Winnebago Industries Inc (WGO) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter-two 2014 Winnebago earnings conference call.

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

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

We will conduct a question-and-answer session towards the end of this conference.

(Operator Instructions)

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

I would like to turn the call over to Sheila Davis, Winnebago Industries's Public Relations and Investor Relations Manager.

These proceed, ma'am.

Thank you, Sheila.

Good morning, and welcome to Winnebago Industries's conference call to review the Company's results for the second quarter of fiscal 2014 ended March 1, 2014.

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.

The news release with our earnings results was posted to our website earlier this morning.

This call is being broadcast live on our website at www.wgo.net/investor.html, and a replay of the call will be available on our website at approximately 1:00 PM Central Daylight Standard 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.

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.

We are very pleased to announce that second-quarter year-over-year results are greatly improved, despite the extremely challenging weather conditions that we faced.

To satisfy our motorized backlog, we had scheduled four additional production days during the normal Christmas and New Year's shutdown.

The severe weather, however, caused multiple work delays and closures at both our Iowa and Indiana facilities, which led to the loss of several production days and other inefficiencies.

Also related to weather were complications with incoming and outgoing materials as well as higher experiences related to utilities.

But while we had substantial volume and revenue growth in the second quarter, the weather-related inefficiencies and expenses did put pressure on our margin growth.

I'd be remiss if I didn't take this opportunity to point out how extremely hard our dedicated employees worked to overcome these challenges, thus ensuring a very successful quarter.

I'd like to thank them for their commitment, particularly over the holiday season.

Looking ahead, we remain enthusiastic about our near- and long-term outlook.

First, retail registrations as measured by our systems grew nearly 20% year over year in the second quarter, within both motorized and towables.

Second, we are seeing success relative to our Company's multitude of ongoing product enhancements and new floorplans.

And last, we've received great reception from our dealers for our new products, the Trend and Viva, which are the first Class Cs to market built on a Ram ProMaster chassis; and the Travato, which is the first Class B to market on the RAM ProMaster chassis.

Though these products largely began shipping during the second quarter, we believe we will see higher volumes of them in the second half of this year as they gain traction in the retail market.

Based on these developments, we are optimistic regarding our long-term opportunity for continued growth.

We are also extremely enthusiastic about our forthcoming Dealer Days event in April in Las Vegas.

That's in the middle of April, on the 14th and 16th.

There we will host hundreds of our dealer partners and will unveil several exciting products, which we are confident will be incremental to our current business.

Unfortunately, I can't share any more details with you now, but rest assured that we will be sharing all the details of these exciting new products in just a few weeks.

As we discussed last quarter, growth at Winnebago has prompted us to expand to a production facility in Lake Mills, Iowa, not too far from our headquarters.

I am pleased to report that the expansion is progressing as planned, with initial employees hired, trading taking place, and the production line up and running.

We anticipate shipping product from this facility in our third quarter.

This is an important step in our growth phase, as this facility allows us to move our Class B production from its current Charles City location to Lake Mills.

This expands our capacity in our Charles City plant for additional subassembly production.

The strength in marketplace acceptance of our brands is paramount to the future success of our Company.

On that front we are extremely proud to once again announce that Winnebago has been recognized by Statistical Surveys as the number-one selling motorhome brand for 2013.

In fact, Winnebago has received this outstanding recognition every year since 1974.

Keeping this distinguished title is not easy and is a testimony to the Company's constant innovation, manufacturing expertise, and strong dealer network.

Finally, as we announced this morning, we made substantial share repurchases during the quarter, leading to approximately 616,000 shares repurchased through our current Board-authorized program.

With that, I'll let Sarah review our key business and financial highlights during the second quarter.

Sarah?

Thanks, Randy.

The second quarter of fiscal 2014 marked Winnebago's highest level of revenue since the fourth quarter of fiscal 2007.

This is very encouraging to us, as the second quarter is typically our lowest-revenue quarter.

The primary driver of improved revenue was motorized volume growth of nearly 45%.

And interestingly to note, almost 22% of our second-quarter shipments were products not available at this time last year, such as the lower price point Class A diesel products, Forza and Solei; and our Class C and B products, Trend, Viva, and Travato on the new Ram ProMaster chassis.

Our motorized volume growth was partially offset by lower ASPs of 9.8%, due to the popularity of these newly developed products.

Specifically, looking at our ASPs year over year, I will briefly highlight the key changes.

In the second quarter, Class A gas was $94,188, up 2% compared to last year.

Class A diesel was $175,115, which is almost 17% below last year and significantly influenced by the demand of our newer lower price point products.

Class C was $71,075, which is almost 5% lower than last year and also influenced by the shipments of the Trend and Viva products.

Our Class B was $68,797, a decrease of about 12% as a result of our Travato sales.

So from a total motorized ASP in aggregate, we have an ASP $100,566 this quarter, which is a decline of almost 10% over last year.

Moving over to the total product ASPs year over year, travel trailers were $19,380, which is down 1.5% from last year.

However, our fifth wheels were $42,640, at an increase of nearly 40%, and influenced by shipments of our new Winnebago Destination fifth wheel.

In total, all towable ASPs in aggregate was $23,911, up over 9% this quarter.

In light of such strong motorized shipments this quarter, we did see our dealer inventory increase significantly compared to last year.

The increased level of our dealer inventory is in part a result of a strong demand of our new product offerings, as many of our dealers received their initial stocking of this product during the quarter.

We believe that these innovative products will generate additional retail demand in the coming quarters.

Moreover, we have expanded our points of distribution for these new product offerings in the past year as our dealer locations have increased 12%, which is another factor contributing to our dealer inventory growth.

Moving to gross margins, the Company showed a 30 basis point improvement in the second quarter as compared to last year.

Key margin drivers are as follows: variable cost as a percentage of revenues increased year over year about 40 basis points, driven by weather-related production inefficiencies and a temporary outsourcing program related to our metal stamping needs.

Due to our rapid growth, we are investing in additional metal stamping equipment; however, because of long lead times, we do not expect to have this new equipment operational until the fourth quarter.

As a result, we established a temporary component outsourcing program during the second quarter to meet the needs of our higher volumes.

This further underscores the margin expansion opportunity that our vertical integration provides, and we look forward to having this equipment operational.

Meanwhile, although fixed overhead as a percentage of revenues increased improved 70 basis points, we experienced increased weather-related costs, including higher utilities, which offset the improvement.

In summary, we estimate that gross margin was impacted by approximately 20 basis points due the temporary cost component outsourcing program, and by just under 20 basis points due to the higher utility expenses.

And while the weather impact is difficult to quantify, we did -- faced inefficiencies and higher expenses, which limited our growth margin expansion for the second quarter.

However, total operating expenses were leveraged during the quarter and contributed 50 basis points to the operating income improvement, despite having costs related to the Louisville show in fiscal 2014's second quarter which were not present in last year's second quarter.

Moving to operating cash flow, as mentioned in our release, the second quarter was impacted by a receivables increase of approximately $27 million.

The harsh winter weather conditions caused significant disruptions to our independent transportation company, which prevented them from delivering product timely to our dealers, and as a result increased our receivables.

We anticipate positive operating cash flow in the third quarter as those receivables are reduced.

As we announced previously and reiterated in our release this morning, in our third quarter we will deliver approximately 500 rental units to Apollo Motorhome Holidays, a US RV rental company that principally rents to foreign customers through a strong network of international travel agencies.

We are very excited with partnering with Apollo and increasing our participation in the rental market.

To secure an order of this magnitude, we have contractually agreed to repurchase up to two-thirds of the units at specified prices after one season of rental use, provided certain conditions are met.

Therefore, only one-third of the order will be reported as typical motorhome sales during the third quarter.

The other two-thirds of units, which are subject to the repurchase option, will be accounted for as an operating lease, similar to how the automotive industry treats vehicle sales to daily rental car companies.

Estimated lease revenue will be recorded ratably over the period that Apollo holds the units, based on the difference between the net sales proceeds and repurchase obligations.

We anticipate repurchasing the rental units in the first quarter of our fiscal 2015, and our plan is to immediately resell them into the marketplace.

As a result, only one-third of these units are reported in our order backlog at the end of the second quarter.

Moving to backlog, our motorized background stood at 2,900 units at the end of the second quarter, up 5.4% versus a year ago, but down sequentially.

On a dollar basis, our motorized backlog at the end of the quarter totaled $260.1 million and applies an ASP of just under $90,000, a result of the higher percentage of new products ordered with lower ASPs coupled with a greater-than-historical level of rental units.

We believe our motorized backlog level continues to be robust and is driven by overall growth of the RV industry, positive dealer response, our increased retail registrations, as well as the new products that we have introduced.

However, we are still at a point where we are unable to ship all of backlog within a quarter, part of which is still due to the Class A Ford chassis shortage.

Based on our discussions with Ford, we are scheduled to receive an increased level of chassis during the third quarter, which will allow us to increase production rates inside the quarter.

However, through March we have not yet received adequate supply to initiate higher production rates.

Lastly, we continue to see robust demand for our products -- not only in motorized, but also in towables, where we experienced both an increase in revenues and a profit contribution for the quarter as compared to an operating loss last year.

With that, can you please open the line for questions at this time, Sheila?

(Operator Instructions) Alvin Concepcion, Citigroup Global Market.

Thank you and good morning.

It sounded like the operating margins were pretty impressive.

I think they were trending around 6.2%, if you net out weather, outsourcing, and the real estate gain.

And if that's true, that's some of the highest profitability you have had since, I think, 2005 in this quarter.

So I'm wondering if there's anything else that was more temporary in nature to margins?

Or is that trend sustainable?

Well, we definitely highlighted some of the challenges experienced inside of the quarter.

But on the positive side, with the added revenue and production volumes, that has continued to provide opportunity for us to reduce our fixed costs as a percentage.

So I think we really did cover the key items that were unique in nature to try to quantify and separate those.

And we are excited about the future.

We highlighted what were kind of the extraordinary items.

I think the most predominant thing that we will always face us the effect of model mix.

And quarter to quarter that will -- always has been an impact and will continue to be.

But I think the general trend is real and supportable.

That's great to hear.

You mentioned you were optimistic about growth in the motorized division.

Obviously, retail sales are report supporting that view, but wondering what else is driving that confidence?

And how much of an impact you think weather has had on retail trends to date?

Yes.

We get asked a lot about the impact of weather on the retail business.

And it's just -- you know, it's very hard to really draw any conclusions on that.

I'm sure it has an impact.

I'd like to think that the impact just delays a purchase, it doesn't cancel it, because this isn't something you just decide to do -- to purchase a new RV one day and not the next.

But there's other reasons to be optimistic.

Sarah did mention that our towables operation has performed in the black for the quarter.

And we are working very hard, as we have said every quarter, to get that on the right track.

And we certainly seeing signs of that.

Great.

And just one more for me -- just wondering how you feel about dealer inventory levels in motorhomes?

Maybe you could talk about it on a per-dealer basis or in terms of inventory turns.

Just wondering your level of comfort with them today.

Well, those are kind of the common statistics, but Sarah has some other stats she can embellish that with that we don't normally use that I think shed some good light on this.

Well, we definitely have a significant amount of opportunity with the added level of dealer inventory to see that positively impact retail on a go-forward basis.

So much of what we delivered had never been in the marketplace before with our dealers, and so they are going to create new turns, or added turns, for us on a prospective basis.

We've been adding locations, as well, in light of new product offerings.

And on a year-over-year basis, as I mentioned, that was approximately 12%.

So that -- you ask a good question, because it's a function, too, of how much a dealer has across the country.

And we think there are still continued opportunities, because we have so much that some of our dealers don't have a lot on their lots yet of the new items.

But the second quarter was disruptive a little bit by weather, so the product wasn't reaching the dealers as timely as we would have liked.

And you saw it on our balance sheet and receivables.

So there's an element, too, where there hadn't been, really, a lot of time for any of that to flow through.

It wasn't the season for a lot of people to be interested in being on a snowy lot in some of the areas of the country, or many areas of the country.

But those would be probably my key points in relation to dealer inventory to highlight.

All right.

That's very helpful.

Thank you very much.

Craig Kennison, Robert W. Baird & Company.

So I wanted to follow up on that last response, Sarah.

It seems like a very interesting bump in the number of distribution points.

Could you talk about what you are doing internally, or what factors are driving the growth in distribution?

Well, we want to look at the new product offerings that we are launching into the marketplace that have adequate coverage.

So that's a key part of it.

But I'll maybe let Randy share a little thought on it.

Yes.

I think a really big part of it -- and what Sarah mentioned is huge, but another big part is Scott Degnan and his leadership of sales and marketing has really put an emphasis on plugging holes out there in the marketplace, filling open points.

And he has directed his organization to be a lot more aggressive towards filling open points, and that's a big part of the numbers.

Is it equal on the motorhome and towables side, or is this being driven by one of those categories?

Well, primarily we are talking about motorized dealerships.

Towables has even more opportunities, but that's such a young, immature organization for us, we'd expect that.

You know, our motorized dealer base is very, very established.

So Scott has just really put a lot of effort towards identifying what we might have viewed as really smaller opportunities in the past.

He's capitalizing on those.

He's directing his group to capitalize on those, and I think they will find more.

And are you displacing other brands at these dealerships?

Or are these new dealerships kind of springing up from nowhere?

It all of the above, Craig.

It's never quite the same scenario.

Sometimes it's new dealerships, sometimes -- it's every scenario you can imagine.

Okay.

And then I wanted to follow up on your retail, which was much stronger than we anticipated -- up, I think you said, around 20%.

As you know, the industry source here had you for the first two months down about 4%.

There is often variation between your results and what the industry source would indicate, but that's a huge gap.

Any explanation for why your retail looked so much better?

Well, our retail includes B vans, and they separate out a lot of things, and it comes out at different times.

They separate United States, Canada B vans from the other RV market; that's confusing to start with.

It all comes out at different times, and people run with the first numbers that come out.

And then, they are the first to say that their numbers are incomplete.

And then it seems that the follow-up that they have, when they do fill in the holes, never really gets much attention.

It's just the initial announcement that gets the attention.

That's my take, Craig.

I can't speak for them as to why things don't match up.

But we watch our real retail registration numbers.

Yes, we are looking at that on a daily basis, because it's the key trigger for the warranty to start.

And so we are looking at wanting that registration to happen at the point of sale.

It's a constant management product process and follow-up.

And then we also have the opportunity to validate dealer inventory information when our DMs are on-site at the dealership.

We do work very closely with Statistical Survey to exchange information.

And when we look at it on a rolling 12-month basis, there is not significant variance.

But in any particular month, there can be.

I think it's these snapshots that --.

And it can go both ways.

I mean, we can have information more timely than they might, but there are instances where sometimes they have information more timely than what we do.

We are also working with all the flooring institutions to exchange information on retail registrations.

So we try to validate that data in many different ways.

It's critical for us to understand our dealer inventory, and retail is a key driver of reducing or increasing our dealer inventory.

So we will continue to track it and report it from our own internal system, but I understand the question, because it's a bit confusing as to what the external data point you would have available to you.

Yes.

Thank you.

That helps.

And then maybe I will finish with just more questions on this repurchase agreement.

Can you share with us any details on the terms of your rental repurchase agreement?

And then maybe comment a little more on how we should see that flow through the income statement from a revenue and profit standpoint?

Yes.

This is an arrangement that's very typical in other industries, but new for the RV industry on a public company basis, potentially, to be talking about the specifics.

In general we are delivering all the units just in the normal course here in the third quarter.

So we will be paid in the normal course, upfront, but on two-thirds of the order, we have an obligation at a specified price to repurchase it back, assuming certain mileage and other conditions are met.

We anticipate that to happen in the September through December time frame.

I think primarily this will be Q1.

We are working to collaborate with Apollo to have, basically, places for all that product to go after the rental season is over, very close to where those units are at, so they don't make their way back up to Iowa.

And from the standpoint of how that two-thirds will flow through the income statement, we are required to record that as an operating lease.

And so you have the estimated lease revenue being recorded on a ratable basis over the time frame.

So it's a very different process.

We will be having some footnotes and added disclosure on this in our Qs as the transaction flows through, because probably the oddest element of this is it's going to be a retail registration for us, but it will never be illustrated in dealer inventory or in our wholesale numbers for a portion of the order.

But when you amortize it into the financials on a straight-line basis, it becomes less of a significant number in a particular quarter.

And it won't happen in the third quarter, because the holding period will be really in quarters four and one.

But those are the key components of how that will work.

So just to follow up, next quarter presumably you would book one-third of 500, or about 167 units, as being shipped.

Would you then also book essentially 500 units being retailed, so you would kind of get credit for all 500 at retail?

Yes.

They will all be retail registered.

I don't know if the retail registration will completely take place inside of the third quarter, but they should all be retail registered, I would think, by June.

So, yes, that will create some very interesting dynamics through the P&L.

But if we look at the transaction on an economic basis, that's how we evaluated the opportunity.

We are pretty excited on working with Apollo and having our product more fully represented in the market on the rental side.

But it is going to create some odd flowthrough as it relates to the typical sale of a unit.

And do you plan to sort of break out the unit impact so that we can adjust our inventory, and retail, and shipment numbers?

Yes.

We will -- that was our goal today, to be upfront and just highlight and be transparent as it flows through the financials.

Is that clear, Craig?

It is clear, and I appreciate that.

It's -- you know, we have a model that tries to forecast where inventory should be, and this has the potential to create 500 retail units and only 167 shipments.

And it would kind of wreak havoc on our model unless we have the details.

We want to make sure we are clear on that.

We are trying to make it as clear and simple as we can, but if it's not, we need the questions to be asked.

And then to be fair, on the balance sheet side, this would be represented as an obligation until we do in fact repurchase a unit.

So there will be some items on the balance sheet that you will see flow through.

But again, we will be very clear on all the pieces of this.

This is now prospective and forward-looking in nature.

It doesn't affect us here at the end of the second quarter -- except, as I highlighted, these orders are not in our backlog as it is reported today, because we won't be recognizing the revenue on those particular units.

Very helpful.

Thank you very much.

Morris Ajzenman, Griffin Private Securities.

A question, again, with the retail registration industry sales.

Again, your retail registration is up about 20%.

As best I can make of it from the USSI stats in the retail sales -- I don't have all the complete data, but I think it's running up about half your rate for the quarter, but I'm not even sure that that's correct.

I think in that ballpark.

So what I take from that is on the positive side, you are garnering share; but on the side of the glass being half empty, retail sales for the industry is rising a lot less than the overall dealer inventory is rising.

Is there any concern on your part that -- and again, you touched on whether it's really a full impact -- but that this might be an indicator of industry sales having to slow down.

Any take on that?

Well, I think we are all looking to the spring selling season to tell us where this market goes.

There's no denying that there has to be sellthrough of this product that's been wholesaled.

I think it's as simple as that.

It is real that a lot of our dealer inventory increase is products that simply weren't on the market -- weren't on dealers' lots in the last spring/summer selling season.

So just the effect of all of these things: the additional dealer points we have, the new products that are out there that weren't before, the availability of certain models that we were short in supply of last year that will be out there this year -- we are going to have to see how it all works out.

So like you said, glass half full/half empty.

Time will tell which one it is.

Okay.

Fair enough.

In past quarters when towables wasn't doing so well -- not that it's going that great; but it's doing better -- you broke out the operating loss.

Can you break out the operating profit for this quarter?

Where is it versus last year?

Yes.

Last year it was a sizable loss, and we definitely spent some time talking about that on our call a year ago.

We lost approximately $850,000 in the quarter just reported.

Our operating income was approximately $50,000.

So we were very happy to have a black quarter and to see that we are growing the revenue stream.

Revenue was up approximately 15%.

And we are seeing part of that a function of shipments; and part of it ASP growth, with the fifth-wheel offerings gaining some traction in the marketplace.

So it's a good comp and a good trend, but we are focused on day by day making progress and having this be sustainable going forward.

One last question and I will get back in queue.

Do you have any sort of projection -- what are we now, half way through this fiscal year -- on what you think the free cash flow could be for the entire year?

Definitely a key part of the use of cash -- I commented on it, as well -- has been the impact inside of this most recently reported quarter of the growth in receivables.

When you look at our thoughts on a full-year basis, we have opportunities to generate operating cash flow in relation to movements in both receivables, and to a lesser degree in the inventory category.

Because we didn't have a significant movement in inventories inside the quarter, but we've been building product to ship for the rental -- this is our big rental shipments quarter, in quarter three.

So we have an opportunity to improve upon what we reported a year ago from an operating or a free cash flow standpoint.

Now, we did comment on the use of cash in some of our other areas.

When you look at investing and financing, we spent more and continue to plan to spend more on CapEx, reinvesting into the business.

So that is going to be at a higher level in the last six months of the year than it was in the first six months, and definitely up over last year.

And we have been more active on the stock repurchase front.

So we are using that cash that we plan to generate from operating activities in some other areas.

Thank you.

Thank you.

There are no more questions at this time.

(Operator Instructions) David Whiston, Morningstar.

Good morning.

Just wanted to follow up on that last comment by Sarah on the share buybacks.

Given that it sounds like you are going to have a lot of favorable cash inflow in this now current quarter, are you looking to be much more aggressive with buybacks for the rest of the fiscal year, where you, perhaps, held back in the last quarter?

Well, we definitely were more active in the second quarter than we had been in the first.

We will continue to evaluate that.

As I mentioned, we do have some planned CapEx that are at a higher level that we will be using cash for.

But at this point we will just continue to evaluate based on the parameters we've been following in the first six months, so we have an established grid, and we incorporate our view on the future into that mix.

But it is also contingent on the other uses of what are cash could be invested in.

So I don't have any specific items to announce on that front.

But we still have $18.4 million remaining on the authorization that we've been repurchasing under, so there's availability yet if we choose to repurchase more shares.

We did invest almost $16 million in the second quarter.

Right.

And this may be a bit early, but do you think the higher CapEx spend is going to continue next fiscal year?

Yes.

That is a bit early.

We have some pretty sizable things that we've been working and planning on, so I think 2014 is a bigger year.

I can't think of any reasons 2015 would be bigger than 2014.

No, that's fair.

But it would probably be -- well, it would be up from where we've been in the last five years.

Okay.

That's very helpful.

Thank you.

Thank you.

There are no more questions.

I'd like to call turn the call over to Randy for closing remarks.

Okay.

Thank you.

We are very proud of our performance in the second quarter, especially in light of the many challenges we discussed.

We also have a lot of opportunities ahead of us, and we are excited to introduce our newest products to our dealers in Las Vegas in just a couple of weeks.

Thank you, everybody, for joining our call today.

We look forward to speaking with you again when we report our third-quarter conference call at our third-quarter fiscal call for the results on Thursday, June 26.

Thank you for participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.