for $69,900.

This was well received at the retail and wholesale level and has been a large component of our financial performance over the last 12 months.

To further exploit this shift in the industry, we introduced a value-priced Class C product last fall and additional offerings in the Class A diesel and Class C products at our third-quarter Dealer Days event.

Generally speaking, value-price and rental products achieve a lower gross margin; therefore even as our net revenue grew on a consecutive-quarter basis, our gross margin percentage remained constant at 9.7%.

Although our gross margin remained level when measured as a percentage of net sales, we did make strides to our overall financial goal of increasing EBITDA.

Our quarterly EBITDA grew by nearly 14% when comparing the third quarter to the second quarter of 2013.

In the coming quarters we do not expect to face the same factors that impacted our gross margins in the third quarter.

Typically we do not have rental sales in the summer selling season.

In addition, we have faced very little commodity pressure and currently do not foresee significant changes in that area.

We would expect these factors to be an accelerator to gross margins and EBITDA in the coming quarters.

The balance sheet is also in a strong position.

At the end of the third quarter, we had over $78 million in cash, short-term investments, and accounts receivable.

During the quarter, we generated over $19 million in cash from operations.

This was primarily attributed to a decrease in our inventory levels, which declined by $11.1 million inside the period.

Since the close of the quarter, we have liquidated a portion of our auction rate security portfolio.

We received a small partial redemption at par and sold another position at 99% of par.

As we stated in the past, our intent for capital allocation is to first reinvest in the business and, second, return value to our shareholders.

We have executed this plan in fiscal 2013 by doubling our CapEx in the first nine months as compared to a year ago, and we have repurchased $11.2 million worth of equity on a year-to-date basis.

We expect to follow this strategy going forward unless there is a substantial change in the business or an unexpected opportunity.

In regard to towables, we did incur an operating loss of $764,000 in our third quarter.

However, as Randy noted, much progress was made.

Specifically, we saw improvements in the warranty and service area, as warranty expense was lower than previous quarters.

At our Dealer Day event in late April we rolled out electronic retail signature registration for new towable owners.

An industry first, electronic retail registrations are completed by the customer at the dealership when they take delivery, which initiates warranty coverage immediately.

Our next step in the fourth quarter is to eliminate paper warranty claims and migrate to an electronic process.

This will allow us to react more quickly to warranty items, as we will have the information sooner, a positive for the dealer and the retail consumer.

These actions, coupled with a more robust quality improvement process, have improved the overall quality of our products, which in turn have helped to drive our warranty costs lower.

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.

Hi, thanks for taking my questions today.

Just going back to the margin impact that you talked about in your prepared comments, how much -- if you are looking in terms of just buckets on a percentage basis or if you want to think about it in terms of basis points, how much was related to the towable segment that you referred to, versus trying to keep up with production demand on the motorized side?

It doesn't sound like discounting was an impact in the quarter; but if you could help us understand really what were the big drivers and how will that change going forward.

Well, when I look at the third quarter, compared to last year's third quarter, and we look at the expansion in margins, and the key contributing factors quantified on a percentage basis, about half of the improvement is a function of lower incentives and half of the improvement is a function of higher volumes and better fixed-cost leverage or absorption.

So that being said, when we look on a sequential basis, the key drivers for having a fairly constant margin between second and third was a function of the mix of what we sold -- and rental being in that category -- and also new product introductions at that value-priced segment of the business.

Now on a prospective basis, we are not going to have rental -- that for us is typically a one-quarter dynamic.

We have had a lot of new products also introduced that we highlighted at our Dealer Day event.

Some of those products really start from a production standpoint inside our fourth quarter, so those are more products that will be delivered in quarters 1 and forward of fiscal '14 in material numbers.

But I guess those would maybe be the first comment I would make in response to your questions.

I don't know if I have covered it sufficiently for you.

I will let you follow up.

No, no, that helps.

That helps.

How have you been in terms of -- I know that labor had been an issue, just -- in other words, getting enough labor to meet demand.

Do you feel like you are up to speed on the labor side?

Kathryn, we are right where we need to be.

Labor is always a challenge when you are growing, and I think there might have been some perception out there that it was a bigger challenge than it was.

We did find the people we needed to achieve the production rates we had scheduled.

We worked a lot of overtime and we have hired a lot of people.

But we are fully staffed at this point for the production rate that we plan to have through the summer.

Okay.

Have there been any changes in order rates over the past 30 days, with the greater discussion of rising interest rates in the market?

No, we haven't really seen a change from the standpoint of the orders from the dealers.

It has been consistent, and the mix as well has been fairly consistent.

So we haven't seen that impact the order volume.

Okay.

That's all I have for now.

Thank you.

Craig Kennison, Robert W. Baird.

Good morning.

Thanks for taking my questions as well.

Maybe start with the backlog, Randy.

It is a huge number.

Can you ship all of that product in Q4, or do you not just have the production capacity to do so?

It isn't so much a production capacity issue, Craig, as it is some supply constraints.

We have spoken to this in the past, that there is a few industry constraints, most notable Ford gas A body chassis.

So that is an industrywide ongoing concern.

The dealer bodies know that, so I think that certainly drives some aggressive order placement.

There is a few other, less significant types of constraints; but the Ford gas A chassis would be the biggest one.

There is no question but that if there were a larger supply of those chassis we would be at higher production rates right now to build those out.

We wouldn't sit on them.

And I would also follow up, maybe just to add to that, Craig, in regards to new product introductions, that also impacts the timing of when we would be shipping products.

And when you look in the Class A diesel segment, a portion of those orders reflect great interest in products that we showed at that event.

That production is starting here in the coming weeks, after the Fourth of July holiday.

So that is really going to be a quarter 1 impact for us and prospectively.

And we also showed a new Class B product, which production starts late enough where that really can impact our Q4 deliveries.

So there is an impact I would say in a lot of the different categories in our backlog for different reasons that are indications of why the backlog is large as it is.

Great interest; and to Randy's point, it does create a dynamic where a lot more dealers put their orders in to have a spot in line, as well as the interest in new things that we have shown them.

When I look back at the backlog at the end of our second quarter, we shipped a little over 70% of that inside of Q3, and we faced a lot of those similar challenges a quarter ago.

That really hasn't been any significant change in the Ford Class A chassis constraint for us.

Another thing that enters into that, Craig, is some dealers place forward orders, and -- even though we could build it today, they might not want it for a few months.

So we're not going to build it ahead of time.

That is all excellent.

Is there anything you would say that is artificial, then, about the backlog?

In other words, dealers know they can place the order today just to get in line.

Maybe to improve their priority in line, they may over-order, and knowing that they can cancel at a future date?

Well, that is always a concern.

We haven't seen anything like that.

In looking at the size of our order bank and the quality of the orders, the types of products that are being ordered and what our sales are and where the market seems to be going, I don't have any reason to be concerned about that.

But yes, it could happen.

We have seen such a good increase in the retail registration activity on our product specifically that also helps support where the backlog is at.

The dealer inventory out there in the channel is so fresh and the growth that we have seen in recent months is completely supportable.

And really it could move upward based on the growing retail demand.

Then just to again follow up on a point you made, Sarah.

To what extent is the backlog comprised of new products that really didn't exist a year ago?

So not existing orders that are growing because of a strong appetite, but demand for new products that didn't exist.

I can probably easily give you a metric that relates to product that we just showed at our Dealer Day event; and it's probably 8% of our backlog would be in those categories.

But it would grow if I would incorporate the Minnie Winnie that we showed late last fall, and that is in the C category.

We have been producing that and expanding floor plans.

And a year ago when we introduced some of the new offerings in the Class A gas segment would also expand upon that.

But if we just concentrate on very, very new product that we showed in the recent event, it is under 10%.

I think I heard you correctly that some of that backlog is comprised of products that you will not ship until after the fourth quarter.

Yes.

Notably for the new offerings it is not going to be a quarter 4 shipment, just in light of the production starts.

That's all helpful.

Shifting gears if I may to ASPs, could you provide the ASPs for motorhomes and towables by category?

Certainly.

From a Class A gas perspective, our ASP was $90,038 as compared to $93,611 a year ago; so that is down almost 4%, very much impacted by new offerings that we have in that category.

On the Class A diesel side it was fairly flat, $197,832 versus $197,514, so it was up only 0.2%.

Our Class A gas in total, based on the mix of what we sold averaged -- I'm sorry, Class A category in total was $125,602 as compared to $130,283.

So all a function of that Class A gas impact, that is down about 3.6%.

Our Cs remain fairly flat, $70,161 versus $70,008.

And then our A/C mix in total was $97,699 versus $103,505, so that is down 5.6%.

From a Class B perspective, our average was $77,900 versus $76,204; so that, was up over 2%.

And all-in we saw an ASP of $97,906 versus $101,650.

On the towable side, our travel trailer ASP was $20,033 versus $21,051.

So that is down almost 5%, very much influenced by the Minnie and its popularity.

From a fifth-wheel perspective, it was $28,217 versus $30,150; and that was down over 6%.

So the blended ASP for all of the towables shipped in the quarter was $21,479 versus $25,122, down 14.5%.

Hope you were writing fast, Craig.

We did write fast.

Thank you for that.

And a couple of other questions if I may.

Just a point of clarification on rental units.

When you ship those into the channel they are immediately essentially sold and they don't qualify as inventory for the dealer in that metric that you report.

Is that correct?

Right, they are immediately retailed.

Got it.

That is helpful.

Then, Sarah, getting back to the margin question and what Kathryn had to say there as well, could you help us understand your fixed versus your variable margin within cost of goods sold today?

Yes.

In the quarter that we are reporting, our fixed costs as a percentage of revenue were 5.7%, and a year ago same quarter it was 6.6%.

So, as I touched upon, that was half of the reason we saw such improvement on our margins year-over-year.

We will be filing our Q as planned tomorrow, so we go into great detail in our variable and our fixed costs there.

But the added volumes in this fiscal year have really been a pretty significant contributing factor to a lower level of our fixed costs, and that is positively impacting the margins.

Great.

Congratulations and thanks.

David Whiston, Morningstar.

Good morning.

I guess first on the auction rate securities, can you talk to me a little bit about that market?

Is it getting better, given the sale?

And do you think you can sell the rest of them in the next 12 months?

Yes, we were happy to see the activity.

So the short-term investments that we reported have all been redeemed here inside of June.

And there is some other momentum going on in that category, so I think it is reasonable that we could have the rest of the long-term -- which is, as we presented, about $4.4 million -- work through inside of 12 months and maybe even faster than that.

Great.

What was the capacity utilization in the quarter?

Around -- a little less than 70% is where we would place it.

Okay.

And somewhat related to that is staffing.

You said earlier today that you are adequately staffed for now.

But last quarter we talked about on the assembly you were one shift with overtime.

So at what point with the backlog and your utilization would you ever want to just go two shifts straight time in assembly and no overtime there?

Yes, we have never run multiple shifts in final assembly.

In the way our manufacturing organization is set up and the nature of the product would make that very difficult.

We do run multiple shifts in many of the support areas, and we already do run multiple shifts in select areas.

So we have always measured our plant capacity in a single shift in the final assembly area; so overtime, maximum staffing, single shift, final assembly is really how we calculate our capacity.

And beyond that, we would have to find other, facilities, as we have in the past, to expand final assembly capacity.

And I would add, too, the production run rate that we are at and have been at essentially for the last six months now, the greatest opportunity with the demand would be in the Class A gas category of product, which we don't have the chassis to support increasing that run rate.

And the additional demand in some of the other product categories are a function of new products which, based on the timing of when we will launch them, we are producing those as soon and as quickly as we can.

But based on how that is laid into the schedule it wouldn't at this point require -- we couldn't support running faster than we are today.

So I wanted maybe just to add that in regards to why we're running at the levels we are right now.

Okay.

That's helpful.

Just finally on mix, the Class C you had a higher mix in the quarter relative to where it has been for the year to date.

I know you talked at the beginning of the call about value product; but you made it seem like that was more in the Class A segment.

So can you just talk about why C was higher in Q3?

Well, the value-priced product does affect the C categories too, notably in a product we introduced in the last year, our -- the micro -- the Minnie Winnie and the Spirit.

Those are full-sized C body products designed to make us more competitive in that market, and they are proving to be very popular and we are rolling out new floor plans as the year goes on.

In the third quarter we were just in the process of introducing our third floor plan and ultimately we will have more floor plans than that.

So I think that probably had the effect that you are looking for.

And we also had rental product that was sold inside the quarter.

That was in the Class C category, so that is another element of why the C deliveries were up sequentially.

But again, that is a third-quarter phenomenon.

The popularity of the Minnie and Spirit product we expect to be ongoing.

Okay.

Just one more question probably for either of you.

Now that we are well into summer, obviously it has been a very tremendous improvement year-over-year in your deliveries.

But can you say it was better than expected, or about where you expected?

Well, I guess that you would have to reflect back on when the expectation was made.

A year ago, we were really starting to see an improvement in the market last summer.

I think we went on record as saying that even last summer and last fall we reacted to the market change, and the success of our products in the market, with a little bit of guarded optimism.

And we probably -- we had an opportunity to be more aggressive than we were.

But of course, you never quite know how to react to those changes.

So I think by the time we got into the fall and winter the signs were certainly more positive.

The order outlook was more solid and stronger, and we were really starting to hit it hard.

And that is why we talked of some of the labor constraints that we did in the spring, because we did go through quite a growth spurt there.

Things are pretty stable right now.

You are going into a slower season, but we are bringing a lot of new products on that, as Sarah mentioned, are going to keep us busy.

So we continue to be optimistic.

Okay, great.

Thanks, guys.

(Operator Instructions) Barry Vogel, Barry Vogel & Associates.

Good morning, ladies and gentlemen.

Great job.

You are really doing very well with your product innovation and you seem to be scoring across the board.

You did mention, Sarah, $11.2 million share buyback.

Was that since you started it, or was that for the first nine months of this year?

The first nine months of this year.

And how many shares did you purchase?

On a cumulative basis, in the first --

For the nine months, for the nine months.

I will have to do the quick math here.

When I look at -- why don't you let -- you can go on to the next question, and I will make sure I have that answer for you.

Okay.

The next question concerns your investments in towables.

I noticed -- and again, even though it is a small -- well, it is an infinitesimal part of the business -- and the fact that you are losing money every quarter.

But it was done, I believe -- and Randy, correct me if I am wrong -- to get another leg into the business, with obviously the largest part of the RV business, which is towables.

So can you give us an assessment of where you are at this time?

And in light of the fact this was some decent deterioration in your backlog numbers, I believe based on your figures in your press release, fifth-wheel backlogs were down 59% from last year at this time and fifth-wheel shipments were down 56% from the third quarter of fiscal '13.

So I am wondering, going forward what is your outlook now in terms of getting that to become a decent profit contributor?

Well, Barry, I guess I will speak to the bigger picture and then let Sarah talk about a few of the details, as she is very involved in that towables segment or piece of our business now.

We are disappointed with where we are at.

We were planning to be profitable at this point.

We are not giving up.

As you said, it is a very big opportunity.

A lot -- many of the pieces of our strategy have worked very well.

Most notably, the Winnebago branded product has been very well received by the dealers.

We had good momentum a year and a half, two years into it, and we lost that.

It is our own fault.

The towable change -- and this kind of ties into it -- I'm sorry.

The fifth-wheel change, and this kind of ties into that, we had a lot of momentum with a new product we introduced called the Raven line; and we just didn't stay on top of it.

We had a lot of missteps there.

We are committed to getting it right and participating in that great opportunity.

So that is where I see it from the top; and I will let Sarah speak to more detail.

Well, the first thing I would highlight is that we showed a lot of new towable product at the Dealer Day event in late April, and categories that covers both fifth wheels and the Winnebago branded product and in our SunnyBrook branded product.

And we saw our order position sequentially from Q2 to Q3 grow, in light of what we showed it to the dealers and their interest in that product.

So we did see a positive sequential impact.

But you are right; on a year-over-year basis, it is lower.

Part of the contributing factor to the weaker fifth-wheel performance relates to the Raven that Randy touched upon, where we had quality issues and production issues in one specific plant that caused a lot of our financial challenges in the first half of this year.

We talked about this a bit last quarter as well.

And one of the actions that we took to improve upon that and change course was to idle that plant where the production problems were.

We have hired a new plant manager, and now production is resuming here in the fourth quarter.

So part of our decline in deliveries and our ASPs for towables has been a period of time where we were not producing the product and we had a little bit of a void on some of the categories that would satisfy the fifth-wheel demand on the SunnyBrook side.

On the Winnebago side, too, we have really refreshed the fifth-wheel offerings that we have there.

But a lot of time and energy has been put into this in the last four or five to six months.

Johnny Hernandez is working really hard with the team there, and we are starting to see some of the efforts really take shape and turn around some of the trends that we had seen.

Our goal is still to operationally breakeven in the fourth quarter and have -- 2014, have this be an accretive, profitable piece of our business for the consolidated results.

I think the good news, Barry, is we know what went wrong.

We know what we need to do to get it right.

So it is not a mystery, and we are going to keep working at it.

Also, the follow-up to your question on how many shares purchased this fiscal year, we purchased approximately 817,000 shares this year at an average a little under $14.00 a share.

Going forward, it looks to me like you are going to generate significant excess cash as long as the business continues to move forward.

And you have a great balance sheet, obviously.

So does your appetite end at a certain price point for the shares?

Well, we still have a buyback authorization in place that gives us a lot of room to continue to purchase, and we are going to use a methodology that we put into place almost a year ago now, basically laying out a grid based on our forward outlook.

And I anticipate we will continue to be active.

But it is more opportunistic and it is not necessarily at a predetermined dollar amount in any one quarter.

So with the stock at $19.00 or $20.00, I am not sure exactly where it is, right now this second, would that -- is it conceivable, given your feelings of your forward-looking outlook that you just mentioned and your cash generation and your great balance sheet, that you could buy some shares at $19.00 or $20.00?

Yes, Barry.

Okay.

That is pretty good.

Thank you very much.

Continue -- oh, I know what I wanted.

What is your new estimate of CapEx this year and D&A?

We are looking at CapEx coming a little bit lower for the fiscal year than we had commented on last quarter.

I think it will be in the $5 million range, and depreciation slightly less than that for the year.

We only have one quarter left and we are in the middle of planning for 2014 in detail.

And we can share that with you at our October conference call, on those numbers for the next fiscal year.

Thank you very much.

At this time I am showing no further questions in queue.

I would like to turn the conference back over to Mr. Randy Potts for any closing remarks.

Thank you.

The RV market continues to rebound, creating growth opportunities for us within both the motorhome and towable businesses.

We are pleased with the progress we have made within the last year and remain focused on continuing that successful trend profitably.

Thank you for joining our call this morning.

We look forward to talking with you again on Thursday, October 17, when we report our results for the fourth quarter and fiscal 2013.

Thanks again.

Ladies and gentlemen, that concludes today's conference.

We thank you for your participation.

You may now disconnect.

Have a great day.